**FORM 10-Q**

 

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------|-----------------------------------------------------------------------------------------------|

 

**For the quarterly period ended October 3, 2004**

 

**OR**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom                                      to**

 

**Commission file number 1-12692**

 

**MORTON’S RESTAURANT GROUP, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                     | ** ** | **13-3490149**                       |
|------------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization)  |       | (I.R.S. employer identification no.) |
|                                                             |       |                                 |
| **3333 New Hyde Park Road, Suite 210, New Hyde  Park, New York** | ** ** | **11042**                            |
| (Address of principal executive offices)                         |       | (Zip code)                           |
|                                                             |       |                                 |
| **516-627-1515**                                                 |
| (Registrant’s telephone number, including area code)        |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ýor No o.

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act). Yes oor No ý.

 

Asof November 15, 2004, the registrant had 1,000 shares of its Common Stock,$0.01 par value, outstanding.

 

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

INDEX

 
| Part I - Financial  Information                                                                                                       | 3      |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                  |   |
| Item 1. Financial  Statements                                                                                                         | 3      |
|                                                                                                                                  |   |
| Consolidated Balance Sheets  as of October 3, 2004 and January 4, 2004 - unaudited                                                    | 3      |
|                                                                                                                                  |   |
| Consolidated  Statements of Operations for the three and nine month periods ended October  3, 2004 and September 28, 2003 - unaudited | 5      |
|                                                                                                                                  |   |
| Consolidated  Statements of Cash Flows for the nine month periods ended October 3, 2004 and  September 28, 2003 - unaudited           | 6      |
|                                                                                                                                  |   |
| Notes  to Unaudited Consolidated Financial Statements                                                                                 | 7      |
|                                                                                                                                  |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                   | 20     |
|                                                                                                                                  |   |
| Item 3. Quantitative and Qualitative Disclosure  about Market Risk                                                                    | 28     |
|                                                                                                                                  |   |
| Item 4. Controls and Procedures                                                                                                       | 28     |
|                                                                                                                                  |   |
| Part II - Other Information                                                                                                           | 30     |
|                                                                                                                                  |   |
| Item 1. Legal Proceedings                                                                                                             | 30     |
|                                                                                                                                  |   |
| Item 6. Exhibits                                                                                                                      | 30     |
|                                                                                                                                  |   |
| Signatures                                                                                                                            | 31     |

 

2

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Part I - FinancialInformation

 

Item 1. Financial Statements

 

MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

ConsolidatedBalance Sheets

 

(amounts in thousands)

 
| ** **                                      | ** ** | **October 3,  2004** | ** ** | **January 4,  2004** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **(unaudited)**      | ** ** | ** **           | ** ** |
| Assets                                          |       |                 |       |                 |       |
| Current assets:                                 |       |                 |       |                 |       |
| Cash and cash  equivalents                      |       | $                    | 2,688      |                 | $          | 17,997 |   |
| Restricted cash                                 |       | 777                  |       | 1,100                |       |
| Marketable  securities                          |       | 968                  |       | —               |       |
| Accounts  receivable                            |       | 4,960                |       | 3,829                |       |
| Inventories                                     |       | 8,527                |       | 9,094                |       |
| Prepaid expenses  and other current assets |       | 5,902                |       | 5,069                |       |
| Deferred income  taxes                          |       | 6,130                |       | 7,076                |       |
|                                            |       |                 |       |                 |       |
| Total current  assets                           |       | 29,952               |       | 44,165               |       |
|                                            |       |                 |       |                 |       |
| Property and  equipment, at cost:               |       |                 |       |                 |       |
| Furniture,  fixtures and equipment              |       | 16,022               |       | 14,131               |       |
| Buildings and  leasehold improvements           |       | 41,586               |       | 38,667               |       |
| Land                                            |       | 8,474                |       | 8,474                |       |
| Construction in  progress                       |       | 744                  |       | 338                  |       |
|                                            |       | 66,826               |       | 61,610               |       |
| Less accumulated  depreciation and amortization |       | 11,950               |       | 7,500                |       |
| Net property and  equipment                     |       | 54,876               |       | 54,110               |       |
|                                            |       |                 |       |                 |       |
| Intangible asset                                |       | 92,000               |       | 92,000               |       |
| Goodwill                                        |       | 61,552               |       | 61,552               |       |
| Other assets and  deferred expenses, net        |       | 9,541                |       | 10,360               |       |
|                                            |       | $                    | 247,921    |                 | $          | 262,187 |   |

 

3

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(amounts in thousands, except share and per shareamounts)

 
| ** **                                                                                                                        | ** ** | **October 3,  2004** | ** ** | **January 4,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                                                                        | ** ** | **(unaudited)**      | ** ** | ** **           | ** ** |
| Liabilities and Stockholder’s Equity                                                                                         |       |                 |       |                 |       |
|                                                                                                                              |       |                 |       |                 |       |
| Current  liabilities:                                                                                                             |       |                 |       |                 |       |
| Accounts payable                                                                                                                  |       | $                    | 6,334      |                 | $          | 6,111 |   |
| Accrued expenses                                                                                                                  |       | 25,614               |       | 27,955               |       |
| Current portion  of obligations to financial institutions                                                                         |       | 509                  |       | 658                  |       |
| Accrued income  taxes                                                                                                             |       | 128                  |       | 296                  |       |
|                                                                                                                              |       |                 |       |                 |       |
| Total current  liabilities                                                                                                        |       | 32,585               |       | 35,020               |       |
|                                                                                                                              |       |                 |       |                 |       |
| 7.5% senior  secured notes, net of unamortized discount of $13,720 and $14,987 at October  3, 2004 and January 4, 2004            |       | 91,280               |       | 90,013               |       |
| Obligations to  financial institutions, less current maturities                                                                   |       | 6,771                |       | 12,274               |       |
| Deferred income  taxes                                                                                                            |       | 20,471               |       | 20,471               |       |
| Other  liabilities                                                                                                                |       | 3,350                |       | 2,087                |       |
|                                                                                                                              |       |                 |       |                 |       |
| Total liabilities                                                                                                                 |       | 154,457              |       | 159,865              |       |
|                                                                                                                              |       |                 |       |                 |       |
| Commitments and  contingencies                                                                                                    |       |                 |       |                 |       |
|                                                                                                                              |       |                 |       |                 |       |
| Stockholder’s  equity:                                                                                                       |       |                 |       |                 |       |
| Common stock,  $0.01 par value per share. Authorized, issued and outstanding 1,000 shares at  October 3, 2004 and January 4, 2004 |       | —               |       | —               |       |
| Additional  paid-in capital                                                                                                       |       | 97,076               |       | 97,075               |       |
| Accumulated  other comprehensive income                                                                                           |       | 127                  |       | 128                  |       |
| (Accumulated  deficit) retained earnings                                                                                          |       | (3,739               | )          | 5,119                |       |
|                                                                                                                              |       |                 |       |                 |       |
| Total  stockholder’s equity                                                                                                  |       | 93,464               |       | 102,322              |       |
|                                                                                                                              |       |                 |       |                 |       |
|                                                                                                                              |       | $                    | 247,921    |                 | $          | 262,187 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations

 

(amounts in thousands)

 
| ** **                                                          | ** ** | **Three month periods ended** | ** ** | **Nine month periods ended** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **                                                          | ** ** | **October 3,  2004**          | ** ** | **September 28,  2003**      | ** ** | **October 3,  2004** | ** ** | **September 28,  2003** | ** ** |
| ** **                                                          | ** ** | ** **                    | ** ** | ** **                   | ** ** | ** ** | ** ** | **Restated  (see Note 2)** | ** ** |
| ** **                                                          | ** ** | **(unaudited)**               | ** ** |
| Revenues                                                            |       | $                             | 61,789     |                         | $          | 58,371 |   | $ | 199,682 |   | $ | 183,233 |   |
|                                                                |       |                          |       |                         |       |   |   |   |   |
| Food and  beverage costs                                            |       | 21,105                        |       | 19,850                       |       | 67,566 |   | 61,710 |   |
| Restaurant  operating expenses                                      |       | 31,051                        |       | 29,678                       |       | 94,294 |   | 89,029 |   |
| Pre-opening  costs, depreciation, amortization and non-cash charges |       | 2,295                         |       | 1,631                        |       | 6,482 |   | 5,927 |   |
| General and  administrative expenses                                |       | 4,463                         |       | 3,934                        |       | 14,011 |   | 11,751 |   |
| Marketing and  promotional expenses                                 |       | 2,133                         |       | 1,826                        |       | 7,002 |   | 4,401 |   |
| Costs associated  with the repayment of certain debt                |       | —                        |       | 2,349                        |       | 264 |   | 2,349 |   |
| Interest  expense, net                                              |       | 2,768                         |       | 2,897                        |       | 8,706 |   | 5,973 |   |
| Management fee  paid to related party                               |       | 700                           |       | 700                          |       | 2,100 |   | 2,100 |   |
|                                                                |       |                          |       |                         |       |   |   |   |   |
| Loss before  income taxes                                           |       | (2,726                        | )          | (4,494                       | )          | (743 | ) | (7 | ) |
|                                                                |       |                          |       |                         |       |   |   |   |   |
| Income tax  expense (benefit)                                       |       | 731                           |       | (1,348                       | )          | 1,326 |   | (14 | ) |
|                                                                |       |                          |       |                         |       |   |   |   |   |
| Net (loss)  income                                                  |       | $                             | (3,457     | )                            | $          | (3,146 | ) | $ | (2,069 | ) | $ | 7 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

5

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

(amounts in thousands)

 
| ** **                                                                                | ** ** | **Nine month periods ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                | ** ** | **October 3,  2004**         | ** ** | **September 28,  2003** | ** ** |
| ** **                                                                                | ** ** | ** **                   | ** ** | **Restated  (see Note 2)** | ** ** |
| ** **                                                                                | ** ** | **(unaudited)**              | ** ** |
| Cash flows from  operating activities:                                                    |       |                         |       |   |   |
| Net (loss)  income                                                                        |       | $                            | (2,069     | ) | $ | 7 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by operating activities: |       |                         |       |   |   |
| Depreciation,  amortization and other non-cash charges                                    |       | 8,025                        |       | 5,398 |   |
| Deferred income  taxes                                                                    |       | 946                          |       | 18 |   |
| Change in assets  and liabilities:                                                        |       |                         |       |   |   |
| Accounts  receivable                                                                      |       | (1,126                       | )          | 2,717 |   |
| Income taxes  receivable                                                                  |       | —                       |       | 251 |   |
| Inventories                                                                               |       | 570                          |       | 355 |   |
| Prepaid expenses  and other assets                                                        |       | (928                         | )          | 1,088 |   |
| Accounts  payable, accrued expenses and other liabilities                                 |       | (1,517                       | )          | (6,539 | ) |
| Accrued income  taxes                                                                     |       | (159                         | )          | (114 | ) |
| Net cash  provided by operating activities                                                |       | 3,742                        |       | 3,181 |   |
|                                                                                      |       |                         |       |   |   |
| Cash flows from  investing activities:                                                    |       |                         |       |   |   |
| Purchases of  property and equipment                                                      |       | (5,418                       | )          | (3,219 | ) |
| Increase in  marketable securities                                                        |       | (968                         | )          | — |   |
| Net cash used in  investing activities                                                    |       | (6,386                       | )          | (3,219 | ) |
|                                                                                      |       |                         |       |   |   |
| Cash flows from  financing activities:                                                    |       |                         |       |   |   |
| Principal  reduction on obligations to financial institutions and capital leases          |       | (5,652                       | )          | (79,240 | ) |
| Proceeds from  senior secured notes offering                                              |       | —                       |       | 89,250 |   |
| Proceeds from  obligations to financial institutions                                      |       | —                       |       | 6,900 |   |
| Payment of  deferred financing costs                                                      |       | (550                         | )          | (6,168 | ) |
| Dividends paid                                                                            |       | (6,789                       | )          | — |   |
| Decrease  (increase) in restricted cash                                                   |       | 323                          |       | (1,663 | ) |
| Net cash (used  in) provided by financing activities                                      |       | (12,668                      | )          | 9,079 |   |
|                                                                                      |       |                         |       |   |   |
| Effect of  exchange rate changes on cash                                                  |       | 3                            |       | 50 |   |
|                                                                                      |       |                         |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                                     |       | (15,309                      | )          | 9,091 |   |
|                                                                                      |       |                         |       |   |   |
| Cash and cash  equivalents at beginning of period                                         |       | 17,997                       |       | 1,703 |   |
|                                                                                      |       |                         |       |   |   |
| Cash and cash  equivalents at end of period                                               |       | $                            | 2,688      |   | $ | 10,794 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

