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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
(Amendment No. 2)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
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 (I.R.S. employer identification no.)
incorporation or organization)
3333 NEW HYDE PARK ROAD, 11042
NEW HYDE PARK, NY (zip code)
(Address of principal executive
offices)
516-627-1515
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
(Title of Class)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of March 15, 2002, the aggregate market value of voting stock held by
non-affiliates of the registrant was $41,002,575.
As of March 15, 2002, the registrant had 4,182,475 shares of its common
stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
ITEM 1. BUSINESS
Morton's Restaurant Group, Inc. was incorporated as a Delaware corporation
on October 3, 1988. As used in this Report, the terms "MRG" or "Company" refer
to Morton's Restaurant Group, Inc. and its consolidated subsidiaries.
RECENT DEVELOPMENTS
On March 26, 2002, the Company entered into a definitive merger agreement
("Merger Agreement") providing for the acquisition of the Company by an
affiliate of Castle Harlan, Inc., a New York based private equity investment
firm. Under the terms of the Merger Agreement, the Company's stockholders will
receive $12.60 in cash for each share of common stock. Completion of the merger
is subject to various closing conditions including, but not limited to, approval
of the Company's stockholders and customary industry regulatory approvals,
receipt of third party consents and achievement of a minimum level of earnings.
There can be no assurance that these or other conditions to the merger will be
satisfied or that the merger will be completed. If the merger is not completed
for any reason, it is expected that the current management of the Company, under
the direction of the Board of Directors, will continue to manage the Company as
an ongoing business. The Company has also entered into an amendment to its
Credit Agreement which allows for the transactions contemplated under the
merger; however, this amendment will only become effective upon the completion
of the merger. The merger is currently expected to be completed in early summer
of 2002.
GENERAL
At December 30, 2001, the Company owned and operated 62 Morton's of Chicago
Steakhouse restaurants ("Morton's") and 4 Bertolini's Authentic Trattoria
restaurants ("Bertolini's"). These concepts appeal to a broad spectrum of
consumer tastes and target separate price points and dining experiences. During
January 2002, the Morton's of Chicago steakhouse in Sydney, Australia was
closed.
The Company provides strategic support and direction to its subsidiary
companies, and evaluates and analyzes potential locations for new restaurants.
Management consists of Allen J. Bernstein, Chairman of the Board, President and
Chief Executive Officer, and vice presidents responsible for site selection and
development, finance, communications and administration.
The Company's Credit Agreement restricts capital expenditures (see Note 6 to
the Company's consolidated financial statements), limiting the Company to five
new Morton's restaurants during 2002 and no new restaurant development in 2003.
The Company has executed agreements to open Morton's of Chicago Steakhouses in
Arlington, VA; Burbank, CA; Paramus, NJ; King of Prussia, PA; and Richmond, VA.
Additional sites are under review for potential new Morton's restaurants to
open; however, under the Company's Credit Agreement, the Company may not enter
into new restaurant leases until a specified cash flow leverage ratio is
achieved. There can be no assurance that the Company's expansion plans will be
successfully achieved or that new restaurants will meet with consumer acceptance
or can be operated profitably. No new Bertolini's are planned for the
foreseeable future. The Company has no current intention to acquire other
restaurant concepts, although it may do so in the future. The Company does not
currently intend to develop a franchise program.
MORTON'S OF CHICAGO STEAKHOUSE RESTAURANTS
At December 30, 2001, the Company owned and operated 62 Morton's of Chicago
steakhouses (54 in the continental United States, one each in Honolulu, HI; San
Juan, Puerto Rico; Toronto and Vancouver, Canada; Singapore; Sydney, Australia
and two in Hong Kong) located in 57 cities. As a result of the World Trade
Center terrorist attacks on September 11, 2001, the Morton's of Chicago
2
steakhouse restaurant located at 90 West Street, two blocks from the World Trade
Center, was closed permanently due to structural damage. During January 2002,
the Morton's of Chicago steakhouse in Sydney, Australia was closed. Morton's
offers its clientele a combination of excellent service and large quantities of
the highest quality menu items. Morton's has received awards in many locations
for the quality of its food and hospitality. Morton's serves USDA prime aged
beef, including, among others, a 24 oz. porterhouse, a 20 oz. NY strip sirloin
and a 16 oz. ribeye. Morton's also offers fresh fish, lobster, veal and chicken.
All Morton's have identical dinner menu items. While the emphasis is on beef,
the menu selection is broad enough to appeal to many taste preferences. The
Morton's dinner menu consists of a tableside presentation by the server of many
of the dinner items, including a 48 oz. porterhouse steak and a live Maine
lobster, and all Morton's restaurants feature an open display kitchen where
steaks are prepared. Each restaurant has a fully stocked bar with a complete
list of name brands and an extensive premium wine list that offers approximately
175 selections.
Morton's caters primarily to high-end, business-oriented clientele. During
the fiscal year ended December 30, 2001, the average per-person check, including
dinner and lunch, was approximately $72.75. Management believes that a vast
majority of Morton's weekday revenues and a substantial portion of its weekend
revenues are derived from business people using expense accounts. Sales of
alcoholic beverages accounted for approximately 32% of Morton's revenues during
fiscal 2001. In the ten Morton's serving both dinner and lunch during fiscal
2001, dinner service accounted for approximately 85% of revenues and lunch
service accounted for approximately 15%. All Morton's are open seven days a
week. Those 52 Morton's serving only dinner are typically open from 5:30 p.m. to
11:30 p.m., while those Morton's serving both dinner and lunch typically open at
11:30 a.m. for the lunch period. All except for one Morton's (including all
restaurants opened since the 1989 acquisition) have on-premises, private dining
and meeting facilities referred to as "Boardrooms." During fiscal 2001,
Boardroom revenues were approximately 19% of sales in those locations offering
Boardrooms.
Morton's believes that its operations and cost systems, developed over
23 years, enable Morton's to maintain tight controls over operating expenses.
The cooking staff is highly trained and experienced. Uniform staffing patterns
throughout Morton's restaurants enhance operating efficiencies. Morton's
management believes that its centralized sourcing from primary suppliers of USDA
prime aged beef gives it significant cost and availability advantages over many
independent restaurants. Morton's purchases Midwest-bred, grain-fed, USDA prime
aged beef (approximately the finest two to three percent of a 1,200 pound
steer).
BERTOLINI'S AUTHENTIC TRATTORIA RESTAURANTS
At December 30, 2001, the Company owned and operated 4 Bertolini's, located
in three cities. Bertolini's is a white tablecloth, authentic Italian trattoria,
which provides table service in a casual dining atmosphere. For the fiscal year
ended December 30, 2001, Bertolini's average per-person check, including dinner
and lunch, was approximately $22.50. Bertolini's restaurants are open seven days
a week, for dinner and lunch, with typical hours of 11:00 a.m. to 12:00
midnight. During fiscal 2001, dinner service accounted for approximately 68% of
revenues and lunch service accounted for approximately 32%. Sales of alcoholic
beverages accounted for approximately 22% of Bertolini's revenues during fiscal
2001. During 2001, one restaurant was closed and during fiscal 2000 and 1999
seven restaurants were closed. See Note 3 to the Company's consolidated
financial statements.
SITE DEVELOPMENT AND EXPANSION
GENERAL. To date, the Company has attempted to maximize its capital
resources by obtaining substantial development or rent allowances from its
landlords. The Company's leases typically provide for substantial landlord
development and or rent allowances and an annual percentage rent based on gross
revenues, subject to market-based minimum annual rents. This leasing strategy
enables the Company to reduce its net investments in newly developed
restaurants.
3
The costs of opening a Morton's vary by restaurant depending upon, among
other things, the location of the site and construction required. The Company
generally leases its restaurant sites and operates both free-standing and
in-line restaurants. In recent years, the Company has received substantial
landlord development and or rent allowances for leasehold improvements,
furniture, fixtures and equipment. The Company currently targets its average
cash investment, net of such landlord allowances in new restaurants, in leased
premises, to be less than $2.0 million per restaurant, although the Company may
expend greater amounts for particular restaurants.
During fiscal 1998 and fiscal 1999, the Company executed contracts to
purchase six parcels of land to develop five Morton's and one Bertolini's, all
of which were built and opened.
The Company believes that the locations of its restaurants are critical to
its long-term success, and management devotes significant time and resources to
analyzing each prospective site. As it has expanded, the Company has developed
specific criteria by which each prospective site is evaluated. Potential sites
are generally sought in major metropolitan areas. Management considers such
factors as demographic information, average household size, income, traffic
patterns, proximity to shopping areas and office buildings, area restaurant
competition, accessibility and visibility. The Company's ability to open new
restaurants depends upon, among other things, locating satisfactory sites,
negotiating favorable lease terms, securing appropriate government permits and
approvals, obtaining liquor licenses, recruiting or transferring additional
qualified management personnel and access to financing. For these and other
reasons, there can be no assurance that the Company's expansion plans will be
successfully achieved or that new restaurants will meet with consumer acceptance
or can be operated profitably.
The standard decor and interior design of each of the Company's restaurant
concepts can be readily adapted to accommodate different types of locations.
MORTON'S. The first Morton's was opened in 1978 in downtown Chicago, where
Morton's operations headquarters are still located. From 1978 to 1989, Morton's
expanded to a group of nine restaurants in nine cities. Since the 1989
acquisition by the Company, Morton's has grown from nine to 61 restaurants as of
March 1, 2002. During 2001, new Morton's opened in Louisville, KY; Los Angeles
(downtown), CA; Hong Kong, the second in that region; Honolulu, HI; Reston, VA
and Sydney, Australia. One Morton's was relocated within Orange County, CA. As a
result of the World Trade Center terrorist attacks on September 11, 2001, the
Morton's of Chicago steakhouse restaurant located at 90 West Street, two blocks
from the World Trade Center, was closed permanently due to structural damage.
During January 2002, the Morton's of Chicago steakhouse in Sydney, Australia was
closed.
Morton's are very similar in terms of style concept and decor and are
located in retail, hotel, commercial and office building complexes in major
metropolitan areas and urban centers. Management believes that fixed investment
costs and occupancy costs have been relatively low, as appropriate space for new
Morton's restaurants has been readily available. The approximate gross costs to
the Company for the seven Morton's opened or relocated in leased premises
between January 1, 2001 and March 1, 2002 ranged from $1.9 million to
$4.0 million, including costs for leasehold construction, improvements,
furniture, fixtures, equipment, and pre-opening expenses. These aggregate
per-restaurant costs were substantially offset by landlord development and or
rent allowances ranging from $0.1 million to $1.3 million and equipment lease
financings ranging from $0 million to $0.4 million. The Company's average net
cash investment for those seven restaurants was approximately $2.0 million, in
each case, net of landlord development and or rent allowances and restaurant
equipment lease financings.
The Company's Credit Agreement restricts capital expenditures (see Note 6 to
the Company's consolidated financial statements), limiting the Company to five
new Morton's restaurants during 2002 and no new restaurant development in 2003.
The Company has executed agreements to open Morton's of Chicago Steakhouses in
Arlington, VA; Burbank, CA; Paramus, NJ; King of Prussia, PA; and Richmond, VA.
Additional sites are under review for potential new Morton's restaurants to
open;
4
however, under the Company's Credit Agreement, the Company may not enter into
new restaurant leases until a specified cash flow leverage ratio is achieved.
There can be no assurance that the Company's expansion plans will be
successfully achieved or that new restaurants will meet with consumer acceptance
or can be operated profitably.
BERTOLINI'S AUTHENTIC TRATTORIA RESTAURANTS. The first Bertolini's opened
in Las Vegas in May 1992, and is located in the Forum Shops Mall, adjacent to
Caesars Palace Casino. At December 30, 2001 the Company owned and operated four
Bertolini's. No Bertolini's were opened during fiscal 2001 and none are planned
for the foreseeable future.
RESTAURANT LOCATIONS
The Company owned and operated 61 Morton's and 4 Bertolini's as of March 1,
2002.
The following table provides information with respect to those restaurants:
MORTON'S OF CHICAGO STEAKHOUSE RESTAURANTS DATE OPENED
------------------------------------------ --------------
Chicago, IL(1)............................................. December 1978
Washington (Georgetown), DC................................ November 1982
Westchester/Oakbrook, IL................................... June 1986
Dallas (Downtown), TX...................................... May 1987
Boston, MA................................................. December 1987
Rosemont, IL............................................... June 1989
Cleveland, OH.............................................. September 1990
Tysons Corner, VA.......................................... November 1990
Columbus, OH............................................... April 1991
Cincinnati, OH............................................. August 1991
San Antonio, TX............................................ September 1991
Palm Beach, FL............................................. November 1991
Minneapolis, MN............................................ December 1991
Beverly Hills, CA(2)....................................... October 1992
Detroit (Southfield), MI................................... November 1992
Sacramento, CA............................................. May 1993
Pittsburgh, PA............................................. August 1993
New York (Midtown Manhattan), NY........................... October 1993
St. Louis (Clayton), MO.................................... December 1993
Palm Desert, CA............................................ January 1994
Atlanta (Buckhead), GA..................................... March 1994
Charlotte, NC.............................................. July 1994
San Francisco, CA.......................................... November 1994
Dallas (Addison), TX....................................... November 1994
Denver (Downtown), CO...................................... March 1995
Atlanta (Downtown), GA..................................... November 1995
Houston, TX................................................ January 1996
Phoenix, AZ................................................ March 1996
Orlando, FL................................................ March 1996
Washington (Connecticut Ave.), DC.......................... January 1997
San Diego, CA.............................................. April 1997
Baltimore, MD.............................................. August 1997
Miami (Downtown), FL....................................... December 1997
Stamford, CT............................................... February 1998
Singapore.................................................. May 1998
North Miami Beach, FL...................................... July 1998
Toronto, Canada............................................ September 1998
Portland, OR............................................... December 1998
Nashville, TN.............................................. January 1999
5
MORTON'S OF CHICAGO STEAKHOUSE RESTAURANTS (CONTINUED) DATE OPENED
------------------------------------------------------ --------------
Scottsdale, AZ............................................. January 1999
Philadelphia, PA........................................... July 1999
Boca Raton, FL............................................. August 1999
Kansas City, MO............................................ October 1999
Indianapolis, IN........................................... November 1999
Schaumburg, IL............................................. December 1999
Hong Kong (Kowloon)........................................ December 1999
Seattle, WA................................................ December 1999
Denver (Tech Center), CO................................... March 2000
Las Vegas, NV.............................................. May 2000
Jacksonville, FL........................................... June 2000
Hartford, CT............................................... September 2000
San Juan, PR............................................... October 2000
Great Neck (Long Island), NY............................... October 2000
Vancouver, Canada.......................................... October 2000
New Orleans, LA............................................ December 2000
Hong Kong (Central District)............................... May 2001
Louisville, KY............................................. June 2001
Reston, VA................................................. July 2001
Santa Ana/Costa Mesa (Orange), CA(3)....................... November 2001
Los Angeles (Downtown), CA(2).............................. November 2001
Honolulu, HI............................................... November 2001
BERTOLINI'S AUTHENTIC TRATTORIAS DATE OPENED
-------------------------------- --------------
Las Vegas, NV.............................................. May 1992
King of Prussia, PA........................................ November 1995
Indianapolis, IN........................................... October 1996
West Las Vegas, NV......................................... December 1998
(1) Does not have Morton's Boardroom Banquet facilities.
(2) Operates under the name "Arnie Morton's of Chicago."
(3) The Morton's Orange County, CA location was relocated in November 2001 to a
new site. The original location had been open since March 1995.
The Company's Credit Agreement restricts capital expenditures (see Note 6 to
the Company's consolidated financial statements), limiting the Company to five
new Morton's restaurants during 2002 and no new restaurant development in 2003.
The Company has executed agreements to open Morton's of Chicago Steakhouses in
Arlington, VA; Burbank, CA; Paramus, NJ; King of Prussia, PA; and Richmond, VA.
Additional sites are under review for potential new Morton's restaurants to
open; however, under the Company's Credit Agreement, the Company may not enter
into new restaurant leases until a specified cash flow leverage ratio is
achieved. There can be no assurance that the Company's expansion plans will be
successfully achieved or that new restaurants will meet with consumer acceptance
or can be operated profitably.
RESTAURANT OPERATIONS AND MANAGEMENT
Morton's and Bertolini's restaurants have a well-developed management
infrastructure and are operated and managed as distinct concepts. Operations for
the Company's restaurants are supervised by regional managers, each of whom is
responsible for several restaurants and reports to a division vice president.
Division vice presidents and regional managers meet frequently with senior
management to review operations and to resolve any issues. Working in concert
with vice presidents, regional managers and restaurant general managers, senior
management defines operations and performance objectives for each restaurant.
Incentive plans tied to achievement of specified revenue, profitability and
operating targets and related quality objectives have been established for vice
presidents, regional managers and certain restaurant managers.
6
The Company strives to maintain quality and consistency in its restaurants
through the careful training and supervision of personnel and the establishment
of standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. Restaurant managers, many of whom are
developed from the Company's restaurant personnel, must complete a training
program of typically eight to twelve weeks during which they are instructed in
areas of restaurant management, including food quality and preparation, customer
service, alcoholic beverage service, liquor liability avoidance and employee
relations. Restaurant managers are also provided with operations manuals
relating to food and beverage preparation and operation of restaurants. These
manuals are designed to ensure uniform operations, consistently high quality
products and service, and proper accounting for restaurant operations. The
Company holds regular meetings of its restaurant managers to discuss menu items,
continuing training and other aspects of business management.
The staff for a typical Morton's consists of one general manager, up to four
assistant managers and approximately 40 to 60 hourly employees. The staff for a
typical Bertolini's consists of one general manager, up to six assistant
managers and approximately 100 hourly employees. Each new restaurant employee of
the Company participates in a training program during which the employee works
under the close supervision of restaurant managers. Management strives to
instill enthusiasm and dedication in its employees. Restaurant management
regularly solicits employee suggestions concerning restaurant operations,
strives to be responsive to the employees' concerns and meets regularly with
employees at each of the restaurants.
The Company devotes considerable attention to controlling food costs. The
Company makes extensive use of information technology providing management with
pertinent information on daily revenues and inventory requirements, thus
minimizing the need to carry excessive quantities of food inventories. This cost
management system is complemented by the Company's ability to obtain certain
volume-based discounts. In addition, each Morton's and Bertolini's have similar
menu items and common operating methods, allowing for more simplified management
operating controls.
The Company maintains financial and accounting controls for each of its
restaurants through the use of centralized accounting and management information
systems and reporting requirements. Revenue, cost and related information is
collected daily for each restaurant. Restaurant managers are provided with
operating statements for their respective restaurants. Cash and credit card
receipts are controlled through daily deposits to local operating accounts, the
balances of which are wire transferred or deposited to cash concentration
accounts.
PURCHASING
The Company's ability to maintain consistent quality throughout its
restaurants depends in part upon the ability to acquire food products and
related items from reliable sources in accordance with Company specifications.
The Company has no long-term contracts for any food items used in its
restaurants. The Company currently does not engage in any futures contracts and
all purchases are made at prevailing market or contracted prices. While
management believes adequate alternative sources of supply are readily
available, these alternative sources might not provide as favorable terms to the
Company as its current suppliers when viewed on a long-term basis. All of
Morton's USDA prime aged beef is shipped to Morton's restaurants by refrigerated
common carrier from its primary suppliers. Other products used by Morton's are
procured locally based on strict Company specifications. Bertolini's restaurants
also adhere to strict product specifications and use national, regional, and
local suppliers. Food and supplies are shipped directly to the restaurants and
invoices for purchases are sent for payment to the headquarters office.
