SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(Amendment No. )
Filed by the Registrant [ ]
Filed by a party other than the Registrant [X]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[X] Soliciting Material Pursuant to Section 240.14a-12
MORTON'S RESTAURANT GROUP, INC.
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(Name of Registrant as Specified In Its Charter)
BFMA HOLDING CORPORATION
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(Name of Persons(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(1) Aggregate number of securities to which transaction applies:
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(1) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials:
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
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SCHEDULE 13D FILING MADE BY BFMA HOLDING CORPORATION
On May 14, 2002, BFMA Holding Corporation ("BFMA") filed Amendment No. 10
to the statement on Schedule 13D with respect to its equity ownership in
Morton's Restaurant Group, Inc. ("Morton's"). The text of Items 4 and 6 disclose
the following information:
"BFMA has nominated three individuals - Richard A. Bloom, Logan D. Delany,
Jr. and Charles W. Miersch - for election to the Morton's Board of Directors at
its 2002 Annual Meeting. As of the date hereof, Morton's has not scheduled a
date for the 2002 Annual Meeting of Stockholders. The Reporting Persons are
considering actions to compel the Morton's Board of Directors to hold an annual
meeting for this year. If they are successful, BFMA intends to solicit proxies
in favor of its nominees to Morton's Board of Directors.
The Reporting Persons are also exploring various alternatives with respect
to their shareholder position, including raising additional financing for a
potential acquisition of the Issuer. However, no definite determination as to
what course of action to take regarding the Issuer has been made at this time."
In addition, the Schedule 13D attached a copy of a letter delivered to the
Special Committee of Morton's Restaurant Group, Inc. on May 14, 2002. The text
of the letter is set forth below (note that the Annex to the letter has been
previously filed and is therefore not being filed herewith):
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BFMA HOLDING CORPORATION
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May 14, 2002
VIA FACSIMILE AND OVERNIGHT COURIER
Members of the Special Committee of
Morton's Restaurant Group, Inc.
Lee M. Cohn (Chairman)
Alan A. Teran
Robert L. Barney
c/o Morton's Restaurant Group, Inc.
3333 New Hyde Park Road
New Hyde Park, NY 11042
Gentlemen:
I am writing to you to express my outrage at the manner in which the
senior management, directors and the special committee of the Board of Directors
of Morton's have conducted themselves over the last year. It is appalling that
the end result of this conduct may be the sale of Morton's to an insider for a
fraction of the amount offered by BFMA only a year ago. That the members of the
special committee could first reward the mismanagement by Allen Bernstein, the
CEO of the company, and Thomas Baldwin, the CFO of the company, and then allow
(with their express approval) their crony John Castle, the lead outside director
of the company, to steal the company away from the other shareholders, is beyond
belief. The victims of this whole process have been the Morton's shareholders
who have been ignored and deceived and may ultimately be robbed.
The special committee could have given the shareholders an opportunity
to sell their stock for $28.25 per share. From the very beginning, I stated that
Mr. Castle should not be on the special committee, let alone its chairman.
Nonetheless, the Board of Directors constituted a special committee consisting
of John Castle and directors a majority of whom have been and continue to be
paid by Mr. Castle and his affiliated entities. It is therefore not surprising
that the special committee determined to sell the company to Mr. Castle. The
special committee was never more than a smokescreen for the Board of Directors
to insure that John Castle would ultimately own the company. I believe that the
special committee rigged the process and breached its fiduciary duties to the
Morton's shareholders.
More than a year ago, I publicly predicted that Morton's would find a
way to discredit and reject BFMA's offer and manipulate the process to the
advantage of Messrs. Castle, Bernstein and Baldwin. Six months ago, I publicly
predicted in a letter to Mr. Bernstein that John Castle intended to submit a
"low-ball" bid to acquire Morton's and that, despite Mr. Castle's resignation
from the special committee, his continued presence and the presence of his
associates on the board of directors would allow him to manipulate the sale
process to his advantage. It is with great disgust that I witness my predictions
coming true. I believe that this has always been the plan of Mr. Castle and this
management team: to take Morton's private for themselves, to the detriment of
the shareholders.
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 2
In this letter, I will summarize how John Castle schemed to take over
Morton's, the BFMA offer was killed, the special committee was improperly formed
and irreparably tainted with advisers who were not independent and the "auction"
process was rigged. Through this sham, you are allowing Mr. Castle to steal
Morton's away from the shareholders.
I. THE SCHEME TO TAKE CONTROL OF MORTON'S
A. 2001 Annual Meeting
Approximately fifteen months ago, BFMA commenced a proxy contest to
attempt to replace Messrs. Bernstein, Baldwin and Castle with three nominees who
would have served as shareholder representatives to seek to commence a sale of
the company to a third party. BFMA's rationale for the proxy contest was that
management had clearly exhibited poor business and financial judgment; Messrs.