6

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Notes to UnauditedConsolidated Financial Statements

 

October 3, 2004 andSeptember 28, 2003

 

**1)**                                     **Basis of Presentation**

 

The accompanyingunaudited consolidated financial statements of Morton’s Restaurant Group, Inc.and its subsidiaries (the “Company,” “we,” “us” and “our”) have been preparedin accordance with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions to Form10-Q.****Accordingly, they do notinclude all information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements and should be read in conjunction with the Annual Report on Form10-K for the fiscal year ended January 4, 2004.

 

The accompanyingconsolidated financial statements are unaudited and include all adjustments(consisting of normal recurring adjustments and accruals) that managementconsiders necessary for a fair presentation of its financial position andresults of operations for the interim periods presented.  The results of operations for the interim periodsare not necessarily indicative of the results that may be expected for the fullyear.

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management of the Company to make estimates and assumptionsrelating to the reported amount of assets, liabilities, revenues and expensesreported during the period.  Actualresults could differ from those estimates.

 

The Company uses a 52/53 week fiscal year which endson the Sunday closest to January 1. Approximately every six or seven years, a53rd week will be added.  Fiscal 2003 wasa 53 week year.

 

**2)**                                     **Restatement of Consolidated Financial Statements**

 

The effect of the restatement discussed herein on theCompany’s results as of, and for the fiscal year ended January 4, 2004 wasreflected in the Company’s Annual Report on Form 10-K. The Company has restatedits consolidated financial statements for the three month period ended March30, 2003 and nine month period ended September 28, 2003 as a result of havingincorrectly provided estimates for expirations and non-redemption of giftcertificates that it had sold.  Theeffect of the restatement was to reduce revenues for the three month periodended March 30, 2003 in the amount of $137,000 and accordingly reduce revenuesfor the nine month period ended September 28, 2003 in the amount of$137,000.  The restatement had no effecton the Company’s net operating cash position. The impact of the above-mentioned restatement on the consolidatedstatement of operations for the nine month period ended September 28, 2003 isas follows (amounts in thousands):

 
| ** **                         | ** ** | **Nine month period ended  September 28, 2003** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|
| ** **                         | ** ** | **Reported**                                    | ** ** | **Restated** | ** ** |
| Revenues                           |       | $                                               | 183,370    |   | $ | 183,233 |   |
| Income (loss)  before income taxes |       | 130                                             |       | (7 | ) |
| Income tax  expense (benefit)      |       | 39                                              |       | (14 | ) |
| Net income                         |       | 91                                              |       | 7 |   |
|                                    |            |                                                 |            |  |  |  |  |

 

7

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**3)****                                    ****Recent Events**

 

On June 3, 2004, theCompany paid a dividend of $6,789,000 to its parent, Morton’s Holdings, LLC(“MHLLC”).

 

On June 4, 2004, Morton’s Holding Company, Inc.(“MHCI”), a newly formed wholly-owned subsidiary of MHLLC, became anintermediate holding company and the direct parent of the Company.Subsequently, MHCI completed a $40,000,000, 14% senior secured notes offering(“MHCI notes”). Interest on the MHCI notes can be paid in cash or “in kind,”through the issuance of additional “PIK notes.” The notes are secured by theassets of MHCI, which include the stock of the Company.  The notes are not secured by the assets of,nor are they guaranteed by, the Company or any of its subsidiaries.  MHCI used the proceeds of the offering tomake a distribution to MHLLC’s equity holders and to pay fees and expensesrelated to the issuance.  Pursuant to theMHCI notes, if at the end of a fiscal quarter the Company has cash and cashequivalents and marketable securities in excess of $5,000,000, excluding up to$750,000 of cash and cash equivalents held by one or more of the Company’sforeign subsidiaries) and is permitted to pay a dividend under the RestrictedPayments covenant of the 7.5% senior secured notes (defined therein), theCompany is required to pay a dividend, to the extent permitted, to MHCI torepay outstanding PIK notes.  Thedividend will be in the amount of the lesser of the excess cash and cashequivalents and marketable securities over the $5,000,000 threshold or theaggregate outstanding PIK notes.

 

**4)**                                     **Statements of Cash Flows**

 

For the purposes of theconsolidated statements of cash flows, the Company considers all highly liquidinstruments purchased with a maturity of three months or less to be cashequivalents.  The Company paid cashinterest, net of amounts capitalized, of approximately $5,276,000 and$4,370,000, and income taxes of approximately $559,000 and $386,000, for thenine month periods ended October 3, 2004 and September 28, 2003, respectively.

 

**5)**                                     **Restricted Cash**

 

Restricted cash of$777,000 and $1,100,000 as of October 3, 2004 and January 4, 2004,respectively, represents cash collateral relating to two interest rate swapagreements with Bank of America, formerly Fleet National Bank (“B of A”). SeeNote 8.

 

**6)**                                     **Marketable Securities**

 

The Company accounts forits marketable securities in accordance with Statement of Financial AccountingStandard (“SFAS”) No. 115, “Accounting for Certain Investments in Debt andEquity Securities.”  In accordance withSFAS No. 115, marketable securities of approximately $968,000 as of October 3,2004 are accounted for as trading securities. Securities held by the Company are bought and held principally for thepurpose of selling them in the near term and are recorded at fair value.Unrealized gains and losses on such securities have been recognized in interestexpense, net in the consolidated statements of operations.

 

**7)****                                     IntangibleAsset and Goodwill**

 

The identifiable intangible asset acquired representsthe Company’s trade name “Morton’s,” which has an indefinite life andaccordingly is not subject to amortization, but is subject to impairmenttesting. The trade name is used in the advertising and marketing of therestaurants and is widely recognized and accepted by consumers in itsrespective market as an indication of and recognition of service, value andquality. Goodwill represents the excess of costs over fair value of assets ofthe business acquired.

 

**8)****                                    ****DerivativeFinancial Instruments**

 

TheCompany accounts for its derivative financial instruments in accordance withSFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,”as amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards forderivative instruments,

 

8

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includingcertain derivative instruments embedded in other contracts, and for hedgingactivities.  It requires that an entityrecognize all derivatives as either assets or liabilities in the statement offinancial position and measures those instruments at fair value.  As of October 3, 2004, the Company’sderivative financial instruments consist of two interest rate swap agreementswith notional amounts of $20,000,000 each. Prior to the July 7, 2003 repaymentof our prior credit facility with a portion of the proceeds from our 7.5%senior secured notes offering, the interest rate swap agreements wereoriginally designated as cash flow hedges for purposes of SFAS No. 133. As aresult of such repayment, these two interest rate swap agreements, which expireon October 24, 2004 and October 24, 2005, are accounted for as speculativeinstruments and resulting changes in their fair market value since suchrepayment have been charged or credited to interest expense, net in theconsolidated statement of operations.  Asof October 3, 2004 and January 4, 2004, in accordance with SFAS No. 133,liabilities were approximately $250,000 and $723,000, respectively.

 

**9)****                                    ****Comprehensive Income**

 

The components of comprehensive(loss) income for the nine month periods ended October 3, 2004 and September28, 2003 are as follows (amounts in thousands):

 
| ** **                                                                         | ** ** | **Nine month periods ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                         | ** ** | **October 3,  2004**         | ** ** | **September 28,  2003** | ** ** |
| ** **                                                                         | ** ** | ** **                   | ** ** | **Restated** | ** ** |
| Net (loss)  income                                                                 |       | $                            | (2,069     | ) | $ | 7 |   |
| Other  comprehensive income (loss):                                                |       |                         |       |   |   |
| Foreign currency  translation                                                      |       | (1                           | )          | (20 | ) |
| Unrealized loss  on swap agreements                                                |       | —                       |       | (191 | ) |
| Reclassification  adjustment on swap agreements for amounts realized in net income |       | —                       |       | 711 |   |
| Total  comprehensive (loss) income                                                 |       | $                            | (2,070     | ) | $ | 507 |   |

 

**10)****                              Morton’s90 West Street, NY**

 

As a result of the impact of the World Trade Centerterrorist attacks on September 11, 2001, the Morton’s steakhouse restaurantlocated at 90 West Street, New York, New York, two blocks from the World TradeCenter was closed permanently due to structural damage.  During the nine month period ended September28, 2003, the Company recorded a benefit in restaurant operating expenses inthe accompanying consolidated statement of operations of approximately$1,111,000 representing business interruption insurance recovery related tocosts incurred from the closing of that restaurant.  There were no comparable benefits recordedduring the nine month period ended October 3, 2004.  During March 2004, the Company receivedapproximately $1,007,000 for such insurance. As of October 3, 2004, cumulative benefits recorded and received wereapproximately $3,619,000 for this insurance. Based on the insurance policycoverage, the Company believes that additional benefits will be recorded infuture periods relating to future insurance recoveries, although there is noassurance that any future recoveries will be received. Additionally, at thistime, the total amount of any future recoveries is unknown.

