**FORM 10-Q**

 

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**ý****   ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES********EXCHANGEACT OF 1934**

 

**For thequarterly period ended   April 3, 2005**

 

**OR**

 

**o****   ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES********EXCHANGEACT 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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes ý or No o.

 

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

 

Asof May 17, 2005, the registrant had 1,000 shares of its Common Stock,$0.01 par value, outstanding.

 

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

INDEX

 
| Part I -  Financial Information                                                                                            |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                            |   |
| Item 1.  Financial Statements                                                                                                   |   |
|                                                                                                                            |   |
| Consolidated Balance Sheets  as of April 3, 2005 and January 2, 2005 - unaudited                                      |   |
|                                                                                                                            |   |
| Consolidated  Statements of Income for the three month periods ended April 3, 2005 and  April 4, 2004 - unaudited     |   |
|                                                                                                                            |   |
| Consolidated  Statements of Cash Flows for the three month periods ended April 3, 2005  and April 4, 2004 - unaudited |   |
|                                                                                                                            |   |
| Notes  to Unaudited Consolidated Financial Statements                                                                           |   |
|                                                                                                                            |   |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                             |   |
|                                                                                                                            |   |
| Item 3. Quantitative and Qualitative Disclosure  about Market Risk                                                              |   |
|                                                                                                                            |   |
| Item 4. Controls and Procedures                                                                                                 |   |
|                                                                                                                            |   |
| Part II - Other  Information                                                                                               |   |
|                                                                                                                            |   |
| Item 1. Legal Proceedings                                                                                                       |   |
|                                                                                                                            |   |
| Item 6. Exhibits                                                                                                                |   |
|                                                                                                                            |   |
| Signatures                                                                                                                      |   |

 

2

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Part I - Financial Information

 

Item1.  Financial Statements

 

MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

ConsolidatedBalance Sheets

 

(amounts in thousands)

 
| ** **                                      | ** ** | **April 3,  2005** | ** ** | **January 2,  2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**         | ** ** |
| Assets                                          |       |                    |       |                      |       |
| Current assets:                                 |       |                    |       |                      |       |
| Cash and  cash equivalents                      |       | $                       | 9,329      |                      | $          | 10,179 |   |
| Restricted  cash                                |       | 417                     |       | 548                       |       |
| Marketable  securities                          |       | 4,126                   |       | 4,112                     |       |
| Accounts  receivable                            |       | 5,170                   |       | 4,346                     |       |
| Inventories                                     |       | 9,296                   |       | 9,302                     |       |
| Prepaid  expenses and other current assets |       | 6,479                   |       | 6,600                     |       |
| Deferred  income taxes                          |       | 3,623                   |       | 5,237                     |       |
|                                            |       |                    |       |                      |       |
| Total  current assets                           |       | 38,440                  |       | 40,324                    |       |
|                                            |       |                    |       |                      |       |
| Property and  equipment, at cost:               |       |                    |       |                      |       |
| Furniture,  fixtures and equipment              |       | 18,467                  |       | 16,499                    |       |
| Buildings  and leasehold improvements           |       | 51,692                  |       | 45,139                    |       |
| Land                                            |       | 8,474                   |       | 8,474                     |       |
| Construction  in progress                       |       | 271                     |       | 5,234                     |       |
|                                            |       | 78,904                  |       | 75,346                    |       |
| Less  accumulated depreciation and amortization |       | 15,512                  |       | 13,859                    |       |
| Net property  and equipment                     |       | 63,392                  |       | 61,487                    |       |
|                                            |       |                    |       |                      |       |
| Intangible  asset                               |       | 92,000                  |       | 92,000                    |       |
| Goodwill                                        |       | 61,545                  |       | 61,789                    |       |
| Other assets  and deferred expenses, net        |       | 8,682                   |       | 8,836                     |       |
|                                            |       | $                       | 264,059    |                      | $          | 264,436 |   |

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets, Continued

 

(amounts in thousands, except share and per share amounts)

 
| ** **                                                                                                                                | ** ** | **April 3,  2005** | ** ** | **January 2,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                | ** ** | **(unaudited)**         | ** ** |
| Liabilities  and Stockholder’s Equity                                                                                                |       |                    |       |                      |       |
|                                                                                                                                      |       |                    |       |                      |       |
| Current  liabilities:                                                                                                                     |       |                    |       |                      |       |
| Accounts  payable                                                                                                                         |       | $                       | 6,042      |                      | $          | 6,390 |   |
| Accrued  expenses                                                                                                                         |       | 29,930                  |       | 30,902                    |       |
| Current  portion of obligations to financial institutions                                                                                 |       | 134                     |       | 521                       |       |
| Accrued  income taxes                                                                                                                     |       | 297                     |       | 379                       |       |
|                                                                                                                                      |       |                    |       |                      |       |
| Total  current liabilities                                                                                                                |       | 36,403                  |       | 38,192                    |       |
|                                                                                                                                      |       |                    |       |                      |       |
| 7.5% senior  secured notes, net of unamortized discount of $12,822 and $13,283 at April 3,  2005 and January 2, 2005            |       | 92,178                  |       | 91,717                    |       |
| Obligations  to financial institutions, less current maturities                                                                           |       | 3,553                   |       | 6,636                     |       |
| Deferred  income taxes                                                                                                                    |       | 23,004                  |       | 23,004                    |       |
| Other  liabilities                                                                                                                        |       | 9,446                   |       | 7,546                     |       |
|                                                                                                                                      |       |                    |       |                      |       |
| Total  liabilities                                                                                                                        |       | 164,584                 |       | 167,095                   |       |
|                                                                                                                                      |       |                    |       |                      |       |
| Commitments  and contingencies                                                                                                            |       |                    |       |                      |       |
|                                                                                                                                      |       |                    |       |                      |       |
| Stockholder’s  equity:                                                                                                               |       |                    |       |                      |       |
| Common  stock, $0.01 par value per share. Authorized, issued and outstanding 1,000  shares at April 3, 2005 and January 2, 2005 |       | —                  |       | —                    |       |
| Additional  paid-in capital                                                                                                               |       | 97,077                  |       | 97,077                    |       |
| Accumulated  other comprehensive income                                                                                                   |       | 169                     |       | 189                       |       |
| Retained  earnings                                                                                                                        |       | 2,229                   |       | 75                        |       |
|                                                                                                                                      |       |                    |       |                      |       |
| Total stockholder’s  equity                                                                                                          |       | 99,475                  |       | 97,341                    |       |
|                                                                                                                                      |       |                    |       |                      |       |
|                                                                                                                                      |       | $                       | 264,059    |                      | $          | 264,436 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

