**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

**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 April 4, 2004** |
|                                                        |   |                                                                                                |
| **OR**                                                      |
|                                                        |   |                                                                                                |
| **o**                                                       |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

| **For the transition period from** |   | **                                   to                                              ** |
|------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **Commission file number**         |   | **1-12692**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

| **MORTON’S  RESTAURANT GROUP, INC.**                        |
|------------------------------------------------------------------|
| (Exact name of registrant as specified in its  charter)          |
|                                                             |   |   |
| **Delaware**                                                     |   | **13-3490149** |
| (State or other jurisdiction of incorporation 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)        |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes ýor No o.

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes oor No ý.

 

As of May 17, 2004, the registrant had 1,000 shares ofits 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 April 4, 2004 and January 4,  2004 - unaudited                                       | 3      |
|                                                                                                                             |   |
| Consolidated Statements of Income for the  three month periods ended April 4, 2004 and March 30, 2003 -   unaudited    | 5      |
|                                                                                                                             |   |
| Consolidated Statements of Cash Flows for  the three month periods ended April 4, 2004 and March 30, 2003 -  unaudited | 6      |
|                                                                                                                             |   |
| Notes to Unaudited Consolidated Financial  Statements                                                                            | 7      |
|                                                                                                                             |   |
| Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations                       | 18     |
|                                                                                                                             |   |
| Item 3.   Quantitative and Qualitative Disclosure about Market Risk                                                         | 25     |
|                                                                                                                             |   |
| Item 4.   Controls and Procedures                                                                                           | 25     |
|                                                                                                                             |   |
| Part II - Other Information                                                                                                      | 26     |
|                                                                                                                             |   |
| Item 1.  Legal Proceedings                                                                                                  | 26     |
|                                                                                                                             |   |
| Item 6.   Exhibits and Reports on Form 8-K                                                                                  | 26     |
|                                                                                                                             |   |
| Signatures                                                                                                                       | 27     |

 

2

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Part I -Financial Information

 

Item 1.  Financial Statements

 

MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(amounts in thousands)

 
|                                            |   | **April 4,  2004** |    | **January 4,  2004** |   |
|-------------------------------------------------|--------|-------------------------|---------|---------------------------|--------|
|                                            |   | **(unaudited)**         |    |                      |   |
| Assets                                          |   |                    |    |                      |   |
| Current assets:                                 |   |                    |    |                      |   |
| Cash and cash equivalents                       |   | $                       | 14,884  |                      | $      | 17,997 |   |
| Restricted cash                                 |   | 1,173                   |    | 1,100                     |   |
| Accounts receivable                             |   | 4,810                   |    | 3,829                     |   |
| Inventories                                     |   | 8,991                   |    | 9,094                     |   |
| Prepaid expenses and other current  assets |   | 4,645                   |    | 5,069                     |   |
| Deferred income taxes                           |   | 6,212                   |    | 7,076                     |   |
|                                            |   |                    |    |                      |   |
| Total current assets                            |   | 40,715                  |    | 44,165                    |   |
|                                            |   |                    |    |                      |   |
| Property and equipment, at cost:                |   |                    |    |                      |   |
| Furniture, fixtures and equipment               |   | 14,578                  |    | 14,131                    |   |
| Buildings and leasehold improvements            |   | 38,677                  |    | 38,667                    |   |
| Land                                            |   | 8,474                   |    | 8,474                     |   |
| Construction in progress                        |   | 643                     |    | 338                       |   |
|                                            |   | 62,372                  |    | 61,610                    |   |
| Less accumulated depreciation and  amortization |   | 8,876                   |    | 7,500                     |   |
| Net property and equipment                      |   | 53,496                  |    | 54,110                    |   |
|                                            |   |                    |    |                      |   |
| Intangible asset                                |   | 92,000                  |    | 92,000                    |   |
| Goodwill                                        |   | 61,552                  |    | 61,552                    |   |
| Other assets and deferred expenses, net         |   | 10,619                  |    | 10,360                    |   |
|                                            |   | $                       | 258,382 |                      | $      | 262,187 |   |

 

3

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Consolidated BalanceSheets, Continued

 

(amounts in thousands, except share and per shareamounts)

 
|                                                                                                                                            |   | **April 4  2004** |    | **January 4,  2004** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|---------------------------|--------|
|                                                                                                                                            |   | **(unaudited)**        |    |                      |   |
| Liabilities and Stockholder’s Equity                                                                                                       |   |                   |    |                      |   |
|                                                                                                                                            |   |                   |    |                      |   |
| Current liabilities:                                                                                                                            |   |                   |    |                      |   |
| Accounts payable                                                                                                                                |   | $                      | 5,507   |                      | $      | 6,111 |   |
| Accrued expenses                                                                                                                                |   | 27,601                 |    | 27,955                    |   |
| Current portion of obligations to financial  institutions                                                                                       |   | 485                    |    | 658                       |   |
| Accrued income taxes                                                                                                                            |   | 137                    |    | 296                       |   |
|                                                                                                                                            |   |                   |    |                      |   |
| Total current liabilities                                                                                                                       |   | 33,730                 |    | 35,020                    |   |
|                                                                                                                                            |   |                   |    |                      |   |
| 7.5% senior secured notes, net of  unamortized discount of $14,572 and   $14,987 at April 4, 2004 and January 4, 2004            |   | 90,428                 |    | 90,013                    |   |
| Obligations to financial institutions, less  current maturities                                                                                 |   | 7,032                  |    | 12,274                    |   |
| Deferred income taxes                                                                                                                           |   | 20,471                 |    | 20,471                    |   |
| Other liabilities                                                                                                                               |   | 2,521                  |    | 2,087                     |   |
|                                                                                                                                            |   |                   |    |                      |   |
| Total liabilities                                                                                                                               |   | 154,182                |    | 159,865                   |   |
|                                                                                                                                            |   |                   |    |                      |   |
|                                                                                                                                            |   |                   |    |                      |   |
| Commitments and contingencies                                                                                                                   |   |                   |    |                      |   |
|                                                                                                                                            |   |                   |    |                      |   |
| Stockholder’s equity:                                                                                                                      |   |                   |    |                      |   |
| Common stock, $0.01 par value per  share.  Authorized, issued and  outstanding 1,000 shares at April 4, 2004 and January 4, 2004 |   | —                 |    | —                    |   |
| Additional paid-in capital                                                                                                                      |   | 97,076                 |    | 97,075                    |   |
| Accumulated other comprehensive income                                                                                                          |   | 96                     |    | 128                       |   |
| Retained earnings                                                                                                                               |   | 7,028                  |    | 5,119                     |   |
|                                                                                                                                            |   |                   |    |                      |   |
| Total stockholder’s equity                                                                                                                 |   | 104,200                |    | 102,322                   |   |
|                                                                                                                                            |   |                   |    |                      |   |
|                                                                                                                                            |   | $                      | 258,382 |                      | $      | 262,187 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Consolidated Statements of Income

 

(amounts in thousands)

 
|                                                                |   | **Three  month periods ended** |   |
|---------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                |   | **April 4,  2004**        |   | **March 30,  2003** |   |
|                                                                |   |                           |   | **Restated  (see Note 2)** |   |
|                                                                |   | **(unaudited)**                |   |
| Revenues                                                            |   | $                              | 72,981 |   | $ | 65,116 |   |
|                                                                |   |                           |   |   |   |
| Food and beverage costs                                             |   | 24,472                         |   | 21,995 |   |
| Restaurant operating expenses                                       |   | 32,201                         |   | 30,125 |   |
| Pre-opening costs, depreciation,  amortization and non-cash charges |   | 2,031                          |   | 2,438 |   |
| General and administrative expenses                                 |   | 4,886                          |   | 4,036 |   |
| Marketing and promotional expenses                                  |   | 2,629                          |   | 1,467 |   |
| Costs associated with the repayment of  certain debt                |   | 264                            |   | — |   |
| Interest expense, net                                               |   | 3,071                          |   | 1,641 |   |
| Management fee paid to related party                                |   | 700                            |   | 700 |   |
|                                                                |   |                           |   |   |   |
| Income before income taxes                                          |   | 2,727                          |   | 2,714 |   |
|                                                                |   |                           |   |   |   |
| Income tax expense                                                  |   | 818                            |   | 802 |   |
|                                                                |   |                           |   |   |   |
| Net income                                                          |   | $                              | 1,909  |   | $ | 1,912 |   |