 

**11)****                              EmployeeSubscription Agreements**

 

Certain of our executives and other employees havebeen granted common units of MHLLC, which represent an ownership interest inMHLLC, pursuant to employee subscription agreements.  MHLLC’s Board approved 1,711,344 unitsavailable for grant of which 1,497,585 and 26,200 were granted on August 26,2003 and June 21, 2004, respectively.  OnAugust 26, 2003 and June 21, 2004, the fair value of each common unit granted was$0.01.  Common units granted to an employeepursuant to employee subscription agreements are granted at no cost to theemployee. These common units are subject to vesting.  Fifty percent of the granted common unitsvest upon certain dates if the employee is employed as of such date.  In addition, fifty percent of the commonunits will vest upon certain change of control or liquidation events if,

 

9

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upon the occurrence ofsuch an event, Castle Harlan Partners III, L.P. achieves an internal rate ofreturn of at least 30% and the employee is employed as of such date.  Upon termination of employment, unvestedcommon units will be forfeited and vested common units will be subject torepurchase pursuant to the terms of MHLLC’s operating agreement.  Stock-based employee compensation expenserelated to this plan is charged to the Company based on the recognition andmeasurement provisions of Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.  Accordingly, the Company recognizedcompensation expense relating to the vesting of common units granted in ourconsolidated statement of operations for the three and nine month periods endedOctober 3, 2004 and September 28, 2003. The compensation expense recorded during the three and nine monthperiods ended October 3, 2004 and September 28, 2003, represents thestraight-line amortization of the difference between the fair value at the dateof grant of $0.01 per common unit and the exercise price (which is zero) of thecommon units of the outstanding time-vesting common units for the respectiveperiod.  The compensation expenserecorded during the three and nine month periods ended September 28, 2003, alsoincludes the difference between the fair value at the date of grant and theexercise price of the common units that were immediately vested on the date ofgrant of August 26, 2003. The remaining compensation expense that was measuredat the date of grant will be amortized on a straight-line basis over theremaining vesting period.  Compensationexpense relating to the other 50% of common units granted, which vest uponcertain change of control or liquidation events if, upon the occurrence of suchan event, Castle Harlan Partners III, L.P. achieves an internal rate of returnof at least 30%, will be measured and recognized if and when these eventsoccur.

 

Activity relating to the common units granted pursuantto employee subscription agreements during the nine month period ended October3, 2004 is as follows:

 
| Unvested common  units outstanding as of January 4, 2004 |   | 1,482,385 |   |
|----------------------------------------------------------|--------|-----------|--------|
| Granted units                                            |   | 26,200    |   |
| Vested units                                             |   | —    |   |
| Forfeited units                                          |   | (17,600   | )      |
| Unvested common  units outstanding as of October 3, 2004 |   | 1,490,985 |   |

 

As of October 3, 2004, there were 220,359 common unitsavailable for grant.

 

In December 2002, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure.” SFAS No. 148 provides alternative methods of transition for a voluntarychange to the fair value method of accounting for stock-based employeecompensation as originally provided by SFAS No. 123, “Accounting forStock-Based Compensation.”  Additionally,SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to requireprominent disclosure in both the annual and interim financial statements aboutthe method of accounting for stock-based compensation and the effect of themethod used on reported results.  Thetransitional requirements of SFAS No. 148 are effective for all financialstatements for fiscal years ending after December 15, 2002.  The application of the disclosure portion ofthis standard did not have any impact on our consolidated financial statements.  The financial and accounting standards boardrecently indicated that it will require stock-based employee compensation to berecorded as a charge to earnings pursuant to a standard it is currentlydeliberating, which it believes will become effective during the second half of2005.  We will continue to monitor itsprogress on the issuance of this standard as well as evaluate our position withrespect to current guidance.

 

10

----

 

**12)****                              FinancialInformation about Geographic Areas**

 

Income (loss) before income taxes for the Company’sdomestic and foreign operations are as follows (amounts in thousands):

 
| ** ** | ** ** | **Three month periods ended** | ** ** | **Nine month periods ended** | ** ** |
|------------|------------|-------------------------------|------------|------------------------------|------------|
| ** ** | ** ** | **October 3,  2004**          | ** ** | **September 28,  2003**      | ** ** | **October 3,  2004** | ** ** | **September 28,  2003** | ** ** |
| ** ** | ** ** | ** **                    | ** ** | ** **                   | ** ** | ** ** | ** ** | **Restated** | ** ** |
| Domestic   |       | $                             | (2,905     | )                            | $          | (4,900 | ) | $ | (1,581 | ) | $ | (203 | ) |
| Foreign    |       | 179                           |       | 406                          |       | 838 |   | 196 |   |
| Total      |       | $                             | (2,726     | )                            | $          | (4,494 | ) | $ | (743 | ) | $ | (7 | ) |

 

**13)****                              RestaurantActivity**

 

In January 2003, the Company closed the Morton’ssteakhouse in the Hong Kong Central District. In August 2003, the Companyclosed the Morton’s steakhouse in Addison, Texas. During July 2004, a newMorton’s steakhouse opened in White Plains, New York. No restaurants wereclosed during the nine month period ended October 3, 2004.

 

**14)****                              LegalMatters and Contingencies**

 

Since August 2002, a number of the Company’s currentand former employees in New York, Boston and Florida have initiatedarbitrations with the American Arbitration Association in their respectivestates alleging that the Company has violated state (Boston arbitration), stateand federal (New York arbitrations) and federal (Florida arbitrations) wage andhour laws regarding the sharing of tips with other employees and failure to payfor all hours worked. In general, the complainants are seeking restitution oftips, the difference between the tip credit wage and the minimum wage, paymentfor hours worked off the clock (Florida only), liquidated damages andattorneys’ fees and costs. The arbitrator in the New York arbitrations haspermitted the complainants to consolidate their arbitrations into one actionand proceed as a collective action. The Florida complainants are also seekingto consolidate their arbitrations. The arbitrator has ruled that the claimscannot be consolidated but is considering the question of whether they couldproceed as a collective action.  Thearbitrator has indicated that he believes a collective action would bepermitted. The Company intends to contest these cases vigorously.

 

The Company is involved in various other claims andlegal actions arising in the ordinary course of business. Management does notbelieve that the ultimate resolution of these actions will have a materialadverse effect on the Company’s consolidated financial position, results ofoperations, liquidity and capital resources.

** **

**15)          IncomeTaxes**

 

The Company accounts for income taxes in accordancewith SFAS No. 109 “Accounting for Income Taxes”.  Under SFAS No. 109, income taxes areaccounted for based upon the future tax consequences attributable to differencesbetween the financial statement carrying amounts of existing assets andliabilities and their respective tax basis and operating loss and tax creditcarry-forwards.  Income taxes are one ofthe Company’s critical accounting policies and estimates and therefore involvea certain degree of judgment.  During thethird quarter of fiscal 2004, the Company determined it would elect to treatcertain of its employee-portion FICA tax payments as current income tax deductionsrather than income tax credits.  Suchelection was made in order to minimize cash paid for income taxes in theshort-term. The impact of this change resulted in recording additional taxexpense of approximately $1,500,000 to the Company’s income tax expense for thethree and nine month periods ended October 3, 2004.

 

**16)****                              SupplementalCondensed Consolidating Financial Information**

 

The obligations of Morton’s Restaurant Group, Inc.(the “Issuer”) related to the 7.5% senior secured notes are fully andunconditionally guaranteed on a joint and several basis and on a senior basisby certain of the Company’s wholly-owned domestic subsidiaries (the“Guarantors”). These guarantees are senior secured obligations of theGuarantors, subject to liens permitted under the indenture governing the 7.5% seniorsecured notes, rank senior in right of payment to all subordinated indebtednessof the Guarantors and rank *pari passu*in right of payment with all existing and future senior indebtedness of theGuarantors. There are no restrictions on the Company’s ability to obtain cashdividends or other distributions of funds from the Guarantors, except thoseimposed by applicable law and certain contractual restrictions, which do notexceed 25% of consolidated net assets of any Guarantor, that are permitted underthe indenture governing the 7.5% senior secured notes. The followingsupplemental financial information sets forth, on a condensed consolidatingbasis, balance sheets, statements of operations and statements of cash flowsfor the Issuer, domestic subsidiaries of the Company that are Guarantors andforeign subsidiaries and domestic

 

11

----

 

subsidiaries of the Company that are not Guarantors(collectively, the “Non-Guarantor Subsidiaries”). The Company has not presentedseparate financial statements and other disclosures concerning the GuarantorSubsidiaries because management has determined that such information is notmaterial to investors.

 

**SupplementalConsolidating Balance Sheet**

**October3, 2004**

**(unaudited)**

 

**(amountsin thousands)**

 
| ** **                                 | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Assets                                     |       |       |       |                        |       |                            |       |             |       |             |       |
| Current assets:                            |       |       |       |                        |       |                            |       |             |       |             |       |
| Cash and cash  equivalents                 |       | $          | 1,194      |                        | $          | 1,039                           |       | $                | 455        |             | $          | — |   | $ | 2,688 |   |
| Restricted cash                            |       | 777        |       | —                      |       | —                          |       | —           |       | 777              |       |
| Marketable  securities                     |       | 968        |       | —                      |       | —                          |       | —           |       | 968              |       |
| Accounts  receivable                       |       | 64         |       | 4,693                       |       | 203                             |       | —           |       | 4,960            |       |
| Inventories                                |       | —     |       | 8,029                       |       | 498                             |       | —           |       | 8,527            |       |
| Prepaid expenses  and other current assets |       | 563        |       | 5,328                       |       | 11                              |       | —           |       | 5,902            |       |
| Deferred income  taxes                     |       | 2,816      |       | 3,314                       |       | —                          |       | —           |       | 6,130            |       |
|                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Total current  assets                      |       | 6,382      |       | 22,403                      |       | 1,167                           |       | —           |       | 29,952           |       |
|                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Property and  equipment, net               |       | 143        |       | 53,630                      |       | 1,103                           |       | —           |       | 54,876           |       |
| Intangible asset                           |       | —     |       | 92,000                      |       | —                          |       | —           |       | 92,000           |       |
| Goodwill                                   |       | —     |       | 61,552                      |       | —                          |       | —           |       | 61,552           |       |
| Other assets and  deferred expenses, net   |       | 8,049      |       | 3,761                       |       | 251                             |       | (2,520           | )          | 9,541            |       |
| Amounts due from  affiliates               |       | 140,897    |       | 263                         |       | —                          |       | (141,160         | )          | —           |       |
|                                       |       | $          | 155,471    |                        | $          | 233,609                         |       | $                | 2,521      |             | $          | (143,680 | ) | $ | 247,921 |   |

 

12

----

 

**SupplementalConsolidating Balance Sheet**

**October3, 2004**

**(unaudited)**

 