ConsolidatedStatements of Income

 

(amounts in thousands)

 
| ** **                                                          | ** ** | **Three month periods ended** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                          | ** ** | **April 3, 2005**        | ** ** | **April 4, 2004** | ** ** |
| ** **                                                          | ** ** | **(unaudited)**               | ** ** |
| ** **                                                          | ** ** | ** **                    | ** ** |
| Revenues                                                            |       | $                             | 77,191     |   | $ | 72,981 |   |
|                                                                |       |                          |       |   |   |
| Food and  beverage costs                                            |       | 25,855                        |       | 24,472 |   |
| Restaurant  operating expenses                                      |       | 34,776                        |       | 32,598 |   |
| Pre-opening  costs, depreciation, amortization and non-cash charges |       | 2,724                         |       | 1,634 |   |
| General and  administrative expenses                                |       | 5,199                         |       | 4,886 |   |
| Marketing  and promotional expenses                                 |       | 1,423                         |       | 2,629 |   |
| Costs  associated with the repayment of certain debt                |       | 174                           |       | 264 |   |
| Gain on sale  of investment                                         |       | (648                          | )          | — |   |
| Interest  expense, net                                              |       | 2,681                         |       | 3,071 |   |
| Management  fee paid to related party                               |       | 700                           |       | 700 |   |
|                                                                |       |                          |       |   |   |
| Income  before income taxes                                         |       | 4,307                         |       | 2,727 |   |
|                                                                |       |                          |       |   |   |
| Income tax  expense                                                 |       | 2,153                         |       | 818 |   |
|                                                                |       |                          |       |   |   |
| Net income                                                          |       | $                             | 2,154      |   | $ | 1,909 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

ConsolidatedStatements of Cash Flows

 

(amounts in thousands)

 
| ** **                                                                         | ** ** | **Three month periods ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **April 3, 2005**        | ** ** | **April 4, 2004** | ** ** |
|                                                                               |       | **(unaudited)**               |       |
| ** **                                                                         | ** ** | ** **                    | ** ** |
| Cash flows  from operating activities:                                             |       |                          |       |   |   |
| Net income                                                                         |       | $                             | 2,154      |   | $ | 1,909 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                          |       |   |   |
| Depreciation,  amortization and other non-cash charges                             |       | 2,609                         |       | 2,729 |   |
| Deferred  income taxes                                                             |       | 1,858                         |       | 864 |   |
| Change in  assets and liabilities:                                                 |       |                          |       |   |   |
| Accounts  receivable                                                               |       | (826                          | )          | (982 | ) |
| Inventories                                                                        |       | 2                             |       | 96 |   |
| Prepaid  expenses and other assets                                                 |       | (5                            | )          | 467 |   |
| Accounts  payable, accrued expenses and other liabilities                          |       | 350                           |       | (1,059 | ) |
| Accrued  income taxes                                                              |       | (84                           | )          | (163 | ) |
| Net cash  provided by operating activities                                         |       | 6,058                         |       | 3,861 |   |
|                                                                               |       |                          |       |   |   |
| Cash flows  from investing activities:                                             |       |                          |       |   |   |
| Purchases of  property and equipment                                               |       | (3,547                        | )          | (1,011 | ) |
| Increase in  marketable securities                                                 |       | (14                           | )          | — |   |
| Net cash  used in investing activities                                             |       | (3,561                        | )          | (1,011 | ) |
|                                                                               |       |                          |       |   |   |
| Cash flows  from financing activities:                                             |       |                          |       |   |   |
| Principal  reduction on obligations to financial institutions                      |       | (3,470                        | )          | (5,415 | ) |
| Payment of  deferred financing costs                                               |       | —                        |       | (468 | ) |
| Decrease  (increase) in restricted cash                                            |       | 131                           |       | (73 | ) |
| Net cash  used in financing activities                                             |       | (3,339                        | )          | (5,956 | ) |
|                                                                               |       |                          |       |   |   |
| Effect of  exchange rate changes on cash                                           |       | (8                            | )          | (7 | ) |
|                                                                               |       |                          |       |   |   |
| Net decrease  in cash and cash equivalents                                         |       | (850                          | )          | (3,113 | ) |
|                                                                               |       |                          |       |   |   |
| Cash and  cash equivalents at beginning of period                                  |       | 10,179                        |       | 17,997 |   |
|                                                                               |       |                          |       |   |   |
| Cash and  cash equivalents at end of period                                        |       | $                             | 9,329      |   | $ | 14,884 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Notesto Unaudited Consolidated Financial Statements

 

April 3, 2005 and April 4, 2004

 

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

Theaccompanying unaudited consolidated financial statements of Morton’s RestaurantGroup, Inc. and its subsidiaries (the “Company,” “we,” “us” and “our”)have been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information and with theinstructions to Form 10-Q.****Accordingly,they do not include all information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements and should be read in conjunction with the Annual Reporton Form 10-K for the fiscal year ended January 2, 2005.

 

Theaccompanying consolidated financial statements are unaudited and include alladjustments (consisting of normal recurring adjustments and accruals) thatmanagement considers necessary for a fair presentation of its financialposition and results of operations for the interim periods presented.  The results of operations for the interimperiods are not necessarily indicative of the results that may be expected forthe full year.