 

See accompanyingnotes 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)

 
|                                                                                    |   | **Three  month periods ended** |   |
|-----------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                    |   | **April 4,  2004**        |   | **March 30,  2003** |   |
|                                                                                    |   |                           |   | **Restated  (see Note 2)** |   |
|                                                                                    |   | **(unaudited)**                |   |
| Cash flows from operating activities:                                                   |   |                           |   |   |   |
| Net income                                                                              |   | $                              | 1,909  |   | $ | 1,912 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:      |   |                           |   |   |   |
| Depreciation, amortization and other  non-cash charges                                  |   | 2,729                          |   | 1,756 |   |
| Deferred income taxes                                                                   |   | 864                            |   | 1,317 |   |
| Change in assets and liabilities:                                                       |   |                           |   |   |   |
| Accounts receivable                                                                     |   | (982                           | )      | 2,272 |   |
| Income taxes receivable                                                                 |   | —                         |   | 250 |   |
| Inventories                                                                             |   | 96                             |   | 347 |   |
| Prepaid expenses and other assets                                                       |   | 467                            |   | 1,007 |   |
| Accounts payable, accrued expenses and  other liabilities                               |   | (1,059                         | )      | (7,294 | ) |
| Accrued income taxes                                                                    |   | (163                           | )      | 771 |   |
| Net cash provided by operating activities                                               |   | 3,861                          |   | 2,338 |   |
|                                                                                    |   |                           |   |   |   |
| Cash flows from investing activities:                                                   |   |                           |   |   |   |
| Purchases of property and equipment                                                     |   | (1,011                         | )      | (1,689 | ) |
| Net cash used in investing activities                                                   |   | (1,011                         | )      | (1,689 | ) |
|                                                                                    |   |                           |   |   |   |
| Cash flows from financing activities:                                                   |   |                           |   |   |   |
| Principal reduction on obligations to  financial institutions  and capital  leases |   | (5,415                         | )      | (2,337 | ) |
| Proceeds from obligations to financial  institutions                                    |   | —                         |   | 1,900 |   |
| Payment of deferred financing costs                                                     |   | (468                           | )      | — |   |
| Increase in restricted cash                                                             |   | (73                            | )      | — |   |
| Net cash used in financing activities                                                   |   | (5,956                         | )      | (437 | ) |
|                                                                                    |   |                           |   |   |   |
| Effect of exchange rate changes on cash                                                 |   | (7                             | )      | 26 |   |
|                                                                                    |   |                           |   |   |   |
| Net (decrease) increase in cash and cash  equivalents                                   |   | (3,113                         | )      | 238 |   |
|                                                                                    |   |                           |   |   |   |
| Cash and cash equivalents at beginning of  period                                       |   | 17,997                         |   | 1,703 |   |
|                                                                                    |   |                           |   |   |   |
| Cash and cash equivalents at end of period                                              |   | $                              | 14,884 |   | $ | 1,941 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Notes to Unaudited Consolidated FinancialStatements

 

April 4, 2004 and March 30, 2003

 

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

 

The accompanying unaudited consolidated financialstatements of Morton’s Restaurant Group, Inc. and its subsidiaries (the“Company,” “we,” “us” and “our”) have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-Q.****Accordingly, they do not include allinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements and should beread in conjunction with the Annual Report on Form 10-K for the fiscal yearended January 4, 2004.

 

The accompanying consolidated financial statements areunaudited and include all adjustments (consisting of normal recurringadjustments and accruals) that management considers necessary for a fairpresentation of its financial position and results of operations for theinterim periods presented.  The resultsof operations for the interim periods are not necessarily indicative of theresults that may be expected for the full year.

 

The preparation of financial statements in conformitywith generally accepted accounting principles requires management of theCompany to make estimates and assumptions relating to the reported amount ofassets, liabilities, revenues and expenses reported during the period.  Actual results could differ from thoseestimates.

 

The Company uses a52/53 week fiscal year which ends on the Sunday closest to January 1.Approximately every six or seven years, a 53rd week will be added.  Fiscal 2003 was a 53 week year.

 

**2)**                                     **Restatementof Consolidated Financial Statements**

 

The effect of the restatement discussedherein on the Company’s results as of and for the fiscal year endedJanuary 4, 2004 was reflected in the Company’s Annual Report on Form 10-K.The Company has restated its consolidated financial statements for the threemonth period ended March 30, 2003 as a result of having incorrectlyprovided estimates for expirations and non-redemption of gift certificates thatit had sold.  The effect of therestatement was to reduce revenues for the three month period endedMarch 30, 2003 in the amount of $137,000. The restatement had no effect on the Company’s net operating cashposition.  The impact of theabove-mentioned restatement on the consolidated statement of income for thethree month period ended March 30, 2003 is as follows (amounts inthousands):

 
|                       |   | **Three  month period ended  March 30, 2003** |   |
|----------------------------|--------|----------------------------------------------------|--------|
|                       |   | **Reported**                                       |   | **Restated** |   |
| Revenues                   |   | $                                                  | 65,253 |   | $ | 65,116 |   |
| Income before income taxes |   | 2,851                                              |   | 2,714 |   |
| Income tax expense         |   | 855                                                |   | 802 |   |
| Net income                 |   | 1,996                                              |   | 1,912 |   |
|                            |        |                                                    |        |  |  |  |  |

 

**3)**                                     **Statements of Cash Flows**

 

For the purposes of the consolidated statements ofcash flows, the Company considers all highly liquid instruments purchased witha maturity of three months or less to be cash equivalents.  The Company paid cash interest, net ofamounts capitalized, of approximately $495,000 and $1,795,000, and income taxesof approximately $120,000 and $85,000, for the three month periods endedApril 4, 2004 and March 30, 2003, respectively.

 

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**4)**                                     **Restricted Cash**

 

Restricted cash of $1,173,000 and $1,100,000 as ofApril 4, 2004 and January 4, 2004, respectively, represents cashcollateral relating to two interest rate swap agreements with Bank of America,formerly Fleet National Bank (“B of A”). See Note 6.

 

**5)****                                    ****Intangible Asset andGoodwill**

 

The identifiable intangible asset acquired represents the Company’strade name “Morton’s,” which has an indefinite life and accordingly is notsubject to amortization, but is subject to impairment testing. The trade nameis used in the advertising and marketing of the restaurants and is widelyrecognized and accepted by consumers in its respective market as an indicationof and recognition of service, value and quality. Goodwill represents theexcess of costs over fair value of assets of the business acquired.

 

**6)****                                    ****Derivative Financial Instruments**

 

The Company accounts for itsderivative financial instruments in accordance with Statement of FinancialAccounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instrumentsand Hedging Activities,” as amended by SFAS No. 137 and SFAS No. 138.  SFAS No. 133 establishes accounting andreporting standards for derivative instruments, including certain derivativeinstruments embedded in other contracts, and for hedging activities.  It requires that an entity recognize allderivatives as either assets or liabilities in the statement of financialposition and measures those instruments at fair value.  As of April 4, 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, 2003repayment of our prior credit facility with a portion of the proceeds from our7.5% 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 aredue to expire on October 24, 2004 and October 24, 2005, are accountedfor as speculative instruments and resulting changes in their fair market valuehave been charged or credited to the consolidated statement of income.  As of April 4, 2004, andJanuary 4, 2004, in accordance with SFAS No. 133, liabilities wereapproximately $689,000 and $723,000, respectively.  The change in the fair market value has been recognized ininterest expense, net in the consolidated statement of income for the threemonth period ended April 4, 2004.