Bernstein and Baldwin had unduly enriched themselves at shareholder expense; and
management and the Board were unwilling to consider selling Morton's to a third
party. These points were all covered in detail in BFMA's letters of May 2, 2001
and May 8, 2001, copies of which I have annexed to this letter.
BFMA's arguments led Institutional Shareholder Services ("ISS"), the
nation's leading independent provider of proxy voting and governance advice to
major institutional investors, to recommend that the Morton's shareholders vote
for BFMA's nominees. The ISS recommendation stated: "To ensure that the company
will consider a sale in an expedient and fair manner to all shareholders, ISS
believes that shareholders should support the [BFMA] slate of nominees." The ISS
report further stated ISS's belief that "the [BFMA] dissidents have a single
goal: to maximize shareholder value by exploring a sale of the company to BFMA
or the highest bidder." ISS recommended that the company should seriously
consider putting the company up for auction to the highest bidder.
In order to save their Board seats, Messrs. Bernstein, Baldwin and
Castle promised several large institutional investors that, in exchange for
their agreement to reelect them to the Board, they would, among other things,
consider adding a shareholder representative as a director and conduct an
auction of the company, including giving full and fair consideration to BFMA's
offer. It is apparent they never intended to fulfill their promises. Knowing
that fact, they realized they had to enter into any transaction before the next
annual meeting; otherwise, they would have found themselves in another proxy
contest with BFMA with little prospect of winning. Given that, they then mapped
out a scheme to steal the company before the 2002 annual meeting.
B. Original Scheme
I believe that the original scheme developed by Messrs. Bernstein,
Baldwin and Castle had several components. In the recent past, the company had
been buying back company stock (approximately 40% over a two-year period) on the
open market, using Morton's cash flow. This had the dual effect of increasing
Morton's reliance on its debt and virtually eliminating the liquidity in its
stock, thereby depressing the stock price. In its report, the special
committee's financial advisor, Greenhill & Co., cited this combination of high
leverage and low liquidity as one reason that the public markets have
undervalued Morton's shares. At the same time, the company had been issuing an
excessive number of options to senior management, increasing the
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 3
percentage of the company in "friendly hands" while diluting the other
shareholders. The net result is that management options constitute in excess of
20% of the outstanding common stock.
Prior to contacting management of Morton's about possibly making an
offer for the company, BFMA engaged in discussions with industry contacts,
investment bankers and other shareholders of Morton's to determine whether it
was worthwhile to make an offer to acquire Morton's. Through those discussions,
we learned that Mr. Bernstein had been approached about various sale-type
transactions in the past and that management and the Board (especially Messrs.
Bernstein and Castle) were openly resistant to such offers.
It was therefore not a surprise to us when, 10 days after BFMA publicly
disclosed its ownership interest in Morton's, according to its own filings, the
company took several steps to make Morton's look less appealing for an
acquisition. First, the Board amended Morton's "poison pill" rights agreement.
Next, the Board filled the company's sole vacant Board seat with a person with a
long-term relationship with Mr. Bernstein. Then, the Board approved employment
or change of control agreements with at least seven members of senior
management, including Messrs. Bernstein and Baldwin. All of these agreements
included increased compensation, perks and huge "golden parachute" severance
arrangements. For instance, according to Mr. Bernstein's employment agreement,
he is entitled to five years notice of termination and five years' salary and
prorated bonus plus expenses and benefits following termination, including
$17,200 per month in the form of an "expense account parachute." This is
egregious beyond belief! In the aggregate, based on publicly available
information, we estimated that the seven employment agreements could add
approximately $8 million to the cost of buying the company, or almost $2.00 per
share of value that could otherwise have been paid to the shareholders for their
shares.
These changes were all made to deter an offer from BFMA or another
third party. In this manner, Messrs. Bernstein, Baldwin and Castle could keep
Morton's from being sold until such time as they could take Morton's private for
themselves.
C. BFMA's Offer
Notwithstanding these actions taken by the Board and senior management,
in May 2001, prior to the 2001 annual meeting, BFMA made an offer to acquire the
company for $28.25 per share in cash. It was BFMA's stated goal at the time that
Morton's be sold to the highest bidder, whether BFMA or someone else.
In its recommendation of the BFMA slate of director nominees, and in
light of BFMA's offer, ISS recommended that the Board of Directors seriously
consider putting the company up for auction to the highest bidder. The ISS
report stated, "The critical issue to consider is whether or not management will
seriously consider [BFMA's] offer or any other offer for the company in a manner
befitting the best interests of shareholders. Under BFMA's bid, shareholders
would receive at least $28.25 per share, which represents an adequate premium
over the company's stock price if the company initiated a process to sell the
company. It is indisputable that the board cannot ignore the strategic
alternative of selling the company as a means to maximize shareholder value."
The ISS report continued, "Given the company's lack of liquidity in its shares,
the unimpressive stock performance based on three-year total shareholder returns
and the
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 4
increased competition in the restaurant industry, ISS believes that a
potential sale of the company should seriously be considered by the board."