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management of the Company to make estimates andassumptions relating to the reported amount of assets, liabilities, revenuesand expenses reported during the period. Actual results could differ from those estimates.

 

TheCompany uses a 52/53 week fiscal year which ends on the Sunday closest to January 1.Approximately every six or seven years, a 53rd week will be added.

 

Morton’sRestaurant Group, Inc. (“MRG”) was incorporated as a Delaware corporationon October 3, 1988 and is a wholly-owned subsidiary of Morton’s HoldingCompany, Inc. (“MHCI”), which was incorporated as a Delaware corporationon March 10, 2004 and became the direct parent of MRG on June 4,2004. MHCI is a wholly owned subsidiary of Morton’s Holdings, LLC (“MHLLC”), aDelaware limited liability company formed April 4, 2004.

 

**2)****                                    ****Recent Events**

DuringMarch 2005, the Company received proceeds of approximately $658,000 fromthe sale of stock in Charlie Brown’s Acquisition Corp., an affiliate of CastleHarlan, Inc., and recorded a gain on the sale of its investment ofapproximately $648,000 in the consolidated statement of income for the threemonth period ended April 3, 2005.

 

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

Forthe purposes of the consolidated statements of cash flows, the Companyconsiders all highly liquid instruments purchased with a maturity of threemonths or less to be cash equivalents. The Company paid cash interest, net of amounts capitalized, ofapproximately $97,000 and $495,000, and income taxes, net of refunds, ofapproximately $378,000 and $120,000, for the three month periods ended April 3,2005 and April 4, 2004, respectively.

 

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

Restrictedcash of $417,000 and $548,000 as of April 3, 2005 and January 2,2005, respectively, represents cash collateral relating to an interest rateswap agreement with Bank of America, formerly Fleet National Bank (“B of A”).See Note 6.

 

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

Theidentifiable intangible asset acquired represents the Company’s trade name “Morton’s,”which has an indefinite life and accordingly is not subject to amortization,but is subject to impairment testing. The trade name is used in the advertisingand marketing of the restaurants and is widely recognized and accepted byconsumers in its respective market as an indication of and recognition ofservice, value and quality. Goodwill represents the excess of costs over fairvalue of assets of the business acquired. During the first quarter of fiscal2005, goodwill was reduced by $244,000 which represents an adjustment inpurchase accounting as a result of a revision to a deferred tax asset valuationallowance assumed at the time of purchase.

 

**6)****                                    ****Derivative FinancialInstruments**

TheCompany accounts for its derivative financial instruments in accordance withSFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities,” as amended by SFAS No. 137 and SFAS No. 138.  SFAS No. 133 establishes accounting and reportingstandards for derivative instruments, including certain derivative instrumentsembedded 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 3, 2005, the Company’sderivative financial instrument consists of one interest rate swap agreementwith a notional amount of $20,000,000. Additionally, one interest rate swapagreement with a notional amount of $20,000,000 expired in October 2004.The Company’s interest rate swap agreements are accounted for as speculativeinstruments and resulting changes in fair market value have been charged orcredited to interest expense, net in the consolidated statements ofincome.  As of April 3, 2005, inaccordance with SFAS No. 133 the receivable was approximately $8,000. Asof January 2, 2005, in accordance with SFAS No. 133, the liabilitywas approximately $77,000.

 

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

Thecomponents of comprehensive income for the three month periods ended April 3,2005 and April 4, 2004 are as follows (amounts in thousands):

 
| ** **                          | ** ** | **Three month periods ended** | ** ** |
|-------------------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **April 3, 2005**        | ** ** | **April 4, 2004** | ** ** |
|                                |       |                          |       |   |   |
| Net income                          |       | $                             | 2,154      |   | $ | 1,909 |   |
| Other  comprehensive income (loss): |       |                          |       |   |   |
| Foreign  currency translation       |       | (20                           | )          | (32 | ) |
| Total  comprehensive income         |       | $                             | 2,134      |   | $ | 1,877 |   |

 

**8)****                                    ****Employee SubscriptionAgreements**

Certainof our executives and other employees have been granted common units of MHLLC,which represent an ownership interest in MHLLC, pursuant to employeesubscription agreements.  MHLLC’s Boardapproved 1,711,344 units available for grant of which 1,497,585, 28,600 and20,800 were granted in fiscal 2003, fiscal 2004 and on January 25, 2005,respectively.  The fair value of eachcommon unit granted during fiscal 2003, fiscal 2004 and on January 25,2005 was $0.01.  Common units granted toan employee pursuant to employee subscription agreements are granted at no costto the 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.  However, if the employee has been continuouslyemployed by the Company from the date of grant to the date of a change ofcontrol, any unvested time vesting units will immediately vest simultaneouslywith the consummation of the change of control. In addition, fifty percent ofthe

 

8

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common units will vest uponcertain change of control or liquidation events if, upon the occurrence of suchan event, Castle Harlan Partners III, L.P. achieves an internal rate of returnof at least 30% and the employee is employed as of such date.  Upon termination of employment, unvestedcommon units will be forfeited and vested common units will be subject torepurchase pursuant to the terms of MHLLC’s operating agreement.  Stock-based employee compensation expenserelated to this plan is charged to the Company based on the recognition andmeasurement provisions of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations.  Accordingly, the Company recognizedcompensation expense relating to the vesting of common units granted in ourconsolidated statements of income for the three periods ended April 3,2005 and April 4, 2004.  Thecompensation expense recorded during the three month periods ended April 3,2005 and April 4, 2004, represents the straight-line amortization of thedifference between the fair value at the date of grant of $0.01 per common unitand the exercise price (which is zero) of the common units of the outstandingtime-vesting common units for the respective period.  The remaining compensation expense that wasmeasured at the date of grant will be amortized on a straight-line basis overthe remaining vesting period. Compensation expense relating to the other 50% of common units granted,which 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%, will be measured and recognized if andwhen these events occur.