 

**7)****                                    ****Comprehensive Income**

 

Thecomponents of comprehensive income for the three month periods endedApril 4, 2004 and March 30, 2003 are as follows:

 
|                                                   |   | **Three  month periods ended** |       |
|--------------------------------------------------------|--------|--------------------------------|------------|
|                                                   |   | **April 4,  2004**        |       | **March 30,  2003** |   |
|                                                   |   |                           | ** ** | **Restated** | ** ** |
| Net income                                             |   | $                              | 1,909      |   | $ | 1,912 |   |
| Other comprehensive income (loss):                     |   |                           |       |   |   |
| Foreign currency translation                           |   | (32                            | )          | (11 | ) |
| Change in fair value of interest rate swap  agreements |   | —                         |       | (79 | ) |
| Total comprehensive income                             |   | $                              | 1,877      |   | $ | 1,822 |   |

 

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

 

As a result of the impact of the World Trade Center terrorist attackson September 11, 2001, the Morton’s steakhouse restaurant located at 90West Street, New York, New York, two blocks from the World Trade Center wasclosed permanently due to structural damage. During the three month period ended March 30, 2003, the Companyrecorded a benefit in “Restaurant operating expenses” in the accompanyingconsolidated statement of income of approximately $514,000 representingbusiness interruption insurance recovery related to costs incurred from theclosing of that restaurant.  There wereno

 

8

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comparable benefits recorded during the three month period endedApril 4, 2004.  During March 2004,the Company received $1,007,000 for such insurance.  As of April 4, 2004, cumulative benefits recorded were$3,619,000 and cumulative amounts received were $3,619,000 for this insurance.Based on the insurance policy coverage, the Company believes that additionalbenefits will be recorded in fiscal 2004 and possibly in future periodsrelating to future insurance recoveries, although there is no assurance thatany future recoveries will be received.

 

**9)****                                     EmployeeSubscription Agreements**

 

Certain of our executives and other employees have been granted commonunits of our parent (“MHLLC”), which represent an ownership interest in MHLLC,pursuant to employee subscription agreements. MHLLC’s Board approved 1,711,344 units available for grant of which 1,497,585were granted on August 26, 2003. On August 26, 2003, the fair value of each common unit granted was$0.01.  Common units granted to anemployee pursuant to employee subscription agreements are granted at no cost tothe employee. 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, upon theoccurrence of such an event, Castle Harlan Partners III, L.P. achieves aninternal rate of return of at least 30% and the employee is employed as of suchdate.  Upon termination of employment,unvested common units will be forfeited and vested common units will be subjectto repurchase pursuant to the terms of MHLLC’s operating agreement.  Stock-based employee compensation expenserelated to this plan will be charged to the Company based on the recognitionand measurement 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 our consolidatedstatement of income for the three month period ended April 4, 2004.  The compensation expense recorded during thethree month period ended April 4, 2004, represents the straight-lineamortization of the difference between the fair value at the date of grant of$0.01 per common unit and the exercise price (which is zero) of the commonunits of the outstanding time-vesting common units for the period fromJanuary 5, 2004 to April 4, 2004. The remaining compensation expense that was measured at the date ofgrant will be amortized on a straight-line basis over the remaining vestingperiod.  Compensation expense relatingto the other 50% of common units granted, which vest upon certain change ofcontrol or liquidation events if, upon the occurrence of such an event, CastleHarlan Partners III, L.P. achieves an internal rate of return of at least 30%,will be measured and recognized if and when these events occur.

 

Activity relating to the common units granted pursuant to employeesubscription agreements during the three month period ended April 4, 2004is as follows:

 
| Unvested common units outstanding as of  January 4, 2004 |   | 1,482,385 |   |
|---------------------------------------------------------------|--------|-----------|--------|
| Granted units                                                 |   | —    |   |
| Vested units                                                  |   | —    |   |
| Forfeited units                                               |   | 3,400     |   |
| Unvested common units outstanding as of  April 4, 2004   |   | 1,478,985 |   |

 

As of April 4, 2004, there were 232,359 common units available forgrant.

 

In December 2002, the Financial Accounting Standards Board(“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 SFASNo. 123 to require prominent disclosure in both the annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results.  The

 

9

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transitionalrequirements of SFAS No. 148 are effective for all financial statements forfiscal years ending after December 15, 2002.  The application of the disclosure portion of this standard didnot 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 2004.  We will continue to monitor its progress onthe issuance of this standard as well as evaluate our position with respect tocurrent guidance.

 

**10)****                             ****Financial Informationabout Geographic Areas**

 

Income before income taxes for the Company’s domestic and foreignoperations are as follows:

 
|     |   | **Three  month periods ended** |   |
|----------|--------|--------------------------------|--------|
|     |   | **April 4,  2004**        |   | **March 30,  2003** |   |
|     |   |                           |   | **Restated** |   |
| Domestic |   | $                              | 2,344  |   | $ | 2,601 |   |
| Foreign  |   | 383                            |   | 113 |   |
| Total    |   | $                              | 2,727  |   | $ | 2,714 |   |

 

**11)****                             ****Restaurant Activity**

 

In January 2003, the Company closed the Morton’s steakhouse inHong Kong Central. In August 2003, the Company closed the Morton’ssteakhouse in Addison, Texas. No restaurants were opened or closed during thethree month period ended April 4, 2004.

 

**(12)****                         ****Legal Matters andContingencies**

 

Since August 2002, a number of the Company’scurrent and former employees in New York and Florida have initiatedarbitrations with the American Arbitration Association in their respectivestates alleging that the Company has violated state and federal (New Yorkarbitrations) and federal (Florida arbitrations) wage and hour laws regardingthe sharing of tips with other employees and failure to pay for all hoursworked. In general, the complainants are seeking restitution of tips, the differencebetween the tip credit wage and the minimum wage, payment for hours worked offthe clock, liquidated damages and attorneys’ fees and costs. The arbitrator inthe New York arbitrations has permitted the complainants to consolidate theirarbitrations into one action and proceed as a collective action. The Floridacomplainants are also seeking to consolidate their arbitrations, but there hasbeen no determination to date. The Company believes that the allegations arewithout merit and intends to contest them 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.

 

**(13)****                         ****Supplemental CondensedConsolidating Financial Information**

 

The obligations of Morton’s Restaurant Group, Inc. (the “Issuer”)related to the 7.5% senior secured notes are fully and unconditionallyguaranteed on a joint and several basis and on a senior basis by certain of theCompany’s wholly-owned domestic subsidiaries (the “Guarantors”). Theseguarantees are senior secured obligations of the Guarantors, subject to lienspermitted under the indenture governing the 7.5% senior secured notes, ranksenior in right of payment to all subordinated indebtedness of the Guarantorsand rank *pari passu* in right ofpayment with all existing and future senior indebtedness of the Guarantors.There are no restrictions on the Company’s ability to obtain cash dividends orother distributions of funds from the Guarantors, except those imposed byapplicable law and certain contractual restrictions, which do not exceed 25% ofconsolidated net assets of any Guarantor, that are permitted under theindenture governing

 

10

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the 7.5% seniorsecured notes. The following supplemental financial information sets forth, ona condensed consolidating basis, balance sheets, statements of income andstatements of cash flows for the Issuer, domestic subsidiaries of the Companythat are Guarantors and foreign subsidiaries and domestic subsidiaries of theCompany that are not Guarantors (collectively, the “Non-GuarantorSubsidiaries”). The Company has not presented separate financial statements andother disclosures concerning the Guarantor Subsidiaries because management hasdetermined that such information is not material to investors.

 

**Supplemental Consolidating Balance Sheet**

**April 4, 2004**

**(unaudited)**

 

**(amounts in thousands)**

 
|                                      |   | **Issuer** |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor    Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------|--------|------------|---------|-----------------------------|--------|-----------------------------------|--------|------------------|--------|------------------|--------|
| Assets                                    |   |       |    |                        |   |                              |   |             |   |             |   |
| Current assets:                           |   |       |    |                        |   |                              |   |             |   |             |   |
| Cash and cash equivalents                 |   | $          | 14,304  |                        | $      | 37                                |   | $                | 543    |             | $      | — |   | $ | 14,884 |   |
| Restricted cash                           |   | 1,173      |    | —                      |   | —                            |   | —           |   | 1,173            |   |
| Accounts receivable                       |   | 51         |    | 4,551                       |   | 208                               |   | —           |   | 4,810            |   |
| Inventories                               |   | —     |    | 8,464                       |   | 527                               |   | —           |   | 8,991            |   |
| Prepaid expenses and other current assets |   | 224        |    | 4,353                       |   | 68                                |   | —           |   | 4,645            |   |
| Deferred income taxes                     |   | 2,899      |    | 3,313                       |   | —                            |   | —           |   | 6,212            |   |
|                                      |   |       |    |                        |   |                              |   |             |   |             |   |
| Total current assets                      |   | 18,651     |    | 20,718                      |   | 1,346                             |   | —           |   | 40,715           |   |
|                                      |   |       |    |                        |   |                              |   |             |   |             |   |
| Property and equipment, net               |   | 117        |    | 52,017                      |   | 1,362                             |   | —           |   | 53,496           |   |
| Intangible asset                          |   | —     |    | 92,000                      |   | —                            |   | —           |   | 92,000           |   |
| Goodwill                                  |   | —     |    | 61,552                      |   | —                            |   | —           |   | 61,552           |   |
| Other assets and deferred expenses, net   |   | 9,187      |    | 3,704                       |   | 248                               |   | (2,520           | )      | 10,619           |   |
| Amounts due from affiliates               |   | 141,551    |    | 23,256                      |   | 4,710                             |   | (169,517         | )      | —           |   |
|                                      |   | $          | 169,506 |                        | $      | 253,247                           |   | $                | 7,666  |             | $      | (172,037 | ) | $ | 258,382 |   |