However, it appears that BFMA's offer led to a revision of the scheme,
as Messrs. Bernstein, Baldwin and Castle could no longer effect a "creeping
going private" transaction. Instead, they would go through the motions of a
genuine auction, but rig the process so that John Castle would in the end be the
only bidder for Morton's. However, they first needed to kill the BFMA offer.
D. Killing BFMA's Offer
Messrs. Bernstein, Baldwin and Castle recognized that BFMA's offer, if
successful, would have ended their tenure at the company so they devised a
scheme to kill it. In order to retain control over the process, they then misled
the institutional shareholders, causing the shareholders to reelect them to the
Morton's board.
Their revised scheme called for John Castle to assume the role as the
Chairman of the special committee which would review the deal. This was letting
the fox guard the henhouse. I insisted from the beginning that Mr. Castle had a
substantial conflict of interest and should not even be on the special
committee, let alone chair it. This plea fell on deaf ears. Once in control of
the special committee, Mr. Castle then caused the special committee to hire
Greenhill & Co. LLC ("Greenhill") even though Greenhill was currently working
for Morton's defending against the BFMA offer (I'll discuss that in detail
later). Next, he hired his law firm, Schulte Roth & Zabel ("SRZ"), to serve as
counsel to the special committee even though SRZ was the legal counsel to Mr.
Castle's private equity fund and also the primary legal counsel to Morton's
(I'll discuss that later, too). Then, he caused the process to stall for weeks
before permitting Greenhill and SRZ to meet with BFMA.
At the beginning of BFMA's first meeting with Greenhill and SRZ,
Greenhill and SRZ communicated that they were not authorized by Mr. Castle, as
Chairman of the special committee, to provide a timetable, a confidentiality
agreement or any of the preliminary information BFMA had requested. It quickly
became clear to me that their purpose for meeting was solely to interrogate BFMA
regarding its offer and financing. BFMA addressed all of Greenhill's and SRZ's
questions about its financing, the commitment from Icahn Associates and its
commitment to the transaction. Greenhill informed BFMA and its representatives
on more than one occasion that it believed that BFMA was serious in its
intentions to purchase the company and did not express any further concerns
about BFMA's financing or capability to complete the transaction. However, this
was not what Mr. Castle wanted.
At the initial meeting I expressed my concern that this was a process
designed by John Castle to stall until BFMA's financing commitment expired, at
which time the special committee would deem BFMA's offer to be "not serious."
Further, I correctly predicted that Mr. Castle, as Chairman of the special
committee, would manipulate the process to reach that result.
Notwithstanding Greenhill's communicated comfort level, Mr. Castle
insisted on asking for additional evidence of our potential financing sources
prior to providing any information to BFMA. This was not a customary procedure,
as Mr. Castle, a veteran of many transactions in his
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 5
capacity as the head of Castle Harlan, Inc., certainly knew. Later, we would
find out why Mr. Castle was so interested in our potential financing sources.
The special committee then challenged our committed bridge financing
for the transaction, even though BFMA had already invested more than $8 million
in Morton's stock and expended more than $2 million on commitment fees, legal
fees and related expenses in connection with the process. At the direction of
Mr. Castle, Greenhill waited another month following the initial meeting to
review BFMA's and Icahn Associates' financing capabilities, personal bank and
brokerage account statements of all of the principals and commitment letters,
all of which evidenced more than enough capital to fund the transaction. Then,
the special committee had the unmitigated gall to assert publicly that neither
BFMA nor Icahn Associates had the financial wherewithal necessary to complete
this transaction and that BFMA was not a serious acquiror.
I still do not understand how the special committee concluded that
Castle Harlan Partners III was deemed sufficient but that Carl Icahn's company,
which had greater resources than Castle Harlan, was not. Moreover, Greenhill
stated in its report to the special committee a concern about BFMA's ability to
refinance its debt 12 months after Morton's had been acquired and taken private
by BFMA. This is simply not a relevant factor under Delaware law for a special
committee to consider when evaluating whether the BFMA offer was in the best
interests of the Morton's shareholders. It sounds like just another excuse to
kill the BFMA offer in favor of a deal with anyone other than BFMA. The special
committee, in its recommendation of the Castle Harlan deal, stated that a
positive factor in its consideration was the shareholders' ability to get cash
in the deal. The shareholders would have received far more cash had the special
committee cooperated with BFMA.