7
MARKETING
Management believes that the Company's commitment to quality food,
hospitality and value/price is the most effective approach to attracting guests.
Accordingly, the Company has historically focused its resources on providing its
customers with superior service and value, and has relied primarily on word of
mouth to attract new customers. The Company utilizes public relations
consultants, local restaurant promotions and limited print, billboard and direct
mail advertising. The Company's expenditure for advertising, marketing and
promotional expenses, as a percentage of its revenues, was 2.9% during fiscal
2001.
COMPETITION
The restaurant business is highly competitive and fragmented, and the
number, size and strength of competitors varies widely by region. The Company
believes that restaurant competition is based on, among other things, quality of
food products, customer service, reputation, restaurant location, name
recognition and menu price points. The Company's restaurants compete with a
number of restaurants within their markets, both locally owned restaurants and
other restaurants which are members of regional or national chains. Some of the
Company's competitors are significantly larger and have greater financial and
other resources and greater name recognition than the Company and its
restaurants. Many of such competitors have been in existence longer than the
Company and are better established in areas where the Company's restaurants are,
or are planned to be, located. The restaurant business is often affected by
changes in consumer taste and spending habits, national, regional or local
economic conditions, population and traffic patterns and weather. In addition,
factors such as inflation, increased costs, food, labor and benefits and the
lack of experienced management and hourly staff employees may adversely affect
the restaurant industry in general and, in particular, the Company's
restaurants.
SERVICE MARKS AND TRADEMARKS
The Company has registered the names Morton's, Morton's of Chicago,
Bertolini's and certain other names used by its restaurants as trademarks or
service marks with the United States Patent and Trademark Office and in certain
foreign countries. The Company is aware of names similar to that of the
Company's restaurants used by third parties in certain limited geographical
areas, although the Company does not anticipate that such use will prevent the
Company from using its marks in such areas. The Company is not aware of any
infringing uses that could materially affect its business. The Company believes
that its trademarks and service marks are valuable to the operation of its
restaurants and are important to its marketing strategy.
GOVERNMENT REGULATION
The Company's business is subject to extensive Federal, state and local
government regulation, including those relating to, among others, alcoholic
beverage control, public health and safety, zoning and fire codes. Failure to
obtain or retain food, liquor or other licenses would adversely affect the
operations of the Company's restaurants. The Morton's of Chicago steakhouse
restaurant in Sydney, Australia was closed in January 2002, based in part on
newly imposed restrictions on importing certain cuts of USDA prime beef from the
United States, an essential ingredient of the Morton's dining experience. While
the Company has not experienced and does not anticipate any additional problems
in obtaining required licenses, permits or approvals, any difficulties, delays
or failures in obtaining such licenses, permits or approvals could delay or
prevent the opening of, or adversely impact the viability of, a restaurant in a
particular area. Approximately 32% and 22% of the revenues of Morton's and
Bertolini's, respectively, for fiscal 2001 were attributable to the sale of
alcoholic beverages. Each restaurant has appropriate licenses to sell liquor,
beer, wine and food. The Company's licenses to sell alcoholic beverages must be
renewed annually and may be suspended or revoked at any time for cause,
8
including violation by the Company, or its employees, of any law or regulation
pertaining to alcoholic beverage control, such as those regulating the minimum
age of patrons or employees, advertising, wholesale purchasing, and inventory
control, handling and storage. However, each restaurant is operated in
accordance with certain standards and procedures designed to comply with
applicable codes and regulations.
The Company is subject in certain states to "dram-shop" statutes, which
generally provide a person injured by an intoxicated person the right to recover
damages from an establishment which wrongfully served alcoholic beverages to
such person. While the Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance, a judgment against the
Company under a dram-shop statute in excess of the Company's liability coverage,
or inability to continue to obtain such insurance coverage at reasonable costs,
could have a material adverse effect on the Company.
The development and construction of additional restaurants will be subject
to compliance with applicable zoning, land use and environmental regulations.
Management believes that Federal and state environmental regulations have not
had a material effect on the Company's operations, but more stringent and varied
requirements of local government bodies with respect to zoning, land use and
environmental factors could delay construction and increase development costs
for new restaurants.
The Company is also subject to the Fair Labor Standards Act, the Immigration
Reform and Control Act of 1986 and various Federal and state laws governing such
matters as minimum wages, overtime, tips, tip credits and other working
conditions. A significant number of the Company's hourly staff are paid at rates
related to the Federal minimum wage and, accordingly, increases in the minimum
wage or decreases in allowable tip credits will increase the Company's labor
cost.
EMPLOYEES
As of December 30, 2001, the Company had 3,786 employees, of whom 3,284 were
hourly restaurant employees, 399 were salaried restaurant employees engaged in
administrative and supervisory capacities and 103 were corporate and office
personnel. Many of the hourly employees are employed on a part-time basis to
provide services necessary during peak periods of restaurant operations. None of
the Company's employees are covered by a collective bargaining agreement. The
Company believes that its relations with its employees are good.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The information regarding revenues, which is reported on the "Consolidated
Statements of Income", includes revenues generated from operations in foreign
countries of $13.1 million, $11.5 million, and $5.8 million for 2001, 2000, and
1999 respectively. The information regarding net property and equipment, which
is reported on the "Consolidated Balance Sheets", includes net property and
equipment in foreign countries of $5.3 million, $4.1 million, and $3.4 million
for 2001, 2000, and 1999 respectively. For information regarding the risks
associated with foreign operations, see "Business--Government Regulation" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quantitative and Qualitative Disclosures about Market Risk".
FORWARD-LOOKING STATEMENTS
This Form 10-K 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,
9
including a highly competitive industry with many well-established competitors
with greater financial and other resources than the Company, and the impact of
changes in consumer tastes, local, regional and national economic and market
conditions, restaurant profitability levels, expansion plans, demographic
trends, traffic patterns, employee availability and benefits and cost increases,
and other risks detailed from time to time in the Company's periodic earnings
releases and reports filed with the Securities and Exchange Commission. In
addition, the Company's ability to expand is dependent upon various factors,
such as restrictions under the Company's Credit Agreement, the availability of
attractive sites for new restaurants, the ability to negotiate suitable lease
terms, the ability to generate or borrow funds to develop new restaurants and
obtain various government permits and licenses and the recruitment and training
of skilled management and restaurant employees. Accordingly, such forward-
looking statements do not purport to be predictions of future events or
circumstances and therefore there can be no assurance that any forward-looking
statement contained herein will prove to be accurate.
ITEM 2. PROPERTIES
The Company's restaurants are generally located in space leased by
subsidiaries of the Company. Restaurant lease expirations, including renewal
options, range from 1 to 41 years. The Company's leases typically provide for
renewal options for terms ranging from five years to twenty years. Restaurant
leases provide for a specified annual rent, and most leases call for additional
or contingent rent based on revenues above specified levels. Generally, leases
are "net leases" which require the Company's subsidiary to pay its pro rata
share of taxes, insurance and maintenance costs. In some cases, the Company or
another subsidiary guarantees the performance of new leases of the tenant
subsidiary for a portion of the lease term, typically not exceeding the first
five years. See Note 10 to the Company's consolidated financial statements. The
Company currently operates six restaurants on properties which it owns.
The Company maintains its executive offices in leased space of approximately
9,800 square feet in New Hyde Park, New York and approximately 16,500 square
feet in Chicago. The Company believes its current office and operating space is
suitable and adequate for its intended purposes.
ITEM 3. LEGAL PROCEEDINGS
During fiscal 1998, the Company identified several underperforming
Bertolini's restaurants and authorized a plan for the closure or abandonment of
specified restaurants which have all been closed. The Company is involved in
legal action relating to such closures, however, the Company does not believe
that the ultimate resolution of these actions will have a material effect beyond
that recorded during fiscal 1998. See Note 3(c) to the Company's consolidated
financial statements.
On or about March 27, 2002, several substantially similar civil actions were
commenced in the Court of Chancery in the State of Delaware in New Castle County
by purported stockholders of the Company. The plaintiff in each action seeks to
represent a putative class consisting of the public stockholders of the Company.
Named as defendants in each of the complaints are the Company, the members of
the Company's Board of Directors and Castle Harlan, Inc. The complaints allege,
among other things, that the proposed merger is unfair and that the Company's
directors breached their fiduciary duties in connection with the
previously-announced entry into the Merger Agreement. The complaints seek an
injunction, damages and other relief. The Company believes that the allegations
in the complaints are without merit and intends to contest the matters
vigorously.
The Company is also involved in other various legal actions incidental to
the normal conduct of its business. Management does not believe that the
ultimate resolution of these actions will have a material adverse effect on the
Company's consolidated financial position, equity, results of operations,
liquidity or capital resources.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the Company's
executive officers:
NAME AGE POSITION
---- -------- ------------------------------------------
Allen J. Bernstein(1)..................... 56 Chairman of the Board, President and Chief
Executive Officer
Thomas J. Baldwin......................... 46 Executive Vice President, Chief Financial
Officer, Assistant Secretary, Treasurer
and Director
Roger J. Drake............................ 41 Vice President-Communications
Agnes Longarzo............................ 63 Vice President-Administration and
Secretary
Allan C. Schreiber........................ 61 Senior Vice President-Development
Klaus W. Fritsch.......................... 58 Vice Chairman and Co-Founder-Morton's of
Chicago
John T. Bettin............................ 46 President-Morton's of Chicago
------------------------
(1) Member of Executive Committee of the Board of Directors.
Allen J. Bernstein has been Chairman of the Board of the Company since
October 1994 and Chief Executive Officer and a Director of the Company since
December 1988. He has been President of the Company since September 1997 and was
previously President of the Company from December 1988 through October 1994.
Mr. Bernstein has worked in many various aspects of the restaurant industry
since 1970. Mr. Bernstein is also a director of Dave and Busters, Inc., Charlie
Browns Acquisition Corp., Luther's Acquisition Corp., Wilshire Restaurant
Group, Inc. and McCormick and Schmick Holdings LLC.
Thomas J. Baldwin was elected a Director of the Company in November 1998 and
Executive Vice President in January 1997. He previously served as Senior Vice
President, Finance of the Company since June 1992, and Vice President, Finance
since December 1988. In addition, Mr. Baldwin has been Chief Financial Officer,
Assistant Secretary and Treasurer of the Company since December 1988. His
previous experience includes seven years at General Foods Corp., now a
subsidiary of Kraft General Foods/Philip Morris Companies, Inc., where he worked
in various financial management and accounting positions and two years at
Citicorp where he served as Vice President responsible for strategic planning
and financial analysis at a major corporate banking division. Mr. Baldwin is
also a director of Charlie Browns Acquisition Corp. Mr. Baldwin is a licensed
certified public accountant in the State of New York.
Roger J. Drake has been Vice President of Communications since May 1999 and
Director of Communications since February 1994. Mr. Drake previously owned and
operated Drake Productions, a video and marketing communications company, from
April 1987 to December 1993. Prior to that, Mr. Drake served as producer,
editor, and copywriter at Major League Baseball Productions, from May 1981 to
June 1986.
Agnes Longarzo has been Vice President of Administration and Secretary of
the Company since December 1988. Ms. Longarzo had been Vice President of
Administration and Corporate Secretary for Le Peep Restaurants, Inc. from
March 1983 to December 1988. Prior to joining Le Peep Restaurants, Inc.,
Ms. Longarzo served as the Director of Administration of Wenco Food
Systems, Inc.
11
Allan C. Schreiber has been Senior Vice President, Development since
January 1999, Vice President of Real Estate since January 1996 and Director of
Real Estate since November 1995. Mr. Schreiber had been a Senior Managing
Director at The Galbreath Company since 1991. Prior to joining Galbreath, he
served as an Executive Vice President of National Westminster Bank USA from 1982
to 1991. Previously, Mr. Schreiber had been a Vice President and Division
Executive of the Chase Manhattan Bank.
Klaus W. Fritsch has been the Vice Chairman of Morton's of Chicago, Inc.
since May 1992. Mr. Fritsch has been with Morton's of Chicago, Inc. since its
inception in 1978, when he co-founded Morton's. After Mr. Arnold Morton ceased
active involvement in 1987, Mr. Fritsch assumed all operating responsibilities
as President in which capacity he served until May 1992.
John T. Bettin has been President of Morton's of Chicago since July 1998.
Prior to joining the Company, Mr. Bettin had been Executive Vice President of
Capital Restaurant Concepts, Ltd. since April 1994. Previously, Mr. Bettin
worked for Gilbert Robinson, Inc. where he served in various positions including
Corporate Executive Chef, Vice President Operations and Senior Vice President
Concept Development since 1975.
Officers are elected by and serve at the discretion of the Board of
Directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "MRG". The Company has received notice from the NYSE that it is
below the NYSE continued listing standards regarding total market capitalization
and stockholders' equity. The Company is in discussion with the NYSE regarding
planned compliance with such continued listing standards. The NYSE will
determine whether the Company's common stock will continue to be eligible for
trading on the NYSE. It cannot be assured that the Company's common stock will
remain listed on the NYSE. If the common stock is delisted from the NYSE, the
Company may seek another established trading market for the common stock,
although it cannot be assured that another established trading market would be
available. The following table sets forth, for the periods indicated, the
highest and lowest sale prices for the Common Stock, as reported by the NYSE.
FISCAL YEAR 2001 ENDED DECEMBER 30, 2001 HIGH LOW
---------------------------------------- -------- --------
First Quarter............................................... $24.15 $19.15
Second Quarter.............................................. 28.00 18.70
Third Quarter............................................... 20.30 7.60
Fourth Quarter.............................................. 14.15 8.50
FISCAL YEAR 2000 ENDED DECEMBER 31, 2000 HIGH LOW
---------------------------------------- -------- --------
First Quarter............................................... $19.81 $15.00
Second Quarter.............................................. 21.75 17.75
Third Quarter............................................... 21.50 19.88
Fourth Quarter.............................................. 23.50 18.69
On December 30, 2001, the last reported sale price of the Common Stock on
the NYSE was $11.30. On March 1, 2002, the last reported sale price of the
Common Stock on the NYSE was $8.90.
As of March 1, 2002, there were approximately 105 holders of record of the
Company's Common Stock. The Company believes that as of such date there were
approximately 1,000 beneficial owners of its Common Stock.
12
The Company has not paid any dividends on its Common Stock since its
inception. The Company currently intends to retain all of its earnings to
support the continued development of its business. The Company's Credit
Agreement prohibits the payment of dividends. See Note 6 to the Company's
consolidated financial statements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical financial data of the
Company as of and for each of the past five fiscal years. The Company derived
this statement of operations and balance sheet information from the Company's
audited historical consolidated financial statements.
FISCAL YEARS
----------------------------------------------------------------
STATEMENT OF OPERATIONS INFORMATION 2001 2000 1999 1998 1997
----------------------------------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues....................................... $237.1 $248.4 $206.9 $189.8 $172.7(5)
Income (Loss) Before Income Taxes and
Cumulative
Effect of a Change in an Accounting
Principle.................................... 0.3(1) 14.4 14.3(2) (6.1)(4) 9.2(6)
Income (Loss) Before Cumulative Effect of a
Change in an Accounting Principle............ 1.0(1) 10.1 10.7(2) (1.9)(4) 6.9(6)
Net Income (Loss).............................. 1.0(1) 10.1 8.5(2)(3) (1.9)(4) 6.9(6)
Net Income (Loss) Per Share Before Cumulative
Effect of a Change in an Accounting
Principle:
Basic........................................ 0.24(1) 2.20 1.81(2) (0.28)(4) 1.06(6)
Diluted...................................... 0.23(1) 2.12 1.77(2) (0.28)(4) 1.00(6)
Net Income (Loss) Per Share:
Basic........................................ 0.24(1) 2.20 1.42(2)(3) (0.28)(4) 1.06(6)
Diluted...................................... $ 0.23(1) $ 2.12 $ 1.39(2)(3) $(0.28)(4) $ 1.00(6)
FISCAL YEARS
----------------------------------------------------
BALANCE SHEET INFORMATION 2001 2000 1999 1998 1997
------------------------- -------- -------- -------- -------- --------
Current Assets...................................... $ 24.7 $ 23.8 $ 22.5 $ 19.3 $ 18.6
Property and Equipment, Net......................... 82.9 78.0 66.7 45.8 34.6
Total Assets........................................ 134.7 124.4 114.4 95.0 81.9
Current Liabilities................................. 30.6 35.8 34.5 28.2 21.4
Obligations to financial institutions and capital
leases, less current maturities................... 100.2 85.0 61.0 40.3 28.7
Stockholders' Equity (Deficit)...................... $ (0.2) $ (0.9) $ 12.1 $ 23.0 $ 28.6
------------------------
(1) Includes pre-tax charge of $1.6 million representing restaurant closing
costs, pre-tax charge of $0.7 million for costs associated with strategic
alternatives and proxy contest and an income tax benefit of $0.7 million.
(2) Includes nonrecurring, pre-tax litigation benefit of $0.2 million.
(3) Includes a $2.3 million charge, net of income taxes, representing the
cumulative effect of the requisite change in accounting for pre-opening
costs.
(4) Includes nonrecurring, pre-tax charge of $19.9 million representing the
write-down of impaired Bertolini's restaurant assets and the write-down and
accrual of lease exit costs associated with the closure of specified
Bertolini's restaurants, as well as the remaining interests in Mick's and
Peasant restaurants.
(5) Includes Mick's and Peasant revenues of $8.4 million.
(6) Includes nonrecurring, pre-tax litigation charge of $2.3 million.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to recoverability of fixed assets, intangible assets, and reserves related to
income taxes, and contingent liabilities. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Future adverse changes in market
conditions or poor operating results of underlying restaurant locations could
result in losses or an inability to recover the carrying value of the long-lived
assets that may not be reflected in the long-lived assets current carrying
value, thereby possibly requiring an impairment charge in the future. The
Company records a valuation allowance to reduce its deferred tax assets to the
amount that it believes is more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event the Company were to determine that it would not be able to realize all
or part of its net deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged to income in the period such determination
was made. Likewise, should the Company determine that it would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the deferred tax assets would increase income in the
period such determination was made.
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
Revenues decreased $11.3 million, or 4.5%, to $237.1 million for fiscal
2001, from $248.4 million for fiscal 2000. Incremental restaurant revenues of
$19.6 million were attributable to thirteen new restaurants opened after
January 2, 2000 which were offset by $23.0 million, or 10.1%, attributable to a
reduction in comparable revenues from restaurants open all of both periods.
Revenues decreased $2.7 million for the Morton's of Chicago Steakhouse
restaurant located in the Wall Street area of downtown Manhattan (closed since
September 11, 2001). Revenues for the four Bertolini's restaurants closed during
2001 and 2000 decreased by $5.4 million compared to fiscal 2000. Included in
2001 revenues is approximately $0.2 million representing the sale of the
Company's remaining interests in the Atlanta-based Mick's and Peasant
restaurants. Average revenue per restaurant open for a full period decreased
12.7%. Revenues for fiscal 2001 reflect the impact of menu price increases of
approximately 1% in each of February 2000 and May 2000. As of December 30, 2001,
the Company operated 66 restaurants (62 Morton's and 4 Bertolini's) and as of
December 31, 2000, 62 restaurants (57 Morton's and 5 Bertolini's).