**(amountsin thousands, except share and per share amounts)**

 
| ** **                                                                                | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Liabilities and Stockholder’s Equity                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Current  liabilities:                                                                     |       |       |       |                        |       |                            |       |             |       |             |       |
| Accounts payable  and accrued expenses                                                    |       | $          | 6,962      |                        | $          | 23,934                          |       | $                | 1,052      |             | $          | — |   | $ | 31,948 |   |
| Current portion  of obligations to financial institutions                                 |       | —     |       | 509                         |       | —                          |       | —           |       | 509              |       |
| Accrued income  taxes                                                                     |       | 31         |       | 678                         |       | (581                            | )          | —           |       | 128              |       |
| Amounts due to  affiliates                                                                |       | —     |       | 140,897                     |       | 263                             |       | (141,160         | )          | —           |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total current  liabilities                                                                |       | 6,993      |       | 166,018                     |       | 734                             |       | (141,160         | )          | 32,585           |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| 7.5% senior secured  notes, net of unamortized discount of $13,720                        |       | 91,280     |       | —                      |       | —                          |       | —           |       | 91,280           |       |
| Obligations to  financial institutions, less current maturities                           |       | —     |       | 6,771                       |       | —                          |       | —           |       | 6,771            |       |
| Deferred income  taxes                                                                    |       | —     |       | 20,471                      |       | —                          |       | —           |       | 20,471           |       |
| Other  liabilities                                                                        |       | (32        | )          | 3,296                       |       | 86                              |       | —           |       | 3,350            |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  liabilities                                                                        |       | 98,241     |       | 196,556                     |       | 820                             |       | (141,160         | )          | 154,457          |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Commitments and  contingencies                                                            |       |       |       |                        |       |                            |       |             |       |             |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Stockholder’s  equity:                                                               |       |       |       |                        |       |                            |       |             |       |             |       |
| Common stock,  $0.01 par value per share. Authorized, issued and outstanding 1,000 shares |       | —     |       | —                      |       | —                          |       | —           |       | —           |       |
| Additional  paid-in capital                                                               |       | 97,076     |       | 2,520                       |       | —                          |       | (2,520           | )          | 97,076           |       |
| Accumulated  other comprehensive income (loss)                                            |       | —     |       | 295                         |       | (168                            | )          | —           |       | 127              |       |
| (Accumulated  deficit) retained earnings                                                  |       | (39,846    | )          | 34,238                      |       | 1,869                           |       | —           |       | (3,739           | )          |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  stockholder’s equity                                                          |       | 57,230     |       | 37,053                      |       | 1,701                           |       | (2,520           | )          | 93,464           |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
|                                                                                      |       | $          | 155,471    |                        | $          | 233,609                         |       | $                | 2,521      |             | $          | (143,680 | ) | $ | 247,921 |   |

 

13

----

 

**SupplementalConsolidating Balance Sheet**

**January4, 2004**

 

**(amountsin thousands)**

 
| ** **                                 | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Assets                                     |       |       |       |                        |       |                            |       |             |       |             |       |
| Current assets:                            |       |       |       |                        |       |                            |       |             |       |             |       |
| Cash and cash  equivalents                 |       | $          | 17,911     |                        | $          | (614                            | )          | $                | 700        |             | $          | — |   | $ | 17,997 |   |
| Restricted cash                            |       | 1,100      |       | —                      |       | —                          |       | —           |       | 1,100            |       |
| Accounts  receivable                       |       | 2          |       | 3,665                       |       | 162                             |       | —           |       | 3,829            |       |
| Inventories                                |       | —     |       | 8,511                       |       | 583                             |       | —           |       | 9,094            |       |
| Prepaid expenses  and other current assets |       | 382        |       | 4,649                       |       | 38                              |       | —           |       | 5,069            |       |
| Deferred income  taxes                     |       | 1,875      |       | 5,201                       |       | —                          |       | —           |       | 7,076            |       |
|                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Total current  assets                      |       | 21,270     |       | 21,412                      |       | 1,483                           |       | —           |       | 44,165           |       |
|                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Property and  equipment, net               |       | 91         |       | 52,537                      |       | 1,482                           |       | —           |       | 54,110           |       |
| Intangible asset                           |       | —     |       | 92,000                      |       | —                          |       | —           |       | 92,000           |       |
| Goodwill                                   |       | —     |       | 61,552                      |       | —                          |       | —           |       | 61,552           |       |
| Other assets and  deferred expenses, net   |       | 8,899      |       | 3,732                       |       | 249                             |       | (2,520           | )          | 10,360           |       |
| Amounts due from  affiliates               |       | 150,482    |       | 14,325                      |       | 4,710                           |       | (169,517         | )          | —           |       |
|                                       |       | $          | 180,742    |                        | $          | 245,558                         |       | $                | 7,924      |             | $          | (172,037 | ) | $ | 262,187 |   |

 

14

----

 

**SupplementalConsolidating Balance Sheet**

**January4, 2004**

 

**(amountsin thousands, except share and per share amounts)**

 
| ** **                                                                                | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Liabilities and Stockholder’s Equity                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Current  liabilities:                                                                     |       |       |       |                        |       |                            |       |             |       |             |       |
| Accounts payable  and accrued expenses                                                    |       | $          | 6,090      |                        | $          | 26,704                          |       | $                | 1,272      |             | $          | — |   | $ | 34,066 |   |
| Current portion  of obligations to financial institutions                                 |       | —     |       | 658                         |       | —                          |       | —           |       | 658              |       |
| Accrued income  taxes                                                                     |       | 10,661     |       | (11,774                     | )          | 1,409                           |       | —           |       | 296              |       |
| Amounts due to  affiliates                                                                |       | —     |       | 165,206                     |       | 4,311                           |       | (169,517         | )          | —           |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total current  liabilities                                                                |       | 16,751     |       | 180,794                     |       | 6,992                           |       | (169,517         | )          | 35,020           |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| 7.5% senior  secured notes, net of unamortized discount of $14,987                        |       | 90,013     |       | —                      |       | —                          |       | —           |       | 90,013           |       |
| Obligations to  financial institutions, less current maturities                           |       | —     |       | 12,274                      |       | —                          |       | —           |       | 12,274           |       |
| Deferred income  taxes                                                                    |       | (3,860     | )          | 24,331                      |       | —                          |       | —           |       | 20,471           |       |
| Other  liabilities                                                                        |       | (56        | )          | 2,074                       |       | 69                              |       | —           |       | 2,087            |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  liabilities                                                                        |       | 102,848    |       | 219,473                     |       | 7,061                           |       | (169,517         | )          | 159,865          |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Commitments and  contingencies                                                            |       |       |       |                        |       |                            |       |             |       |             |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Stockholder’s  equity:                                                               |       |       |       |                        |       |                            |       |             |       |             |       |
| Common stock,  $0.01 par value per share. Authorized, issued and outstanding 1,000 shares |       | —     |       | —                      |       | —                          |       | —           |       | —           |       |
| Additional  paid-in capital                                                               |       | 97,075     |       | 2,520                       |       | —                          |       | (2,520           | )          | 97,075           |       |
| Accumulated  other comprehensive income (loss)                                            |       | —     |       | 296                         |       | (168                            | )          | —           |       | 128              |       |
| (Accumulated  deficit) retained earnings                                                  |       | (19,181    | )          | 23,269                      |       | 1,031                           |       | —           |       | 5,119            |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  stockholder’s equity                                                          |       | 77,894     |       | 26,085                      |       | 863                             |       | (2,520           | )          | 102,322          |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
|                                                                                      |       | $          | 180,742    |                        | $          | 245,558                         |       | $                | 7,924      |             | $          | (172,037 | ) | $ | 262,187 |   |

 

15

----

 

**SupplementalConsolidating Statement of Operations**

**Threemonth period ended October 3, 2004**

**(unaudited)**

 

**(amountsin thousands)**

 
| ** **                                                          | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                            |       | $          | 3,700      |                        | $          | 58,836                          |       | $                | 2,953      |             | $          | (3,700 | ) | $ | 61,789 |   |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and  beverage costs                                            |       | —     |       | 20,097                      |       | 1,008                           |       | —           |       | 21,105           |       |
| Restaurant  operating expenses                                      |       | —     |       | 29,533                      |       | 1,518                           |       | —           |       | 31,051           |       |
| Pre-opening  costs, depreciation, amortization and non-cash charges |       | 3          |       | 2,136                       |       | 156                             |       | —           |       | 2,295            |       |
| General and  administrative expenses                                |       | 4,463      |       | 3,700                       |       | —                          |       | (3,700           | )          | 4,463            |       |
| Marketing and  promotional expenses                                 |       | —     |       | 2,041                       |       | 92                              |       | —           |       | 2,133            |       |
| Interest  expense, net                                              |       | 2,643      |       | 125                         |       | —                          |       | —           |       | 2,768            |       |
| Management fee  paid to related party                               |       | 700        |       | —                      |       | —                          |       | —           |       | 700              |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss) income  before income taxes                                  |       | (4,109     | )          | 1,204                       |       | 179                             |       | —           |       | (2,726           | )          |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax  expense                                                 |       | 731        |       | —                      |       | —                          |       | —           |       | 731              |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss)  income                                                  |       | $          | (4,840     | )                           | $          | 1,204                           |       | $                | 179        |             | $          | — |   | $ | (3,457 | ) |

 

 

**SupplementalConsolidating Statement of Operations**

**Threemonth period ended September 28, 2003**

**(unaudited)**

 

**(amountsin thousands)**

 
| ** **                                                          | ** ** | **Issuer** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-Guarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                            |       | $          | 3,494      |                       | $          | 55,600                         |       | $                | 2,771      |             | $          | (3,494 | ) | $ | 58,371 |   |
|                                                                |       |       |       |                       |       |                           |       |             |       |             |       |
| Food and  beverage costs                                            |       | —     |       | 18,928                     |       | 922                            |       | —           |       | 19,850           |       |
| Restaurant  operating expenses                                      |       | —     |       | 28,380                     |       | 1,298                          |       | —           |       | 29,678           |       |
| Pre-opening  costs, depreciation, amortization and non-cash charges |       | 3          |       | 1,552                      |       | 76                             |       | —           |       | 1,631            |       |
| General and  administrative expenses                                |       | 3,934      |       | 3,494                      |       | —                         |       | (3,494           | )          | 3,934            |       |
| Marketing and  promotional expenses                                 |       | —     |       | 1,762                      |       | 64                             |       | —           |       | 1,826            |       |
| Costs associated  with the repayment of certain debt                |       | 2,349      |       | —                     |       | —                         |       | —           |       | 2,349            |       |
| Interest  expense, net                                              |       | 2,557      |       | 335                        |       | 5                              |       | —           |       | 2,897            |       |
| Management fee  paid to related party                               |       | 700        |       | —                     |       | —                         |       | —           |       | 700              |       |
|                                                                |       |       |       |                       |       |                           |       |             |       |             |       |
| (Loss) income  before income taxes                                  |       | (6,049     | )          | 1,149                      |       | 406                            |       | —           |       | (4,494           | )          |
|                                                                |       |       |       |                       |       |                           |       |             |       |             |       |
| Income tax  benefit                                                 |       | (1,348     | )          | —                     |       | —                         |       | —           |       | (1,348           | )          |
|                                                                |       |       |       |                       |       |                           |       |             |       |             |       |
| Net (loss)  income                                                  |       | $          | (4,701     | )                          | $          | 1,149                          |       | $                | 406        |             | $          | — |   | $ | (3,146 | ) |

 

16

----

 

**SupplementalConsolidating Statement of Operations**

**Ninemonth period ended October 3, 2004**

**(unaudited)**

 