The same stall tactics were used with respect to the confidentiality
agreement. It took more than two months for SRZ to provide BFMA with the first
draft of a confidentiality agreement. The draft demanded highly unusual terms
and conditions in these circumstances. In particular, among other requirements,
SRZ (i) demanded a three-year standstill provision which would have prevented
BFMA from taking any action with respect to the company including limiting
BFMA's rights to wage a proxy fight at the company's shareholder meetings for
the next three years (which, given BFMA's 14% ownership and past history
fighting to protect the interests of Morton's shareholders, would not have been
in the interest of shareholders; other potential buyers, such as private equity
firms and strategic buyers might not care about this provision because they do
not own any shares or they are prohibited from acting against management for a
variety of reasons), (ii) insisted on prior approval for BFMA to contact any
alternative sources of funds (those sources could have lowered BFMA's cost of
capital which would have allowed BFMA to pay more for the Morton's shares) and
(iii) specifically stated that Morton's reserved the right, in its sole
discretion, not to provide BFMA with any information Morton's might decide to
withhold (which would have allowed Morton's to severely limit BFMA's due
diligence and to continue to hide material information). These demands were
accompanied by the special committee's refusal to provide any due diligence with
respect to Morton's general and administrative expense costs, which were
critical to any analysis of potential cost savings. Despite numerous attempts by
BFMA to move the process forward, the special committee, through SRZ and its
successor, never budged from their position. The fact that the company states
that Mr. Castle agreed to sign a customary confidentiality agreement is a
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 6
joke. John Castle had at all times unlimited and unrestricted access to all of
Morton's information. The execution of the confidentiality agreement was mere
window dressing.
It is clear to me that the entire charade of negotiating a
confidentiality agreement was simply a stall tactic devised by John Castle, as
Chairman of the special committee, to force BFMA's financing commitment from
Icahn Associates to expire, leaving the special committee in a position to claim
that our offer was "not serious." It is stunning that the special committee
would claim that it gave BFMA's offer "full and fair consideration." I believe
that Mr. Castle's ultimate intention was to have BFMA drop its offer to purchase
the company or to sell its interest to a "friend of Castle." In that regard, I
was personally approached by an associate of Mr. Castle, who inquired about the
possibility of acquiring BFMA's shares. When I informed him that BFMA's shares
were not for sale, he made what I interpreted to be nothing less than a threat.
At the time Mr. Castle killed the BFMA offer, I stated my belief that
he was not acting in the interest of all of the Morton's shareholders. I also
stated that he would rig the sale process to ensure that in the end he would be
the only bidder.
II. THE RIGGED SALE PROCESS
I believe that the special committee, through John Castle and its
advisors, rigged the process to Mr. Castle's advantage by
o delaying the process, thereby insuring that BFMA's financing would
terminate
o dissuading parties that had expressed interest from entering the
process
o refusing to return phone calls and other inquiries from interested
parties in a timely manner
o actively threatening financing sources who might otherwise
participate in the process with other interested parties
o requiring unreasonable terms as a condition to entering the process
o denying material information to parties in the process who had met
all of the required terms and conditions (even though Mr. Castle was
in possession of such information long before Castle Harlan entered
the process)
o accelerating the process after the September 11th tragedy to deter
any third-party potential bidder not intimately familiar with the
company
Finally, in order to make sure that no one other than Mr. Castle would
ultimately bid, Morton's senior management created and disclosed deliberately
negative information about Morton's to depress the stock price artificially and
to deter financing sources for other interested parties.
Even apart from the above-discussed treatment of BFMA by the special
committee, which I believe was an obvious violation of the special committee's
fiduciary duties to the Morton's shareholders, the special committee and its
advisers had a number of conflicts of
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 7
interest which I believe irrevocably tainted the special committee and fatally
flawed the process as it relates to the Castle Harlan offer.
A. John Castle's Conduct
Mr. Castle's actions make it clear that he wanted to remove all
obstacles to his acquisition of Morton's, even while he was serving as Chairman
of the special committee. Although BFMA had a commitment letter from Icahn
Associates, BFMA entered into discussions with a number of other financial
institutions with respect to financing the acquisition. Several of those
institutions reported that Mr. Castle discouraged them from discussing any
participation in a potential acquisition by BFMA. Some of these institutions
even reported implicit threats by Mr. Castle to withhold future business in the
event that they discussed the transaction with BFMA. This was a blatant breach
of Mr. Castle's duty to Morton's shareholders. Then, once Mr. Castle
successfully stalled BFMA until its financing commitment had expired, he
apparently felt that his job as Chairman of the special committee was done.
Approximately two weeks after the expiration of BFMA's financing
commitment, Mr. Castle resigned as Chairman of the special committee, having
previously determined to make an offer for the company. It obviously did not
register with Mr. Castle that having been privy to all information gathered by
the special committee and its counsel and financial advisor over the previous
three months might pose a conflict. According to Greenhill's report and the
proxy statement, Greenhill had discussions with at least seven potential
interested parties prior to Mr. Castle's resignation from the special committee,
some of whom had given the special committee detailed information regarding
their interest in a transaction.
Mr. Castle's ethical lapses are even more magnified when you review the
purported timeline set forth in the Morton's proxy statement. It strains
credibility to believe that Mr. Castle did not consider acquiring the company
while he was Chairman of the special committee. First, he had owned the company
previously. Second, he is in the business of buying and selling restaurant
companies. Third, he told at least one interested party that BFMA's offer was
too high for him to get involved in the auction process. These facts, when taken
together, directly contradict Mr. Castle's assertion that he determined for the
first time on August 15, 2001 that he might want to acquire the company.