14
Percentage changes in comparable restaurant revenues for fiscal 2001 versus
fiscal 2000 for restaurants open all of both periods are as follows:
PERCENTAGE CHANGE
-----------------
Morton's.................................................... -10.7%
Bertolini's................................................. -2.9%
Total....................................................... -10.1%
The Company believes that due to the severe nationwide impact of the World
Trade Center terrorist attacks, the continuing impact of the troubled economy,
unfavorable business conditions, corporate spending cutbacks and reduced
business travel, it has and will continue to experience weak revenue trends and
negative comparable restaurant revenues. These adverse operating conditions,
unfavorable revenue trends, increased operating costs and investment banking,
legal and other costs associated with the Company's evaluation of strategic
alternatives are expected to negatively impact results. The Company believes
that if such unfavorable conditions continue or worsen, future results will also
be adversely affected, the full extent of which cannot be determined or
forecasted at this time.
The building in which the Morton's of Chicago Steakhouse restaurant was
located in the Wall Street area of downtown Manhattan (located at 90 West
Street, two blocks from the World Trade Center) was damaged and has been closed
permanently. Accordingly the restaurant has been excluded from comparable
restaurant revenues.
On March 26, 2002, the Company entered into a definitive merger agreement
("Merger Agreement") providing for the acquisition of the Company by an
affiliate of Castle Harlan, Inc., a New York based private equity investment
firm. Under the terms of the Merger Agreement, the Company's stockholders will
receive $12.60 in cash for each share of common stock. Completion of the merger
is subject to various closing conditions including, but not limited to, approval
of the Company's stockholders and customary industry regulatory approvals,
receipt of third party consents and achievement of a minimum level of earnings.
There can be no assurance that these or other conditions to the merger will be
satisfied or that the merger will be completed. If the merger is not completed
for any reason, it is expected that the current management of the Company, under
the direction of the Board of Directors, will continue to manage the Company as
an ongoing business. The Company has also entered into an amendment to its
Credit Agreement which allows for the transactions contemplated under the
merger; however, this amendment will only become effective upon the completion
of the merger. The merger is currently expected to be completed in early summer
of 2002.
Food and beverage costs decreased from $84.2 million for fiscal 2000 to
$82.2 million for fiscal 2001. Primarily as a result of higher meat costs, these
costs as a percentage of revenues increased from 33.9% for fiscal 2000 to 34.6%
for the comparable 2001 period.
Restaurant operating expenses, which include labor, occupancy and other
operating expenses, increased from $105.6 million for fiscal 2000 to
$107.9 million for fiscal 2001. Those costs as a percentage of revenues
increased 3.0% from 42.5% for fiscal 2000 to 45.5% for fiscal 2001. Included in
fiscal 2000, is a gain of approximately $1.1 million resulting from the
disposition of certain restaurant assets. Included in fiscal 2001 is a recovery
of approximately $0.9 million for business interruption insurance recovery
related to costs incurred from the closing of the Morton's of Chicago Steakhouse
restaurant located in the Wall Street area of downtown Manhattan as a result of
the World Trade Center attacks. As of December 30, 2001, the Company has
received $500,000 related to this recovery in fiscal 2001 for such insurance. In
fiscal 2002, the Company received an additional $3,250,000 related to this
recovery and property insurance claims, $250,000 of which was accrued for in
fiscal 2001. The Company believes that additional benefits will be recorded in
fiscal 2002 relating to future insurance recoveries.
Pre-opening costs, depreciation, amortization and non-cash charges increased
from $11.1 million for fiscal 2000 to $12.7 million for fiscal 2001 and
increased from 4.5% of revenues to 5.3%,
15
respectively. Of the increase, $1.1 million was attributable to incremental
depreciation expense associated with thirteen new restaurants opened after
January 2, 2000. In accordance with the adoption of SOP 98-5 (see Note 2 to the
Company's consolidated financial statements), 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 fiscal 2001 and 2000 were
$3.7 million and $4.0 million, respectively. The timing and number of restaurant
openings, as well as costs per restaurant, affected the amounts of such costs.
Included in fiscal 2000 are charges of approximately $0.5 million related to the
disposition of one Bertolini's restaurant and charges of approximately
$0.6 million related to the write-down, to net realizable values, of another
Bertolini's restaurant. 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 fiscal 2001 included approximately $48,000 of
additional depreciation expense.
General and administrative expenses for fiscal 2001 were $17.2 million, a
decrease of $2.6 million, from $19.8 million for fiscal 2000. Decreases in such
costs were due in part to the Company's reduction in certain staff, travel and
other overhead expenditures. Such costs as a percentage of revenues were 7.3%
for fiscal 2001, a decrease of 0.7% from fiscal 2000.
Marketing and promotional expenses were $6.9 million, or 2.9% of revenues,
for fiscal 2001 versus $6.9 million, or 2.8% of revenues, for fiscal 2000.
Costs associated with the Company's 2001 proxy contest and its evaluation of
strategic alternatives were $0.7 million for fiscal 2001.
Interest expense, net of interest income, increased $1.2 million, from
$6.4 million for fiscal 2000 to $7.6 million for fiscal 2001. This increase in
interest expense was due to increased borrowings, partially offset by a decrease
in interest rates.
Restaurant closing costs recorded during fiscal 2001 represent a pre-tax
charge of $1.6 million for the write-down and exit costs associated with the
closing of one restaurant. Based on a strategic assessment of recent and current
revenue trends, the Company closed the Morton's of Chicago steakhouse restaurant
in Sydney, Australia in January 2002. Newly-imposed restrictions on importing
certain cuts of USDA prime beef from the United States, an essential ingredient
of the Morton's dining experience, contributed to the decision to close the
restaurant.
The Company's income tax (benefit) provision for income taxes consisted of a
tax benefit of $0.7 million for fiscal 2001, or an effective tax recovery of
254.5%, compared to a tax provision of $4.3 million for fiscal 2000, or an
effective tax rate of 30%. The effective tax rate variance represents the
establishment of additional deferred tax assets relating to FICA and other tax
credits that were generated during fiscal 2001. See Note 7 to the Company's
consolidated financial statements.
2000 COMPARED TO 1999
Revenues increased $41.5 million, or 20.1%, to $248.4 million for fiscal
2000, from $206.9 million for fiscal 1999. Of the increase in revenues,
$30.3 million was attributable to incremental restaurant revenues from fourteen
new restaurants opened after January 4, 1999 and $15.3 million, or 8.1%, was
attributable to additional comparable revenues from restaurants open all of both
periods. Revenues for the seven Bertolini's restaurants closed during 1999 and
2000 decreased by $3.7 million compared to fiscal 1999. Included in 1999
revenues is approximately $0.4 million of consulting fee income. Average revenue
per restaurant open for a full period increased 10.6%. Higher revenues for
fiscal 2000 reflect the impact of menu price increases of approximately 1% in
each of September 1999, February 2000 and May 2000. Additionally, as reflected
in the table below, certain Bertolini's restaurants have generated lower than
anticipated revenues, which have adversely impacted average restaurant revenues,
earnings and earnings trends. As of December 31, 2000, the Company operated 62
restaurants (57 Morton's and 5 Bertolini's) and as of January 2, 2000, 58
restaurants (50 Morton's and 8 Bertolini's).
16
Percentage changes in comparable restaurant revenues for fiscal 2000 versus
fiscal 1999 for restaurants open all of both periods are as follows:
PERCENTAGE CHANGE
-----------------
Morton's.................................................... 9.5%
Bertolini's................................................. -1.9%
Total....................................................... 8.1%
Food and beverage costs increased from $69.9 million for fiscal 1999 to
$84.2 million for fiscal 2000. These costs as a percentage of related revenues
remained consistent with fiscal 1999.
Restaurant operating expenses, which include labor, occupancy and other
operating expenses, increased from $90.0 million for fiscal 1999 to
$105.6 million for fiscal 2000. Those costs as a percentage of revenues
decreased 1.0% from 43.5% for fiscal 1999 to 42.5% for fiscal 2000. Included in
fiscal 2000, is a gain of approximately $1.1 million resulting from the
disposition of certain restaurant assets.
Pre-opening costs, depreciation, amortization and non-cash charges increased
from $7.6 million for fiscal 1999 to $11.1 million for fiscal 2000 and increased
from 3.7% of revenues to 4.5%, respectively. Of the increase, $1.4 million was
attributable to incremental depreciation expense associated with fourteen new
restaurants opened after January 4, 1999. Included in fiscal 2000 are charges of
approximately $0.5 million related to the disposition of one Bertolini's
restaurant and 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 3 to the
Company's consolidated financial statements). Effective April 3, 2000, the
Company changed the estimated useful lives for computer equipment and software.
As a result of such change, fiscal 2000 included approximately $144,000 of
additional depreciation expense. Beginning in fiscal 1999, in accordance with
its adoption of SOP 98-5 (see Note 2 to the Company's consolidated financial
statements), 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 fiscal 2000 and 1999 were $4.0 million and
$3.1 million, respectively. The timing and number of restaurant openings, as
well as costs per restaurant, affected the amounts of such costs.
General and administrative expenses for fiscal 2000 were $19.8 million, an
increase of $4.3 million, from $15.5 million for fiscal 1999. Such costs as a
percentage of revenues were 8.0% for fiscal 2000, an increase of 0.5% from
fiscal 1999. The increase in such costs is driven by incremental costs
associated with increased restaurant development, training and salary costs.
Marketing and promotional expenses were $6.9 million, or 2.8% of revenues,
for fiscal 2000 versus $5.7 million, or 2.7% of revenues, for fiscal 1999.
Interest expense, net of interest income, increased $2.3 million, from
$4.1 million for fiscal 1999 to $6.4 million for fiscal 2000. This increase in
interest expense was due to increased borrowings and higher interest rates.
During fiscal 1999, the Company settled all claims relating to a lawsuit.
The amount of the final settlement, including all related legal and other costs,
resulted in the Company recording a nonrecurring, pre-tax benefit of
approximately $159,000. See Note 3 to the Company's consolidated financial
statements.
Income tax expense of $4.3 million for fiscal 2000 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 2000, as well as state income taxes. See Note 7 to the Company's
consolidated financial statements.
17
LIQUIDITY AND CAPITAL RESOURCES
At present and in the past, the Company has had, and may have in the future,
negative working capital balances. The working capital deficit is principally
the result of the Company's investment in long-term restaurant operating assets
and real estate. The Company does not have significant receivables or
inventories and receives trade credit based upon negotiated terms in purchasing
food and supplies. Funds available from cash sales not needed immediately to pay
for food and supplies or to finance receivables or inventories are used for
noncurrent capital expenditures and or payments of long-term debt balances under
revolving credit agreements. The Company believes that negative working capital
balances are customary in the restaurant industry. The Company believes that its
negative working capital balances do not impact the Company's ability to operate
its businesses or meet its obligations as they come due.
Cash flows from operating activities for fiscal 2001, 2000 and 1999 were
$4,160,000, $14,915,000 and $24,467,000, respectively. The Company believes that
fiscal 2001 revenue trends, net income and cash flows decreased 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. Additionally,
investment banking, legal and other costs associated with the Company's
evaluation of strategic alternatives negatively impacted results. Changes in
working capital further impacted cash flow in each year.
Cash flows from investing activities for fiscal 2001, 2000 and 1999 were
$14,939,000, $15,714,000 and $15,432,000, respectively. For fiscal 2001, 2000
and 1999 the Company opened or relocated, respectively, seven, eight and nine
Morton's of Chicago steakhouse restaurants.
Cash flows provided (used) by financing activities for fiscal 2001, 2000 and
1999 were $13,345,000, $(2,701,000) and $(5,289,000), respectively. During
fiscal 2000 and 1999, the Company repurchased treasury stock of $23,210,000 and
$19,428,000, respectively. For fiscal 2001, 2000 and 1999, proceeds, net of
principal reductions, from obligations to financial institutions and capital
leases aggregated $12,864,000, $20,281,000 and $14,006,000, respectively.
Obligations to financial institutions and capital leases consists of the
following:
DEC. 30, DEC. 31,
2001 2000
-------- --------
(AMOUNTS IN THOUSANDS)
Credit Facility (a)......................................... $ 75,960 $64,925
Loan Agreement with CNL Financial I, Inc., due in monthly
principal and interest payments at 10.002% per annum,
matures on April 1, 2007.................................. 1,614 1,837
Mortgage loans with GE Capital Franchise Finance (formerly
FFCA Acquisition Corp.), due in monthly principal and
interest payments scheduled over twenty-year periods at
interest rates ranging from 7.68% to 9.26% per annum.
(b)....................................................... 18,093 11,574
Capital leases (see Note 11 to the Company's consolidated
financial statements)..................................... 9,042 11,435
-------- -------
Total obligations to financial institutions and capital
leases................................................ 104,709 89,771
Less current portion of obligations to financial
institutions and capital leases....................... 4,477 4,759
-------- -------
Obligations to financial institutions and capital
leases, less current maturities....................... $100,232 $85,012
======== =======
18
The following table represents contractual commitments associated with
obligations to financial institutions, capital leases and restaurant operating
leases (amounts in thousands):
2002 2003 2004 2005 2006 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
Credit Facility(a)......... $ 1,500 $ 7,000 $14,210 $53,250 $ 0 $ 0 $ 75,960
Loan Agreement with CNL
Financial I, Inc......... 246 293 274 329 364 108 1,614
Mortgage loans with GE
Capital Franchise
Finance(b)............... 448 486 528 574 625 15,432 18,093
Capital leases (see Note 11
to the Company's
consolidated financial
statements).............. 3,783 2,200 1,745 1,016 298 0 9,042
------- ------- ------- ------- ------- -------- --------
Subtotal............... 5,977 9,979 16,757 55,169 1,287 15,540 104,709
Restaurant Operating
Leases(c)................ 15,748 15,990 16,131 16,081 15,375 104,377 183,702
------- ------- ------- ------- ------- -------- --------
Total.................. $21,725 $25,969 $32,888 $71,250 $16,662 $119,917 $288,411
======= ======= ======= ======= ======= ======== ========
(a) Credit Facility obligations relate to borrowings under the Company's
Second Amended and Restated Revolving Credit and Term Loan Agreement, dated
June 19, 1995, between the Company and Fleet National Bank ("Fleet"), as amended
from time to time (the "Credit Agreement"), pursuant to which the Company's
credit facility (the "Credit Facility"), at December 30, 2001, was $89,750,000.
At December 30, 2001, the Credit Facility consisted 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 December 30, 2001,
calculated pursuant to the Credit Agreement, the Company's applicable margin on
the Revolving Credit was 1.25% on base rate loans and 3.25% on Eurodollar Rate
loans and the Company's applicable margin on the Term Loan was 1.50% on base
rate loans and 3.50% on Eurodollar Rate loans. In addition, the Company was
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. Pursuant to an amendment of the Credit
Agreement dated March 13, 2002 (see Note 6 to the Company's consolidated
financial statements), calculated pursuant to the Credit Agreement, the
Company's applicable margin on the Revolving Credit and on the Term Loan is
3.00% on base rate loans and 4.50% on Eurodollar Rate loans. Additionally, if
the borrowings under the Revolving Credit exceed $55,000,000, an additional
0.50% will be added to the applicable margin on base rate loans and Eurodollar
Rate loans under the Revolving Credit facility. In addition, the Company is
obligated to pay fees of 0.75% on unused loan commitments and a per annum letter
of credit fee (based on the face amount thereof) equal to the applicable margin
on the Eurodollar Rate loans. The Credit Agreement also provides for annual
additional mandatory prepayments as calculated based on the Company's net cash
flows, as defined. The amendment reduces the Revolving Credit facility to
$60,000,000 through June 30, 2003 unless a specified leverage ratio is achieved,
in which case the facility will return to $65,500,000, and also reduces the
Revolving Credit facility by $5 million every 6 months from June 30, 2003
through June 30, 2005.
At December 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 $13,523,000 and the weighted
average interest rate on all borrowings under the Credit Facility was 6.33% on
December 30, 2001. Fleet has syndicated portions of the Credit Facility to First
19
Union National Bank (formerly First Union Corporation), Comerica Bank (formerly
Imperial Bank), JPMorgan Chase Bank and LaSalle Bank National Association.
Borrowings under the Credit Agreement have been classified as noncurrent on
the Company's consolidated balance sheet since the Company may borrow amounts
due under the Term Loan from the Revolving Credit, including the Term Loan
principal payments which commenced in September 2001.
Borrowings under the Credit Agreement are secured by all tangible and
intangible assets of the Company. The Credit Agreement contains, among other
things, certain restrictive covenants with respect to the Company that create
limitations (subject to certain exceptions) on: (i) the incurrence or existence
of additional indebtedness or the granting of liens on assets or contingent
obligations; (ii) the making of certain investments; (iii) mergers, dispositions
of assets or consolidations; (iv) prepayment of certain other indebtedness;
(v) making capital expenditures above specified amounts; and (vi) the ability to
make certain fundamental changes or to change materially the present method of
conducting the Company's business. The Credit Agreement prohibits the Company
from entering into any new capital expenditure commitments or lease commitments
for new restaurants until a specified cash flow leverage ratio test is achieved
and prohibits the payment of dividends and the repurchase of the Company's
outstanding common stock. The Company's Credit Agreement also requires the
Company to satisfy certain financial ratios and tests. On March 13, 2002, the
Company amended the Credit Agreement to, among other things, reset these
financial ratios and tests (see Note 6 to the Company's consolidated financial
statements).
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, and the Company recognized a loss of
approximately $244,000 in accumulated other comprehensive income (loss). As of
December 30, 2001, in accordance with SFAS 133, assets were increased by
approximately $320,000 and liabilities by approximately $875,000 and the Company
recognized a loss of approximately $555,000 in accumulated other comprehensive
income (loss).
(b) Mortgage loans relate to loan commitments entered into during 1999 and
1998 by various subsidiaries of the Company and GE Capital Franchise Finance
(formerly known as FFCA Acquisition Corporation), 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.
(c) Included in obligations for restaurant operating leases are certain
restaurant operating leases for which the Company or another subsidiary of the
Company guarantees the performance of the restaurant operating lease for such
subsidiary for a portion of the lease term, typically not exceeding the first
five years. See Note 10 to the Company's consolidated financial statements.
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 December 30, 2001 and
December 31, 2000 are such capital lease obligations, related equipment of
$1,218,000 and $3,300,000, respectively, and a deferred gain of approximately
$1,279,000 and $3,173,000, respectively, each of which are being recognized over
the three year lives of such transactions.
During fiscal 2001, the Company's net investment in fixed assets and related
investment costs, including pre-opening costs and net of capitalized leases,
approximated $18.6 million. Mortgage
20
financing of approximately $6.9 million offset this amount. The Company
estimates that it will expend up to an aggregate of $13.0 million in 2002 to
finance ordinary refurbishment of existing restaurants and capital expenditures,
net of landlord development and or rent allowances and net of equipment lease
financing, for new restaurants. As a result of the March 13, 2002 amendment to
the Company's Credit Agreement (see Note 6 to the Company's consolidated
financial statements), capital expenditures have been limited to $13.0 million
in 2002, and further restricted in future years. As a result, the Company is
limited to five new Morton's of Chicago steakhouse restaurants in 2002 and no
new development in 2003 (see Note 6 to the Company's consolidated financial
statements). The Company may not enter into new restaurant leases until a
specified cash flow leverage ratio is achieved. Subject to the Company's
performance, which if adversely affected, could adversely affect the
availability of funds, the Company anticipates that funds generated through
operations and funds available under the Credit Agreement will be sufficient to
fund planned expansion during 2002.
From fiscal October 1998 through fiscal July 2000, the Company's board of
directors authorized repurchases of the Company's outstanding common stock of up
to 2,930,600 shares. The Company had repurchased 2,635,090 shares at an average
stock price of $17.80. The Company suspended the stock repurchase program on
May 8, 2001.