 

Activityrelating to the common units granted pursuant to employee subscriptionagreements is as follows:

 
| Unvested common units  outstanding as of January 4, 2004 | ** ** | 1,482,385 | ** ** |
|---------------------------------------------------------------|------------|-----------|------------|
| Granted  units                                                |       | 28,600    |       |
| Vested units                                                  |       | —    |       |
| Forfeited  units                                              |       | (17,600   | )          |
| Unvested common  units outstanding as of January 2, 2005 |       | 1,493,385 |       |
| Granted  units                                                |       | 20,800    |       |
| Vested units                                                  |       | —    |       |
| Forfeited  units                                              |       | (1,000    | )          |
| Unvested  common units outstanding as of April 3, 2005   |       | 1,513,185 |       |

 

Asof April 3, 2005, there were 198,159 common units available for grant.

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation-Transition and Disclosure.” SFAS No. 148 providesalternative methods of transition for a voluntary change to the fair valuemethod of accounting for stock-based employee compensation as originallyprovided 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 yearsending after December 15, 2002. Due to the fact that the compensationexpense on the unvested common units is based on the fair value of the commonunits of MHLLC at the date of grant, there is no difference between reportednet income and the pro forma net income that would be recognized under SFAS No. 123.

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-BasedPayment.” This statement replaces SFAS No. 123, “Accounting forStock-Based Compensation” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.” SFAS No. 123(R) requires all stock-basedemployee compensation to be recorded as an expense in the consolidatedstatement of operations and that such cost be measured according to the fairvalue of stock options. SFAS No. 123(R) will be effective the first annualreporting period that begins after June 15, 2005.  As the Company already charges stock-based

 

9

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employee compensationexpense related to units issued pursuant to employee subscription agreementsbased on the fair value of such units, the adoption of this statement will nothave any effect on the Company’s consolidated financial statements.

 

**9)****                                    ****Financial Information aboutGeographic Areas**

Incomebefore income taxes for the Company’s domestic and foreign operations are asfollows (amounts in thousands):

 
| ** ** | ** ** | **Three month periods ended** | ** ** |
|------------|------------|-------------------------------|------------|
| ** ** | ** ** | **April 3, 2005**        | ** ** | **April 4, 2004** | ** ** |
|       |       |                          |       |   |   |
| Domestic   |       | $                             | 3,744      |   | $ | 2,344 |   |
| Foreign    |       | 563                           |       | 383 |   |
| Total      |       | $                             | 4,307      |   | $ | 2,727 |   |

 

**10)****                             ****Restaurant Activity**

DuringJuly 2004, a new Morton’s steakhouse opened in White Plains, New York.During the first quarter of 2005, new Morton’s steakhouses opened in Bethesda,Maryland; Charlotte, North Carolina and Chicago, Illinois. No restaurants wereclosed during the three month periods ended April 3, 2005 and April 4,2004.

 

TheCompany records rental expense on a straight-line basis from the date that theCompany takes control of the premises over the lease term. Any differencebetween the calculated expense and the amounts actually paid are reflected as adeferred rent liability included in other liabilities in the consolidatedbalance sheets. The Company also includes landlord allowances for leaseholdimprovements, furniture, fixtures and equipment in the deferred rent liability.These amounts are amortized on a straight-line basis from the date that theCompany takes control of the premise over the lease term. The Company has apolicy of capitalizing the portion of deferred rent during the construction periodto leasehold improvements.

 

**11)****                             ****Legal Matters andContingencies**

SinceAugust 2002, a number of the Company’s current and former employees in NewYork, Boston and Florida have initiated arbitrations with the AmericanArbitration Association in their respective states alleging that the Companyhas violated state (Boston arbitration), 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, thedifference between the tip credit wage and the minimum wage, payment for hoursworked off the clock (Florida only), liquidated damages and attorneys’ fees andcosts. The arbitrator in the New York arbitrations has permitted thecomplainants to consolidate their arbitrations into one action and proceed as acollective action. The Florida complainants are also seeking to consolidatetheir arbitrations. The arbitrator has ruled that the claims cannot beconsolidated but believes a collective action would be permitted. The Bostonarbitrator has ruled that the claimants may proceed as a class, but to datethere are only three people in the class and no class has been certified. The Companyintends to and is contesting these matters vigorously. Management believes anadverse opinion in any one of these cases would not have a material adverseimpact on the Company’s financial condition.

 

InNovember 2004, current and former employees of the Sacramento Morton’ssteakhouse commenced a federal lawsuit asserting individual, representative andclass claims against the Sacramento Morton’s steakhouse and several otherMorton’s steakhouses.  The plaintiffsasserted claims based on the Company’s alleged failure to provide them withmeal and rest periods, and for unlawful tip sharing and unfaircompetition.  The plaintiffs seekrestitution of tips, meal and break period compensation and

 

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attorney’s fees. Dismissalswith prejudice for all defendants, except the Sacramento Morton’s steakhouse,have been filed.  The Sacramento Morton’ssteakhouse has filed motions seeking to dismiss the claims brought against it.

 

TheCompany is involved in various other claims and legal actions arising in theordinary course of business. Management does not believe that the ultimateresolution of these actions will have a material adverse effect on the Company’sconsolidated financial position, results of operations, liquidity and capitalresources.