B. Conflicts of the Advisors to the Special Committee
I believe that the interrelationships among Morton's, the special
committee, John Castle, SRZ and Greenhill were replete with conflicts of
interest and cause concerns over the legitimacy and independence of the special
committee.
It appears that Morton's did not abide by any traditional conflict of
interest analyses in selecting the advisors of the special committee. The
Morton's proxy statement describes that Messrs. Bernstein and Baldwin, along
with SRZ, hired Greenhill to represent Morton's in March 2001. This was two
months prior to the formation of the special committee. According to Greenhill's
own website, Greenhill "advised Morton's in the successful defense of a hostile
acquisition offer from BFMA." Given Greenhill's own description of its role in
the process, it is inconceivable that the special committee could have
subsequently hired Greenhill to be its independent financial advisor. Further,
according to the Morton's proxy statement, SRZ was the
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 8
primary legal counsel to the company and was also long-time counsel to Mr.
Castle and Castle Harlan. In fact, the 2001 SRZ newsletter trumpets the firm's
relationship with Castle Harlan. When a special committee seeks outside
financial advisors and legal counsel, it customarily seeks firms with no prior
relationship with the company in order to ensure the independence of the special
committee. The facts speak for themselves; Mr. Castle, Greenhill and SRZ are not
independent.
While it appears that SRZ resigned as counsel to the special committee
at the time John Castle resigned from the special committee, the damage was
already done. Furthermore, Greenhill continued to represent the special
committee throughout the process even though it was originally hired by Messrs.
Bernstein and Baldwin to advise Morton's on the defense of the BFMA's "hostile
acquisition offer" and SRZ continued to represent the company. The bottom line
is that the special committee and the process were irreparably tainted by the
appearance of SRZ and Greenhill in the process.
C. Conflicts of the Special Committee and the Board of Directors
Next, there are the ties among the members of the special committee,
the Board of Directors and Mr. Castle. Morton's own proxy statement discloses
that a number of Morton's directors, including two of the members of the special
committee, serve on boards of, and are compensated by, one or more companies
controlled by Mr. Castle or his affiliates and have made investments in these
Castle-controlled companies, as shown in the following information taken
directly from the Morton's proxy statement:
Annual Fees Paid by "Sweetheart" Investments
Castle Affiliates to Made by Below Individuals in
Below Individuals Castle-Related Deals
Allen J. Bernstein $220,000 $337,263
Thomas J. Baldwin 50,000 33,711
Lee M. Cohn (1) 30,000 0
John J. Connolly 32,000 0
Alan A. Teran (1) 10,000 0
(1) Member of special committee that accepted the Castle Harlan offer.
According to the Morton's proxy statement, Morton's has previously
invested an aggregate of $80,714 in private companies controlled by Mr. Castle
and his affiliates. In addition, Dr. Connolly and Mr. Castle are principals in
several medical publishing ventures together.
There is also a further question of the independence of Robert Barney.
I understand that Mr. Barney was recently brought back to the Board, at the
urging of Mr. Bernstein, to fill the open Board seat after BFMA publicly
announced its ownership position. Mr. Barney has a 20+ year relationship with
Mr. Bernstein. As I will discuss later, Mr. Bernstein's independence in this
matter must be seriously questioned.
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 9
The special committee was irreparably tainted by the interrelationships
among Mr. Bernstein, Mr. Castle and the other members of the special committee
and Board of Directors.
D. Conduct of the Special Committee
According to the preliminary proxy statement, John Castle resigned from
the special committee on August 15, 2001, approximately two weeks after the
expiration of BFMA's financing commitment. Even after Mr. Castle resigned, the
special committee continued to manipulate the process in numerous ways to
benefit Mr. Castle.
It apparently did not register with the special committee or the
company that Mr. Castle's resignation as Chairman of the special committee was a
material event requiring public disclosure. Morton's never disclosed this fact
even though both Greenhill and the new counsel to the special committee assured
BFMA that the information had been disclosed. In fact, I disclosed it when I was
finally told about it three months after the fact. Mr. Castle's presence on the
special committee served to deter expressions of interest in a transaction. Had
they disclosed Mr. Castle's resignation when he actually resigned three months
earlier, giving a clear signal that the company would actually be sold, I
believe that potential buyers would have been willing to expend more time and
effort to explore a transaction.
Moreover, it took approximately six weeks after Mr. Castle's
resignation for the Board of Directors to reconstitute the special committee.
Ironically, this action took place a mere 14 days after the September 11th
tragedy. It appears clear to me that the special committee took advantage of the
tragedy to manipulate the process in favor of Mr. Castle. While other interested
parties were focusing on recovering from those terrible events, the special
committee accelerated the process, demanding indications of interest at a time
when there was greater uncertainty about Morton's for those not intimately
familiar with the company. This had the effect of reducing the number of
potential buyers and discouraging otherwise interested buyers. This was good for
John Castle and Castle Harlan and bad for the Morton's shareholders.