 

11

----

 

**Supplemental Consolidating Balance Sheet**

**April 4, 2004**

**(unaudited)**

 

**(amounts in thousands, except share and pershare amounts)**

 
|                                                                                                  |   | **Issuer** |    | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------|---------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
| Liabilities and Stockholder’s Equity                                                             |   |       |    |                        |   |                            |   |             |   |             |   |
| Current liabilities:                                                                                  |   |       |    |                        |   |                            |   |             |   |             |   |
| Accounts payable and accrued expenses                                                                 |   | $          | 7,702   |                        | $      | 24,415                          |   | $                | 991    |             | $      | — |   | $ | 33,108 |   |
| Current portion of obligations to financial  institutions                                             |   | —     |    | 485                         |   | —                          |   | —           |   | 485              |   |
| Accrued income taxes                                                                                  |   | (1,393     | )       | 204                         |   | 1,326                           |   | —           |   | 137              |   |
| Amounts due from affiliates                                                                           |   | —     |    | 165,495                     |   | 4,022                           |   | (169,517         | )      | —           |   |
|                                                                                                  |   |       |    |                        |   |                            |   |             |   |             |   |
| Total current liabilities                                                                             |   | 6,309      |    | 190,599                     |   | 6,339                           |   | (169,517         | )      | 33,730           |   |
|                                                                                                  |   |       |    |                        |   |                            |   |             |   |             |   |
| 7.5% senior secured notes, net of  unamortized discount of $14,572                                    |   | 90,428     |    | —                      |   | —                          |   | —           |   | 90,428           |   |
| Obligations to financial institutions, less  current maturities                                       |   | —     |    | 7,032                       |   | —                          |   | —           |   | 7,032            |   |
| Deferred income taxes                                                                                 |   | —     |    | 20,471                      |   | —                          |   | —           |   | 20,471           |   |
| Other liabilities                                                                                     |   | (38        | )       | 2,485                       |   | 74                              |   | —           |   | 2,521            |   |
|                                                                                                  |   |       |    |                        |   |                            |   |             |   |             |   |
| Total liabilities                                                                                     |   | 96,699     |    | 220,587                     |   | 6,413                           |   | (169,517         | )      | 154,182          |   |
|                                                                                                  |   |       |    |                        |   |                            |   |             |   |             |   |
| 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)                                                        |   | —     |    | 257                         |   | (161                            | )      | —           |   | 96               |   |
| (Accumulated deficit) retained earnings                                                               |   | (24,269    | )       | 29,883                      |   | 1,414                           |   | —           |   | 7,028            |   |
|                                                                                                  |   |       |    |                        |   |                            |   |             |   |             |   |
| Total stockholder’s equity                                                                       |   | 72,807     |    | 32,660                      |   | 1,253                           |   | (2,520           | )      | 104,200          |   |
|                                                                                                  |   |       |    |                        |   |                            |   |             |   |             |   |
|                                                                                                  |   | $          | 169,506 |                        | $      | 253,247                         |   | $                | 7,666  |             | $      | (172,037 | ) | $ | 258,382 |   |

 

12

----

 

**Supplemental Consolidating Balance Sheet**

**January 4, 2004**

 

**(amounts in 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 |   |

 

13

----

 

**Supplemental Consolidating Balance Sheet**

**January 4, 2004**

 

**(amounts in thousands, except share and pershare 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 from 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 |   |

 

14

----

 

**Supplemental Consolidating Statement ofOperations**

**Three month period ended April 4, 2004**

**(unaudited)**

 

**(amounts in thousands)**

 
|                                                                |   | **Issuer** |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------|--------|------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
| Revenues                                                            |   | $          | 4,371  |                        | $      | 69,704                          |   | $                | 3,277  |             | $      | (4,371 | ) | $ | 72,981 |   |
|                                                                |   |       |   |                        |   |                            |   |             |   |             |   |
| Food and beverage costs                                             |   | —     |   | 23,403                      |   | 1,069                           |   | —           |   | 24,472           |   |
| Restaurant operating expenses                                       |   | —     |   | 30,561                      |   | 1,640                           |   | —           |   | 32,201           |   |
| Pre-opening costs, depreciation,  amortization and non-cash charges |   | 3          |   | 1,934                       |   | 94                              |   | —           |   | 2,031            |   |
| General and administrative expenses                                 |   | 4,886      |   | 4,371                       |   | —                          |   | (4,371           | )      | 4,886            |   |
| Marketing and promotional expenses                                  |   | —     |   | 2,538                       |   | 91                              |   | —           |   | 2,629            |   |
| Costs associated with the repayment of  certain debt                |   | 264        |   | —                      |   | —                          |   | —           |   | 264              |   |
| Interest expense, net                                               |   | 2,788      |   | 283                         |   | —                          |   | —           |   | 3,071            |   |
| Management fee paid to related party                                |   | 700        |   | —                      |   | —                          |   | —           |   | 700              |   |
|                                                                |   |       |   |                        |   |                            |   |             |   |             |   |
| (Loss) income before income taxes                                   |   | (4,270     | )      | 6,614                       |   | 383                             |   | —           |   | 2,727            |   |
|                                                                |   |       |   |                        |   |                            |   |             |   |             |   |
| Income tax expense                                                  |   | 818        |   | —                      |   | —                          |   | —           |   | 818              |   |
|                                                                |   |       |   |                        |   |                            |   |             |   |             |   |
| Net (loss) income                                                   |   | $          | (5,088 | )                           | $      | 6,614                           |   | $                | 383    |             | $      | — |   | $ | 1,909 |   |

 

**Supplemental Consolidating Statement ofOperations**

**Three month period ended March 30, 2003**

**(unaudited)**

**Restated**

 

**(amounts in thousands)**

 
|                                                                |   | **Issuer** |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------------------------------|--------|------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|------------------|--------|
| Revenues                                                            |   | $          | 3,899  |                        | $      | 62,211                          |   | $                | 2,905  |             | $      | (3,899 | ) | $ | 65,116 |   |
|                                                                |   |       |   |                        |   |                            |   |             |   |             |   |
| Food and beverage costs                                             |   | —     |   | 21,001                      |   | 994                             |   | —           |   | 21,995           |   |
| Restaurant operating expenses                                       |   | —     |   | 28,534                      |   | 1,591                           |   | —           |   | 30,125           |   |
| Pre-opening costs, depreciation,  amortization and non-cash charges |   | 53         |   | 2,256                       |   | 129                             |   | —           |   | 2,438            |   |
| General and administrative expenses                                 |   | 4,036      |   | 3,899                       |   | —                          |   | (3,899           | )      | 4,036            |   |
| Marketing and promotional expenses                                  |   | —     |   | 1,400                       |   | 67                              |   | —           |   | 1,467            |   |
| Interest expense, net                                               |   | 1,152      |   | 478                         |   | 11                              |   | —           |   | 1,641            |   |
| Management fee paid to related party                                |   | 700        |   | —                      |   | —                          |   | —           |   | 700              |   |
|                                                                |   |       |   |                        |   |                            |   |             |   |             |   |
| (Loss) income before income taxes                                   |   | (2,042     | )      | 4,643                       |   | 113                             |   | —           |   | 2,714            |   |
|                                                                |   |       |   |                        |   |                            |   |             |   |             |   |
| Income tax expense                                                  |   | 802        |   | —                      |   | —                          |   | —           |   | 802              |   |
|                                                                |   |       |   |                        |   |                            |   |             |   |             |   |
| Net (loss) income                                                   |   | $          | (2,844 | )                           | $      | 4,643                           |   | $                | 113    |             | $      | — |   | $ | 1,912 |   |