 

**12)****                             ****Supplemental CondensedConsolidating Financial Information**

Theobligations of Morton’s Restaurant Group, Inc. (the “Issuer”) related tothe 7.5% senior secured notes are fully and unconditionally guaranteed on ajoint and several basis and on a senior basis by certain of the Company’swholly-owned domestic subsidiaries (the “Guarantors”). These guarantees aresenior secured obligations of the Guarantors, subject to liens permitted underthe indenture governing the 7.5% senior secured notes, rank senior in right ofpayment to all subordinated indebtedness of the Guarantors and rank *pari passu* in right of payment with allexisting and future senior indebtedness of the Guarantors. There are norestrictions on the Company’s ability to obtain cash dividends or otherdistributions of funds from the Guarantors, except those imposed by applicablelaw and certain contractual restrictions, which do not exceed 25% ofconsolidated net assets of any Guarantor, that are permitted under theindenture governing the 7.5% senior secured notes. The following supplementalfinancial information sets forth, on a condensed consolidating basis, balancesheets, statements of operations and statements of cash flows for the Issuer,domestic subsidiaries of the Company that are Guarantors and foreignsubsidiaries and domestic subsidiaries of the Company that are not Guarantors(collectively, the “Non-Guarantor Subsidiaries”). The Company has not presentedseparate financial statements and other disclosures concerning the GuarantorSubsidiaries because management has determined that such information is notmaterial to investors.

 

**Supplemental Consolidating Balance Sheet**

**April 3, 2005**

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                 | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Assets                                     |       |       |       |                        |       |                            |       |             |       |             |       |
| Current  assets:                           |       |       |       |                        |       |                            |       |             |       |             |       |
| Cash and  cash equivalents                 |       | $          | 6,941      |                        | $          | 1,950                           |       | $                | 438        |             | $          | — |   | $ | 9,329 |   |
| Restricted  cash                           |       | 417        |       | —                      |       | —                          |       | —           |       | 417              |       |
| Marketable  securities                     |       | 4,126      |       | —                      |       | —                          |       | —           |       | 4,126            |       |
| Accounts  receivable                       |       | —     |       | 4,942                       |       | 228                             |       | —           |       | 5,170            |       |
| Inventories                                |       | —     |       | 8,686                       |       | 610                             |       | —           |       | 9,296            |       |
| Prepaid  expenses and other current assets |       | 1,039      |       | 5,393                       |       | 47                              |       | —           |       | 6,479            |       |
| Deferred  income taxes                     |       | (3,094     | )          | 6,717                       |       | —                          |       | —           |       | 3,623            |       |
|                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  current assets                      |       | 9,429      |       | 27,688                      |       | 1,323                           |       | —           |       | 38,440           |       |
|                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Property and  equipment, net               |       | 139        |       | 62,284                      |       | 969                             |       | —           |       | 63,392           |       |
| Intangible  asset                          |       | —     |       | 92,000                      |       | —                          |       | —           |       | 92,000           |       |
| Goodwill                                   |       | —     |       | 61,545                      |       | —                          |       | —           |       | 61,545           |       |
| Other assets  and deferred expenses, net   |       | 7,489      |       | 3,412                       |       | 301                             |       | (2,520           | )          | 8,682            |       |
| Amounts due  from affiliates               |       | 117,948    |       | —                      |       | 573                             |       | (118,521         | )          | —           |       |
|                                       |       | $          | 135,005    |                        | $          | 246,929                         |       | $                | 3,166      |             | $          | (121,041 | ) | $ | 264,059 |   |

 

11

----

 

**Supplemental Consolidating Balance Sheet**

**April 3, 2005**

**(unaudited)**

 

**(amounts in thousands, except share and per shareamounts)**

 
| ** **                                                                                 | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Liabilities  and Stockholder’s Equity                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Current  liabilities:                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Accounts  payable and accrued expenses                                                     |       | $          | 5,701      |                        | $          | 29,321                          |       | $                | 950        |             | $          | — |   | $ | 35,972 |   |
| Current  portion of obligations to financial institution                                   |       | —     |       | 134                         |       | —                          |       | —           |       | 134              |       |
| Accrued  income taxes                                                                      |       | (6,223     | )          | 7,229                       |       | (709                            | )          | —           |       | 297              |       |
| Amounts due  to affiliates                                                                 |       | —     |       | 118,521                     |       | —                          |       | (118,521         | )          | —           |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  current liabilities                                                                 |       | (522       | )          | 155,205                     |       | 241                             |       | (118,521         | )          | 36,403           |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| 7.5% senior  secured notes, net of unamortized discount of $12,822                         |       | 92,178     |       | —                      |       | —                          |       | —           |       | 92,178           |       |
| Obligations  to financial institution, less current maturities                             |       | —     |       | 3,553                       |       | —                          |       | —           |       | 3,553            |       |
| Deferred  income taxes                                                                     |       | —     |       | 23,004                      |       | —                          |       | —           |       | 23,004           |       |
| Other  liabilities                                                                         |       | (29        | )          | 9,377                       |       | 98                              |       | —           |       | 9,446            |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Total liabilities                                                                          |       | 91,627     |       | 191,139                     |       | 339                             |       | (118,521         | )          | 164,584          |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| 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                                                                |       | 97,077     |       | 2,520                       |       | —                          |       | (2,520           | )          | 97,077           |       |
| Accumulated  other comprehensive income (loss)                                             |       | —     |       | 350                         |       | (181                            | )          | —           |       | 169              |       |
| (Accumulated  deficit) retained earnings                                                   |       | (53,699    | )          | 52,920                      |       | 3,008                           |       | —           |       | 2,229            |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  stockholder’s equity                                                           |       | 43,378     |       | 55,790                      |       | 2,827                           |       | (2,520           | )          | 99,475           |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
|                                                                                       |       | $$$        | 135,005    |                        | $          | 246,929                         |       | $                | 3,166      |             | $          | (121,041 | ) | $ | 264,059 |   |

 

12

----

 

**Supplemental Consolidating Balance Sheet**

**January 2, 2005**

**(unaudited)**

 