In addition, it appears that the potential buyers who did express
interest had problems with the special committee. The special committee failed
to provide necessary information to interested parties to evaluate the
opportunity. In fact, no other interested buyers received the same access to
information that Mr. Castle had. Many of the interested buyers were denied due
diligence they requested. For example, at least one of the interested buyers was
denied general and administrative expense details. This information is
imperative to evaluate the potential savings, which materially affects how much
a buyer would be willing to offer for the shares. That put all other interested
buyers at a distinct disadvantage to Mr. Castle. This all seems contrary to the
fiduciary duty of the special committee to seek the maximum price for the
company.
Moreover, the senior management of the company, especially Mr.
Bernstein, failed to communicate with potential buyers and did not respond to
their telephone inquiries and requests for meetings. That put all other
interested buyers at a distinct disadvantage to Mr. Castle who, based on his
special relationship with Mr. Bernstein, had unlimited access.
Finally, once Mr. Castle was the only remaining bidder, it does not
appear that the special committee negotiated very diligently to increase the
purchase price for the shareholders. According to the proxy statement, the
special committee was able to negotiate only a $0.60 per
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 10
share, or 5%, increase in the offer price, from $12.00 to $12.60. This
represents only a 2% increase in the total enterprise value of the deal.
In conclusion, the special committee was tainted from its inception,
did not act in a manner consistent with its fiduciary duty to seek the maximum
price for the company and allowed a director of the company to steal Morton's
away from the shareholders. The special committee members should be ashamed of
their actions and should be held personally liable for their breaches.
III. BERNSTEIN AND BALDWIN ARE BEHOLDEN TO CASTLE
A. Financial Support by John Castle
Messrs. Bernstein and Baldwin are beholden to John Castle and acted to
support Mr. Castle and stonewalled all other potential buyers, including BFMA.
Mr. Castle has been a long-time supporter of Messrs. Bernstein and Baldwin -
financially, job security-wise and otherwise.
As disclosed in Morton's own proxy statement, Messrs. Bernstein and
Baldwin serve on the board of several companies owned by Mr. Castle and his
affiliates and have had the opportunity to invest in sweetheart deals in
Castle-controlled companies. Mr. Bernstein receives $220,000 each year in
compensation from these companies and has invested more than $330,000. Mr.
Baldwin receives $50,000 each year in compensation from these companies and has
invested more than $33,000. Morton's prior proxy statements indicated that
Messrs. Bernstein and Baldwin took an undisclosed amount of consulting fee
income and equity securities from Wilshire Restaurant Group, another Castle
Harlan restaurant company.
Given these financial ties, and their long-term relationship (we
understand that Messrs. Bernstein and Castle have been together for more than 15
years), it is unrealistic to believe, as was stated in the Morton's proxy
statement, that there were no discussions among Messrs. Castle, Bernstein and
Baldwin to continue as management of the company post-closing or to discuss
their participation in the scheme. Given the poor financial performance of
Morton's in recent years, I would expect Messrs. Bernstein and Baldwin to do
almost anything to keep their jobs. Mr. Bernstein's poor health and track record
would make it difficult to obtain a comparable job. If his friendship, cash
payments and sweetheart investment opportunities weren't enough, as a further
incentive, Mr. Castle promised Messrs. Bernstein and Baldwin a substantial
equity interest in the new private company. It is ludicrous to imply that
Messrs. Bernstein and Baldwin were not full partipicants in the scheme from the
very beginning, assisting the special committee to rig the process.
B. Actions by Senior Management to Assist Castle
I am suspicious of the reason for the overly negative information
issued to the public during the precise time that the special committee was
purportedly auctioning the company to the highest bidder. After September 11th,
the company issued two extremely negative press releases in relatively short
order, which pummeled the stock. The warnings appear to be deliberately more
pessimistic than they should have been, especially in relation to the less
pessimistic warnings by Morton's competitors and in light of the ultimate
reported results. Although this may normally seem prudent in the context of
managing earnings expectations, in light of their
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 11
knowledge of the process and the fact that the special committee was
accelerating the bidding process, it now appears that the warnings were designed
to ensure that no one other than Mr. Castle would ultimately bid or be able to
finance a bid for the company. These actions appear self-interested as senior
management knew that they would participate in a Castle-led transaction.
In addition, it appears that senior management intentionally (or
grossly negligently) managed the company poorly to depress the performance. For
instance, Morton's opened a restaurant in Sydney, Australia and closed it within
six months. Senior management stated in a January 2002 press release that
"recently-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," a decision which cost
Morton's almost $2 million for write-offs and sunk pre-opening costs. I have
attempted, without success, to confirm that such regulations were actually
imposed by Australian authorities. This appears at best to be one of the many
terrible business and financial decisions made by senior management over the
past ten years or at worst a lie. I have detailed many of these in my letters of
May 2, 2001 and May 8, 2001.