At December 30, 2001, the Company had Federal and various state income tax
net operating loss carryforwards which expire in various periods through 2019.
As of December 30, 2001, the Company had approximately $11.6 million in FICA and
other tax credits expiring in various periods through 2019 available to reduce
income taxes payable in future years. The FICA credits equal the amount of
employer social security and Medicare taxes paid or incurred by the employer on
tips received by its employees. The amount of FICA and other tax credits
available to reduce income taxes payable in the future years increased from
$9.4 million at December 31, 2000 to $11.6 million at December 30, 2001, because
the Company experienced a lower level of taxable income relative to prior years
resulting in lower current deductibility. Approximately $3.0 million of the
Company's deferred tax assets represents capital loss carryforwards. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
upon generating future taxable income during the periods in which temporary
differences become deductible and net operating losses can be carried forward.
Management considers the scheduled reversal of deferred tax assets, projected
future taxable income and tax planning strategies in making this assessment. See
Note 7 to the Company's consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENT TO BE ADOPTED
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
provisions of SFAS 141 were effective for transactions accounted for using the
purchase method 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 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
December 31, 2001.
21
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 income.
As of December 31, 2001, the Company will 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
December 31, 2001. The Company has not determined the effect, if any, that the
adoption of SFAS 144 will have on the Company's consolidated financial
statements.
INFLATION
The impact of inflation on labor, food and occupancy costs can significantly
affect the Company's operations. Many of the Company's employees are paid hourly
rates related to the Federal minimum wage. Food costs as a percentage of net
sales have been somewhat stable due to procurement efficiencies and menu price
adjustments. The Company currently does not engage in any futures contracts and
all purchases are made at prevailing market or contracted prices. Costs for
construction, taxes, repairs, maintenance and insurance all impact the Company's
occupancy costs, which increased during the period. Management believes the
current practice of maintaining operating margins through a combination of menu
price increases, cost controls, careful evaluation of property and equipment
needs, and efficient purchasing practices is its most effective tool for dealing
with inflation.
22
SEASONALITY
The Company's business is somewhat seasonal in nature, with revenues being
less in the third quarter primarily due to Morton's reduced summer volume. The
2001 third quarter includes the impact of the September 11, 2001 World Trade
Center terrorist attacks. The following table sets forth historical, unaudited
quarterly revenues for the Company's Morton's and Bertolini's restaurants which
were open for the entire period from January 1, 2001 to December 30, 2001 (53
restaurants), and for the entire period from January 3, 2000 to December 31,
2000 (47 restaurants):
COMPARABLE RESTAURANT REVENUES
2001 2000 2000 1999
------------------- ------------------- ------------------- -------------------
53 RESTAURANTS 47 RESTAURANTS
----------------------------------------- -----------------------------------------
$ % $ % $ % $ %
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
First Quarter............... 59,489 29.0 61,546 27.0 55,021 26.9 49,807 26.4
Second Quarter.............. 50,560 24.7 55,441 24.3 49,007 24.0 45,260 23.9
Third Quarter............... 43,296 21.1 50,855 22.3 46,305 22.7 41,823 22.1
Fourth Quarter.............. 51,687 25.2 60,187 26.4 53,974 26.4 52,105 27.6
------- ----- ------- ----- ------- ----- ------- -----
205,032 100.0 228,029 100.0 204,307 100.0 188,995 100.0
======= ===== ======= ===== ======= ===== ======= =====
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 December 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
December 30, 2001 is not considered material. The Morton's of Chicago steakhouse
in Sydney, Australia was closed in January 2002.
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. See Note 6 to the Company's
consolidated financial statements. The change in fair value of long-term debt
resulting from a hypothetical 10% fluctuation in interest rates as of
December 30, 2001 is not considered material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements follow on pages 24 to 45.
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Morton's Restaurant Group, Inc.:
We have audited the accompanying consolidated balance sheets of Morton's
Restaurant Group, Inc. and subsidiaries as of December 30, 2001 and
December 31, 2000 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 30, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Morton's
Restaurant Group, Inc. and subsidiaries as of December 30, 2001 and
December 31, 2000 and the results of their operations and their cash flows for
each of the years in the three-year period ended December 30, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
Melville, New York
January 30, 2002, except as to
Note 6, which is as of March 13, 2002
24
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 2001 AND DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,827 $ 2,296
Accounts receivable....................................... 3,988 4,639
Income taxes receivable................................... 560 --
Inventories............................................... 8,061 8,303
Landlord construction receivables, prepaid expenses and
other
current assets.......................................... 2,632 2,867
Deferred income taxes..................................... 4,616 5,653
-------- --------
Total current assets.................................... 24,684 23,758
-------- --------
Property and equipment, net................................. 82,936 78,047
Intangible assets, net of accumulated amortization of $5,072
at December 30, 2001 and $4,668 at December 31, 2000...... 10,923 11,327
Other assets and deferred expenses, net of accumulated
amortization of $649 at December 30, 2001 and $518 at
December 31, 2000......................................... 7,582 6,412
Insurance receivable........................................ 1,682 --
Deferred income taxes....................................... 6,907 4,866
-------- --------
$134,714 $124,410
======== ========
See accompanying notes to consolidated financial statements.
25
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 30, 2001 AND DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,566 $ 8,677
Accrued expenses.......................................... 19,531 21,375
Current portion of obligations to financial institutions
and capital leases........................................ 4,477 4,759
Accrued income taxes...................................... -- 1,004
-------- --------
Total current liabilities............................... 30,574 35,815
-------- --------
Obligations to financial institutions and capital leases,
less current maturities................................... 100,232 85,012
Other liabilities........................................... 4,118 4,506
-------- --------
Total liabilities....................................... 134,924 125,333
-------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value per share. Authorized
3,000,000 shares,
no shares issued or outstanding......................... -- --
Common stock, $0.01 par value per share. Authorized
25,000,000 shares,
issued 6,803,801 at December 30, 2001 and 6,778,363 at
December 31, 2000....................................... 68 68
Nonvoting common stock, $0.01 par value per share.
Authorized 3,000,000
shares, no shares issued or outstanding................. -- --
Additional paid-in capital................................ 63,478 63,077
Accumulated other comprehensive loss...................... (907) (150)
Accumulated deficit....................................... (16,095) (17,084)
Less treasury stock, at cost, 2,624,154 shares at December
30, 2001 and
2,630,361 shares at December 31, 2000................... (46,754) (46,834)
-------- --------
Total stockholders' equity (deficit).................... (210) (923)
-------- --------
$134,714 $124,410
======== ========
See accompanying notes to consolidated financial statements.
26
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
DEC. 30, DEC. 31, JAN. 2,
2001 2000 2000
-------- -------- --------
Revenues.................................................... $237,112 $248,382 $206,869
Food and beverage costs..................................... 82,150 84,224 69,873
Restaurant operating expenses............................... 107,905 105,580 89,988
Pre-opening costs, depreciation, amortization and non-cash
charges................................................... 12,678 11,087 7,592
General and administrative expenses......................... 17,201 19,811 15,497
Marketing and promotional expenses.......................... 6,927 6,879 5,669
Costs associated with strategic alternatives and proxy
contest................................................... 730 -- --
Interest expense, net....................................... 7,617 6,427 4,100
Restaurant closing costs.................................... 1,625 -- --
Nonrecurring benefit........................................ -- -- (159)
-------- -------- --------
Income before income taxes and cumulative effect of a
change in
an accounting principle............................... 279 14,374 14,309
Income tax (benefit) expense................................ (710) 4,312 3,577
-------- -------- --------
Income before cumulative effect of a change in an
accounting
principle............................................. 989 10,062 10,732
Cumulative effect of a change in an accounting principle,
net of income tax benefit of $1,357....................... -- -- 2,281
-------- -------- --------
Net income.............................................. $ 989 $ 10,062 $ 8,451
======== ======== ========
Net income (loss) per share--basic:
Before cumulative effect of a change in an accounting
principle................................................. $ 0.24 $ 2.20 $ 1.81
Cumulative effect of a change in an accounting
principle................................................. -- -- (0.39)
-------- -------- --------
Net income.............................................. $ 0.24 $ 2.20 $ 1.42
======== ======== ========
Net income (loss) per share--diluted:
Before cumulative effect of a change in an accounting
principle................................................. $ 0.23 $ 2.12 $ 1.77
Cumulative effect of a change in an accounting
principle................................................. -- -- (0.38)
-------- -------- --------
Net income.............................................. $ 0.23 $ 2.12 $ 1.39
======== ======== ========
Weighted average common and potential common shares
outstanding:
Basic..................................................... 4,172 4,565 5,938
======== ======== ========
Diluted................................................... 4,241 4,756 6,078
======== ======== ========
See accompanying notes to consolidated financial statements.
27
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
TOTAL
ACCUMULATED STOCK-
ADDITIONAL OTHER TREASURY HOLDERS'
COMMON PAID-IN ACCUMULATED COMPREHENSIVE STOCK EQUITY
STOCK CAPITAL DEFICIT INCOME (LOSS) AT COST (DEFICIT)
--------- ---------- ----------- ------------- --------- ---------
Balance at January 3, 1999..... $ 67 $ 62,717 $ (35,597) $ (34) $ (4,196) $ 22,957
Comprehensive income (loss):
Net income................... -- -- 8,451 -- --
Foreign currency translation
adjustments................ -- -- -- (45) --
---------
Total comprehensive income
(loss)....................... 8,406
---------
Exercise of stock options...... 1 132 -- -- -- 133
Purchase of 1,146,790 shares of
common stock (average cost of
$16.94 per share)............ -- -- -- -- (19,428) (19,428)
--------- --------- --------- --------- --------- ---------
Balance at January 2, 2000..... 68 62,849 (27,146) (79) (23,624) 12,068
Comprehensive income (loss):
Net income................... -- -- 10,062 -- --
Foreign currency translation
adjustments................ -- -- -- (71) --
---------
Total comprehensive income
(loss)....................... 9,991
---------
Exercise of stock options...... -- 228 -- -- -- 228
Purchase of 1,249,171 shares of
common stock (average cost of
$18.57 per share)............ -- -- -- -- (23,210) (23,210)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 2000... 68 63,077 (17,084) (150) (46,834) (923)
Comprehensive income (loss):
Net income................... -- -- 989 -- --
Foreign currency translation
adjustments................ -- -- -- (202) --
Fair value of interest rate
swaps........................ -- -- -- (555) --
---------
Total comprehensive income
(loss)....................... 232
---------
Return of "short swing" profit
realized by insider pursuant
to Section 16(b)............. -- 68 -- -- -- 68
Exercise of stock options...... -- 333 -- -- -- 333
Issuance of 6,207 shares of
treasury stock (average cost
of $13.00 per share)......... -- -- -- -- 80 80
--------- --------- --------- --------- --------- ---------
Balance at December 30, 2001... $ 68 $ 63,478 $ (16,095) $ (907) $ (46,754) $ (210)
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
28
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
(AMOUNTS IN THOUSANDS)
DEC. 30, DEC, 31, JAN. 2,
2001 2000 2000
-------- -------- --------
Cash flows from operating activities:
Net income................................................ $ 989 $10,062 $ 8,451
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of a change in an accounting
principle, net of income tax benefit................ -- -- 2,281
Depreciation of property and equipment................ 7,501 6,624 3,391
Amortization of intangible assets, deferred occupancy
costs and other deferred expenses................... 1,478 455 1,120
Deferred income taxes................................. (1,004) 2,691 2,618
Restaurant closing costs.............................. 1,625 -- --
Nonrecurring benefit.................................. -- -- (159)
Change in assets and liabilities:
Accounts receivable................................. 643 (3,549) (197)
Income taxes receivable............................. (560) -- --
Inventories......................................... (39) (1,181) (730)
Landlord construction receivables, prepaid expenses
and other assets.................................. (938) (692) 258
Accounts payable, accrued expenses and other
liabilities....................................... (4,531) (359) 7,666
Accrued income taxes................................ (1,004) 864 (232)
------- ------- -------
Net cash provided by operating activities......... 4,160 14,915 24,467
------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment....................... (14,939) (15,714) (15,432)
------- ------- -------
Net cash used by investing activities............. (14,939) (15,714) (15,432)
------- ------- -------
Cash flows from financing activities:
Principal reduction on obligations to financial
institutions and capital leases......................... (11,421) (11,196) (13,952)
Proceeds from obligations to financial institutions and
capital leases.......................................... 24,285 31,477 27,958
Issuance (purchases) of treasury stock.................... 80 (23,210) (19,428)
Net proceeds from issuance of stock and other............. 401 228 133
------- ------- -------
Net cash provided (used) by financing
activities...................................... 13,345 (2,701) (5,289)
------- ------- -------
Effect of exchange rate changes on cash..................... (35) (10) (57)
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 2,531 (3,510) 3,689
Cash and cash equivalents at beginning of year.............. 2,296 5,806 2,117
------- ------- -------
Cash and cash equivalents at end of year.................... $ 4,827 $ 2,296 $ 5,806
======= ======= =======
See accompanying notes to consolidated financial statements.
29
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
(1) ORGANIZATION AND OTHER MATTERS
Morton's Restaurant Group, Inc. (the "Company") was incorporated as a
Delaware corporation in October 1988 and is engaged in the business of owning
and operating restaurants under the names Morton's of Chicago ("Morton's") and
Bertolini's Authentic Trattorias ("Bertolini's"). As of December 30, 2001, the
Company owned and operated 66 restaurants (62 Morton's and 4 Bertolini's).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and results of
operations of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) REPORTING PERIOD
The Company uses a fiscal year which consists of 52 weeks. Approximately
every six or seven years, a 53rd week will be added.
(c) INVENTORIES
Inventories consist of food, beverages and supplies and are recorded at the
lower of cost or market. Cost is determined using the first-in, first-out (FIFO)
method.
(d) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets.
Improvements to leased premises and property under capital leases are amortized
on the straight-line method over the shorter of the lease term, including
planned extensions, or estimated useful lives of the improvements. Effective
April 3, 2000, the Company changed the estimated useful lives for depreciation
of computer equipment and software, from periods ranging from three to ten years
to periods ranging from three to five years, so as to more accurately reflect
the relative replacement periods. As a result of such change, fiscal 2001 and
2000 included approximately $48,000 and $144,000, respectively, of additional
depreciation expense. In fiscal 2001, 2000 and 1999, interest costs capitalized
during the construction period for leasehold improvements were approximately
$150,000, $577,000 and $350,000, respectively.
(e) OTHER ASSETS AND DEFERRED EXPENSES
Beginning in fiscal 1999, in accordance with its adoption of SOP 98-5, the
Company expenses all costs incurred during start-up activities, including
pre-opening costs, as incurred. In connection with the adoption, the Company
recorded a charge for the cumulative effect of an accounting change of
approximately $2,281,000, net of income tax benefits of approximately
$1,357,000. Pre-opening costs incurred and recorded as expense for fiscal 2001
and 2000 were approximately $3,700,000 and $4,008,000, respectively. Included in
"Other assets and deferred expenses" are smallwares of approximately $2,754,000
and $2,580,000 at the end of fiscal 2001 and 2000, respectively.
(f) INCOME TAXES
The Financial Accounting Standards Board Statement of Financial Accounting
Standards ("SFAS") 109, "Accounting for Income Taxes", requires a change from
the deferred method of accounting for income taxes of Accounting Principles
Board ("APB") Opinion 11 to the asset and liability method of
30
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
accounting for income taxes. Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(g) INTANGIBLE ASSETS
Intangible assets represent goodwill which arose from the acquisition of
Morton's. Amortization is recognized on a straight-line basis over forty years.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
In July 2001, the Financial Accounting Standards Board issued SFAS 141,
"Business Combinations" which supersedes 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
provisions of SFAS 141 were effective for transactions accounted for using the
purchase method 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 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
December 31, 2001.
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 income.
31
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
As of December 31, 2001, the Company will 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.
(h) DERIVATIVE FINANCIAL INSTRUMENTS
Amounts receivable or payable under interest rate swap agreements are
accounted for as adjustments to interest expense.
The Company adopted SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS 137 and SFAS 138, as of January 1, 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measures those instruments at fair value. The Company's derivative
financial instruments consist of two interest rate swap agreements with notional
amounts of $10,000,000 each. The interest rate swap agreements are designated as
cash flow hedges for purposes of SFAS 133. Based on regression analysis, the
Company has determined that its interest rate swap agreements are highly
effective. The adoption of SFAS 133 on January 1, 2001, increased assets by
approximately $141,000 and liabilities by approximately $385,000, and recognized
a loss of approximately $244,000 in accumulated other comprehensive income
(loss). As of December 30, 2001, in accordance with SFAS 133, assets were
increased by approximately $320,000 and liabilities by approximately $875,000,
and recognized a loss of approximately $555,000 in accumulated other
comprehensive income (loss).
(i) MARKETING AND PROMOTIONAL EXPENSES
Marketing and promotional expenses in the accompanying consolidated
statements of income include advertising expenses of approximately $3,190,000,
$3,767,000 and $3,296,000 for fiscal 2001, 2000 and 1999, respectively.
Advertising costs are expensed as incurred.
(j) STATEMENTS OF CASH FLOWS
For the purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments purchased with a maturity of three
months or less to be cash equivalents. The Company paid cash interest and fees,
net of amounts capitalized, of approximately $7,199,000, $6,027,000 and
$3,774,000 and income taxes, net of refunds, of approximately $1,541,000,
$757,000 and $1,179,000 for fiscal 2001, 2000 and 1999, respectively. During
fiscal 2001, 2000 and 1999, the Company entered into capital lease finance
agreements of approximately $2,106,000, $4,132,000 and $3,290,000, respectively,
for restaurant equipment. In addition, during fiscal 1999 the Company entered
into sale-leaseback transactions aggregating $6,000,000 for existing restaurant
equipment (see Note 11). In addition, as of December 30, 2001, the Company has
written off the net book value of the assets of the Morton's of Chicago
Steakhouse restaurant located in the Wall Street area of downtown Manhattan and
recorded a receivable in "Insurance receivable" in the accompanying consolidated
balance sheet of approximately $1,682,000, representing minimum expected
insurance proceeds relating to such assets.
32
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
(k) EARNINGS PER SHARE
Basic income (loss) per share is computed by dividing net income (loss) by
the weighted average number of shares of common stock outstanding during each
period. Diluted income (loss) per share is computed assuming the conversion of
stock options with a market value greater than the exercise price.
(l) USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(m) LONG-LIVED ASSETS
The Company's accounting policies relating to the recording of long-lived
assets, including property and equipment and intangibles, are discussed above.
Pursuant to SFAS 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", the Company reviews long-lived assets
to be held and used or disposed of for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is determined on a
restaurant-by-restaurant basis by a comparison of the carrying amount of an
asset to undiscounted future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of or sold are
reported at the lower of the carrying amount or fair value less costs to sell.
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
December 31, 2001. The Company has not determined the effect, if any, that the
adoption of SFAS 144 will have on the Company's consolidated financial
statements.
(n) STOCK-BASED COMPENSATION
The Company applies the provisions of SFAS 123 which encourages, but does
not require companies to record compensation expense for stock-based employee
compensation plans at fair value. The Company applies the intrinsic value-based
method of accounting prescribed by APB Opinion 25, Accounting for Stock Issued
to Employees, and related interpretations, in accounting for its fixed plan
stock options. As such, compensation expense would be recorded on the date of
grant only if the
33
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
current market price of the underlying stock exceeded the exercise price. The
Company discloses the pro forma net earnings and pro forma earnings per share
for stock option grants made beginning in fiscal 1995 as if such method had been
used to account for stock-based compensation costs as described in SFAS 123.