**(amountsin thousands)**

 
| ** **                                                          | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                            |       | $          | 11,958     |                        | $          | 190,286                         |       | $                | 9,396      |             | $          | (11,958 | ) | $ | 199,682 |   |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and  beverage costs                                            |       | —     |       | 64,430                      |       | 3,136                           |       | —           |       | 67,566           |       |
| Restaurant  operating expenses                                      |       | —     |       | 89,549                      |       | 4,745                           |       | —           |       | 94,294           |       |
| Pre-opening  costs, depreciation, amortization and non-cash charges |       | 9          |       | 6,069                       |       | 404                             |       | —           |       | 6,482            |       |
| General and  administrative expenses                                |       | 14,011     |       | 11,958                      |       | —                          |       | (11,958          | )          | 14,011           |       |
| Marketing and  promotional expenses                                 |       | —     |       | 6,729                       |       | 273                             |       | —           |       | 7,002            |       |
| Costs associated  with the repayment of certain debt                |       | 264        |       | —                      |       | —                          |       | —           |       | 264              |       |
| Interest  expense, net                                              |       | 8,124      |       | 582                         |       | —                          |       | —           |       | 8,706            |       |
| Management fee  paid to related party                               |       | 2,100      |       | —                      |       | —                          |       | —           |       | 2,100            |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss) income  before income taxes                                  |       | (12,550    | )          | 10,969                      |       | 838                             |       | —           |       | (743             | )          |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax  expense                                                 |       | 1,326      |       | —                      |       | —                          |       | —           |       | 1,326            |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss)  income                                                  |       | $          | (13,876    | )                           | $          | 10,969                          |       | $                | 838        |             | $          | — |   | $ | (2,069 | ) |

 

 

**SupplementalConsolidating Statement of Operations**

**Ninemonth period ended September 28, 2003**

**(unaudited)**

**Restated**

 

**(amountsin thousands)**

 
| ** **                                                          | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                            |       | $          | 10,967     |                        | $          | 175,745                         |       | $                | 7,488      |             | $          | (10,967 | ) | $ | 183,233 |   |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and  beverage costs                                            |       | —     |       | 59,138                      |       | 2,572                           |       | —           |       | 61,710           |       |
| Restaurant  operating expenses                                      |       | —     |       | 84,856                      |       | 4,173                           |       | —           |       | 89,029           |       |
| Pre-opening  costs, depreciation, amortization and non-cash charges |       | 61         |       | 5,540                       |       | 326                             |       | —           |       | 5,927            |       |
| General and  administrative expenses                                |       | 11,751     |       | 10,967                      |       | —                          |       | (10,967          | )          | 11,751           |       |
| Marketing and  promotional expenses                                 |       | —     |       | 4,206                       |       | 195                             |       | —           |       | 4,401            |       |
| Costs associated  with the repayment of certain debt                |       | 2,349      |       | —                      |       | —                          |       | —           |       | 2,349            |       |
| Interest  expense, net                                              |       | 4,681      |       | 1,266                       |       | 26                              |       | —           |       | 5,973            |       |
| Management fee  paid to related party                               |       | 2,100      |       | —                      |       | —                          |       | —           |       | 2,100            |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss) income  before income taxes                                  |       | (9,975     | )          | 9,772                       |       | 196                             |       | —           |       | (7               | )          |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax  benefit                                                 |       | (14        | )          | —                      |       | —                          |       | —           |       | (14              | )          |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss)  income                                                  |       | $          | (9,961     | )                           | $          | 9,772                           |       | $                | 196        |             | $          | — |   | $ | 7 |   |

 

17

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**SupplementalConsolidating Statement of Cash Flows**

**Ninemonth period ended October 3, 2004**

**(unaudited)**

 

**(amountsin thousands)**

 
| ** **                                                                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| Cash flows from  operating activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Net (loss)  income                                                                                   |       | $          | (13,876    | )                           | $          | 10,969                          |       | $                | 838        |   | $ | (2,069 | ) |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities: |       |       |       |                        |       |                            |       |             |       |
| Depreciation,  amortization and other non-cash charges                                               |       | 2,105      |       | 5,489                       |       | 431                             |       | 8,025            |       |
| Deferred income  taxes                                                                               |       | 2,919      |       | (1,973                      | )          | —                          |       | 946              |       |
| Change in assets  and liabilities:                                                                   |       |       |       |                        |       |                            |       |             |       |
| Accounts  receivable                                                                                 |       | (62        | )          | (1,025                      | )          | (39                             | )          | (1,126           | )          |
| Inventories                                                                                          |       | —     |       | 482                         |       | 88                              |       | 570              |       |
| Prepaid expenses  and other assets                                                                   |       | 9,403      |       | (9,187                      | )          | (1,144                          | )          | (928             | )          |
| Accounts  payable, accrued expenses and other liabilities                                            |       | 1,469      |       | (2,785                      | )          | (201                            | )          | (1,517           | )          |
| Accrued income  taxes                                                                                |       | (10,630    | )          | 10,663                      |       | (192                            | )          | (159             | )          |
| Net cash (used  in) provided by operating activities                                                 |       | (8,672     | )          | 12,633                      |       | (219                            | )          | 3,742            |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash flows from  investing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Purchases of  property and equipment                                                                 |       | (61        | )          | (5,328                      | )          | (29                             | )          | (5,418           | )          |
| Increase in  marketable securities                                                                   |       | (968       | )          | —                      |       | —                          |       | (968             | )          |
| Net cash used in  investing activities                                                               |       | (1,029     | )          | (5,328                      | )          | (29                             | )          | (6,386           | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash flows from  financing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Principal  reduction on obligations to financial institutions                                        |       | —     |       | (5,652                      | )          | —                          |       | (5,652           | )          |
| Payment of  deferred financing costs                                                                 |       | (550       | )          | —                      |       | —                          |       | (550             | )          |
| Dividends paid                                                                                       |       | (6,789     | )          | —                      |       | —                          |       | (6,789           | )          |
| Decrease in  restricted cash                                                                         |       | 323        |       | —                      |       | —                          |       | 323              |       |
| Net cash used in  financing activities                                                               |       | (7,016     | )          | (5,652                      | )          | —                          |       | (12,668          | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Effect of  exchange rate changes on cash                                                             |       | —     |       | —                      |       | 3                               |       | 3                |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Net (decrease)  increase in cash and cash equivalents                                                |       | (16,717    | )          | 1,653                       |       | (245                            | )          | (15,309          | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash and cash  equivalents at beginning of period                                                    |       | 17,911     |       | (614                        | )          | 700                             |       | 17,997           |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash and cash  equivalents at end of period                                                          |       | $          | 1,194      |                        | $          | 1,039                           |       | $                | 455        |   | $ | 2,688 |   |

 

18

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**SupplementalConsolidating Statement of Cash Flows**

**Ninemonth period ended September 28, 2003**

**(unaudited)**

**Restated**

 

**(amountsin thousands)**

 
| ** **                                                                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| Cash flows from  operating activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Net (loss)  income                                                                                   |       | $          | (9,961     | )                           | $          | 9,772                           |       | $                | 196        |   | $ | 7 |   |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities: |       |       |       |                        |       |                            |       |             |       |
| Depreciation,  amortization and other non-cash charges                                               |       | 431        |       | 4,646                       |       | 321                             |       | 5,398            |       |
| Deferred income  taxes                                                                               |       | 3,849      |       | (3,831                      | )          | —                          |       | 18               |       |
| Change in assets  and liabilities:                                                                   |       |       |       |                        |       |                            |       |             |       |
| Accounts  receivable                                                                                 |       | (14        | )          | 2,776                       |       | (45                             | )          | 2,717            |       |
| Income taxes  receivable                                                                             |       | 251        |       | —                      |       | —                          |       | 251              |       |
| Inventories                                                                                          |       | —     |       | 256                         |       | 99                              |       | 355              |       |
| Prepaid expenses  and other assets                                                                   |       | 3,074      |       | (3,022                      | )          | 1,036                           |       | 1,088            |       |
| Accounts  payable, accrued expenses and other liabilities                                            |       | (292       | )          | (5,138                      | )          | (1,109                          | )          | (6,539           | )          |
| Accrued income  taxes                                                                                |       | (9,331     | )          | 9,345                       |       | (128                            | )          | (114             | )          |
| Net cash (used  in) provided by operating activities                                                 |       | (11,993    | )          | 14,804                      |       | 370                             |       | 3,181            |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash flows from  investing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Purchases of  property and equipment                                                                 |       | (65        | )          | (3,050                      | )          | (104                            | )          | (3,219           | )          |
| Net cash used in  investing activities                                                               |       | (65        | )          | (3,050                      | )          | (104                            | )          | (3,219           | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash flows from  financing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Principal  reduction on obligations to financial institutions and capital leases                     |       | (68,125    | )          | (10,569                     | )          | (546                            | )          | (79,240          | )          |
| Proceeds from  senior secured notes offering                                                         |       | 89,250     |       | —                      |       | —                          |       | 89,250           |       |
| Proceeds from  obligations to financial institutions                                                 |       | 6,900      |       | —                      |       | —                          |       | 6,900            |       |
| Payment of  deferred financing costs                                                                 |       | (6,168     | )          | —                      |       | —                          |       | (6,168           | )          |
| Increase in  restricted cash                                                                         |       | (1,663     | )          | —                      |       | —                          |       | (1,663           | )          |
| Net cash  provided by (used in) financing activities                                                 |       | 20,194     |       | (10,569                     | )          | (546                            | )          | 9,079            |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Effect of  exchange rate changes on cash                                                             |       | —     |       | —                      |       | 50                              |       | 50               |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Net increase  (decrease) in cash and cash equivalents                                                |       | 8,136      |       | 1,185                       |       | (230                            | )          | 9,091            |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash and cash  equivalents at beginning of period                                                    |       | 243        |       | 601                         |       | 859                             |       | 1,703            |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash and cash  equivalents at end of period                                                          |       | $          | 8,379      |                        | $          | 1,786                           |       | $                | 629        |   | $ | 10,794 |   |

 

19

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MORTON’S RESTAURANTGROUP, INC. AND SUBSIDIARIES

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations

 

Restatement ofConsolidated Financial Statements

 

The effect of the restatement discussed herein on ourresults as of and for the fiscal year ended January 4, 2004 was reflected inour Annual Report on Form 10-K. We have restated our consolidated financialstatements for the three month period ended March 30, 2003 and the nine monthperiod ended September 28, 2003 as a result of having incorrectly providedestimates for expirations and non-redemption of gift certificates that wesold.  The effect of the restatement wasto reduce revenues for the three month period ended March 30, 2003 in theamount of $0.1 million and accordingly reduce revenues for the nine monthperiod ended September 28, 2003 in the amount of $0.1 million.  The restatement had no effect on our netoperating cash position. See Note 2 to our unaudited consolidated financialstatements.

 

Results ofOperations

 

Our net loss increased $0.3 million,or 9.9%, to $3.5 million for the three month period ended October 3, 2004 from$3.1 million for the three month period ended September 28, 2003.  The increase is due, in part, to increases ingeneral and administrative expenses, marketing and promotional expenses,pre-opening costs, depreciation, amortization and non-cash charges and incometax expense discussed below.  Theseincreases were partially offset by an increase in comparable restaurantrevenues plus the impact of new restaurants, less food and beverage costs andrestaurant operating expenses. There were no comparable costs associated withthe repayment of certain debt during the three month period ended October 3,2004.  In conjunction with the issuanceof the 7.5% senior secured notes, there were costs associated with therepayment of certain debt during the three month period ended September 28,2003.  For the nine month period endedOctober 3, 2004 our net loss was $2.1 million compared to net income of $7,000for the nine month period ended September 28, 2003.  The decrease was due, in part, to increasesin general and administrative expenses, marketing and promotional expenses,interest expense, net and income tax expense discussed below. These increaseswere partially offset by an increase in comparable restaurant revenues plus theimpact of new restaurants, less food and beverage costs and restaurantoperating expenses, and decreases in costs associated with the repayment ofcertain debt.