In a letter dated July 19, 2001, I wrote to Mr. Bernstein the
following:
"The recent announcements by management regarding Morton's financial
performance are further evidence supporting our concerns that this senior
management team is incapable of managing Morton's through these turbulent times.
.... Either you cannot manage a restaurant company (given your track record I
might be inclined to believe this) or you are attempting to make the company
look less attractive to a potential suitor."
"We also believe that you are manipulating the company's balance sheet
to further your sale avoidance efforts. Since the end of last year, there has
been an unusual reduction in the company's payables and accrued expenses to
below customary levels. We believe that you are keeping your debt levels higher
to make a purchase of the company appear more expensive. All of this leads us to
further question the integrity of your financial reporting. In the past, you
have shown the proclivity to manipulate your earnings by delaying certain
expenses (ala the endless Mick's, Peasant's and Bertolini's write-offs). Your
refusal to permit us to perform any due diligence further fuels our concerns
that you are playing games with your numbers."
I believe that Messrs. Bernstein and Baldwin have been "hiding" cash on
the company's balance sheet to help them and their friend Mr. Castle buy the
company with less of their own cash. Companies that have expressed concern about
their own weak financial performance and leverage would typically use cash they
generate to pay down their outstanding bank debt. Morton's has not. Instead,
Morton's is artificially keeping the levels of bank debt higher and is using the
excess cash generated by its business to pay down payables and accrued expenses
to historically low levels (increasing their working capital). Since the
beginning of Morton's last fiscal year, the company's debt levels have increased
by approximately $11 million and the company has increased its working capital
position by almost $8 million. This implies that they have unnecessarily paid
down their suppliers and other accrued expenses instead of paying down their
debt. Much of this has been done since Mr. Castle resigned from the special
committee to pursue buying the company.
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page 12
All of this is important because potential buyers most often look at
the total purchase cost of a company and not just the purchase price of the
shares. If the debt level is higher, it appears to be more expensive to acquire.
Generally speaking, neither potential buyers nor their lenders give much
emphasis to "normalizing" working capital items when evaluating a deal. Although
we can clearly see the overall effect of the company's balance sheet
manipulations on its cash, without proper due diligence it is difficult to know
what the normalized debt levels should be.
Messrs. Bernstein and Baldwin are manipulating their financial reports
to make it look more expensive to other potential buyers. They know that their
purchase of the company with Mr. Castle will be less expensive because they will
be able to pull this cash back out of the balance sheet and pay down the
company's debt. Very recently, Morton's did reverse this trend, now that the
rigged process resulted in a deal benefiting Messrs. Bernstein, Baldwin and
Castle. In addition, there will be a substantial amount of cash generated from
the business between March (the company's last reported quarter) and the
expected closing of the Castle deal. Based on management's own forecasts, this
would likely be more than $6 million. If we add this to expected insurance
proceeds of almost $2 million and the $8 million "hidden" on the company's
balance sheet, the likely additional cash available at closing will be
approximately $16 million. This is $16 million less than Castle Harlan will have
to come up with at closing and represents almost $4 per share that really
belongs to the shareholders. This isn't just underpaying.
Consistent with my prior predictions, I believe that Messrs. Bernstein,
Baldwin and Castle are acting in their own interests and not on behalf of
Morton's public stockholders and that they are attempting, through fraud and
deception, and with the complicity of the special committee, to steal value from
the public stockholders.
IV. STEALING THE COMPANY AWAY FROM THE SHAREHOLDERS
It wasn't that long ago that this Board of Directors, including John
Castle (a member of the Morton's compensation committee), granted in excess of
20% of the Morton's common stock to senior management in the form of options and
approved seven employment agreements providing for approximately $8 million in
"change of control" payments.
I believe that John Castle and senior management, with the help of the
special committee, schemed to acquire the company at an artificially low price,
using the worst financial performance in the company's recent past and the
tragedy of September 11th as cover. Even Greenhill's own report indicates that
the sale price of $12.60 is at the low end of the valuation range. This is after
the company had purchased shares at prices well above the current offer price
based on senior management's stated belief that the company's shares were
undervalued. Does that mean that the company overpaid then or is the special
committee "under-accepting" value now? It is clear to me that the entire process
has been rigged and that the special committee has failed to fulfill its
fiduciary duties to the shareholders.
Where do we go from here? It appears likely that the special committee
has already rigged the process and will not consider any other acquisition
proposal, arguing that such a proposal fails to satisfy the superior proposal
standard set forth in the Castle acquisition agreement. It is only fair that the
shareholders be given a true choice as to the direction of the company.
Therefore, I request that the special committee cause the Board of Directors to
hold the 2002 annual meeting at same time as the upcoming special meeting so
that the shareholders may
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
Members of the Special Committee of
Morton's Restaurant Group, Inc.
May 14, 2002
Page
vote for the Castle transaction or for a new slate of directors composed of true
shareholder representatives. In that way, we can begin to take the necessary
steps to ensure a truly fair evaluation of all of the company's strategic
alternatives.
I appreciate your consideration in this matter.