(o) TRANSLATION OF FOREIGN CURRENCIES
As of December 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 Toronto (opened September 1998), one in Vancouver, Canada
(opened October 2000) and one in Sydney, Australia (opened May 2001). The
restaurant in Sydney, Australia was closed on January 6, 2002 (see Note 3). The
financial position and results of operations of the Company's foreign businesses
are measured using local currency as the functional currency. Assets and
liabilities are translated into U.S. dollars at year-end rates of exchange, and
revenues and expenses are translated at the average rates of exchange for the
year. Gains or losses resulting from the translation of foreign currency
financial statements are accumulated as a separate component of stockholders'
equity.
(p) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards for the reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and equity adjustments from foreign
currency translation and interest rate swaps and is presented in the
consolidated statements of stockholders' equity.
(q) REVENUE RECOGNITION
Sales from restaurants are recognized as revenue at the point of the
delivery of meals and services.
(r) RECLASSIFICATION
Certain items previously reported in specific financial statement captions
have been reclassed to conform to the fiscal 2001 presentation.
(3) RESTAURANT CLOSING COSTS AND NONRECURRING (BENEFIT) CHARGES
(a) MORTON'S OF CHICAGO--SYDNEY
Based on a strategic assessment of revenue trends, the Company closed the
Morton's of Chicago steakhouse restaurant in Sydney, Australia in January 2002.
Newly imposed restrictions on importing certain cuts of USDA prime beef from the
United States, an essential ingredient of the Morton's dining experience,
contributed to the decision to close the restaurant. The Company recorded a 2001
fourth quarter, pre-tax charge of approximately $1,625,000, representing the
write-down and exit costs associated with the closing of the restaurant.
(b) MORTON'S OF CHICAGO--90 WEST STREET, NY
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 was located in the Wall Street area of downtown Manhattan (located at
90 West Street, two blocks from the World Trade Center) was damaged and has been
closed permanently. The Company recorded a benefit in "Restaurant operating
expenses" in the accompanying consolidated statements of income of approximately
$860,000 through December 30, 2001 representing business interruption insurance
recovery related to costs incurred from
34
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
the closing of that restaurant since September 11, 2001. As of December 30,
2001, the Company has received $500,000 for such insurance. The Company believes
that additional benefits will be recorded in fiscal 2002 and possibly future
periods relating to future insurance recoveries. In addition, as of
December 30, 2001, the Company has written off the net book value of the assets
of the restaurant and recorded a receivable in "Insurance receivable" in the
accompanying consolidated balance sheet of approximately $1,682,000,
representing expected minimum insurance proceeds relating to such assets. Such
proceeds may be in excess of the net book value of the assets and may give rise
to a gain, the amount of which cannot be determined at this time, and has not
been recorded in the accompanying consolidated financial statements.
(c) BERTOLINI'S
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 December 30, 2001 and December 31, 2000, included in "Accrued
expenses" in the accompanying consolidated balance sheets is approximately
$1,714,000 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 2000 and 1999 three
such underperforming restaurants were closed. (See "Part II--Other Information,
Item 1. Legal Proceedings".)
(d) LITIGATION AND RELATED EXPENSES
During 1999, the Company settled all claims relating to a lawsuit. The
amount of the final settlement, which was paid in fiscal 2000, including all
related legal and other costs, resulted in the Company recording a nonrecurring,
pre-tax benefit of approximately $159,000 in the third quarter of fiscal 1999.
(e) MICK'S AND PEASANT RESTAURANTS
In the fourth quarter of fiscal 1998, the Company evaluated the
recoverability of its ownership interests in Mick's and Peasant and the related
promissory notes received in connection with its February 1997 sale of such
restaurants. The analysis was based upon a review of the purchaser's 1998
operating performance, including anticipated future cash flows, and concluded
that pursuant to the provisions of SFAS 114 and SFAS 115, the notes receivable
and investment carrying values were impaired and therefore recorded an
impairment charge of $2,200,000. Additionally, the Company recorded additional
lease termination liabilities of $1,688,000, based upon additional defaults of
35
MORTON'S RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 30, 2001, DECEMBER 31, 2000 AND JANUARY 2, 2000
sublease agreements and litigation charges for certain Mick's and Peasant
Restaurants, previously guaranteed by the Company. During fiscal 2001 the
Company sold its remaining interests in Mick's and Peasant for $200,000. At
December 30, 2001 and December 31, 2000, included in "Accrued expenses" in the
accompanying consolidated balance sheets, is $0 and approximately $162,000,
respectively, representing the remaining lease disposition liabilities for such
restaurants.
(4) PROPERTY AND EQUIPMENT
The costs and related accumulated depreciation and amortization of major
classes of assets as of December 30, 2001 and December 31, 2000 are set forth
below:
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
(AMOUNTS IN THOUSANDS)
Furniture, fixtures and equipment........................... $41,100 $35,842
Leasehold improvements...................................... 60,692 51,052
Land........................................................ 6,241 6,337
Construction in progress.................................... 669 2,160
------- -------
108,702 95,391
Less accumulated depreciation and amortization............ 25,766 17,344
------- -------
Net property and equipment.................................. $82,936 $78,047
======= =======
(5) ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 30, 2001 DECEMBER 31, 2000
----------------- -----------------
(AMOUNTS IN THOUSANDS)
Accrued gift certificates................................... $ 3,773 $ 2,997
Restaurant operating expenses............................... 2,551 2,873
Payroll and related taxes................................... 1,768 2,427
Sales and use tax........................................... 1,718 1,969
Bertolini's accrued lease exit costs........................ 1,714 2,153
Rent and property taxes..................................... 1,607 2,033
Accrued construction costs.................................. 1,534 2,129
Deferred gain on sale of assets............................. 1,279 1,813
Other....................................................... 3,587 2,981
------- -------
Total accrued expenses.................................... $19,531 $21,375
======= =======
36
(6) OBLIGATIONS TO FINANCIAL INSTITUTIONS
Obligations to financial institutions and capital leases consists of the
following:
DEC. 30, DEC. 31,
2001 2000
-------- --------
(AMOUNTS IN
THOUSANDS)
Credit Facility (a)......................................... $ 75,960 $64,925
Loan Agreement with CNL Financial I, Inc., due in monthly
principal and interest payments at 10.002% per annum,
matures on April 1, 2007.................................. 1,614 1,837
Mortgage loans with GE Capital Franchise Finance (formerly
FFCA Acquisition Corp.), due in monthly principal and
interest payments scheduled over twenty-year periods at
interest rates ranging from 7.68% to 9.26% per annum.
(b)....................................................... 18,093 11,574
Capital leases (see Note 11)................................ 9,042 11,435
-------- -------
Total obligations to financial institutions and capital
leases.................................................... 104,709 89,771
Less current portion of obligations to financial
institutions and capital leases........................... 4,477 4,759
-------- -------
Obligations to financial institutions and capital leases,
less current maturities................................... $100,232 $85,012
======== =======
Future maturities of obligations to financial institutions and capital
leases are as follows as of December 30, 2001:
2002 2003 2004 2005 2006 THEREAFTER TOTAL
-------- -------- -------- -------- -------- ---------- --------
(AMOUNTS IN THOUSANDS)
Credit Facility (a)......... $ 1,500 $ 7,000 $14,210 $53,250 $ 0 $ 0 $ 75,960
Loan Agreement with CNL
Financial I, Inc.......... 246 293 274 329 364 108 1,614
Mortgage loans with GE
Capital Franchise
Finance(b)................ 448 486 528 574 625 15,432 18,093
Capital leases (see Note
11)....................... 3,783 2,200 1,745 1,016 298 0 9,042
------- ------- ------- ------- ------- ------- --------
Total................... $ 5,977 $ 9,979 $16,757 $55,169 $ 1,287 $15,540 $104,709
======= ======= ======= ======= ======= ======= ========
(a) Credit Facility obligations relate to borrowings under the Company's
Second Amended and Restated Revolving Credit and Term Loan Agreement, dated
June 19, 1995, between the Company and Fleet National Bank ("Fleet"), as amended
from time to time (the "Credit Agreement"), pursuant to which the Company's
credit facility (the "Credit Facility"), at December 30, 2001, was $89,750,000.
At December 30, 2001, the Credit Facility consisted 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 December 30, 2001,
calculated pursuant to the Credit Agreement, the Company's applicable margin on
the Revolving Credit was 1.25% on base rate loans and 3.25% on Eurodollar Rate
loans and the Company's applicable margin on the Term Loan was 1.50% on base
rate loans and 3.50% on Eurodollar Rate loans. In addition, the Company was
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. Pursuant to an amendment of the Credit
Agreement dated March 13, 2002, calculated pursuant to the Credit Agreement, the
Company's applicable margin on the Revolving Credit and on the Term Loan is
3.00% on base rate loans and 4.50% on Eurodollar Rate loans. Additionally, if
the borrowings under the Revolving Credit exceed $55,000,000, an additional
0.50% will be added to the applicable margin on base rate loans and Eurodollar
Rate loans under the Revolving Credit facility. In addition, the
37
Company is obligated to pay fees of 0.75% on unused loan commitments and a per
annum letter of credit fee (based on the face amount thereof) equal to the
applicable margin on the Eurodollar Rate loans. The Credit Agreement also
provides for annual additional mandatory prepayments as calculated based on the
Company's net cash flows, as defined. The amendment reduces the Revolving Credit
facility to $60,000,000 through June 30, 2003 unless a specified leverage ratio
is achieved, in which case the facility will return to $65,500,000, and also
reduces the Revolving Credit facility by $5 million every 6 months from
June 30, 2003 through June 30, 2005.
At December 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 $13,523,000 and the weighted
average interest rate on all borrowings under the Credit Facility was 6.33% on
December 30, 2001. Fleet has syndicated portions of the Credit Facility to First
Union National Bank (formerly First Union Corporation), Comerica Bank (formerly
Imperial Bank), JPMorgan Chase Bank and LaSalle Bank National Association.
Borrowings under the Credit Agreement have been classified as noncurrent on
the Company's consolidated balance sheet since the Company may borrow amounts
due under the Term Loan from the Revolving Credit, including the Term Loan
principal payments which commenced in September 2001.
Borrowings under the Credit Agreement are secured by all tangible and
intangible assets of the Company. The Credit Agreement contains, among other
things, certain restrictive covenants with respect to the Company that create
limitations (subject to certain exceptions) on: (i) the incurrence or existence
of additional indebtedness or the granting of liens on assets or contingent
obligations; (ii) the making of certain investments; (iii) mergers, dispositions
of assets or consolidations; (iv) prepayment of certain other indebtedness;
(v) making capital expenditures above specified amounts; (vi) the ability to
make certain fundamental changes or to change materially the present method of
conducting the Company's business. The Credit Agreement prohibits the Company
from entering into any new capital expenditure commitments or lease commitments
for new restaurants until a specified cash flow leverage ratio test is achieved
and prohibits the payment of dividends and the repurchase of the Company's
outstanding common stock. The Company's Credit Agreement also requires the
Company to satisfy certain financial ratios and tests. On March 13, 2002, the
Company amended the Credit Agreement to, among other things, reset these
financial ratios and tests.
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, and the Company recognized a loss of
approximately $244,000 in accumulated other comprehensive income (loss). As of
December 30, 2001, in accordance with SFAS 133, assets were increased by
approximately $320,000 and liabilities by approximately $875,000 and the Company
recognized a loss of approximately $555,000 in accumulated other comprehensive
income (loss).
(b) Mortgage loans relate to loan commitments entered into during 1999 and
1998 by various subsidiaries of the Company and GE Capital Franchise Finance
(formerly known as FFCA Acquisition Corporation), 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.
Management believes that the carrying amount of long-term debt approximates
fair value since the interest rate is variable and the margins are consistent
with those available to the Company under similar terms.
38
(7) INCOME TAXES
Income tax (benefit) expense is comprised of the following:
2001 2000 1999
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Federal: Current............................................ $ (341) $ 1,215 $ --
Deferred............................................. (557) 2,402 2,798
------- ------- -------
(898) 3,617 2,798
State and Local: Current.................................... 635 406 509
Deferred...................................... (447) 289 270
------- ------- -------
188 695 779
------- ------- -------
Income tax (benefit) expense................................ $ (710) $ 4,312 $ 3,577
======= ======= =======
Income tax (benefit) expense differed from the amounts computed by applying
the U.S. Federal income tax rates to income before income taxes as a result of
the following:
2001 2000 1999
-------- -------- --------
(AMOUNTS IN THOUSANDS)
Computed "expected" tax expense (benefit)................... $ 95 $ 4,887 $ 4,865
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal income tax
benefit................................................... 124 459 514
FICA tax credits.......................................... (1,488) (1,386) (1,555)
Change in valuation allowance............................. (268) (242) --
Other, net................................................ 827 594 (247)
------- ------- -------
$ (710) $ 4,312 $ 3,577
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at the end of fiscal 2001
and 2000 are presented below:
DECEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
(AMOUNTS IN THOUSANDS)
Deferred tax assets:
Federal and state net operating loss carryforwards........ $ 3,509 $ 3,106
Capital loss carryforwards................................ 2,970 3,285
Nonrecurring charge for write-down and related charges for
assets held
for sale................................................ -- 59
Nonrecurring charge for write-down and related charges for
impaired
assets.................................................. 1,310 1,001
Interest rate swap agreements............................. 320 --
Deferred rent and start-up amortization................... 2,639 2,740
FICA and other tax credits................................ 11,640 9,386
------- -------
Total gross deferred tax assets......................... 22,388 19,577
Less valuation allowance................................ (5,264) (5,533)
------- -------
Net deferred tax assets................................. 17,124 14,044
Deferred tax liabilities:
Property and equipment depreciation....................... 5,601 3,525
------- -------
Net deferred tax assets and liabilities..................... $11,523 $10,519
======= =======
39
At December 30, 2001, the Company had Federal and various state income tax
net operating loss carryforwards, capital loss carryforwards, and FICA and other
tax credits expiring in various periods through 2019, 2006 and 2019,
respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences become deductible and net operating losses can be
carried forward. Management considers the scheduled reversal of deferred tax
assets, projected future taxable income and tax planning strategies in making
this assessment. In order to fully realize the deferred tax asset, the Company
will need to generate future taxable income of approximately $30,200,000.
Taxable income (loss), before the application of net operating loss
carryforwards and FICA and other tax credits, for the years ended December 31,
2000 and January 2, 2000 was approximately $8,300,000 and $(3,391,000),
respectively, and for the year ended December 30, 2001 is estimated to be
approximately $(1,300,000). The Company assesses the recoverability of its net
deferred tax asset based upon the level of historical income and projections of
future taxable income. Deferred tax assets arising from capital losses have been
fully reserved. The amount of the deferred tax asset considered realizable could
be reduced in the near term if estimates of future taxable income during the
carryforward periods are reduced.
(8) CAPITAL STOCK
(a) On December 15, 1994, the Company adopted a Stockholder Protection
Rights Plan ("Rights Plan"). Pursuant to the Rights Plan, a dividend of one
Right for each outstanding share of the Company's common stock was issued to
shareholders of record on January 3, 1995. Under certain conditions, each Right
may be exercised to purchase 1/100 of a share of Series A Junior Participating
Preferred Stock (the "Preferred Stock") of the Company at a price of $42. The
Rights will become exercisable following the tenth day after a person or group
acquires 15% or more of the Company's common stock or announces a tender or
exchange offer, the consummation of which would result in ownership by such
person or group of 15% or more of the Company's common stock. If a person or
group acquires 15% or more of the Company's outstanding common stock, each Right
will entitle its holder (other than such person or members of such group) to
purchase, at the Right's then-current purchase price, in lieu of 1/100 of a
share of Preferred Stock, a number of shares of the Company's common stock
having a market value of twice the Right's purchase price. In addition, if the
Company is acquired in a merger or other business combination, 50% or more of
its assets or earning power is sold or transferred, or a reclassification or
recapitalization of the Company occurs that has the effect of increasing by more
than 1% the proportionate ownership of the Company's common stock by the
acquiring person, then, each Right will entitle its holder to purchase, at the
Right's then-current purchase price, a number of the acquiring company's shares
of common stock having a market value at that time of twice the Right's purchase
price.
The Rights may be redeemed prior to becoming exercisable by the Company,
subject to approval of the Board of Directors for $.01 per Right, in accordance
with the provisions of the Rights Plan. The Rights expire on January 3, 2005.
The Company has reserved 200,000 shares of Preferred Stock for issuance upon
exercise of the Rights.
(b) The Company's Stock Option Plan (the "Stock Option Plan"), as amended,
provides for the issuance, to employees, of incentive stock options ("ISOs") and
non-qualified stock options ("NQSOs"), having a maximum term of ten years, to
purchase up to 900,000 shares of Common Stock. During fiscal 2000, pursuant to
shareholder approval, the Company adopted the Morton's Restaurant Group 2000
Stock Option Plan which provides an additional 550,000 shares to be granted
under the same terms as the Stock Option Plan.
40
The exercise price of ISOs will be equal to the fair market value of the
shares subject to option on the date of grant, while the exercise price of NQSOs
will be determined by a committee of the Board of Directors. Options vest and
become exercisable commencing at the second anniversary date of the grant at the
rate of 25% per year. Options vest and become exercisable immediately upon a
defined change of control. During fiscal 2001 and 2000, the Company issued
96,800 and 176,100 NQSOs, respectively.
Activity in stock options is summarized as follows:
2001 2000 1999
--------------------------------- --------------------------------- ----------------
WEIGHTED AVERAGE SHARES SUBJECT WEIGHTED AVERAGE SHARES SUBJECT WEIGHTED AVERAGE
EXERCISE PRICE TO OPTION EXERCISE PRICE TO OPTION EXERCISE PRICE
---------------- -------------- ---------------- -------------- ----------------
Beginning of year............ $16.10 1,159,337 $15.16 911,400 $13.73
Options granted.............. 20.49 96,800 18.93 298,450 15.31
Options exercised............ 13.10 25,438 11.33 20,163 1.26
Options canceled............. 19.61 32,650 18.81 30,350 20.01
------ --------- ------ --------- ------
End of year.................. $16.43 1,198,049 $16.10 1,159,337 $15.16
====== ========= ====== ========= ======
1999
--------------
SHARES SUBJECT
TO OPTION
--------------
Beginning of year............ 835,955
Options granted.............. 208,700
Options exercised............ 96,830
Options canceled............. 36,425
---------
End of year.................. 911,400
=========
As of December 30, 2001, there were 505,862 options exercisable with a
weighted average exercise price of $14.32.
The following table summarizes information about stock options outstanding
at December 30, 2001:
WEIGHTED
RANGE OF EXERCISE SHARES WEIGHTED AVERAGE WEIGHTED AVERAGE SHARES AVERAGE
PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE EXERCISABLE EXERCISABLE PRICE
------------------------ ----------- ---------------- ---------------- ----------- -----------------
$9.875-$15.00........... 491,312 5.40 yrs. $12.32 316,061 $11.75
$15.00-$20.00........... 408,312 6.87 yrs. $17.71 143,063 $17.29
$20.00-$26.10........... 298,425 8.06 yrs. $21.42 46,738 $22.59
--------- -------
Total................. 1,198,049 6.56 yrs. $16.43 505,862 $14.32
========= =======
(c) SFAS 123, "Accounting for Stock-Based Compensation", was adopted by the
Company in 1996. The Company has elected to disclose the pro forma net income
and earnings per share as if such method had been used to account for
stock-based compensation cost as described in SFAS 123.