 

15

----

 

**Supplemental Consolidating Statement of CashFlows**

**Three month period ended April 4, 2004**

**(unaudited)**

 

**(amounts in thousands)**

 
|                                                                                                |   | **Issuer** |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidated** |   |
|-----------------------------------------------------------------------------------------------------|--------|------------|--------|----------------------------------|--------|--------------------------------------|--------|------------------|--------|
| Cash flows from operating activities:                                                               |   |       |   |                             |   |                                 |   |             |   |
| Net (loss) income                                                                                   |   | $          | (5,088 | )                                | $      | 6,614                                |   | $                | 383    |   | $ | 1,909 |   |
| Adjustments to reconcile net (loss) income  to net cash (used in) provided by operating activities: |   |       |   |                             |   |                                 |   |             |   |
| Depreciation, amortization and other  non-cash charges                                              |   | 700        |   | 1,903                            |   | 126                                  |   | 2,729            |   |
| Deferred income taxes                                                                               |   | 2,836      |   | (1,972                           | )      | —                               |   | 864              |   |
| Change in assets and liabilities:                                                                   |   |       |   |                             |   |                                 |   |             |   |
| Accounts receivable                                                                                 |   | (49        | )      | (885                             | )      | (48                                  | )      | (982             | )      |
| Inventories                                                                                         |   | —     |   | 46                               |   | 50                                   |   | 96               |   |
| Prepaid expenses and other assets                                                                   |   | 9,089      |   | (8,329                           | )      | (293                                 | )      | 467              |   |
| Accounts payable, accrued expenses and  other liabilities                                           |   | 1,529      |   | (2,327                           | )      | (261                                 | )      | (1,059           | )      |
| Accrued income taxes                                                                                |   | (12,054    | )      | 11,979                           |   | (88                                  | )      | (163             | )      |
| Net cash (used in) provided by operating  activities                                                |   | (3,037     | )      | 7,029                            |   | (131                                 | )      | 3,861            |   |
|                                                                                                |   |       |   |                             |   |                                 |   |             |   |
| Cash flows from investing activities:                                                               |   |       |   |                             |   |                                 |   |             |   |
| Purchases of property and equipment                                                                 |   | (29        | )      | (963                             | )      | (19                                  | )      | (1,011           | )      |
| Net cash used in investing activities                                                               |   | (29        | )      | (963                             | )      | (19                                  | )      | (1,011           | )      |
|                                                                                                |   |       |   |                             |   |                                 |   |             |   |
| Cash flows from financing activities:                                                               |   |       |   |                             |   |                                 |   |             |   |
| Principal reduction on obligations to  financial institutions and capital leases                    |   | —     |   | (5,415                           | )      | —                               |   | (5,415           | )      |
| Payment of deferred financing costs                                                                 |   | (468       | )      | —                           |   | —                               |   | (468             | )      |
| Increase in restricted cash                                                                         |   | (73        | )      | —                           |   | —                               |   | (73              | )      |
| Net cash used in financing activities                                                               |   | (541       | )      | (5,415                           | )      | —                               |   | (5,956           | )      |
|                                                                                                |   |       |   |                             |   |                                 |   |             |   |
| Effect of exchange rate changes on cash                                                             |   | —     |   | —                           |   | (7                                   | )      | (7               | )      |
|                                                                                                |   |       |   |                             |   |                                 |   |             |   |
| Net (decrease) increase in cash and cash  equivalents                                               |   | (3,607     | )      | 651                              |   | (157                                 | )      | (3,113           | )      |
|                                                                                                |   |       |   |                             |   |                                 |   |             |   |
| Cash and cash equivalents at beginning of  period                                                   |   | 17,911     |   | (614                             | )      | 700                                  |   | 17,997           |   |
|                                                                                                |   |       |   |                             |   |                                 |   |             |   |
| Cash and cash equivalents at end of period                                                          |   | $          | 14,304 |                             | $      | 37                                   |   | $                | 543    |   | $ | 14,884 |   |

 

16

----

 

**Supplemental Consolidating Statement of CashFlows**

**Three month period ended March 30, 2003**

**(unaudited)**

**Restated**

 

**(amounts in thousands)**

 
|                                                                                                |   | **Issuer** |   | **Guarantor  Subsidiaries** |   | **Non-Guarantor  Subsidiaries** |   | **Consolidated** |   |
|-----------------------------------------------------------------------------------------------------|--------|------------|--------|-----------------------------|--------|---------------------------------|--------|------------------|--------|
| Cash flows from operating activities:                                                               |   |       |   |                        |   |                            |   |             |   |
| Net (loss) income                                                                                   |   | $          | (2,844 | )                           | $      | 4,643                           |   | $                | 113    |   | $ | 1,912 |   |
| Adjustments to reconcile net (loss) income  to net cash (used in) provided by operating activities: |   |       |   |                        |   |                            |   |             |   |
| Depreciation, amortization and other  non-cash charges                                              |   | 53         |   | 1,579                       |   | 124                             |   | 1,756            |   |
| Deferred income taxes                                                                               |   | 3,915      |   | (2,598                      | )      | —                          |   | 1,317            |   |
| Change in assets and liabilities:                                                                   |   |       |   |                        |   |                            |   |             |   |
| Accounts receivable                                                                                 |   | (1         | )      | 2,270                       |   | 3                               |   | 2,272            |   |
| Income taxes receivable                                                                             |   | 250        |   | —                      |   | —                          |   | 250              |   |
| Inventories                                                                                         |   | —     |   | 313                         |   | 34                              |   | 347              |   |
| Prepaid expenses and other assets                                                                   |   | 1,071      |   | (159                        | )      | 95                              |   | 1,007            |   |
| Accounts payable, accrued expenses and  other liabilities                                           |   | (136       | )      | (6,840                      | )      | (318                            | )      | (7,294           | )      |
| Accrued income taxes                                                                                |   | (2,862     | )      | 3,680                       |   | (47                             | )      | 771              |   |
| Net cash (used in) provided by operating  activities                                                |   | (554       | )      | 2,888                       |   | 4                               |   | 2,338            |   |
|                                                                                                |   |       |   |                        |   |                            |   |             |   |
| Cash flows from investing activities:                                                               |   |       |   |                        |   |                            |   |             |   |
| Purchases of property and equipment                                                                 |   | (9         | )      | (1,664                      | )      | (16                             | )      | (1,689           | )      |
| Net cash used in investing activities                                                               |   | (9         | )      | (1,664                      | )      | (16                             | )      | (1,689           | )      |
|                                                                                                |   |       |   |                        |   |                            |   |             |   |
| Cash flows from financing activities:                                                               |   |       |   |                        |   |                            |   |             |   |
| Principal reduction on obligations to  financial institutions and capital leases                    |   | (1,500     | )      | (773                        | )      | (64                             | )      | (2,337           | )      |
| Proceeds from obligations to financial  institutions                                                |   | 1,900      |   | —                      |   | —                          |   | 1,900            |   |
| Net cash provided by (used in) financing  activities                                                |   | 400        |   | (773                        | )      | (64                             | )      | (437             | )      |
|                                                                                                |   |       |   |                        |   |                            |   |             |   |
| Effect of exchange rate changes on cash                                                             |   | —     |   | —                      |   | 26                              |   | 26               |   |
|                                                                                                |   |       |   |                        |   |                            |   |             |   |
| Net (decrease) increase in cash and cash  equivalents                                               |   | (163       | )      | 451                         |   | (50                             | )      | 238              |   |
|                                                                                                |   |       |   |                        |   |                            |   |             |   |
| Cash and cash equivalents at beginning of  period                                                   |   | 243        |   | 601                         |   | 859                             |   | 1,703            |   |
|                                                                                                |   |       |   |                        |   |                            |   |             |   |
| Cash and cash equivalents at end of period                                                          |   | $          | 80     |                        | $      | 1,052                           |   | $                | 809    |   | $ | 1,941 |   |

 

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MORTON’S RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations

 

Restatement of Consolidated FinancialStatements

 

The effect ofthe restatement discussed herein on our results as of and for the fiscal yearended January 4, 2004 was reflected in our Annual Report on Form 10-K. Wehave restated our consolidated financial statements for the three month periodended March 30, 2003 as a result of having incorrectly provided estimatesfor expirations and non-redemption of gift certificates that it had sold.  The effect of the restatement was to reducerevenues for the three month period ended March 30, 2003 in the amount of$0.1 million.  The restatement had noeffect on our net operating cash position. See Note 2.