Sincerely,
/s/Barry W. Florescue
Barry W. Florescue
Chairman and CEO
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50 East Sample Road, Suite 400, Pompano Beach, Florida 33064
INFORMATION CONCERNING PARTICIPANTS
BFMA and certain other persons named below may be deemed to be participants
in the solicitation of proxies in respect of the election of Richard A Bloom,
Charles W. Miersch and Logan D. Delany, Jr. as Directors of Morton's.
NAME RELATIONSHIP TO BFMA
---- --------------------
Barry W. Florescue President, Chief Executive Officer and a
director of BFMA
Philip A. Shager Senior Vice President, Chief Financial Officer
and Treasurer of BFMA
Richard A. Bloom Director of BFMA and nominee for director of
Morton's
Logan D. Delany, Jr. Director of BFMA and nominee for director of
Morton's
Charles W. Miersch Director of BFMA and nominee for director of
Morton's
Ned L. Siegel Director of BFMA
Charles I. Weissman Assistant Secretary and a director of BFMA
As of May 14, 2002, BFMA beneficially owns 488,500 shares of common stock
of Morton's ("Common Stock"), which represents approximately 11.7% of issued and
outstanding Common Stock (based on the number of securities contained in
Morton's most recently available filing with the Securities and Exchange
Commission). In addition, as of May 14, 2002, Barry Florescue ("Florescue")
beneficially owns 517,600 shares of Common Stock, which represents approximately
12.4% percent of issued and outstanding Common Stock (based on the number of
securities contained in Morton's most recently available filing with the
Securities and Exchange Commission), which includes 488,500 shares of Common
Stock for which BFMA has sole voting power and sole dispositive power and an
additional 29,100 shares of Common Stock which Florescue Family Corporation
("FFC") has sole voting power and sole dispositive power. As of May 14, 2002,
Florescue and Ned Siegel are deemed to be the joint beneficial owners of
56,300 shares of Common Stock, which represents approximately 1.3% percent of
issued and outstanding Common Stock (based on the number of securities contained
in Morton's most recently available filing with the Securities and Exchange
Commission).
As of May 14, 2002, Richard Bloom beneficially owns 10,000 shares of
Common Stock, which represents less than one percent of issued and outstanding
Common Stock of Morton's (based on the number of securities contained in
Morton's most recently available filing
with the Securities and Exchange Commission).
As of May 14, 2002, Charles Miersch beneficially owns 1,000 shares of
Common Stock, which represents less than one percent of issued and outstanding
Common Stock of the Morton's (based on the number of securities contained in the
Morton's most recently available filing with the Securities and Exchange
Commission).
No other person listed above (or their associates, other than BFMA)
currently directly or indirectly own any securities of Morton's, either
beneficially or of record, except indirectly through their ownership of
securities of BFMA. Collectively, the directors and executive officers of BFMA
beneficially own approximately 83% of the outstanding shares of BFMA common
stock.
SECURITIES LAW LEGEND
BFMA IS NOT SOLICITING PROXIES AT THIS TIME. BFMA CURRENTLY INTENDS TO
SOLICIT PROXIES AGAINST THE CASTLE HARLAN OFFER TO ACQUIRE MORTON'S. MORTON'S
PUBLIC STATEMENTS SUGGEST THAT MORTON'S WILL ONLY HOLD A MEETING TO ELECT
DIRECTORS IN THE EVENT THAT THE STOCKHOLDERS REJECT THE CASTLE HARLAN OFFER. IN
THE EVENT THAT MORTON'S CHOOSES OR IS REQUIRED TO HOLD A MEETING TO ELECT
DIRECTORS, BFMA ALSO CURRENTLY INTENDS TO SOLICIT PROXIES TO ELECT ITS SLATE OF
DIRECTORS. BFMA IS CURRENTLY PREPARING A PROXY STATEMENT RELATING TO THE CASTLE
HARLAN OFFER AND THE ELECTION OF DIRECTORS. BFMA WILL CAUSE THE PROXY STATEMENT
AND THE RELATED FORM OF PROXY TO BE MAILED TO YOU, WHEN COMPLETED. YOU SHOULD
READ THE PROXY STATEMENT WHEN IT BECOMES AVAILABLE TO OBTAIN INFORMATION ABOUT
BFMA HOLDING CORPORATION, ITS OFFICERS AND DIRECTORS, INCLUDING RICHARD A.
BLOOM, CHARLES W. MIERSCH AND LOGAN D. DELANY, JR. A COPY OF THE PROXY STATEMENT
AND OTHER RELATED DOCUMENTS PREPARED BY OR ON BEHALF OF BFMA AND FILED WITH THE
SEC WILL BE AVAILABLE FOR FREE, EITHER AT THE WEB SITE OF THE SEC ( OR FROM BFMA
BY WRITING TO: BFMA HOLDING CORPORATION, 50 EAST SAMPLE ROAD, SUITE 400, POMPANO
BEACH, FL 33064, ATTENTION: SECRETARY.