The per share weighted average fair value of stock options granted during
fiscal 2001, 2000 and 1999 was $8.44, $8.33 and $6.93 on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: 2001-- expected dividend yield 0.0%, risk-free interest rate of
4.46%, volatility of 36% and an expected life of 5.5 years; 2000--expected
dividend yield 0.0%, risk-free interest rate of 6.3%, volatility of 33% and an
expected life of 5.9 years; 1999--expected dividend yield 0.0%, risk-free
interest rate of 5.8%, volatility of 35% and an expected life of 6.3 years.
41
The Company applies APB Opinion 25 in accounting for its Stock Option Plan
and, accordingly, no compensation cost has been recognized for its stock options
in the consolidated financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS 123, the Company's net income (loss) and net income (loss)
per diluted share would have been reduced to the pro forma amounts indicated
below:
2001 2000 1999
-------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income (loss) as reported....................... $ 989 $10,062 $8,451
Pro forma......................................... $ (127) $ 9,082 $7,647
Net income (loss) per diluted share as reported..... $ 0.23 $ 2.12 $ 1.39
Pro forma......................................... $(0.03) $ 1.94 $ 1.27
Pro forma net income (loss) only reflects options granted from 1995 on.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS 123 is not reflected in the pro forma net income amounts presented
above because compensation cost is reflected over the options' vesting period of
five years and compensation cost for options granted prior to January 1, 1995 is
not considered.
(d) From October 1998 through July 2000, the Company announced that its
Board of Directors authorized repurchases of up to 2,930,600 shares of the
Company's outstanding common stock. The timing and amount of the purchases were
at the full discretion of the Company's senior management and subject to market
conditions and applicable securities and tax regulations. Repurchases were
accomplished through periodic purchases at prevailing prices on the open market,
by block purchases or in privately negotiated transactions. The repurchased
shares have been retained as treasury stock to use for corporate purposes. On
May 8, 2001, the Company suspended the stock repurchase program. At
December 30, 2001 and December 31, 2000 the Company had repurchased 2,635,090
shares of its common stock at an average purchase price of $17.80.
(e) In October 1999, the Company commenced an Employee Stock Purchase Plan
under which 600,000 shares of the Company's common stock have been reserved for
future employee purchases. Pursuant to this plan, and as approved by
stockholders, all employees with a minimum of one year of service may purchase,
at a 15% discount, shares of common stock of the Company on a quarterly basis.
In fiscal 2001, there were 6,207 shares issued from treasury shares at an
average price of $13.00 per share.
(9) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
2001 2000 1999
--------- --------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income.................................................. $ 989 $ 10,062 $ 8,451
======== ======== ========
Weighted average common shares (denominator for basic
earnings per share)....................................... 4,172 4,565 5,938
Effect of dilutive securities: Employee stock options....... 69 191 140
-------- -------- --------
Weighted average common and potential common shares
outstanding (denominator for diluted earnings per
share).................................................... 4,241 4,756 6,078
======== ======== ========
Basic earnings per share.................................... $ 0.24 $ 2.20 $ 1.42
======== ======== ========
Diluted earnings per share.................................. $ 0.23 $ 2.12 $ 1.39
======== ======== ========
Options to purchase 877,837, 167,188 and 277,050 shares of common stock were
outstanding for the years ended 2001, 2000, and 1999, respectively, but were not
included in the computation of diluted earnings per share because their effect
would be anti-dilutive. For additional disclosures regarding employee stock
options see Note 8.
42
(10) OPERATING LEASES
The Company's operations are generally conducted in leased premises.
Including renewal options, remaining lease terms range from 1 to 41 years.
In connection with entering into leases, the Company is frequently provided
with development allowances from the lessors. These allowances for leasehold
improvements, furniture, fixtures and equipment are offset against the related
fixed asset accounts and the net amount is amortized on a straight-line basis
over the shorter of the lease term, including planned extensions, or estimated
useful lives of the assets. At the end of fiscal 2001 and 2000, approximately
$655,000 and $762,000, respectively, of development allowances were due from
lessors and are included in "Landlord construction receivables, prepaid expenses
and other current assets" in the accompanying consolidated balance sheets.
The Company leases certain office and restaurant facilities and related
equipment under noncancelable operating lease agreements with third parties.
Certain leases contain contingent rental provisions based upon a percent of
gross revenues and or provide for rent deferral during the initial term of such
leases. Included in obligations for restaurant operating leases are certain
restaurant operating leases for which the Company or another subsidiary of the
Company guarantees the performance of the restaurant operating lease for such
subsidiary for a portion of the lease term, typically not exceeding the first
five years. Included in "Other liabilities" in the accompanying consolidated
balance sheets at the end of fiscal 2001 and fiscal 2000 are accruals related to
such rent deferrals of approximately $4,118,000 and $3,322,000, respectively.
For financial reporting purposes, such leases are accounted for on a
straight-line rental basis. Future minimum annual rental commitments under these
leases are approximately as follows:
(AMOUNTS IN THOUSANDS)
----------------------
Fiscal 2002............................................. $ 15,748
Fiscal 2003............................................. 15,990
Fiscal 2004............................................. 16,131
Fiscal 2005............................................. 16,081
Fiscal 2006............................................. 15,375
Fiscal 2007 and thereafter.............................. 104,377
--------
Total minimum lease payments............................ $183,702
========
Contingent rental payments on building leases are typically made based upon
the percentage of gross revenues on the individual restaurants that exceed
predetermined levels. The percentages of gross revenues to be paid, and the
related gross revenues, vary by restaurant. Contingent rental expense was
approximately $1,987,000, $3,267,000 and $2,727,000 for fiscal 2001, 2000 and
1999, respectively.
Rental expense, inclusive of contingent rent, for all such leases was
approximately $16,370,000, $15,801,000 and $13,419,000, for fiscal 2001, 2000
and 1999, respectively.
(11) CAPITAL LEASES
The Company has typically financed the purchase of certain restaurant
equipment through capital leases. At December 30, 2001, the Company had
approximately $284,000 commitments available for future fundings. At
December 30, 2001 and December 31, 2000, furniture, fixtures and equipment
include approximately $11,764,000 and $15,057,000, respectively, of net assets
recorded under capital leases. These assets are amortized over the life of the
respective leases. At December 30, 2001 and December 31, 2000, capital lease
obligations of approximately $5,259,000 and $7,180,000, respectively, are
included in "Obligations to financial institutions and capital leases, less
current maturities" 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
43
accompanying consolidated balance sheets as of December 30, 2001 and
December 31, 2000 are such capital lease obligations, related equipment of
$1,218,000 and $3,300,000, respectively, and a deferred gain of approximately
$1,279,000 and $3,173,000, respectively, each of which are being recognized over
the three year lives of such transactions.
The Company's minimum future obligations under capital leases as of
December 30, 2001 are as follows:
(AMOUNTS IN THOUSANDS)
----------------------
Fiscal 2002............................................. $4,297
Fiscal 2003............................................. 2,527
Fiscal 2004............................................. 1,917
Fiscal 2005............................................. 1,074
Fiscal 2006............................................. 306
------
Total minimum lease payments............................ 10,121
Less amount representing interest....................... 1,079
------
Present value of net minimum lease payments
(including current portion of $3,783)................. 9,042
======
(12) EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with its Chief Executive
Officer and two senior officers. The agreements, as amended, are terminable by
the Company upon 60 months and 36 months prior notice, respectively. The Company
is a party to change of control agreements with its Chief Executive Officer and
seven other senior officers which grant these employees the right to receive up
to approximately three times their total compensation (as computed under the
Internal Revenue Code) if there is a change in control of the Company and
termination of their employment during a specified period by the Company without
cause or by such officer with good reason.
(13) EMPLOYEE BENEFIT PLANS
Employees of the Company and its subsidiaries who are over the age of 21 and
who have completed one year of service are eligible for voluntary participation
in a profit sharing plan. Employer contributions to the plan are made at the
discretion of the Board of Directors. Employer contributions for fiscal 2001,
2000 and 1999 were approximately $406,000, $734,000, and $523,000, respectively.
(14) LEGAL MATTERS AND CONTINGENCIES
During fiscal 1998, the Company identified several underperforming
Bertolini's restaurants and authorized a plan for the closure or abandonment of
specified restaurants which have all been closed. The Company is involved in
legal action relating to certain 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 also involved in other various legal actions incidental to
the normal conduct of its business. Management does not believe that the
ultimate resolution of these actions will have a material adverse effect on the
Company's consolidated financial position, equity, results of operations,
liquidity and capital resources.
44
(15) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited quarterly operating results:
(amounts in thousands, except per share data)
FIRST SECOND THIRD FOURTH
FISCAL YEAR 2001 QUARTER QUARTER QUARTER QUARTER TOTAL
---------------- -------- -------- -------- -------- --------
Revenues...................................... $66,342 $57,006 $52,274 $61,490 $237,112
Gross Profits*................................ 15,839 10,919 6,653 13,646 47,057
Net income (loss)............................. 2,744 (1,535) (1,952) 1,732 989
Net income (loss) per share:
Basic....................................... 0.66 (0.37) (0.47) 0.41 0.24
Diluted..................................... $ 0.62 $ (0.37) $ (0.47) $ 0.41 $ 0.23
FIRST SECOND THIRD FOURTH
FISCAL YEAR 2000 QUARTER QUARTER QUARTER QUARTER TOTAL
---------------- -------- -------- -------- -------- --------
Revenues...................................... $63,595 $58,600 $56,314 $69,873 $248,382
Gross Profits*................................ 15,821 13,847 11,250 17,660 58,578
Net income.................................... 3,051 2,109 925 3,977 10,062
Net income per share:
Basic....................................... 0.60 0.45 0.21 0.96 2.20
Diluted..................................... $ 0.58 $ 0.43 $ 0.20 $ 0.91 $ 2.12
* Revenues less Food and beverage costs and Restaurant operating expenses.
Net income per share for each of the quarters are based on weighted-average
number of shares outstanding in each period. Therefore, the sum of the quarters
in a year does not necessarily equal the year's income per share.
(16) SUBSEQUENT EVENTS (UNAUDITED)
On March 26, 2002, the Company entered into a definitive merger agreement
("Merger Agreement") providing for the acquisition of the Company by an
affiliate of Castle Harlan, Inc., a New York based private equity investment
firm. Under the terms of the Merger Agreement, the Company's stockholders will
receive $12.60 in cash for each share of common stock. Completion of the merger
is subject to various closing conditions including, but not limited to, approval
of the Company's stockholders and customary industry regulatory approvals,
receipt of third party consents and achievement of a minimum level of earnings.
There can be no assurance that these or other conditions to the merger will be
satisfied or that the merger will be completed. If the merger is not completed
for any reason, it is expected that the current management of the Company, under
the direction of the Board of Directors, will continue to manage the Company as
an ongoing business. The Company has also entered into an amendment to its
Credit Agreement which allows for the transactions contemplated under the
merger; however, this amendment will only become effective upon the completion
of the merger. The merger is currently expected to be completed in early summer
of 2002.
In addition, on March 26, 2002, the Company amended the Rights Plan to,
among other things, provide that the rights under the Rights Plan will not
become exercisable as a result of the Merger Agreement and the transactions
contemplated thereby, and that the Rights Plan will be terminated simultaneously
with the consummation of the merger (see Note 8).
On or about March 27, 2002, several substantially similar civil actions were
commenced in the Court of Chancery in the State of Delaware in New Castle County
by purported stockholders of the Company. The plaintiff in each action seeks to
represent a putative class consisting of the public stockholders of the Company.
Named as defendants in each of the complaints are the Company, the members of
the Company's Board of Directors and Castle Harlan, Inc. The complaints allege,
among other things, that the proposed merger is unfair and that the Company's
directors breached their fiduciary duties in connection with the
previously-announced entry into the Merger Agreement. The complaints seek an
injunction, damages and other relief. The Company believes that the allegations
in the complaints are without merit and intends to contest the matters
vigorously.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information with respect to each member of
the Company's Board of Directors.
YEAR TERM EXPIRES
NAME AGE DIRECTOR SINCE AND CLASS
---- -------- ---------------------------------------- -----------------
Allen J. Bernstein................... 56 December 1988 2004 Class 3
Thomas J. Baldwin.................... 46 November 1998 2004 Class 3
John K. Castle....................... 61 December 1988 2004 Class 3
Lee M. Cohn.......................... 54 August 1997 2002 Class 1
Dianne H. Russell.................... 58 May 1993 2002 Class 1
Alan A. Teran........................ 56 May 1993 2002 Class 1
February 2001;
Robert L. Barney..................... 65 December 1991-August 1997 2003 Class 2
Dr. John J. Connolly................. 62 October 1994 2003 Class 2
David B. Pittaway.................... 50 December 1988 2003 Class 2
Allen J. Bernstein has been chairman of the board of the Company since
October 1994 and chief executive officer and a director of the Company since
December 1988. He has been president of the Company since September 1997 and was
previously president of the Company from December 1988 through October 1994.
Mr. Bernstein has worked in various aspects of the restaurant industry since
1970. Mr. Bernstein is also a director of Dave and Busters, Inc., Charlie Browns
Acquisition Corp., Luther's Acquisition Corp., Wilshire Restaurant Group, Inc.
and McCormick and Schmick Holdings LLC, the last four of which are owned by an
affiliate of Castle Harlan, Inc.
Thomas J. Baldwin was elected a director of the Company in November 1998 and
executive vice president in January 1997. He previously served as senior vice
president, finance of the Company since June 1992, and vice president, finance
since December 1988. In addition, Mr. Baldwin has been chief financial officer,
assistant secretary and treasurer of the Company since December 1988. His
previous experience includes seven years at General Foods Corp., now a
subsidiary of Kraft General Foods / Philip Morris Companies, Inc., where he
worked in various financial management and accounting positions, and two years
at Citicorp where he served as Vice President responsible for strategic planning
and financial analysis at a major corporate banking division. Mr. Baldwin is
currently a director of Charlie Browns Acquisition Corp., which is owned by an
affiliate of Castle Harlan, Inc. Mr. Baldwin is a licensed certified public
accountant in the State of New York.
John K. Castle has been a director of the Company since December 1988.
Mr. Castle has been chairman, controlling stockholder and a director of Castle
Harlan, Inc. since 1987 and of Castle Harlan Partners III, G.P., Inc. since
1997. Mr. Castle is also chairman and chief executive officer of Branford
Castle, Inc., an investment company formed in 1986, located at 150 East 58th
Street, New York, New York 10155. Immediately prior to forming Castle
Harlan, Inc., Mr. Castle was president and chief executive officer and a
director of Donaldson Lufkin & Jenrette, Inc., one of the nation's leading
investment banking firms. Mr. Castle is a director of Sealed Air Corporation,
American Achievement Corporation, AdobeAir, Inc., Wilshire Restaurant
Group, Inc., Equipment Support Services, Inc. and a managing director of Statia
Terminals Group, N.V. Mr. Castle is a member of the Corporation of the
Massachusetts Institute of Technology and is also a trustee of the New
York-Presbyterian Hospital, Inc. and the Whitehead Institute of Biomedical
Research. Formerly, Mr. Castle was a director of The Equitable Life Assurance
Society of the United States and the New York Medical College (for 11 years he
was chairman of the board).
Lee M. Cohn has been a director of the Company since August 1997. Mr. Cohn
co-founded and has been the chief executive officer of Big 4 Restaurants, Inc.,
located at 16601 North Pima Road,
46
Scottsdale, Arizona 85260, since 1973. Mr. Cohn has served on the boards of
Valley Big Brothers and the Phoenix Ballet Company and is an active member of
The Phoenix Thunderbirds, The Fiesta Bowl Committee and the Young Presidents
Organization. Mr. Cohn is a director of Luther's Acquisition Corp. and Wilshire
Restaurant Group, Inc., which are owned by an affiliate of Castle Harlan, Inc.
Dianne H. Russell has been a director of the Company since May 1993.
Ms. Russell is a senior vice president and regional managing director of the
Technology and Life Sciences Division of Comerica Bank (formerly Imperial Bank)
in Boston, one of the Company's lenders, located at 100 Federal Street, Boston,
Massachusetts 02110, heading the Northeast Region. Formerly, Ms. Russell was
president of Hyde Boston Capital, a financial consulting company, since January
1992, and before that, a senior vice president and department executive at
BankBoston, N.A., a national bank, where she was employed from 1975 to 1991.
Ms. Russell is the chairman of the Financial Advisory Board of the Commonwealth
of Massachusetts.
Alan A. Teran has been a director of the Company since May 1993. Mr. Teran
was the president of Cork 'N Cleaver Restaurants from 1975 to 1981. Since 1981,
Mr. Teran has been a principal in private restaurant businesses. Mr. Teran is
currently a director of Good Times, Inc. and Charlie Browns Acquisition Corp.,
an affiliate of Castle Harlan, Inc., and previously served on the board of
Boulder Valley Bank and Trust.
Robert L. Barney has been a director of the Company since February 2001.
Mr. Barney previously served as a director of the Company from December 1991
through August 1997. Mr. Barney was the chairman of Wendy's International, Inc.,
a restaurant company, from February 1982 to May 1990, and its chief executive
officer from September 1982 to February 1989. Since September 1994, Mr. Barney
has been the president and owner of Rolling Meadows Golf Club, Inc. which runs a
golf course.
Dr. John J. Connolly has been a director since October 1994. He is the
president and chief executive officer of Castle Connolly Medical Ltd., located
at 42 West 24th Street, New York, New York 10010, since 1992. He previously
served as president and chief executive officer of New York Medical College for
over ten years. He serves on the President's Advisory Council of the United
Hospital Fund, as a director of Funding First and as a director of the New York
Business Group on Health. He also has served as chairman of the Board of
Trustees of St. Francis Hospital in Poughkeepsie and as a member of the Board of
Trustees of St. Agnes Hospital in White Plains. He is a fellow of the New York
Academy of Medicine and is a founder and past chairman of the American Lyme
Disease Foundation. Dr. Connolly serves as a trustee emeritus and past chairman
of the board of the Culinary Institute of America and director of the
Westchester County Association. Dr. Connolly also presently serves as a director
of Dearborn Risk Management, Charlie Browns Acquisition Corp., which is an
affiliate of Castle Harlan, Inc., Gradipore, Inc. and as chairman and a director
of AlphaGene, Inc. (located at 260 West Cummings Park, Woburn, Massachusetts
01801).
David B. Pittaway has been a director of the Company since December 1988. He
was a vice president from December 1988 through May 1993 and assistant secretary
from May 1988 through September 1993. Mr. Pittaway is currently the senior
managing director, senior vice president and secretary of Castle Harlan, Inc.
and secretary of Castle Harlan Partners III, G.P. Inc. He has been with Castle
Harlan, Inc. since 1987 and with Castle Harlan Partners III, G.P. Inc. since
1997. Mr. Pittaway has been vice president and secretary of Branford
Castle, Inc., an investment company, since October 1986, located at 150 East
58th Street, New York, New York 10155. From 1987 to 1998 he was vice president,
chief financial officer and a director of Branford Chain, Inc., a marine
wholesale company, located at 150 East 58th Street, New York, New York 10155,
where he is now a director and vice chairman. Prior thereto, Mr. Pittaway was
vice president of strategic planning and assistant to the president of Donaldson
Lufkin & Jenrette, Inc. Mr. Pittaway is also a director of American Achievement
Corporation, Equipment Support Services, Inc., Charlie Browns Acquisition Corp.,
Luther's Acquisition Corp., Wilshire Restaurant Group, Inc., McCormick and
Schmick Holdings LLC,
47
and The Dystrophic Epidermolysis Bullosa Research Association of America, Inc.
and a managing director of Statia Terminals Group, N.V.