 

Results of Operations

 

Revenuesincreased $7.9 million, or 12.1%, to $73.0 million for the three month periodended April 4, 2004 from $65.1 million for the three month period endedMarch 30, 2003. Revenues increased $8.3 million due to an increase incomparable revenues from restaurants open all of both fiscal years. Revenuesincreased $0.3 million due to the opening of one new restaurant in fiscal 2003.Revenues declined $0.7 million due to the closing of the Morton’s steakhouseformerly located in Hong Kong Central (closed since January 2003) andAddison, Texas (closed since August 2003). These steakhouses were closeddue to their comparatively low revenues and negative cash flows. Averagerevenue per restaurant open all of either period increased 13.3%. Revenues forthree month period ended April 4, 2004 also reflect the impact ofaggregate menu price increases of approximately 3% in November 2003 and inFebruary 2004.

 

Percentagechanges in comparable restaurant revenues for the three month periods endedApril 4, 2004 versus March 30, 2003 for restaurants open all of bothperiods are as follows:

 
|             |   | **Percentage  Change** |   |
|------------------|--------|------------------------|--------|
|             |   |                   |   |
| Morton’s    |   | 13.1                   | %      |
| Bertolini’s |   | 12.4                   | %      |
| Total            |   | 13.0                   | %      |

 

During thefirst and second quarters of fiscal 2003, we believe that the war in Iraq andthe weak economic environment, adversely affected many of the markets in whichwe operate which, in turn, contributed to weak revenue trends and negativecomparable restaurant revenues. Additionally, during the first and secondquarters of fiscal 2003, the outbreak of “severe acute respiratory syndrome”materially affected the results of our three restaurants located in Hong Kong,Singapore and Toronto. During the first quarter of fiscal 2004, an improvedeconomy has contributed to stronger revenue trends.

 

Our businessis somewhat seasonal in nature, with revenues generally being less in thesecond and third quarters primarily due to our reduced summer volume.  We believe we may incur a net loss orgenerate a small profit in the second and third quarters of fiscal 2004.

 

Food andbeverage costs increased $2.5 million, or 11.3%, to $24.5 million for the threemonth period ended April 4, 2004 from $22.0 million for the three monthperiod ended March 30, 2003. These costs as a percentage of revenuesdecreased by 0.3% to 33.5% for the three month period ended April 4, 2004from 33.8% for the three month period ended March 30, 2003. During thethree month period ended April 4, 2004 high demand for U.S. beef productshas decreased the availability of USDA prime beef which resulted in increasedfood costs. We were able to offset such cost increases with the benefit of menuprice increases,

 

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which resultedin a decrease in food and beverage costs as a percentage of revenue for thethree month period ended April 4, 2004 compared to the three month periodended March 30, 2003.  We cannotassure you that we would be able or willing to increase menu prices or takeother actions to offset increases in such costs in the future.

 

Restaurantoperating expenses, which include labor, occupancy and other operating expenses,increased $2.1 million, or 6.9%, to $32.2 million for the three month periodended April 4, 2004 from $30.1 million for the three month period endedMarch 30, 2003. This increase was primarily due to increases in labor andbenefit costs and the opening of an additional restaurant. Restaurant operatingexpenses as a percentage of revenues decreased 2.2% to 44.1% for the threemonth period ended April 4, 2004 from 46.3% for the three month periodended March 30, 2003. Included in the three month period endedMarch 30, 2003 are recoveries of approximately $0.5 million for businessinterruption insurance benefits related to the closing of the Morton’ssteakhouse formerly located at 90 West Street, New York, New York, two blocksfrom the World Trade Center, which was closed permanently due to structuraldamages. There were no comparable benefits recorded during the three monthperiod ended April 4, 2004.  As ofApril 4, 2004, cumulative benefits recorded were $3.6 million andcumulative amounts received were $3.6 million for this insurance. Based on ourinsurance policy coverage, we believe that additional benefits will be recordedin fiscal 2004 relating to future insurance recoveries, although we cannotassure you that we will receive any future recoveries. Additionally, at thistime, the total amount of any future recoveries is unknown.

 

Pre-openingcosts, depreciation, amortization and non-cash charges decreased $0.4 million,or 16.7%, to $2.0 million for the three month period ended April 4, 2004from $2.4 million for the three month period ended March 30, 2003. Thesecosts decreased as a percentage of revenues by 0.9% to 2.8% for the three monthperiod ended April 4, 2004 from 3.7% for the three month period endedMarch 30, 2003.  We expense allcosts incurred during start-up activities, including pre-opening costs, asincurred. Pre-opening costs incurred and recorded as expense were $0.7 millionfor the three month period ended March 30, 2003. There were no comparableexpenses in the three month period ended April 4, 2004. The number ofrestaurants opened, the timing of restaurant openings and the costs perrestaurant opened affected the amount of these costs.

 

General andadministrative expenses increased $0.9 million, or 21.1%, to $4.9 million forthe three month period ended April 4, 2004 from $4.0 million for the threemonth period ended March 30, 2003. The increase was primarily due toincreased salary, bonus and benefit costs. These costs as a percentage of revenues increased 0.5% to 6.7% for thethree month period ended April 4, 2004 from 6.2% for the three monthperiod ended March 30, 2003.

 

Marketing andpromotional expenses increased $1.2 million, or 79.2%, to $2.6 million for thethree month period ended April 4, 2004 from $1.5 million for the three monthperiod ended March 30, 2003. These costs as a percentage of revenuesincreased 1.3% to 3.6% for the three month period ended April 4, 2004 from2.3% for the three month period ended March 30, 2003. This increase wasprimarily due to increased spending for print advertising.

 

Costsassociated with the repayment of certain debt of $0.3 million for the threemonth period ended April 4, 2004 represent prepayment penalties that weincurred with the early repayment of two of our mortgages. There were no comparablecosts associated with the repayment of certain debt during the three monthperiod ended March 30, 2003.

 

Interestexpense, net, increased $1.4 million, or 87.0%, to $3.1 million for the threemonth period ended April 4, 2004 from $1.6 million for the three monthperiod ended March 30, 2003.  Thisincrease was primarily due to the issuance of the 7.5% senior secured notes inJuly 2003. Interest income was not significant in any of these periods.

 

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Management feepaid to related party was $0.7 million for the three month periods endedApril 4, 2004 and March 30, 2003. We paid this fee pursuant to ourparent’s management agreement with Castle Harlan, Inc.

 

Provision forincome taxes consisted of income tax expense of $0.8 million for the threemonth periods ended April 4, 2004 and March 30, 2003. Our effectivetax rate differs from the statutory rate due to the establishment of additionaldeferred tax assets relating to FICA and other tax credits.

 

Liquidity and Capital Resources

 

Our principalliquidity requirements are to service our debt and meet our working capital andcapital expenditure needs. Subject to our operating performance, which, ifadversely affected, could adversely affect the availability of funds, we expectto be able to meet our liquidity requirements for the foreseeable futurethrough cash provided by operations and through borrowings available under ourworking capital facility. We cannot assure you, however, that this will be thecase. As of April 4, 2004, we had cash and cash equivalents of $14.9million, compared to $18.0 million as of January 4, 2004.

 

*Working Capital and Cash Flows*

 

In the past we have had, and in the future we mayhave, negative working capital balances. We do not have significant receivablesand we receive trade credit based upon negotiated terms in purchasing food andsupplies. Funds available from cash sales not needed immediately to pay forfood and supplies or to finance receivables or inventories historically havetypically been used for noncurrent capital expenditures and/or payments oflong-term debt balances under our prior revolving credit agreement.

 

*Operating Activities*.  Cash flows from operating activities for thethree month period ended April 4, 2004 were $3.9 million, consistingprimarily of a net increase in cash of $4.6 million resulting from net incomebefore depreciation, amortization and other non-cash charges partially offsetby a net decrease in cash of $1.1 million resulting from a decrease in accountspayable, accrued expenses and other liabilities.

 

*Investing Activities*.  Cash flows used in investing activities forthe three month period ended April 4, 2004 were $1.0 million due topurchases of property and equipment which include capital expenditures relatedto the Morton’s steakhouse scheduled to open in the third quarter of fiscal2004.