**(Amounts in thousands)**

 
| ** **                                 | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Assets                                     |       |       |       |                        |       |                            |       |             |       |             |       |
| Current  assets:                           |       |       |       |                        |       |                            |       |             |       |             |       |
| Cash and  cash equivalents                 |       | $          | 9,014      |                        | $          | 535                             |       | $                | 630        |             | $          | — |   | $ | 10,179 |   |
| Restricted  cash                           |       | 548        |       | —                      |       | —                          |       | —           |       | 548              |       |
| Marketable  securities                     |       | 4,112      |       | —                      |       | —                          |       | —           |       | 4,112            |       |
| Accounts  receivable                       |       | 1          |       | 4,172                       |       | 173                             |       | —           |       | 4,346            |       |
| Inventories                                |       | —     |       | 8,717                       |       | 585                             |       | —           |       | 9,302            |       |
| Prepaid  expenses and other current assets |       | 677        |       | 5,866                       |       | 57                              |       | —           |       | 6,600            |       |
| Deferred  income taxes                     |       | (991       | )          | 6,228                       |       | —                          |       | —           |       | 5,237            |       |
|                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  current assets                      |       | 13,361     |       | 25,518                      |       | 1,445                           |       | —           |       | 40,324           |       |
|                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Property and  equipment, net               |       | 147        |       | 60,227                      |       | 1,113                           |       | —           |       | 61,487           |       |
| Intangible  asset                          |       | —     |       | 92,000                      |       | —                          |       | —           |       | 92,000           |       |
| Goodwill                                   |       | —     |       | 61,789                      |       | —                          |       | —           |       | 61,789           |       |
| Other assets  and deferred expenses, net   |       | 7,774      |       | 3,297                       |       | 285                             |       | (2,520           | )          | 8,836            |       |
| Amounts due  from affiliates               |       | 119,894    |       | —                      |       | 179                             |       | (120,073         | )          | —           |       |
|                                       |       | $          | 141,176    |                        | $          | 242,831                         |       | $                | 3,022      |             | $          | (122,593 | ) | $ | 264,436 |   |

 

13

----

 

**Supplemental Consolidating Balance Sheet**

**January 2, 2005**

**(unaudited)**

 

**(Amounts in thousands, except share and per shareamounts)**

 
| ** **                                                                                 | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Liabilities  and Stockholder’s Equity                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Current  liabilities:                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Accounts  payable and accrued expenses                                                     |       | $          | 4,348      |                        | $          | 31,698                          |       | $                | 1,246      |             | $          | — |   | $ | 37,292 |   |
| Current  portion of obligations to financial institutions                                  |       | —     |       | 521                         |       | —                          |       | —           |       | 521              |       |
| Accrued  income taxes                                                                      |       | (3,850     | )          | 4,827                       |       | (598                            | )          | —           |       | 379              |       |
| Amounts due  from affiliates                                                               |       | —     |       | 120,073                     |       | —                          |       | (120,073         | )          | —           |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  current liabilities                                                                 |       | 498        |       | 157,119                     |       | 648                             |       | (120,073         | )          | 38,192           |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| 7.5% senior  secured notes, net of unamortized discount of $13,283                         |       | 91,717     |       | —                      |       | —                          |       | —           |       | 91,717           |       |
| Obligations  to financial institutions, less current maturities                            |       | —     |       | 6,636                       |       | —                          |       | —           |       | 6,636            |       |
| Deferred  income taxes                                                                     |       | —     |       | 23,004                      |       | —                          |       | —           |       | 23,004           |       |
| Other  liabilities                                                                         |       | (42        | )          | 7,493                       |       | 95                              |       | —           |       | 7,546            |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  liabilities                                                                         |       | 92,173     |       | 194,252                     |       | 743                             |       | (120,073         | )          | 167,095          |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| 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                                                                |       | 97,077     |       | 2,520                       |       | —                          |       | (2,520           | )          | 97,077           |       |
| Accumulated  other comprehensive income (loss)                                             |       | —     |       | 355                         |       | (166                            | )          | —           |       | 189              |       |
| (Accumulated  deficit) retained earnings                                                   |       | (48,074    | )          | 45,704                      |       | 2,445                           |       | —           |       | 75               |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Total  stockholder’s equity                                                           |       | 49,003     |       | 48,579                      |       | 2,279                           |       | (2,520           | )          | 97,341           |       |
|                                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
|                                                                                       |       | $          | 141,176    |                        | $          | 242,831                         |       | $                | 3,022      |             | $          | (122,593 | ) | $ | 264,436 |   |

 

14

----

 

**Supplemental Consolidating Statement of Operations**

**Three month period ended April 3, 2005**

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                                          | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                            |       | $          | 4,623      |                        | $          | 73,675                          |       | $                | 3,516      |             | $          | (4,623 | ) | $ | 77,191 |   |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and  beverage costs                                            |       | —     |       | 24,751                      |       | 1,104                           |       | —           |       | 25,855           |       |
| Restaurant  operating expenses                                      |       | —     |       | 33,122                      |       | 1,654                           |       | —           |       | 34,776           |       |
| Pre-opening  costs, depreciation, amortization and non-cash charges |       | 15         |       | 2,568                       |       | 141                             |       | —           |       | 2,724            |       |
| General and  administrative expenses                                |       | 5,199      |       | 4,623                       |       | —                          |       | (4,623           | )          | 5,199            |       |
| Marketing  and promotional expenses                                 |       | —     |       | 1,369                       |       | 54                              |       | —           |       | 1,423            |       |
| Costs  associated with the repayment of certain debt                |       | 174        |       | —                      |       | —                          |       | —           |       | 174              |       |
| Gain on sale  of investment                                         |       | (648       | )          | —                      |       | —                          |       | —           |       | (648             | )          |
| Interest  expense, net                                              |       | 2,655      |       | 26                          |       | —                          |       | —           |       | 2,681            |       |
| Management  fee paid to related party                               |       | 700        |       | —                      |       | —                          |       | —           |       | 700              |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss)  income before income taxes                                  |       | (3,472     | )          | 7,216                       |       | 563                             |       | —           |       | 4,307            |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax  expense                                                 |       | 2,153      |       | —                      |       | —                          |       | —           |       | 2,153            |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss)  income                                                  |       | $          | (5,625     | )                           | $          | 7,216                           |       | $                | 563        |             | $          | — |   | $ | 2,154 |   |