REPORTING UNDER SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who own more than 10% of the
Company's Common Stock, to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the SEC. Executive officers, directors and greater than
10% stockholders are required to furnish the Company with copies of all Forms 3,
4 and 5 that they file. Based solely on the Company's review of the copies of
such Forms it has received and written representations from certain reporting
persons that they were not required to file Forms 5 for specified fiscal years,
the Company believes that all of its executive officers, directors and greater
than 10% stockholders complied with all Section 16(a) filing requirements
applicable to them during the Company's fiscal year ended December 30, 2001.
See also Item 4A, "Executive Officers of the Registrant" in Part I of the Annual
Report on Form 10-K filed with the SEC March 29, 2002.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the Company's last three fiscal years
(ended December 30, 2001, December 31, 2000 and January 2, 2000, respectively),
the compensation of those persons who were, at December 30, 2001, (i) the chief
executive officer, and (ii) the other four most highly compensated executive
officers of the Company (together the "Named Officers"):
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION (1) SECURITIES
------------------------------ UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)
--------------------------- -------- -------- -------- ------------ -------------
Allen J. Bernstein....................... 2001 $675,500 $478,000 -- $44,811(2)(3)
Chairman of the Board, President 2000 $649,519 $375,000 65,000 $43,761(4)(5)
and Chief Executive Officer 1999 $625,000 $350,000 65,000 $43,121(6)(7)
Thomas J. Baldwin........................ 2001 $265,788 $200,000 -- $ 4,550(2)(3)
Executive Vice President, Chief
Financial 2000 $254,807 $175,000 30,000 $ 3,500(4)(5)
Officer, Assistant Secretary and
Treasurer 1999 $244,923 $160,000 30,000 $ 2,860(6)(7)
Allan C. Schreiber....................... 2001 $187,846 $150,000 -- $ 4,550(2)(3)
Senior Vice President, Development 2000 $179,865 $105,000 6,500 $ 3,500(4)(5)
1999 $172,615 $ 90,000 6,500 $ 2,860(6)(7)
Klaus W. Fritsch......................... 2001 $174,269 $120,000 -- $ 1,979(2)(3)
Vice Chairman and Co-Founder, Morton's 2000 $155,769 $100,000 7,000 $ 3,745(4)(5)
of Chicago, Inc. 1999 $149,307 $150,000 7,000 $ 2,560(7)
John T. Bettin........................... 2001 $249,616 $150,000 -- $ 4,610(2)(3)
President, Morton's of Chicago, Inc. 2000 $239,647 $140,000 10,000 $ 3,542(4)(5)
1999 $229,826 $ 55,000 10,000 --
------------------------
(1) Includes cash bonuses paid in the referenced fiscal year with respect to
services rendered in the prior fiscal year. Excludes cash bonuses paid in
the following fiscal year with respect to services
48
rendered in the referenced fiscal year. No cash bonuses were paid in 2002
with respect to services rendered in 2001.
(2) Represents or includes the dollar value of insurance premiums paid by the
Company with respect to term life insurance for the benefit of: Allen J.
Bernstein ($40,561), Thomas J. Baldwin ($300), Allan C. Schreiber ($300),
Klaus W. Fritsch ($642) and John T. Bettin ($360).
(3) Includes employer contributions made by the Company pursuant to the
Morton's Group Profit Sharing and Cash Accumulation Plan and Trust (the
"Morton's Plan"), which is a retirement plan intended to be qualified under
Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended, for the benefit of: Allen J. Bernstein ($4,250), Thomas J. Baldwin
($4,250), Allan C. Schreiber ($4,250), Klaus W. Fritsch ($1,337) and John
T. Bettin ($4,250).
(4) Represents or includes the dollar value of insurance premiums paid by the
Company with respect to term life insurance for the benefit of: Allen J.
Bernstein ($40,561), Thomas J. Baldwin ($300), Allan C. Schreiber ($300),
Klaus W. Fritsch ($545) and John T. Bettin ($342).
(5) Includes employer contributions made by the Company pursuant to the
Morton's Plan, which is a retirement plan intended to be qualified under
Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended, for the benefit of: Allen J. Bernstein ($3,200), Thomas J. Baldwin
($3,200), Allan C. Schreiber ($3,200), Klaus W. Fritsch ($3,200) and John
T. Bettin ($3,200).
(6) Represents or includes the dollar value of insurance premiums paid by the
Company with respect to term life insurance for the benefit of: Allen J.
Bernstein ($40,561), Thomas J. Baldwin ($300), and Allan C. Schreiber
($300).
(7) Includes employer contributions made by the Company pursuant to the
Morton's Plan, for the benefit of: Allen J. Bernstein ($2,560), Thomas J.
Baldwin ($2,560), Allan C. Schreiber ($2,560), and Klaus W. Fritsch
($2,560).
OPTIONS GRANTED IN LAST FISCAL YEAR
No stock options were granted to the Named Officers during fiscal 2001.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth, for fiscal 2001, information concerning the
exercise of options by the Named Officers and the value of unexercised options
of the Named Officers:
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT FY-END
SHARES OPTIONS AT FY-END (#) ($)(1)
ACQUIRED ON VALUE --------------------------- -----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ------------ --------------
Allen J. Bernstein....... -- -- 258,750 191,250 $93,250 $0
Thomas J. Baldwin........ -- -- 65,500 85,500 $ 5,344 $0
Allan C. Schreiber....... -- -- 36,875 19,125 $ 0 $0
Klaus W. Fritsch......... 10,000 $138,000 26,850 19,850 $ 7,125 $0
John T. Bettin........... -- -- 27,500 42,500 $ 0 $0
------------------------
(1) Based upon the closing sale price of $11.30 per share of the Company's
Common Stock on December 30, 2001 on the New York Stock Exchange and
calculated net of the respective option exercise price.
The Company has not awarded stock appreciation rights to any employee and
has no long term incentive plans, as that term is defined in the regulations of
the SEC. The Company has a stock option plan and bonus plans. During fiscal
2001, the Company did not adjust or amend the exercise price of
49
stock options awarded to the Named Officers, whether through amendment,
cancellation or replacement grants, or other means. Also, the Company presently
has no defined benefit or actuarial plans covering any employees of the Company.
COMPENSATION OF DIRECTORS
Each non-officer director of the Company is entitled to receive directors'
fees at the rate of $15,000 per year. All directors are reimbursed for actual
expenses incurred in connection with attendance at meetings of the Board of
Directors or committees of the Board.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL CONTRACTS
EMPLOYMENT AGREEMENTS
Pursuant to the Second Amended and Restated Employment Agreement dated as of
February 28, 1995, as amended on October 1, 1998, between the Company and Allen
J. Bernstein, Mr. Bernstein serves as Chairman of the Board, President and Chief
Executive Officer of the Company. His current annual base salary of $676,000 is
subject to minimum adjustments based upon increases in the Consumer Price Index
for Urban Wage Earners and Clerical Workers. In addition, Mr. Bernstein is
eligible to receive an annual bonus of up to 120% of his base salary based upon
the Company attaining a profitability target, which in the discretion of the
Board of Directors may be based on net income, operating income, net cash flow
(adjusted for nonrecurring items) or any other basis it considers appropriate.
Mr. Bernstein's employment agreement is terminable by the Company upon
60 months written notice or at any time for Cause (as defined in his employment
agreement) and by Mr. Bernstein in the event of non-payment of amounts due under
the agreement or if he is assigned duties inconsistent with his capacity as
Chief Executive Officer of the Company. In the event of such a termination by
Mr. Bernstein or in the event of a termination by the Company for any reason
other than Cause, death or disability, Mr. Bernstein is entitled to receive
either (i) severance pay for a 60 month period following such termination or the
delivery of the Company's notice of termination (the "Measuring Date"), in an
amount equal to his base salary, a pro-rated bonus for the year of termination
plus continuance of certain fringe benefits or (ii) at Mr. Bernstein's election
(the "Election"), a lump-sum payment equal to 60 multiplied by $67,800. Upon
Mr. Bernstein's acquisition of alternative employment, the Company's monthly
obligation to Mr. Bernstein will be reduced to $50,600 (if Mr. Bernstein has not
made the Election). If, however, Mr. Bernstein had made the Election and
acquires alternative employment, he shall repay to the Company an amount equal
to the product of $17,366 and a number equaling the difference between 60 and
the number of months between the Measuring Date and the date Mr. Bernstein
commences such new employment.
Pursuant to the Employment Agreement dated as of March 1, 2001, between the
Company and Thomas J. Baldwin, Mr. Baldwin serves as Executive Vice President
and Chief Financial Officer of the Company. His current annual base salary of
$266,000 is subject to minimum adjustments based upon increases in the Consumer
Price Index for Urban Wage Earners and Clerical Workers. In addition,
Mr. Baldwin is eligible to receive an annual bonus in the sole discretion of the
Company. Mr. Baldwin's employment agreement is terminable by the Company upon 36
months written notice or at any time for Cause (as defined in his employment
agreement) and by Mr. Baldwin in the event of non-payment of amounts due under
the agreement or if he is assigned duties inconsistent with his capacity as
Chief Financial Officer of the Company. In the event of such a termination by
Mr. Baldwin or in the event of a termination by the Company for any reason other
than Cause, death or disability, Mr. Baldwin is entitled to receive a lump sum
payment equal to three multiplied by $346,332. Upon Mr. Baldwin's acquisition of
alternative employment he shall repay to the Company an amount equal to the
product of $7,392 and a number equaling the difference between 36 and the number
of months between the date of such a termination by Mr. Baldwin or delivery of
the Company's notice of termination and the date Mr. Baldwin commences such new
employment. In the event of a change of control, the amounts
50
payable to Mr. Baldwin under his Employment Agreement are subject to reduction
to the extent the total amount received under the Employment Agreement and any
other agreement by reason of a change of control would constitute a "parachute
payment" under Section 280G(b)(2) of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code").
Pursuant to the Employment Agreement dated as of March 1, 2001, between the
Company and Agnes Longarzo, Ms. Longarzo serves as Vice President,
Administration and Secretary of the Company. Her current annual base salary of
$125,000 is subject to minimum adjustments based upon increases in the Consumer
Price Index for Urban Wage Earners and Clerical Workers. In addition,
Ms. Longarzo is eligible to receive an annual bonus in the sole discretion of
the Company. Ms. Longarzo's employment agreement is terminable by the Company
upon 36 months written notice or at any time for Cause (as defined in her
employment agreement) and by Ms. Longarzo in the event of non-payment of amounts
due under the agreement or if she is assigned duties inconsistent with her
capacity as Vice President, Administration of the Company. In the event of such
a termination by Ms. Longarzo or in the event of a termination by the Company
for any reason other than Cause, death or disability, Ms. Longarzo is entitled
to receive a lump sum payment equal to three multiplied by $162,750. Upon
Ms. Longarzo's acquisition of alternative employment she shall repay to the
Company an amount equal to the product of $3,472 and a number equaling the
difference between 36 and the number of months between the date of such a
termination by Ms. Longarzo or delivery of the Company's notice of termination
and the date Ms. Longarzo commences such new employment. In the event of a
change of control, the amounts payable to Ms. Longarzo under her Employment
Agreement are subject to reduction to the extent the total amount received under
the Employment Agreement and any other agreement by reason of a change of
control would constitute a "parachute payment" under Section 280G(b)(2) of the
Internal Revenue Code.
CHANGE OF CONTROL AGREEMENTS
The Company has entered into change of control agreements with Allen J.
Bernstein, Thomas J. Baldwin, Allan C. Schreiber, Agnes Longarzo and one other
senior officer, and Morton's of Chicago, Inc. has entered into change of control
agreements with Klaus W. Fritsch, John T. Bettin and one other officer
(collectively, the "Change of Control Agreements"). Each Change of Control
Agreement has a three-year term, subject to automatic renewal for additional
three-year periods on each anniversary of the Change of Control Agreement unless
the Company or Morton's of Chicago, Inc., as applicable, gives the officer at
least 60 days' prior notice that the Change of Control Agreement will not be so
extended. Pursuant to each Change of Control Agreement, the Company or Morton's
of Chicago, Inc., as applicable, agrees to continue the officer in its employ
for a three-year period (the "Continuation Period") following a "Change of
Control" (as is defined in the applicable Change of Control Agreement). If,
during the Continuation Period, the officer's employment is terminated by the
Company or Morton's of Chicago, Inc., as applicable, other than for "Cause" (as
defined in the applicable Change of Control Agreement) or if the officer
terminates employment with the Company or Morton's of Chicago, Inc., as
applicable, for "Good Reason" (as defined in the applicable Change of Control
Agreement), the Company or Morton's of Chicago, Inc., as applicable, is required
to make a cash lump sum payment to the officer equal to 2.99 times the officer's
base amount, as computed under the Internal Revenue Code, less any severance
payments payable to such officer pursuant to employment agreements, where
applicable; subject to reduction to the extent the total amount received by the
officer under the Change of Control Agreement and any other agreement by reason
of a Change of Control would constitute a "parachute payment" under Section
280G(b)(2) of the Internal Revenue Code. In addition, for a period of at least
three years after such termination, the Company or Morton's of Chicago, Inc., as
applicable, is required to continue to provide the officer with welfare benefits
similar to those received by the officer when employed by the Company or
Morton's of Chicago, Inc., as applicable. In general, an officer's base amount
as used above is the average annual
51
compensation included in the gross income of such officer for the most recent
five taxable years ending before a Change of Control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation and Stock Option Committee of the Board of Directors
consists of John K. Castle, Lee M. Cohn and Dr. John J. Connolly. No member of
the Compensation and Stock Option Committee is a former or current officer or
employee of the Company or any of its subsidiaries.
On March 26, 2002, the Company entered into an Agreement and Plan of Merger
with Morton's Holdings, LLC (formerly Morton's Holdings, Inc., "Morton's
Holdings") and Morton's Acquisition Company ("Morton's Acquisition"). If the
Company's stockholders approve and adopt the merger agreement and approve the
merger, and the merger is completed: (a) Morton's Acquisition, a wholly owned
subsidiary of Morton's Holdings, will be merged with and into the Company, with
the Company as the surviving corporation; (b) each issued and outstanding share
of the Company's common stock will be converted into the right to receive $12.60
in cash without interest (other than shares held by the Company or any of the
Company's subsidiaries, held in the Company's treasury, or held by Morton's
Holdings or Morton's Acquisition, or shares held by Morton's stockholders who
perfect their appraisal rights under Delaware law); and (c) the Company will
continue its operations, but as a privately held company. Castle Harlan Partners
III, L.P. ("CHP") beneficially owns 100% of the outstanding membership interests
of Morton's Holdings. Directors John K. Castle and David B. Pittaway are
executive officers of certain affiliates of CHP and each has an indirect
financial interest in Morton's Holdings.
Except as set forth above and as set forth below under the caption "Certain
Relationships and Related Transactions," there are no other relationships among
the Company, the Company's executive officers, members of the Compensation and
Stock Option Committee or entities whose executives serve on the Board of
Directors or the Compensation and Stock Option Committee that require disclosure
under applicable SEC regulations.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of April 17, 2002,
with respect to the beneficial ownership of the Company's Common Stock of each
director, each named executive officer in the summary compensation table under
"Executive Compensation," all executive officers and directors as a group, and
each person known by the Company to be the beneficial owner of 5% or more of the
Company's Common Stock. This information is based upon information received from
or on behalf of the named individuals or entities. The address of each of the
directors and executive officers is c/o Morton's Restaurant Group, Inc., 3333
New Hyde Park Road, New Hyde Park, New York 11042. The addresses for the other
5% beneficial owners of the Company's common stock are as follows: FMR Corp., 82
Devonshire Street, Boston, Massachusetts 02109; Capital Research & Management
Co., 333 South Hope Street, Los Angeles, California 90071; Goldman, Sachs & Co.,
32
52
Old Slip, New York, New York 10005 and BFMA Holding Corporation, 50 East Sample
Road, Suite 400, Pompano Beach, Florida 33064.
BENEFICIAL
NUMBER OWNERSHIP
OF PERCENT OF
BENEFICIAL OWNER SHARES(1) TOTAL(2)
---------------- ---------- ----------
Allen J. Bernstein(3)....................................... 528,705 11.82%
Thomas J. Baldwin(3)........................................ 110,500 2.59%
Allan C. Schreiber(3)....................................... 39,750 *
Klaus W. Fritsch(3)......................................... 39,525 *
John T. Bettin(3)........................................... 27,500 *
John K. Castle.............................................. 5,178 *
Dr. John J. Connolly........................................ 400 *
Dianne H. Russell........................................... 500 *
David B. Pittaway........................................... 3,132 *
Lee M. Cohn................................................. 1,500 *
Robert L. Barney............................................ 0 *
Alan A. Teran............................................... 560 *
FMR Corp.(4)(6)............................................. 784,800 18.75%
BFMA Holding Corp.(4)....................................... 573,900 13.71%
Capital Research and Management Company(4).................. 396,000 9.46%
Goldman, Sachs & Co.(4)..................................... 241,862 5.78%
Morton's Directors and Executive Officers as a Group
(14 Persons)(5)........................................... 792,275 16.93%
------------------------
* Represents less than 1%.
(1) Unless otherwise noted, the beneficial owners listed have sole voting and
investment power over the shares listed.
(2) Percent of Class based upon 4,184,711 outstanding shares of common stock
plus, for those persons who hold options to acquire shares of common stock,
the number of shares of common stock beneficially owned by such person as
of June 16, 2002.
(3) Includes beneficial ownership of shares of common stock issuable upon
exercise of outstanding incentive stock options issued under the Morton's
Restaurant Group, Inc. 2000 Stock Option Plan ("Stock Option Plan") as
follows: Thomas J. Baldwin (77,000), John T. Bettin (27,500), Allen J.
Bernstein (287,500), Klaus W. Fritsch (29,525) and Allan C. Schreiber
(39,750). Excludes shares of common stock issuable upon exercise of
incentive stock options issued under the Stock Option Plan which are not
exercisable by June 16, 2002.
(4) Shares of common stock beneficially owned by Capital Research and
Management Co. ("CRM"), and Goldman, Sachs & Co. ("Goldman") are listed
according to reports on Schedule 13G as of December 31, 2001, each of which
was filed during February 2002. Shares of common stock beneficially owned
by FMR Corp. are listed according to a report on Schedule 13G as of
December 31, 2000, which was filed during February 2001. Shares of common
stock beneficially owned by BFMA Holding Corporation ("BFMA") are listed
according to a report filed on Schedule 13D as of March 21, 2002, filed on
March 22, 2002.
Based upon information set forth in such report on Schedule 13G filed by FMR
Corp., FMR Corp. and Fidelity Management & Research Company ("Fidelity"), a
wholly-owned subsidiary of FMR Corp., each of which is the beneficial owner
of 784,800 shares or 18.75% of the common stock as a result of acting as an
investment advisor to several investment companies. Members of the Edward C.
Johnson 3rd family, FMR Corp., through its control of Fidelity, and the
53
aforementioned investment companies each has sole dispositive power over
these 784,800 shares. The ownership of two investment companies, Fidelity
Advisor Value Strategies Fund and Fidelity Low-Priced Stock Fund, amounted
to 424,800 shares or 10.15% and 360,000 shares or 8.60%, respectively, of
the common stock. The power to vote such shares resides with the
aforementioned investment companies' Boards of Trustees.
Based upon information set forth in such report on Schedule 13G filed by
CRM, CRM has sole dispositive power over 396,000 shares or 9.46% of the
common stock as a result of acting as investment advisor to SmallCap World
Fund, Inc. which has sole voting power over these 396,000 shares.