 

*Financing Activities*.  Cash flows used in financing activities forthe three month period ended April 4, 2004 were $6.0 million consisting ofnet principal reduction on obligations to financial institutions of $5.4million, primarily due to the early repayment of two mortgages aggregating $5.3million, the payment of deferred financing costs of $0.5 million relating toour 7.5% senior secured notes offering and our working capital facility and anincrease in cash restricted as collateral for our two interest rate swapagreements with B of A of $0.1 million.

 

*Debt and Other Obligations*.

 

*7.5% Senior Secured Notes*.  On July 7, 2003, we completed a privateoffering of $105.0 million in aggregate principal amount at maturity of 7.5%senior secured notes due July 1, 2010. The notes were issued at a discount of 15% and a yield to maturity of12.005% including the accretion of the discount and the amortization of therelated deferred financing costs.  Thenotes are fully and unconditionally guaranteed on a senior secured basis by allof our present and future domestic restricted subsidiaries.  On December 22, 2003, we filed aregistration statement with the Securities and Exchange Commission with respectto notes having substantially identical terms as the original notes, as part ofan offer to exchange registered notes for

 

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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 26, 2004.  We refer to these notes as our 7.5% seniorsecured notes.

 

Our domesticrestricted subsidiaries presently consist of all of our domestic subsidiariesthat either own restaurants or own subsidiaries that own restaurants. Asrestricted subsidiaries, each of these guarantors of the 7.5% senior securednotes is subject to all of the terms, conditions and covenants contained in theindenture governing the 7.5% senior secured notes that apply to restrictedsubsidiaries. The 7.5% senior secured notes are not guaranteed by our foreignsubsidiaries due to the tax implications of providing such guarantees, or byour unrestricted subsidiaries, which presently consist of subsidiaries thathave no material assets. Our unrestricted subsidiaries are not subject to theterms, conditions or covenants contained in the indenture, and must interactwith us and our restricted subsidiaries on the same basis as unrelated thirdparties. From time to time, we may designate other subsidiaries as unrestrictedsubsidiaries subject to the terms and conditions set forth in the indenture.

 

The 7.5%senior secured notes and the guarantees are secured by substantially all of ourand our domestic restricted subsidiaries’ tangible and intangible assets, aswell as by a pledge of a portion of the stock of the subsidiaries owned by usand by our domestic restricted subsidiaries, in each case subject to the priorranking claims on such assets by the lender under our working capital facilityand holders of any capital lease obligations and certain other securedindebtedness. The indenture governing the 7.5% senior secured notes permits usto incur other senior secured indebtedness and to grant liens on our assetsunder certain circumstances.

 

We payinterest on the 7.5% senior secured notes semi-annually in cash, in arrears, onJanuary 1 and July 1 at an annual rate of 7.5%. We paid the firstinterest payment under the 7.5% senior secured notes on January 1, 2004.The indenture governing the 7.5% senior secured notes contains various affirmativeand negative covenants, subject to a number of important limitations andexceptions, including but not limited to those limiting our ability to incuradditional indebtedness or enter into sale and leaseback transactions; paydividends, redeem stock or make other distributions; issue stock of oursubsidiaries; make certain investments or acquisitions; grant liens on assets;enter into transactions with affiliates; merge, consolidate or transfersubstantially all of our assets; and transfer and sell assets. Our indenturehas a covenant that limits our incurrence of additional indebtedness unless onthe date of the incurrence of additional indebtedness our Consolidated FixedCharge Coverage 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 indenturegoverning the 7.5% senior secured notes contains various events of default,including but not limited to those related to non-payment of principal,interest or fees; violations of certain covenants; certain bankruptcy-relatedevents; invalidity of liens; non-payment of certain legal judgments; and crossdefaults with certain other indebtedness.

 

We can redeemthe 7.5% senior secured notes on or after July 1, 2007, except we mayredeem up to 35% of the 7.5% senior secured notes prior to July 1, 2006with the proceeds of one or more public equity offerings. We are required toredeem the 7.5% senior secured notes under certain circumstances involvingchanges of control. Additionally, if we or any of our domestic restrictedsubsidiaries engage in asset sales, we generally must either invest the netcash proceeds from such sales in our business within 360 days, prepay the debtunder our working capital facility or certain other secured debt or make anoffer to purchase a portion of the 7.5% senior secured notes having an accretedvalue equal to the excess net cash proceeds.

 

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*Working Capital Facility.*On July 7,2003, we entered into a $15.0 million senior secured working capital facilitywith Wells Fargo Foothill, Inc. Our working capital facility matures onJuly 7, 2007. Availability under our working capital facility is limitedto the lesser of (i) $15.0 million and (ii) the borrowing base amount, in eachcase, less the sum of (a) the revolving loans then outstanding (includingletters of credit) and (b) reserves required by the lender. The borrowing baseamount is defined as the lesser of (A) 80% of our twelve-month trailing EBITDA,as determined in accordance with the most recently delivered financialstatements, or (B) 25% of our ‘‘enterprise value,’’ determined to be $168.0million as of July 7, 2003, and thereafter to be the amount determined bya third party appraiser. We are permitted to repay and reborrow such advancesuntil the maturity date. As of April 4, 2004, we had no borrowingsoutstanding under our working capital facility. At our option, up to $7.5million of the facility can consist of one or more letters of credit issued bythe lender. As of April 4, 2004, $1.0 million was restricted for letters ofcredit under our working capital facility. Our working capital facility isguaranteed by all of our domestic restricted subsidiaries and secured by afirst priority perfected security interest in all of the collateral securingthe 7.5% senior secured notes. Interest will accrue on borrowings under ourworking capital facility at a floating rate of interest per annum equal to therate of interest announced from time to time within the lender’s principaloffice in San Francisco as its ‘‘prime rate’’ plus 1.75%, or a LIBOR-basedequivalent thereof. Interest is calculated on the basis of a 360-day year andwill be payable monthly for base rate loans and at the end of each interestperiod for LIBOR loans (but not less frequently than quarterly). Our workingcapital facility contains certain customary fees, including a closing fee,anniversary fees, servicing fees and pre-payment fees.

 

Our workingcapital facility contains various affirmative and negative covenants customaryfor similar working capital facilities, including but not limited to covenantspertaining to mergers and sales of assets outside the ordinary course ofbusiness; use of proceeds; granting of liens; incurrence of indebtedness;restricted payments; voluntary prepayment of indebtedness, including the 7.5%senior secured notes; payment of dividends; business activities; investmentsand acquisitions; transactions with affiliates; certain restrictions affectingsubsidiaries; fundamental changes; and amendments or modifications toinstruments governing certain indebtedness. Our working capital facility alsorequires us to achieve and maintain a twelve-month trailing EBITDA (as definedtherein) of not less than $16.0 million. As of April 4, 2004, we were incompliance with all of our financial covenants.

 

Our workingcapital facility contains customary events of default, including but notlimited to those related to non-payment of principal, interest or fees;violations of certain covenants; change of control; certain bankruptcy-relatedevents; inaccuracy of representations and warranties in any material respect;and cross defaults with certain other indebtedness and agreements, includingwithout limitation the indenture governing the 7.5% senior secured notes.

 

*Prior Credit Facility.*Our prior creditfacility was pursuant to the Second Amended and Restated Revolving Credit andTerm Loan Agreement, dated June 19, 1995, between us and Fleet NationalBank (subsequently acquired by B of A) (“Fleet”), as amended from time to time,a portion of which had been syndicated to other lenders. On July 7, 2003,we used a portion of the proceeds from the 7.5% senior secured notes offeringto repay our prior credit facility in full. Following repayment, the creditfacility was terminated. On April 7, 1998 and May 29, 1998, we enteredinto interest rate swap agreements with Fleet on notional amounts of $10.0million each. These agreements terminated on April 7, 2003 and May 29,2003, respectively. Additionally, on October 24, 2002, we entered into twointerest rate swap agreements with Fleet on notional amounts of $20.0 millioneach. These agreements terminate on October 24, 2004 and October 24,2005. These agreements were used to reduce the potential impact of interestrate fluctuations relating to $40.0 million of variable rate debt under ourprior credit facility. As a result of the July 7, 2003 repayment of ourprior credit facility with a portion of the proceeds from the 7.5% seniorsecured notes offering, these interest rate swap agreements are now accountedfor as speculative instruments and resulting changes in their fair market valueare charged or credited to the statement of income. As of both April 4,

 

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2004 andJanuary 4, 2004, in accordance with SFAS No. 133, liabilities wereapproximately $0.7 million in the accompanying consolidated balance sheets Thechange in the fair market value has been recognized in interest expense, net inthe consolidated statement of income for the three month period endedApril 4, 2004.