 

 

**Supplemental Consolidating Statement of Operations**

**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                                      |       | —     |       | 30,947                      |       | 1,651                           |       | —           |       | 32,598           |       |
| Pre-opening  costs, depreciation, amortization and non-cash charges |       | 3          |       | 1,548                       |       | 83                              |       | —           |       | 1,634            |       |
| 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 |   |

 

15

----

 

**Supplemental Consolidating Statement of Cash Flows**

**Three month period ended April 3, 2005**

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                                                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| Cash flows  from operating activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Net (loss)  income                                                                                   |       | $          | (5,625     | )                           | $          | 7,216                           |       | $                | 563        |   | $ | 2,154 |   |
| Adjustments  to reconcile net (loss) income to net cash (used in) provided by operating  activities: |       |       |       |                        |       |                            |       |             |       |
| Depreciation,  amortization and other non-cash charges                                               |       | 751        |       | 1,712                       |       | 146                             |       | 2,609            |       |
| Deferred  income taxes                                                                               |       | 2,103      |       | (245                        | )          | —                          |       | 1,858            |       |
| Change in  assets and liabilities:                                                                   |       |       |       |                        |       |                            |       |             |       |
| Accounts  receivable                                                                                 |       | 1          |       | (770                        | )          | (57                             | )          | (826             | )          |
| Inventories                                                                                          |       | —     |       | 32                          |       | (30                             | )          | 2                |       |
| Prepaid expenses  and other assets                                                                   |       | 1,594      |       | (1,195                      | )          | (404                            | )          | (5               | )          |
| Accounts  payable, accrued expenses and other liabilities                                            |       | 1,366      |       | (733                        | )          | (283                            | )          | 350              |       |
| Accrued  income taxes                                                                                |       | (2,373     | )          | 2,402                       |       | (113                            | )          | (84              | )          |
| Net cash  (used in) provided by operating activities                                                 |       | (2,183     | )          | 8,419                       |       | (178                            | )          | 6,058            |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash flows  from investing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Purchases of  property and equipment                                                                 |       | (7         | )          | (3,534                      | )          | (6                              | )          | (3,547           | )          |
| Increase in  marketable securities                                                                   |       | (14        | )          | —                      |       | —                          |       | (14              | )          |
| Net cash  used in investing activities                                                               |       | (21        | )          | (3,534                      | )          | (6                              | )          | (3,561           | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash flows  from financing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Principal  reduction on obligations to financial institutions                                        |       | —     |       | (3,470                      | )          | —                          |       | (3,470           | )          |
| Decrease in  restricted cash                                                                         |       | 131        |       | —                      |       | —                          |       | 131              |       |
| Net cash  provided by (used in) financing activities                                                 |       | 131        |       | (3,470                      | )          | —                          |       | (3,339           | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Effect of  exchange rate changes on cash                                                             |       | —     |       | —                      |       | (8                              | )          | (8               | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Net  (decrease) increase in cash and cash equivalents                                                |       | (2,073     | )          | 1,415                       |       | (192                            | )          | (850             | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash and  cash equivalents at beginning of period                                                    |       | 9,014      |       | 535                         |       | 630                             |       | 10,179           |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash and  cash equivalents at end of period                                                          |       | $          | 6,941      |                        | $          | 1,950                           |       | $                | 438        |   | $ | 9,329 |   |

 

16

----

 

**Supplemental Consolidating Statement of Cash Flows**

**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 |   |

 

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

 

Results of Operations

 

Ournet income increased $0.2 million, or 12.8%, to $2.2 million for the threemonth period ended April 3, 2005 from $1.9 million for the three monthperiod ended April 4, 2004.  Theincrease is primarily due to a decrease in marketing and promotional expensespartially offset by an increase in pre-opening costs.

 

Revenuesincreased $4.2 million, or 5.8%, to $77.2 million for the three month periodended April 3, 2005 from $73.0 million for the three month period ended April 4,2004. Revenues increased $0.5 million due to an increase in comparable revenuesfrom restaurants open all of both fiscal years. Revenues increased $3.7 milliondue to the opening of four new restaurants (three in fiscal 2005 and one infiscal 2004). Average revenue per restaurant open all of either periodincreased 0.9%. Revenues for the three month period ended April 3, 2005also reflect the impact of an aggregate menu price increase of approximately 3%in February 2004.

 

Percentagechanges in comparable restaurant revenues for the three month periods ended April 3,2005 versus April 4, 2004 for restaurants open all of both periods are asfollows:

 

| ** **       | ** ** | **Three month period  ended April 3, 2005 vs.  April 4, 2004  Percentage Change** | ** ** |
|------------------|------------|---------------------------------------------------------------------------------------------|------------|
|             |       |                                                                                        |       |
| Morton’s    |       | 0.7                                                                                         | %          |
| Bertolini’s |       | 1.1                                                                                         | %          |
| Total            |       | 0.7                                                                                         | %          |

 

Ourbusiness is somewhat seasonal in nature, with revenues generally being less inthe third quarter 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 2005.

 

Foodand beverage costs increased $1.4 million, or 5.7%, to $25.9 million for thethree month period ended April 3, 2005 from $24.5 million for the threemonth period ended April 4, 2004. This increase was primarily due to theopening of three additional restaurants. These costs as a percentage ofrevenues remained consistent at 33.5% for the three month periods ended April 3,2005 and April 4, 2004.