Based upon information set forth in such report on Schedule 13G filed by
Goldman, Goldman has sole voting power over 208,144 shares or 4.97% and sole
dispositive power over 241,862 shares or 5.78% of the common stock.
Based upon information set forth in such reports on Schedule 13D filed by
BFMA, BFMA has sole voting and dispositive power over 488,500 shares or
11.67% of the common stock and shared voting and dispositive power over
56,300 shares, or 1.35%. Barry W. Florescue, president, chief executive
officer, director and controlling shareholder of BFMA reports sole voting
and dispositive power over 517,600 shares or 12.27% of the common stock,
shared voting and dispositive power over 56,300 shares or 1.35% of the
common stock and aggregate beneficial ownership of 573,900 shares or 13.71%
of the common stock.
(5) Includes beneficial ownership of 496,300 shares of common stock issuable in
the aggregate upon exercise of outstanding incentive and non-qualified
stock options issued under Company's the stock option plan to officers of
the Company. Excludes shares of common stock issuable upon exercise of
incentive and non-qualified stock options issued under the stock option
plan that are not exercisable by June 16, 2002.
(6) Pursuant to the terms of the Company's amended and restated stockholders
rights plan, the rights issued thereunder have not become exercisable as a
result of the beneficial ownership held by FMR Corp. exceeding 15%. In
accordance with the terms of the rights plan, the rights issued thereunder
will not become exercisable upon a stockholder's beneficial ownership
exceeding 15% of the outstanding stock of the Company if the increase above
15% is caused by the Company's repurchase of stock. The beneficial
ownership of FMR Corp. has increased above 15% as a result of repurchases
of stock by the Company. Any further purchases of stock by FMR Corp. would
activate the rights plan. The Company has notified FMR Corp. of this fact.
Management of FMR Corp. has indicated that it does not intend to purchase
any additional shares of stock in the Company. The Company will continue to
monitor the beneficial ownership percentages of FMR Corp. and other
significant stockholders and notify those stockholders of the possibility
of triggering the rights plan.
On March 26, 2002, the Company entered into an Agreement and Plan of Merger
with Morton's Holdings and Morton's Acquisition. If the Company's stockholders
approve and adopt the merger agreement and approve the merger, and the merger is
completed: (a) Morton's Acquisition, a wholly owned subsidiary of Morton's
Holdings, will be merged with and into the Company, with the Company as the
surviving corporation; (b) each issued and outstanding share of the Company's
common stock will be converted into the right to receive $12.60 in cash without
interest (other than shares held by the Company or any of the Company's
subsidiaries, held in the Company's treasury, or held by Morton's Holdings or
Morton's Acquisition, or shares held by Morton's stockholders who perfect their
appraisal rights under Delaware law); and (c) the Company will continue its
operations, but as a privately held company.
54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On October 21, 1996, Fleet National Bank ("Fleet") (formerly known as
BankBoston, NA), which was previously the sole provider of the Company's credit
facility, as amended, syndicated a portion of the credit facility to Comerica
Bank (formerly Imperial Bank). Ms. Dianne Russell is a senior officer of
Comerica Bank as well as a director of the Company. Fleet has also syndicated
portions of the credit facility to First Union National Bank (formerly First
Union Corporation), JPMorgan Chase Bank and LaSalle Bank National Association.
On March 26, 2002, the Company entered into an Agreement and Plan of Merger
with Morton's Holdings and Morton's Acquisition. If the Company's stockholders
approve and adopt the merger agreement and approve the merger, and the merger is
completed: (a) Morton's Acquisition, a wholly owned subsidiary of Morton's
Holdings, will be merged with and into the Company, with the Company as the
surviving corporation; (b) each issued and outstanding share of the Company's
common stock will be converted into the right to receive $12.60 in cash without
interest (other than shares held by the Company or any of the Company's
subsidiaries, held in the Company's treasury, or held by Morton's Holdings or
Morton's Acquisition, or shares held by Morton's stockholders who perfect their
appraisal rights under Delaware law); and (c) the Company will continue its
operations, but as a privately held company. CHP beneficially owns 100% of the
outstanding membership interests of Morton's Holdings. Directors John K. Castle
and David B. Pittaway are executive officers of certain affiliates of CHP and
each has an indirect financial interest in Morton's Holdings.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
(1) ALL FINANCIAL STATEMENTS
The response to this portion of Item 14 is set forth in Item 8 of Part II
hereof.
(2) FINANCIAL STATEMENT SCHEDULES
Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.
(3) EXHIBITS
See accompanying Index to Exhibits. The Company will furnish to any
stockholder, upon written request, any exhibit listed in the accompanying
Index to Exhibits upon payment by such stockholder of the Company's
reasonable expenses in furnishing any such exhibit.
(b) Reports on Form 8-K:
None.
(c) Reference is made to Item 14(a)(3) above.
(d) Reference is made to Item 14 (a)(2) above.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MORTON'S RESTAURANT GROUP, INC.
(REGISTRANT)
Date: June 17, 2002 By: /s/ ALLEN J. BERNSTEIN
-----------------------------------------
Allen J. Bernstein
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT, AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: June 17, 2002 By: /s/ THOMAS J. BALDWIN
-----------------------------------------
Thomas J. Baldwin
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, ASSISTANT SECRETARY, TREASURER
AND DIRECTOR (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: June 17, 2002 By: /s/ ALLEN J. BERNSTEIN
-----------------------------------------
Allen J. Bernstein
CHAIRMAN OF THE BOARD OF DIRECTORS,
PRESIDENT, AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: June 17, 2002 By: /s/ THOMAS J. BALDWIN
-----------------------------------------
Thomas J. Baldwin
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, ASSISTANT SECRETARY, TREASURER
AND DIRECTOR (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
56
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. (Continued)
Date: June 17, 2002 By: /s/ ROBERT L. BARNEY
-----------------------------------------
Robert L. Barney
DIRECTOR
Date: June 17, 2002 By: /s/ LEE M. COHN
-----------------------------------------
Lee M. Cohn
DIRECTOR
57
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. (Continued)
Date: June 17, 2002 By: /s/ DIANNE H. RUSSELL
-----------------------------------------
Dianne H. Russell
DIRECTOR
Date: June 17, 2002 By: /s/ ALAN A. TERAN
-----------------------------------------
Alan A. Teran
DIRECTOR
58
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. (Continued)
Date: June 17, 2002 By: /s/ JOHN K. CASTLE
-----------------------------------------
John K. Castle
DIRECTOR
Date: June 17, 2002 By: /s/ DR. JOHN J. CONNOLLY
-----------------------------------------
Dr. John J. Connolly
DIRECTOR
Date: June 17, 2002 By: /s/ DAVID B. PITTAWAY
-----------------------------------------
David B. Pittaway
DIRECTOR
59
INDEX TO EXHIBITS
The following is a list of all exhibits filed as part of this report:
EXHIBIT
NUMBER DOCUMENT
--------------------- ------------------------------------------------------------
2.01 Agreement and Plan of Merger, dated as of March 26, 2002, by
and among Morton's Holding's, Inc., Morton's Acquisition
Company and Morton's Restaurant Group, Inc. (28)
3.01(a) Amended and Restated Certificate of Incorporation of the
Registrant.(5)
(b) Certificate of Designation for the Preferred Stock issuable
pursuant to the Rights Plan.(4)
(c) Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant.(5)
(d) Second Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant.(8)
3.02 Amended and Restated By-Laws of the Registrant, dated
January 17, 1995.(4)
4.01(a) Specimen Certificate representing the Common Stock, par
value $.01 per share including Rights Legend and name change
to Morton's Restaurant Group, Inc.(8)
4.02(a) Registration Rights Agreement for Common Stock, dated as of
July 27, 1989, among the Registrant, BancBoston Capital
Inc., Legend Capital Group, L.P., Legend Capital
International, Ltd. and Allen J. Bernstein.(1)
(b) Amendment to Registration Rights Agreement for Common Stock,
dated as of April 1, 1992, among the Registrant, BancBoston
Capital Inc., Legend Capital Group, L.P., Legend Capital
International, Ltd., Allen J. Bernstein, Castle Harlan, Inc.
and certain executive officers of the Registrant.(2)
4.04(a) Second Amended and Restated Revolving Credit and Term Loan
Agreement, dated June 19, 1995 among the Registrant, The
Peasant Restaurants, Inc., Morton's of Chicago, Inc. and The
First National Bank of Boston, individually and as agent.(5)
(b) First Amendment to the Second Amended and Restated Revolving
Credit and Term Loan Agreement, dated February 14, 1996
among the Registrant, The Peasant Restaurants, Inc.,
Morton's of Chicago, Inc. and The First National Bank of
Boston, individually and as agent.(6)
(c) Second Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated March 5,
1996 among the Registrant, The Peasant Restaurants, Inc.,
Morton's of Chicago, Inc. and The First National Bank of
Boston, individually and as agent.(6)
(d) Letter Agreement, dated May 2, 1996, among the Registrant,
The Peasant Restaurants, Inc., Morton's of Chicago, Inc. and
The First National Bank of Boston, individually and as
agent.(7)
(e) Third Amendment to the Second Amended and Restated Revolving
Credit and Term Loan Agreement, dated June 28, 1996 among
the Registrant, The Peasant Restaurants, Inc., Morton's of
Chicago, Inc. and The First National Bank of Boston,
individually and as agent.(8)
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(f) Fourth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated December 26,
1996 among the Registrant, The Peasant Restaurants, Inc.,
Morton's of Chicago, Inc. and The First National Bank of
Boston, individually and as agent.(10)
(g) Fifth Amendment to the Second Amended and Restated Revolving
Credit and Term Loan Agreement, dated December 31, 1996
among the Registrant, The Peasant Restaurants, Inc.,
Morton's of Chicago, Inc. and The First National Bank of
Boston, individually and as agent.(10)
(h) Sixth Amendment to the Second Amended and Restated Revolving
Credit and Term Loan Agreement, dated February 6, 1997 among
the Registrant, The Peasant Restaurants, Inc., Morton's of
Chicago, Inc. and The First National Bank of Boston,
individually and as agent.(10)
(i) Seventh Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated June 27,
1997 among the Registrant, Peasant Holding Corp., Morton's
of Chicago, Inc. and BankBoston, N.A., individually and as
agent.(11)
(j) Eighth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated February 12,
1998 among the Registrant, Peasant Holding Corp., Morton's
of Chicago, Inc. and BankBoston, N.A., individually and as
agent.(12)
(k) Letter Agreement, dated April 6, 1998, among BankBoston,
N.A. and the Registrant regarding an Extendible Swap
Transaction.(13)
(l) Letter Agreement, dated May 29, 1998, among BankBoston, N.A.
and the Registrant regarding an Extendible Swap
Transaction.(14)
(m) Ninth Amendment to the Second Amended and Restated Revolving
Credit and Term Loan Agreement, dated September 25, 1998
among the Registrant, Peasant Holding Corp., Morton's of
Chicago, Inc. and BankBoston, N.A., individually and as
agent.(15)
(n) Tenth Amendment to the Second Amended and Restated Revolving
Credit and Term Loan Agreement, dated November 18, 1998
among the Registrant, Peasant Holding Corp., Morton's of
Chicago, Inc. and BankBoston, N.A., individually and as
agent.(16)
(o) Eleventh Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated May 20, 1999
among the Registrant, Peasant Holding Corp., Morton's of
Chicago, Inc. and BankBoston, N.A., individually and as
agent.(18)
(p) Twelfth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated June 21,
2000 among the Registrant, Peasant Holding Corp., Morton's
of Chicago, Inc. and BankBoston, N.A., individually and as
agent.(21)
(q) Thirteenth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated September
29, 2000 among the Registrant, Peasant Holding Corp.,
Morton's of Chicago, Inc. and Fleet National Bank,
individually and as agent.(22)
(r) Instrument of Adherence to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated February 28,
2001 among the Registrant, Peasant Holding Corp., Morton's
of Chicago, Inc. and Fleet National Bank, individually and
as agent.(26)
(s) Assignment and Acceptance to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated March 9,
2001 among the Registrant, Peasant Holding Corp., Morton's
of Chicago, Inc. and Fleet National Bank, individually and
as agent.(26)
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(t) Fourteenth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated March 13,
2002 among the Registrant, Peasant Holding Corp., Morton's
of Chicago, Inc. and Fleet National Bank, individually and
as agent.(28)
(u) Fifteenth Amendment to the Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated March 26,
2002 among the Registrant, Peasant Holding Corp., Morton's
of Chicago, Inc. and Fleet National Bank, individually and
as agent.(28)
4.05 (a) Amended and Restated Rights Agreement, dated as of March 22,
2001, between the Registrant and EquiServe Trust Company,
which includes as Exhibit A thereto the form of Certificate
of Designation of Series A Junior Participating Preferred
Stock of the Registrant, as Exhibit B thereto the form of
Rights Certificate and as Exhibit C thereto the Summary of
Rights to Purchase Preferred Stock.(24)
(b) First Amendment to the Amended and Restated Rights
Agreement, dated as of March 26, 2002, between the
Registrant and EquiServe Trust Company, NA.(28)
10.01+ Morton's of Chicago, Inc. Profit Sharing and Cash
Accumulation Plan as Amended Effective January 1, 1989.(4)
10.02 Commercial Lease, between American National Investor
Services, Inc. and Morton's of Chicago, Inc., dated October
15, 1992, relating to the executive offices of Morton's
located at 350 West Hubbard Street, Chicago, Illinois.(2)
10.03 Commercial Lease, between X-Cell Realty Associates and the
Registrant, dated January 18, 1994 relating to the executive
offices of the Registrant located at 3333 New Hyde Park
Road, Suite 210, New Hyde Park, New York 11042.(3)
10.04 (a)+ Change of Control Agreement, dated December 15, 1994,
between the Registrant and Allen J. Bernstein.(4)
(b)+ Amended and Restated Change of Control Agreement, dated
March 1, 2001, between the Registrant and Thomas J.
Baldwin.(26)
(c)+ Change of Control Agreement, dated March 1, 2001, between
the Registrant and Agnes Longarzo.(26)
(d)+ Change of Control Agreement, dated March 1, 2001, between
the Registrant and Allan C. Schreiber.(26)
(e)+ Change of Control Agreement, dated March 1, 2001, between
the Registrant and Roger J. Drake.(26)
(f)+ Change of Control Agreement, dated March 1, 2001, between
Morton's of Chicago, Inc. and Klaus W. Fritsch.(26)
(g)+ Change of Control Agreement, dated March 1, 2001, between
Morton's of Chicago, Inc. and John T. Bettin.(26)
(h)+ Change of Control Agreement, dated March 1, 2001, between
Morton's of Chicago, Inc. and Ronald M. DiNella.(26)
10.05 (a)+ Second Amended and Restated Employment Agreement, dated as
of February 28, 1995, between the Registrant and Allen J.
Bernstein.(4)
(b)+ Employment Agreement, dated March 1, 2001, between the
Registrant and Thomas J. Baldwin.(26)
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(c)+ Employment Agreement, dated March 1, 2001, between the
Registrant and Agnes Longarzo.(26)
10.06+ Quantum Restaurant Group, Inc. Stock Option Plan.(6)
10.07 Stock Purchase Agreement, dated as of December 31, 1996, by
and among Peasant Holding Corp., Morton's Restaurant Group,
Inc., and MRI Acquisition Corporation.(9)
10.08 Stock Purchase Agreement, dated as of December 31, 1996, by
and among Peasant Holding Corp., Morton's Restaurant Group,
Inc., and PRI Acquisition Corporation.(9)
10.09 Promissory Note, dated March 4, 1997, between CNL Financial
I, Inc., as Lender, and Morton's of Chicago, Inc.(10)
10.10 Amended and Restated Promissory Note, dated September 18,
1998, among FFCA Acquisition Corporation and Morton's of
Chicago/North Miami Beach, Inc., a subsidiary of the
Registrant.(15)
10.11+ First Amendment to the Second Amended and Restated
Employment Agreement, dated October 1, 1998, between the
Registrant and Allen J. Bernstein.(15)
10.12 Amended and Restated Promissory Note, dated March 19, 1999,
among FFCA Acquisition Corporation and Morton's of
Chicago/Scottsdale, Inc., a subsidiary of the
Registrant.(17)
10.13 Amended and Restated Promissory Note, dated March 17, 1999,
among FFCA Acquisition Corporation and Bertolini's at
Village Square, Inc., a subsidiary of the Registrant.(17)
10.14+ Form of Indemnification Agreement for Directors and
Executive Officers.(20)
10.15+ Morton's Restaurant Group, Inc. Employee Stock Purchase
Plan.(19)
10.16 Amended and Restated Promissory Note, dated January 31,
2000, among FFCA Acquisition Corporation and Morton's of
Chicago/Schaumburg, Inc., a subsidiary of the
Registrant.(20)
10.17+ Morton's Restaurant Group, Inc. 2000 Stock Option Plan.(23)
10.18+ Form of individual non-qualified stock option
agreements.(25)
10.19 Promissory Note, dated March 5, 2001, among FFCA Funding
Corporation and Morton's of Chicago/Jacksonville LLC, a
subsidiary of the Registrant.(26)
10.20 Promissory Note, dated March 27, 2001, among FFCA Funding
Corporation and Morton's of Chicago/Great Neck LLC, a
subsidiary of the Registrant.(26)
21.01 Subsidiaries of the Registrant.
23.01 Independent Auditors' consent to the incorporation by
reference in the Company's Registration Statement on Form
S-8 of the independent auditors' report included in the
Company's Annual Report to Stockholders.
------------------------
(1) Included as an exhibit to the Registrant's Registration Statement on Form
S-1 (No. 33-45738) and incorporated by reference.
(2) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1992 and incorporated by reference.
63
(3) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993 and incorporated by reference.
(4) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended January 1, 1995 and incorporated by reference.
(5) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated July 2, 1995 and incorporated by reference.
(6) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated by reference.
(7) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated March 31, 1996 and incorporated by reference.
(8) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated June 30, 1996 and incorporated by reference.
(9) Included as an exhibit to the Registrant's Form 8-K, dated January 6, 1996
and incorporated by reference.
(10) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 29, 1996 and incorporated by reference.
(11) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated June 29, 1997 and incorporated by reference.
(12) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the year ended December 28, 1997 and incorporated by reference.
(13) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated March 29, 1998 and incorporated by reference.
(14) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated June 28, 1998 and incorporated by reference.
(15) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated September 27, 1998 and incorporated by reference.
(16) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 3, 1999 and incorporated by reference.
(17) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated April 4, 1999 and incorporated by reference.
(18) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated July 4, 1999 and incorporated by reference.
(19) Included as an exhibit to the Registrant's Form S-8 dated August 27, 1999
and incorporated by reference.
(20) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 2, 2000 and incorporated by reference.
(21) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated July 2, 2000 and incorporated by reference.
(22) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated October 1, 2000 and incorporated by reference.
64
(23) Included as an exhibit to the Registrant's Form S-8 dated November 9, 2000
and incorporated by reference.
(24) Included as an exhibit to the Registrant's Form 8-K dated March 22, 2001
and incorporated by reference.
(25) Included as an exhibit to the Registrant's Form S-8 dated November 9, 2000
and incorporated by reference.
(26) Included as an exhibit to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000 and incorporated by reference.
(27) Included as an exhibit to the Registrant's Quarterly Report on Form 10-Q,
dated April 1, 2001 and incorporated by reference.
(28) Included as an exhibit to the Registrant's Form 8-K, dated March 26, 2002,
and incorporated by reference.
+ Management contracts or compensatory plans or arrangements.
65