 

Revenues increased $3.4 million, or 5.9%, to $61.8million for the three month period ended October 3, 2004 from $58.4 million forthe three month period ended September 28, 2003. Revenues increased $2.6million due to an increase in comparable revenues from restaurants open all ofboth fiscal years. Revenues increased $1.3 million due to the opening of onenew Morton’s steakhouse in fiscal 2004. Revenues decreased $0.3 million due toa decline in revenues attributable to the one new restaurant opened in fiscal2003. Revenues declined $0.2 million due to the closing of the Morton’ssteakhouse formerly located in Addison, Texas (closed since August 2003), whichwas closed due to its comparatively low revenues and negative cash flows.Average revenue per restaurant open all of either period increased 3.9%.Revenues for the three month period ended October 3, 2004 also reflect theimpact of aggregate menu price increases of approximately 3% in November 2003and approximately 3% in February 2004.

 

Revenues increased $16.4 million, or 9.0%, to $199.7million for the nine month period ended October 3, 2004 from $183.2 million forthe nine month period ended September 28, 2003. Revenues increased $16.8million due to an increase in comparable revenues from restaurants open all ofboth fiscal years. Revenues increased $1.3 million due to the opening of one newMorton’s steakhouse in fiscal 2004. Revenues declined $1.3 million due to theclosing of the Morton’s steakhouses formerly located in Hong Kong Central(closed since January 2003) and Addison, Texas (closed since August 2003).These

 

20

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steakhouses were closed due to their comparatively lowrevenues and negative cash flows. Revenues decreased $0.4 million due to adecline in revenues attributable to one new restaurant opened in fiscal 2003.Average revenue per restaurant open all of either period increased 8.7%.Revenues for the nine month period ended October 3, 2004 also reflect theimpact of aggregate menu price increases of approximately 3% in November 2003and approximately 3% in February 2004.

 

Percentage changes in comparable restaurant revenuesfor the three and nine month periods ended October 3, 2004 versus September 28,2003 for restaurants open all of both periods are as follows:

 
| ** **       | ** ** | **Three month period  ended October 3, 2004  Percentage Change** | ** ** | **Nine month period  ended October 3, 2004  Percentage Change** | ** ** |
|------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Morton’s    |       | 4.5                                                              | %          | 9.5                                                             | %          |
| Bertolini’s |       | 4.2                                                              | %          | 7.1                                                             | %          |
| Total            |       | 4.5                                                              | %          | 9.4                                                             | %          |

 

During the first and second quarters of fiscal 2003,we believe that the war in Iraq and the weak economic environment adverselyaffected many of the markets in which we operate which, in turn, contributed toweak revenue trends and negative comparable restaurant revenues. Additionally,during the first and second quarters of fiscal 2003, the outbreak of “severeacute respiratory syndrome” materially affected the results of our threerestaurants located in Hong Kong, Singapore and Toronto. During the first andsecond quarters of fiscal 2004, an improved economy contributed to strongerrevenue trends. During the third quarter of fiscal 2004, we believe revenueswere adversely impacted by hurricanes and severe weather in Florida and thesoutheastern United States.

 

Our business is somewhat seasonal in nature, withrevenues generally being less in the second and third quarters primarily due toour reduced summer volume.

 

Food and beverage costs increased $1.3 million, or6.3%, to $21.1 million for the three month period ended October 3, 2004 from$19.9 million for the three month period ended September 28, 2003. These costsincreased $5.9 million, or 9.5%, to $67.6 million for the nine month periodended October 3, 2004 from $61.7 million for the nine month period endedSeptember 28, 2003. These costs as a percentage of revenues increased by 0.2%to 34.2% for the three month period ended October 3, 2004 from 34.0% for thethree month period ended September 28, 2003 and increased by 0.1% to 33.8% forthe nine month period ended October 3, 2004 from 33.7% for the nine monthperiod ended September 28, 2003. During the three and nine month periods endedOctober 3, 2004 high demand for U.S. beef products has decreased theavailability of USDA prime beef which resulted in increased food costs. We weregenerally able to offset such cost increases with the benefit of menu priceincreases, which resulted in a slight increase in food and beverage costs as apercentage of revenues for the three and nine month periods ended October 3,2004 compared to the three and nine month periods ended September 28,2003.  We cannot assure you that we wouldbe able or willing to increase menu prices or take other actions to offsetincreases in such costs in the future.

 

Restaurant operating expenses, which include labor,occupancy and other operating expenses, increased $1.4 million, or 4.6%, to$31.1 million for the three month period ended October 3, 2004 from $29.7million for the three month period ended September 28, 2003. These costsincreased $5.3 million, or 5.9%, to $94.3 million for the nine month periodended October 3, 2004 from $89.0 million for the nine month period endedSeptember 28, 2003. These increases were primarily due to increases in laborand benefit costs and the opening of additional restaurants. Restaurantoperating expenses as a percentage of revenues decreased 0.5% to 50.3% for thethree month period ended October 3, 2004 from 50.8% for the three month periodended September 28, 2003 and decreased 1.4% to 47.2% for the nine month periodended October 3, 2004

 

21

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from 48.6% for the nine month period ended September28, 2003. The decreases in restaurant operating expenses as a percentage ofrevenues are primarily due to the benefit of menu price increases. Included inthe three and nine month periods ended September 28, 2003 are recoveries ofapproximately $0.2 million and $1.1 million for business interruption insurancebenefits related to the closing of the Morton’s steakhouse formerly located at90 West Street, New York, New York, two blocks from the World Trade Center,which was closed permanently due to structural damages. There were nocomparable benefits recorded during the three and nine month periods endedOctober 3, 2004.  As of October 3, 2004,cumulative benefits recorded and received were $3.6 million for this insurance.Based on our insurance policy coverage, we believe that additional benefitswill be recorded in future periods relating to future insurance recoveries,although we cannot assure you that we will receive any future recoveries.Additionally, at this time, the total amount of any future recoveries isunknown.

 

Pre-opening costs, depreciation, amortization andnon-cash charges increased $0.7 million, or 40.7%, to $2.3 million for thethree month period ended October 3, 2004 from $1.6 million for the three monthperiod ended September 28, 2003. These costs increased as a percentage ofrevenues by 0.9% to 3.7% for the three month period ended October 3, 2004 from2.8% for the three month period ended September 28, 2003.  These costs increased $0.6 million, or 9.4%,to $6.5 million for the nine month period ended October 3, 2004 from $5.9million for the nine month period ended September 28, 2003. These costs as apercentage of revenues remained consistent at 3.2% for the nine month periodsended October 3, 2004 and September 28, 2003. We expense all costs incurredduring start-up activities, including pre-opening costs, as incurred.Pre-opening costs incurred and recorded as expense increased to $0.3 millionfor the three month period ended October 3, 2004 from $29,000 for the three monthperiod ended September 28, 2003 and decreased $0.3 million to $0.6 million forthe nine month period ended October 3, 2004 from $0.9 million for the ninemonth period ended September 28, 2003. The number of restaurants opened, thetiming of restaurant openings and the costs per restaurant opened affected theamount of these costs.

 

General and administrative expenses increased $0.5million, or 13.4%, to $4.5 million for the three month period ended October 3,2004 from $3.9 million for the three month period ended September 28, 2003.These costs increased $2.3 million, or 19.2%, to $14.0 million for the ninemonth period ended October 3, 2004 from $11.8 million for the nine month periodended September 28, 2003. These costs as a percentage of revenues increased0.5% to 7.2% for the three month period ended October 3, 2004 from 6.7% for thethree month period ended September 28, 2003 and increased 0.6% to 7.0% for thenine month period ended October 3, 2004 from 6.4% for the nine month periodended September 28, 2003.  The increaseswere primarily due to increased salary, bonus and benefit costs and legal andprofessional costs.

 

Marketing and promotional expenses increased $0.3million, or 16.8%, to $2.1 million for the three month period ended October 3, 2004from $1.8 million for the three month period ended September 28, 2003. Thesecosts increased $2.6 million, or 59.1%, to $7.0 million for the nine monthperiod ended October 3, 2004 from $4.4 million for the nine month period endedSeptember 28, 2003. These costs as a percentage of revenues increased 0.4% to3.5% for the three month period ended October 3, 2004 from 3.1% for the threemonth period ended September 28, 2003 and increased 1.1% to 3.5% for the ninemonth period ended October 3, 2004 from 2.4% for the nine month period endedSeptember 28, 2003. These increases were primarily due to increased spendingfor print media advertising in conjunction with the introduction of our “Savorthe Good Life” theme in 2004.

 

Costs associated with the repayment of certain debt of$0.3 million for the nine month period ended October 3, 2004 representprepayment penalties that we incurred with the early repayment of two of ourmortgages. There were no comparable costs associated with the repayment ofcertain debt during the three month period ended October 3, 2004. Costsassociated with the repayment of certain debt of $2.3 million for the three andnine month periods ended September 28, 2003 represent: (1) the write-off ofdeferred financing costs of $0.7 million relating to our previously existingcredit facility; (2) prepayment penalties of

 

22

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$0.5 million that we incurred with the repayment ofour capital leases and one mortgage; and (3) the write-off of the accumulatedother comprehensive loss of $0.7 million and deferred tax assets of $0.4million previously recognized in connection with two interest rate swapagreements that expire on October 24, 2004 and October 24, 2005, which due tothe repayment of our previously existing credit facility are now accounted foras speculative instruments. Changes in their fair market value are charged orcredited to interest expense, net in the consolidated statements of operations.

 

Interest expense, net, decreased $0.1 million, or4.5%, to $2.8 million for the three month period ended October 3, 2004 from$2.9 million for the three month period ended September 28, 2003 and increased$2.7 million, or 45.8%, to $8.7 million for the nine month period ended October3, 2004 from $6.0 million for the nine month period ended September 28,2003.  The increase is primarily due tothe issuance of the 7.5% senior secured notes in July 2003. Interest income wasnot significant in any of these periods.

 

Management fee paid to related party was $0.7 millionfor the three month periods ended October 3, 2004 and September 28, 2003 and$2.1 million for the nine month periods ended October 3, 2004 and September 28,2003. We paid this fee pursuant to MHLLC’s management agreement with Castle Harlan,Inc.

 

Provision for income taxes consisted of an income taxexpense of $1.3 million for the nine month period ended October 3, 2004 and anincome tax benefit of $14,000 for the nine month period ended September 28,2003. Our 2004 effective tax rate differs from the statutory rate due to thechange in utilization of 2003 FICA tax payments from a credit to a deductionand certain non-deductible interest expense related to our 7.5% senior securednotes. See Note 15 to our unaudited consolidated financial statements. Our 2003effective tax rate differs from the statutory rate due to the establishment ofadditional deferred tax assets relating to FICA and other tax credits.