 

*CNL Loan*. In March 1997, one of our subsidiaries entered into a $2.5 millionloan agreement with CNL Financial I, Inc. (“CNL”).  This loan is scheduled to mature on April 1, 2007 and bearsinterest at 10.002% per annum.  Thisloan is secured by a security interest in the assets of the Morton’ssteakhouses located in Chicago and Denver (downtown).  Principal and interest payments are due monthly over the term ofthe loan.  On April 4, 2004 andJanuary 4, 2004 the outstanding principal balance of the CNL loan wasapproximately $1.0 million and $1.1 million, respectively, of whichapproximately $0.3 million of principal for each period is included in “Currentportion of obligations to financial institutions” in the accompanyingconsolidated balance sheets.

 

*Mortgages*. During 1998 and 1999, certain of our subsidiaries entered into a totalof six mortgage loans with GE Capital Franchise Finance aggregating $18.9million with interest rates range from 7.68% to 9.26% per annum, the proceedsof which were used to fund the purchases of land and construction ofrestaurants.  The loans generallyrequire monthly payments of principal and interest.  On April 4, 2004 and January 4, 2004 the aggregateoutstanding principal balance due on these loans was approximately $6.5 millionand $11.8 million, respectively, of which approximately $0.2 million and $0.4million, respectively, of principal is included in “Current portion ofobligations to financial institutions” in the accompanying consolidated balancesheets.  We repaid one mortgage in May2003, one in September 2003 and two in April 2004.  The remaining two mortgages outstanding asof April 4, 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.

 

*Contractual Commitments*.  The following table represents ourcontractual commitments associated with our debt and other obligationsdisclosed above as of April 4, 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                           |   | 227                         |   | 329      |   | 364      |   | 104      |   | —   |   | —         |   | 1,024     |   |
| Mortgage loans with GE Capital Franchise  Finance |   | 124                         |   | 189      |   | 207      |   | 227      |   | 248      |   | 5,498          |   | 6,493     |   |
| Subtotal                                          |   | 351                         |   | 518      |   | 571      |   | 331      |   | 248      |   | 110,498        |   | 112,517   |   |
| Restaurant operating leases                       |   | 12,128                      |   | 16,768   |   | 16,147   |   | 15,054   |   | 14,318   |   | 94,029         |   | 168,444   |   |
| Letters of credit                                 |   | 1,000                       |   | —   |   | —   |   | —   |   | —   |   | —         |   | 1,000     |   |
| Total                                             |   | $                           | 13,479 |     | $      | 17,286   |   | $        | 16,718 |     | $      | 15,385         |   | $         | 14,566 |   | $ | 204,527 |   | $ | 281,961 |   |

 

During the first three months of fiscal 2004, our netinvestment in fixed assets and related investment costs, including pre-openingcosts, approximated $1.0 million.  Weestimate that we will spend up to approximately $11.0 million in fiscal 2004,including the $1.0 million recorded in the first three months of fiscal 2004,to finance ordinary refurbishment of existing restaurants and capitalexpenditures, net of landlord development and/or rent allowances and net ofequipment lease financing, for new restaurants.   We anticipate that funds generated through operations andthrough borrowings under our new working

 

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capitalfacility will be sufficient to fund planned expansion.  We cannot assure you, however that this willbe the case.

 

New Accounting 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 late 2004. The Company will continue to monitor itsprogress on the issuance of this standard as well as evaluate the Company’sposition with respect to current guidance.

 

In January 2003, the FASB issued InterpretationNo. (“FIN”) 46, “Consolidation of Variable Interest Entities, an interpretationof ARB No. 51.” FIN 46 was subject to significant interpretation by the FASB,and was 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 ofFIN 46 and FIN 46R did not have any effect on the Company’s consolidatedfinancial statements, as the Company does not have any SPEs.  The Company is in the process of assessingthe applicability of all other types of entities but does not expect that theadoption of the other provision that are applicable in 2004 will have anyeffect on the Company’s consolidated financial statements.

 

Forward-Looking Statements

 

This quarterly report contains various“forward-looking statements” within the meaning of Section 27A of theSecurities 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

 

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managementand restaurant employees.  Accordingly,such forward-looking statements do not purport to be predictions of futureevents or circumstances and therefore there can be no assurance that anyforward-looking statement contained herein will prove to be accurate. TheCompany assumes no obligation to update the forward-looking statements.

 

Item 3.  Quantitative and Qualitative Disclosureabout Market Risk

 

The inherent riskin market risk sensitive instruments and positions primarily relates topotential losses arising from adverse changes in foreign currency exchangerates and interest rates.

 

As ofApril 4, 2004, we owned and operated four international restaurants, onein Hong Kong, one in Singapore, one in Toronto, Canada and one in Vancouver,Canada. As a result, we are subject to risk from changes in foreign exchangerates. These changes result in cumulative translation adjustments, which areincluded in accumulated other comprehensive income (loss). We do not considerthe potential loss resulting from a hypothetical 10% adverse change in quotedforeign currency exchange rates, as of April 4, 2004, to be material.

 

We also aresubject to market risk from exposure to changes in interest rates based on ourfinancing activities. This exposure relates to borrowings under our workingcapital facility that will be payable at floating rates of interest and the7.5% senior secured notes that are payable at a fixed rate of interest of 7.5%.As of April 4, 2004, there were no borrowings outstanding under ourfloating rate working capital facility. A hypothetical 10% fluctuation ininterest rates, as of April 4, 2004, would have a net impact ofapproximately $0.1 million on earnings for the three month period endedApril 4, 2004.

 

Item 4.  Controls and Procedures

 

As of the end of the period covered by this report, anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined under the Securities and ExchangeCommission rules) was carried out under the supervision and with theparticipation of the Company’s management, including our Chief ExecutiveOfficer and Chief Financial Officer. The Company’s disclosure controls and procedures are designed to ensurethat information that the Company must disclose in its reports filed under theSecurities Exchange Act of 1934 is communicated and processed in a timelymanner.  Based upon that evaluation, theChief Executive Officer and the Chief Financial Officer concluded that thedesign and operation of these disclosure controls and procedures wereeffective.  No significant changes weremade in our internal controls or in other factors that could significantlyaffect these controls subsequent to the date of their evaluation.

 

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MORTON’S RESTAURANTGROUP, INC. AND SUBSIDIARIES

 

Part II  -  Other Information

 

Item 1.  LegalProceedings

 

Since August 2002, a number of the Company’s current and formeremployees in New York and Florida have initiated arbitrations with the AmericanArbitration Association in their respective states alleging that the Companyhas violated state and federal (New York arbitrations) and federal (Floridaarbitrations) wage and hour laws regarding the sharing of tips with otheremployees and failure to pay all hours worked. In general, the complainants areseeking restitution of tips, the difference between the tip credit wage and theminimum wage, payment for hours worked off the clock, 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, but there has been no determination to date.The Company believes that the allegations are without merit and intends tocontest them vigorously.

 

The Company is involved in various other claims and legal actionsarising in the ordinary course of business. Management does not believe thatthe ultimate resolution of these actions will have a material adverse effect onthe Company’s consolidated financial position, results of operations, liquidityand capital resources.

 

Item 6. Exhibits and Reports on Form 8-K

 

(a)          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  |

 

(b)         Reports on Form 8-K

 

The Company has not filedany Current Report on Form 8-K with the Securities and Exchange Commissionduring the quarter for which this report is filed.

 

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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   | May 17, 2004                         |                                                            | By: | /s/ ALLEN J. BERNSTEIN |   |
|   |                                 | Allen J. Bernstein                                              |
|   |                                 | Chairman of the Board, President  and Chief Executive Officer   |
|   |                                 |                                                            |
|   |                                 |                                                            |
| Date   | May 17, 2004                         |                                                            | By: | /s/ THOMAS J. BALDWIN |   |
|   |                                 | Thomas J. Baldwin                                               |
|   |                                 | Executive Vice President,  Chief Financial Officer and Director |
|        |                                      |                                                                 |  |  |  |  |

 

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