 

Liquidity and Capital Resources

 

Ourprincipal liquidity requirements are to service our debt and meet our workingcapital and capital expenditure needs. Subject to our operating performance,which, if significantly adversely affected, would adversely affect theavailability of funds, we expect to be able to meet our liquidity requirementsfor the foreseeable future through cash provided by operations and throughborrowings available under our working capital facility. We cannot assure you,however, that this will be the case. As of October 3, 2004, we had cash andcash equivalents of $2.7 million compared to $18.0 million as of January 4,2004.  The decrease in cash and cashequivalents is primarily due to the payment of a dividend of $6.8 million,purchases of property and equipment of $5.4 million and the early repayment oftwo mortgages aggregating $5.3 million.

 

*WorkingCapital and Cash Flows*

 

As of October 3, 2004 wehad, in the past we have had, and in the future we may have, negative workingcapital balances. We do not have significant receivables and we receive tradecredit based upon negotiated terms in purchasing food and supplies. Fundsavailable from cash sales not needed immediately to pay for food and suppliesor to finance receivables or inventories historically have typically been usedfor noncurrent capital expenditures and/or payments of long-term debt balancesunder our prior revolving credit agreement.

 

*Operating Activities*.  Cash flows provided by operating activitiesfor the nine month period ended October 3, 2004 were $3.7 million, consistingprimarily of a net increase in cash of $6.0 million resulting from net incomebefore depreciation, amortization and other non-cash charges partially offsetby a net decrease in cash of $1.5 million resulting from a decrease in accountspayable, accrued expenses and other liabilities and $1.1 million due to anincrease in accounts receivable.

 

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*Investing Activities*.  Cash flows used in investing activities forthe nine month period ended October 3, 2004 were $6.4 million due to purchasesof property and equipment of $5.4 million, which include capital expendituresrelated to the Morton’s steakhouse opened in the third quarter of fiscal 2004,and an increase in marketable securities of $1.0 million.

 

*Financing Activities*.  Cash flows used in financing activities forthe nine month period ended October 3, 2004 were $12.7 million primarilyconsisting of the payment of a dividend of $6.8 million, net principalreduction on obligations to financial institutions of $5.7 million, primarilydue to the early repayment of two mortgages aggregating $5.3 million, and thepayment of deferred financing costs of $0.6 million relating to our 7.5% seniorsecured notes offering and our working capital facility.

 

*Debt and Other Obligations*.

 

*7.5%Senior Secured Notes*. On July 7, 2003, we completed a private offering of $105.0 million inaggregate principal amount at maturity of 7.5% senior secured notes due July 1,2010.  The notes were issued at adiscount of 15% and a yield to maturity of 12.005% including the accretion ofthe discount and the amortization of the related deferred financing costs.  The notes are fully and unconditionallyguaranteed on a senior secured basis by all of our present and future domesticrestricted subsidiaries.  On December 22,2003, we filed a registration statement with the Securities and ExchangeCommission with respect to notes having substantially identical terms as theoriginal notes, as part of an offer to exchange registered notes for theprivately-issued original notes. The new notes evidence the same debt as theoriginal notes, are entitled to the benefits of the indenture governing theoriginal notes and are treated under the indenture as a single class with theoriginal notes. The exchange offer was completed on January 28, 2004.  We refer to these notes as our 7.5% seniorsecured notes.

 

Our domestic restricted subsidiaries presently consistof all of our domestic subsidiaries that either own restaurants or ownsubsidiaries that own restaurants. As restricted subsidiaries, each of theseguarantors of the 7.5% senior secured notes is subject to all of the terms,conditions and covenants contained in the indenture governing the 7.5% seniorsecured notes that apply to restricted subsidiaries. The 7.5% senior securednotes are not guaranteed by our foreign subsidiaries due to the taximplications of providing such guarantees, or by our unrestricted subsidiaries,which presently consist of subsidiaries that have no material assets. Ourunrestricted subsidiaries are not subject to the terms, conditions or covenantscontained in the indenture, and must interact with us and our restrictedsubsidiaries on the same basis as unrelated third parties. From time to time,we may designate other subsidiaries as unrestricted subsidiaries subject to theterms and conditions set forth in the indenture.

 

The 7.5% senior secured notes and the guarantees aresecured by substantially all of our and our domestic restricted subsidiaries’tangible and intangible assets, as well as by a pledge of a portion of thestock of the subsidiaries owned by us and by our domestic restrictedsubsidiaries, in each case subject to the prior ranking claims on such assetsby the lender under our working capital facility and holders of any capitallease obligations and certain other secured indebtedness. The indenturegoverning the 7.5% senior secured notes permits us to incur other seniorsecured indebtedness and to grant liens on our assets under certaincircumstances.

 

We pay interest on the 7.5% senior secured notessemi-annually in cash, in arrears, on January 1 and July 1 at an annual rate of7.5%. The indenture governing the 7.5% senior secured notes contains variousaffirmative and negative covenants, subject to a number of importantlimitations and exceptions, including but not limited to those limiting ourability to incur additional indebtedness or enter into sale and leasebacktransactions; pay dividends, redeem stock or make other distributions; issuestock of our subsidiaries; make certain investments or acquisitions; grantliens on assets; enter into transactions with affiliates; merge, consolidate ortransfer substantially all of our assets; and transfer and sell assets. Ourindenture has a

 

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covenant that limits our incurrence of additionalindebtedness other than Permitted Indebtedness (defined therein) unless on thedate of the incurrence of additional indebtedness our Consolidated Fixed ChargeCoverage Ratio (defined therein) will be, after giving effect to the incurrencethereof and the application of the proceeds thereof, greater than 2.25 to 1.0.The indenture defines Consolidated Fixed Charge Coverage Ratio as the ratio ofConsolidated EBITDA to Consolidated Fixed Charges (defined therein).

 

The indenture governing the 7.5% senior secured notescontains various events of default, including but not limited to those relatedto non-payment of principal, interest or fees; violations of certain covenants;certain bankruptcy-related events; invalidity of liens; non-payment of certainlegal judgments; and cross defaults with certain other indebtedness.

 

We can redeem the 7.5% senior secured notes on orafter July 1, 2007, except we may redeem up to 35% of the 7.5% senior securednotes prior to July 1, 2006 with the proceeds of one or more public equityofferings. We are required to redeem the 7.5% senior secured notes undercertain circumstances involving changes of control. Additionally, if we or anyof our domestic restricted subsidiaries engage in asset sales, we generallymust either invest the net cash proceeds from such sales in our business within360 days, prepay the debt under our working capital facility or certain othersecured debt or make an offer to purchase a portion of the 7.5% senior secured noteshaving an accreted value equal to the excess net cash proceeds.

 

*WorkingCapital Facility.*On July 7, 2003, we entered into a $15.0million senior secured working capital facility with Wells Fargo Foothill, Inc.Our working capital facility matures on July 7, 2007. Availability under ourworking capital facility is limited to the lesser of (i) $15.0 million and (ii)the borrowing base amount, in each case, less the sum of (a) the revolvingloans then outstanding (including letters of credit) and (b) reserves requiredby the lender. The borrowing base amount is defined as the lesser of (A) 80% ofour twelve-month trailing EBITDA, as determined in accordance with the mostrecently delivered financial statements, or (B) 25% of our “enterprise value,”determined to be $168.0 million as of July 7, 2003, and thereafter to be theamount determined by a third party appraiser. We are permitted to repay andreborrow such advances until the maturity date. As of October 3, 2004, we hadno borrowings outstanding under our working capital facility. At our option, upto $7.5 million of the facility can consist of one or more letters of creditissued by the lender. As of October 3, 2004, $1.0 million was restricted forletters of credit under our working capital facility. Our working capitalfacility is guaranteed by all of our domestic restricted subsidiaries andsecured by a first priority perfected security interest in all of thecollateral securing the 7.5% senior secured notes. Interest will accrue onborrowings under our working capital facility at a floating rate of interestper annum equal to the rate of interest announced from time to time within thelender’s principal office in San Francisco as its “prime rate” plus 1.75%, or aLIBOR-based equivalent thereof. Interest is calculated on the basis of a360-day year and will be payable monthly for base rate loans and at the end ofeach interest period for LIBOR loans (but not less frequently than quarterly).Our working capital facility contains certain customary fees, including aclosing fee, anniversary fees, servicing fees and pre-payment fees.

 

Our working capital facility contains variousaffirmative and negative covenants customary for similar working capitalfacilities, including but not limited to covenants pertaining to mergers andsales of assets outside the ordinary course of business; use of proceeds;granting of liens; incurrence of indebtedness; restricted payments; voluntaryprepayment of indebtedness, including the 7.5% senior secured notes; payment ofdividends; business activities; investments and acquisitions; transactions withaffiliates; certain restrictions affecting subsidiaries; fundamental changes;and amendments or modifications to instruments governing certain indebtedness.Our working capital facility also requires us to achieve and maintain atwelve-month trailing EBITDA (as defined therein) of not less than $16.0million. As of October 3, 2004, we were in compliance with all of our financialcovenants.

 

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Our working capital facility contains customary eventsof default, including but not limited to those related to non-payment ofprincipal, interest or fees; violations of certain covenants; change ofcontrol; certain bankruptcy-related events; inaccuracy of representations andwarranties in any material respect; and cross defaults with certain otherindebtedness and agreements, including without limitation the indenturegoverning the 7.5% senior secured notes.

 

*PriorCredit Facility.*Our prior credit facility was pursuant tothe Second Amended and Restated Revolving Credit and Term Loan Agreement, datedJune 19, 1995, between us and Fleet National Bank (subsequently acquired by Bof A) (“Fleet”), as amended from time to time, a portion of which had beensyndicated to other lenders. On July 7, 2003, we used a portion of the proceedsfrom the 7.5% senior secured notes offering to repay our prior credit facilityin full. Following repayment, the credit facility was terminated. On April 7,1998 and May 29, 1998, we entered into interest rate swap agreements with Fleeton notional amounts of $10.0 million each. These agreements expired on April 7,2003 and May 29, 2003. Additionally, on October 24, 2002, we entered into twointerest rate swap agreements with Fleet on notional amounts of $20.0 millioneach. These agreements expire on October 24, 2004 and October 24, 2005. Theseagreements were used to reduce the potential impact of interest ratefluctuations relating to $40.0 million of variable rate debt under our priorcredit facility. As a result of the July 7, 2003 repayment of our prior creditfacility with a portion of the proceeds from the 7.5% senior secured notesoffering, these interest rate swap agreements are now accounted for asspeculative instruments and resulting changes in their fair market value arecharged or credited to interest expense, net in the consolidated statement ofoperations. As of October 3, 2004 and January 4, 2004, in accordance with SFASNo. 133, liabilities were approximately $0.3 million and $0.7 million,respectively, in the accompanying consolidated balance sheets. The change inthe fair market value has been recognized in interest expense, net in theconsolidated statement of operations for the three and nine month periods endedOctober 3, 2004.

 

*CNL Loan*.  In March 1997, one of our subsidiariesentered into a $2.5 million loan agreement with CNL Financial I, Inc.(“CNL”).  This loan is scheduled tomature on April 1, 2007 and bears interest at 10.002% per annum.  This loan is secured by a security interestin the assets of the Morton’s steakhouses located in Chicago and Denver(downtown).  Principal and interestpayments are due monthly over the term of the loan.  On October 3, 2004 and January 4, 2004 theoutstanding principal balance of the CNL loan was approximately $0.9 millionand $1.1 million, respectively, of which approximately $0.3 million ofprincipal for each period is included in “Current portion of obligations tofinancial institutions” in the accompanying consolidated balance sheets.

 

*Mortgages*.  During 1998 and 1999, certain of oursubsidiaries entered into a total of six mortgage loans with GE CapitalFranchise Finance aggregating $18.9 million with interest rates range from7.68% to 9.26% per annum, the proceeds of which were used to fund the purchasesof land and construction of restaurants. The loans generally require monthly payments of principal andinterest.  On October 3, 2004 and January4, 2004 the aggregate outstanding principal balance due on these loans wasapproximately $6.4 million and $11.8 million, respectively, of whichapproximately $0.2 million and $0.4 million, respectively, of principal isincluded in “Current portion of obligations to financial institutions” in theaccompanying consolidated balance sheets. We repaid one mortgage in May 2003, one in September 2003 and two inApril 2004.  The remaining two mortgagesoutstanding as of October 3, 2004 are scheduled to mature in February 2020 andMarch 2021.

 

*Restaurant Operating Leases*.  Our obligations for restaurant operatingleases include certain restaurant operating leases for which we, or one of oursubsidiaries guarantees, for a portion of the lease term, the performance ofthe lease by the operating company that is a party thereto.

 

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*Contractual Commitments*.  The following table represents ourcontractual commitments associated with our debt and other obligationsdisclosed above as of October 3, 2004:

 
| ** **                                        | ** ** | **Remainder of  2004**     | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| ** **                                        | ** ** | **(amounts in thousands)** | ** ** |
| 7.5% senior  secured notes                        |       | $                          | —     |     | $          | —   |       | $        | —     |     | $          | —         |       | $         | —     |   | $ | 105,000 |   | $ | 105,000 |   |
| Loan agreement  with CNL                          |       | 77                         |       | 329      |       | 364      |       | 104      |       | —   |       | —         |       | 874       |       |
| Mortgage loans  with GE Capital Franchise Finance |       | 37                         |       | 189      |       | 207      |       | 227      |       | 248      |       | 5,498          |       | 6,406     |       |
| Subtotal                                          |       | 114                        |       | 518      |       | 571      |       | 331      |       | 248      |       | 110,498        |       | 112,280   |       |
| Operating leases                                  |       | 4,296                      |       | 18,879   |       | 19,076   |       | 18,565   |       | 17,872   |       | 121,662        |       | 200,350   |       |
| Purchase  commitments                             |       | 399                        |       | 1,674    |       | —   |       | —   |       | —   |       | —         |       | 2,073     |       |
| Letters of  credit                                |       | 1,000                      |       | —   |       | —   |       | —   |       | —   |       | —         |       | 1,000     |       |
| Total                                             |       | $                          | 5,809      |     | $          | 21,071   |       | $        | 19,647     |     | $          | 18,896         |       | $         | 18,120     |   | $ | 232,160 |   | $ | 315,703 |   |

 

During the first ninemonths of fiscal 2004, our net investment in fixed assets and relatedinvestment costs, including pre-opening costs, approximated $6.0 million.  We estimate that we will spend up toapproximately $11.0 million in fiscal 2004, including the $6.0 million recordedin the first nine months of fiscal 2004, to finance ordinary refurbishment ofexisting restaurants and capital expenditures, net of landlord development andor rent allowances and net of equipment lease financing, for newrestaurants.  We anticipate that fundsgenerated through operations and through borrowings under our working capital facilitywill be sufficient to fund planned expansion. We cannot assure you, however, that this will be the case.

 

NewAccounting Standards

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No.148 provides alternative methods of transition for a voluntary change to thefair value method of accounting for stock-based employee compensation asoriginally provided by SFAS No. 123, “Accounting for Stock-Based Compensation.”Additionally, SFAS No. 148 amends the disclosure requirements of SFAS No. 123to require prominent disclosure in both the annual and interim financialstatements about the method of accounting for stock-based compensation and theeffect of the method used on reported results. The transitional requirements ofSFAS No. 148 are effective for all financial statements for fiscal years endingafter December 15, 2002. The application of the disclosure portion of thisstandard had no impact on the Company’s consolidated financial position orresults of operations. The FASB recently indicated that it will requirestock-based employee compensation to be recorded as a charge to earningspursuant to a standard it is currently deliberating, which it believes willbecome effective during the second half of 2005. The Company will continue tomonitor its progress on the issuance of this standard as well as evaluate theCompany’s position with respect to current guidance.

 

In January 2003, the FASB issued Interpretation No.(“FIN”) 46, “Consolidation of Variable Interest Entities, an interpretation ofARB No. 51.” FIN 46 was subject to significant interpretation by the FASB, andwas revised and reissued in December 2003 (“FIN 46R”).  FIN 46R states that if an entity has acontrolling financial interest in a variable interest entity, the assets, theliabilities and results of activities of the variable interest entity should beincluded in the consolidated financial statements to the entity.  The provisions of FIN 46 and FIN 46R areapplicable for all entities that are considered special purpose entities(“SPE”) by the end of the first reporting period ending after December 15,2003.  The provisions of FIN 46R areapplicable to all other types of entities for reporting periods ending afterMarch 15, 2004.  The adoption of FIN 46and FIN 46R did not have any effect on the Company’s consolidated financialstatements, as the Company does not have any SPEs.  The Company has determined that the adoptionof the other provisions that are applicable in 2004 did not have any effect onthe Company’s consolidated financial statements.

 

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Forward-LookingStatements

 

This quarterly reportcontains various “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. Forward-looking statements, written, oral or otherwise made, representthe Company’s expectation or belief concerning future events.  Without limiting the foregoing, the words“believes,” “thinks,” “anticipates,” “plans,” “expects,” and similarexpressions are intended to identify forward-looking statements.  The Company cautions that these statementsare further qualified by important economic and competitive factors that couldcause actual results to differ materially, or otherwise, from those in theforward-looking statements, including, without limitation, risks of therestaurant industry, including a highly competitive environment and industrywith many well-established competitors with greater financial and otherresources than the Company, and the impact of changes in consumer tastes,local, regional and national economic and market conditions, restaurantprofitability levels, expansion plans, demographic trends, traffic patterns,employee availability and benefits, cost increases, product safety andavailability, government regulation and other risks detailed from time to timein the Company’s periodic earnings releases and reports filed with theSecurities and Exchange Commission.  Inaddition, the Company’s ability to expand is dependent upon various factors,such as the availability of attractive sites for new restaurants, the abilityto negotiate suitable lease terms, the ability to generate or borrow funds todevelop new restaurants and obtain various government permits and licenses andthe recruitment and training of skilled management and restaurantemployees.  Accordingly, such forward-lookingstatements do not purport to be predictions of future events or circumstancesand therefore there can be no assurance that any forward-looking statementcontained herein will prove to be accurate. The Company assumes no obligationto update the forward-looking statements.

 

Item 3.  Quantitative and Qualitative Disclosure aboutMarket Risk

 

The inherent risk inmarket risk sensitive instruments and positions primarily relates to potentiallosses arising from adverse changes in foreign currency exchange rates andinterest rates.

 

As of October 3, 2004, weowned and operated four international restaurants, one in Hong Kong, one inSingapore, one in Toronto, Canada and one in Vancouver, Canada. As a result, weare subject to risk from changes in foreign exchange rates. These changesresult in cumulative translation adjustments, which are included in accumulatedother comprehensive income (loss). We do not consider the potential lossresulting from a hypothetical 10% adverse change in quoted foreign currencyexchange rates, as of October 3, 2004, to be material.

 

We also are subject tomarket risk from exposure to changes in interest rates based on our financingactivities. This exposure relates to borrowings under our working capitalfacility that will be payable at floating rates of interest and the 7.5% seniorsecured notes that are payable at a fixed rate of interest of 7.5%. As ofOctober 3, 2004, there were no borrowings outstanding under our floating rateworking capital facility. A hypothetical 10% fluctuation in interest rates, asof October 3, 2004, would have a net impact of approximately $0.1 million onearnings for the nine month period ended October 3, 2004.

 

Item4.  Controls and Procedures

 

As of the end of theperiod covered by this report, an evaluation of the effectiveness of the designand operation of our disclosure controls and procedures (as defined under theSecurities and Exchange Commission rules) was carried out under the supervisionand with the participation of the Company’s management, including our ChiefExecutive Officer and Chief Financial Officer. The Company’s

 

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disclosurecontrols and procedures are designed to ensure that information that theCompany must disclose in its reports filed under the Securities Exchange Act of1934 is communicated and processed in a timely manner.  Based upon that evaluation, the ChiefExecutive Officer and the Chief Financial Officer concluded that the design andoperation of these disclosure controls and procedures were effective.  No significant changes were made in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

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MORTON’SRESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Part II  - Other Information

 

Item 1.  Legal Proceedings

 

Since August 2002, a number of the Company’s currentand former employees in New York, Boston and Florida have initiatedarbitrations with the American Arbitration Association in their respectivestates alleging that the Company has violated state (Boston arbitration), stateand federal (New York arbitrations) and federal (Florida arbitrations) wage andhour laws regarding the sharing of tips with other employees and failure to payall hours worked. In general, the complainants are seeking restitution of tips,the difference between the tip credit wage and the minimum wage, payment forhours worked off the clock (Florida only), liquidated damages and attorneys’fees and costs. The arbitrator in the New York arbitrations has permitted thecomplainants to consolidate their arbitrations into one action and proceed as acollective action. The Florida complainants are also seeking to consolidatetheir arbitrations. The arbitrator has ruled that the claims cannot beconsolidated but is considering the question of whether they could proceed as acollective action.  The arbitrator hasindicated that he believes a collective action would be permitted. The Companyintends to contest these cases vigorously.

 

The Company is involved in various other claims andlegal actions arising in the ordinary course of business. Management does notbelieve that the ultimate resolution of these actions will have a materialadverse effect on the Company’s consolidated financial position, results ofoperations, liquidity and capital resources.

 

Item 6.  Exhibits

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                           |
| 31.1             |       | Certification of Allen J. Bernstein Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                 |
|             |       |                                                                                                                                           |
| 31.2             |       | Certification  of Thomas J. Baldwin Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                 |
|             |       |                                                                                                                                           |
| 32.1             |       | Certification of Allen J. Bernstein Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
|             |       |                                                                                                                                           |
| 32.2             |       | Certification of Thomas J. Baldwin Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002  |

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, the Registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 

 
|   | MORTON’S RESTAURANT GROUP, INC. |                                 |
|--------|--------------------------------------|--------------------------------------|
|   | (Registrant)                         |
|   |                                 |
|   |                                 |
| Date   | November 15, 2004                    |                                 | By: | /s/ ALLEN J. BERNSTEIN |   |
|   |                                 | Allen J. Bernstein                   |
|   |                                 | Chairman of the Board, President     |
|   |                                 | and Chief Executive Officer          |
|   |                                 |                                 |
|   |                                 |                                 |
| Date   |  November 15, 2004              |                                 | By: | /s/ THOMAS J. BALDWIN |   |
|   |                                 | Thomas J. Baldwin                    |
|   |                                 | Executive Vice President,            |
|   |                                 | Chief Financial Officer and Director |

 

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