 

Restaurantoperating expenses, which include labor, occupancy and other operatingexpenses, increased $2.2 million, or 6.7%, to $34.8 million for the three monthperiod ended April 3, 2005 from $32.6 million for the three month periodended April 4, 2004. This increase was primarily due to the opening ofthree additional restaurants and increases in labor and benefit costs.Restaurant operating expenses as a percentage of revenues increased 0.4% to45.1% for the three month period ended April 3, 2005 from 44.7% for thethree month period ended April 4, 2004. Included in the three monthperiods ended April 3, 2005 and April 4, 2004 is non-cash rentrecorded in accordance with SFAS No. 13 of $0.2 million and $0.4 million,respectively.

 

Pre-openingcosts, depreciation, amortization and non-cash charges increased $1.1 million,or 66.7%, to $2.7 million for the three month period ended April 3, 2005from $1.6 million for the three month period ended April 4, 2004. Thesecosts increased as a percentage of revenues by 1.3% to 3.5% for the three month

 

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period ended April 3,2005 from 2.2% for the three month period ended April 4, 2004.  We expense all costs incurred during start-upactivities, including pre-opening costs, as incurred. Pre-opening costsincurred and recorded as expense were $1.1 million for the three month periodended April 3, 2005. There were no comparable expenses for the three monthperiod ended April 4, 2004.  Thenumber of restaurants opened, the timing of restaurant openings and the costsper restaurant opened affected the amount of these costs.

 

Generaland administrative expenses increased $0.3 million, or 6.4%, to $5.2 millionfor the three month period ended April 3, 2005 from $4.9 million for thethree month period ended April 4, 2004. The increase was primarily due toincreased legal and professional costs. These costs as a percentage of revenues remained consistent at 6.7% forthe three month periods ended April 3, 2005 and April 4, 2004.

 

Marketingand promotional expenses decreased $1.2 million, or 45.9%, to $1.4 million forthe three month period ended April 3, 2005 from $2.6 million for the threemonth period ended April 4, 2004. These costs as a percentage of revenuesdecreased 1.8% to 1.8% for the three month period ended April 3, 2005 from3.6% for the three month period ended April 4, 2004. These decreases were primarilydue to decreased spending for print media advertising.

 

Costsassociated with the repayment of certain debt of $0.2 million and $0.3 millionfor the three month periods ended April 3, 2005 and April 4, 2004,respectively, represent prepayment penalties that were incurred with the earlyrepayment of certain mortgages.

 

Gainon sale of investment of $0.6 million for the three month period ended April 3,2005 represents a gain from the sale of stock in a privately owned company.

 

Interestexpense, net, decreased $0.4 million, or 12.7%, to $2.7 million for the threemonth period ended April 3, 2005 from $3.1 million for the three monthperiod ended April 4, 2004.  Thedecrease is primarily due to the repayment of certain mortgages in April 2004and February 2005. Interest income was not significant in any of theseperiods.

 

Managementfee paid to related party was $0.7 million for the three month periods ended April 3,2005 and April 4, 2004. We paid this fee pursuant to MHLLC’s managementagreement with Castle Harlan, Inc.

 

Provisionfor income taxes consisted of an income tax expense of $2.2 million  and $0.8 million for the three month periodsended April 3, 2005 and April 4, 2004, respectively. Our 2005effective tax rate differs from the statutory rate due to non-deductibleinterest relating to our 7.5% senior secured notes and other non-deductibleitems.

 

Liquidity and CapitalResources

 

Ourprincipal liquidity requirements are to service our debt and meet our workingcapital and capital expenditure needs. Subject to our operating performance,which, if significantly adversely affected, would adversely affect theavailability of funds, we expect to be able to meet our liquidity requirementsfor the foreseeable future through cash provided by operations and throughborrowings available under our working capital facility. We cannot be sure,however, that this will be the case. As of April 3, 2005, we had cash andcash equivalents of $9.3 million compared to $10.2 million as of January 2,2005.

 

*Working Capital and Cash Flows*

 

Inthe past we have had, and in the future we may have, negative working capitalbalances. We do not have significant receivables and we receive trade creditbased upon negotiated terms in purchasing food and supplies. Funds availablefrom cash sales not needed immediately to pay for food and supplies or tofinance

 

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receivables or inventorieshistorically have typically been used for noncurrent capital expenditures andor payments of long-term debt balances under our prior revolving creditagreement.

 

*Operating Activities*.  Cashflows provided by operating activities for the three month period ended April 3,2005 were $6.1 million, consisting primarily of a net increase in cash of $4.8million resulting from net income before depreciation, amortization and othernon-cash charges and a change in deferred income taxes of $1.9 millionpartially offset by a net decrease in cash of $0.8 million due to an increasein accounts receivable.

 

*Investing Activities*.  Cashflows used in investing activities for the three month period ended April 3,2005 were $3.6 million primarily due to purchases of property and equipment of$3.6 million, which include capital expenditures related to the three Morton’ssteakhouses opened during the first quarter of fiscal 2005.

 

*Financing Activities*.  Cashflows used in financing activities for the three month period ended April 3,2005 were $3.3 million primarily consisting of net principal reduction onobligations to financial institutions of $3.5 million, primarily due to theearly repayment of two mortgages aggregating $3.4 million.

 

*Debt and Other Obligations*.

 

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

 

Ourdomestic restricted subsidiaries presently consist of all of our domesticsubsidiaries that either own restaurants or own subsidiaries that ownrestaurants. As restricted subsidiaries, each of these guarantors of the 7.5%senior secured notes is subject to all of the terms, conditions and covenantscontained in the indenture governing the 7.5% senior secured notes that applyto restricted subsidiaries. The 7.5% senior secured notes are not guaranteed byour foreign subsidiaries due to the tax implications of providing suchguarantees, or by our unrestricted subsidiaries, which presently consist ofsubsidiaries that have no material assets. Our unrestricted subsidiaries arenot subject to the terms, conditions or covenants contained in the indenture,and must interact with MRG and our restricted subsidiaries on the same basis asunrelated third parties. From time to time, we may designate other subsidiariesas unrestricted subsidiaries subject to the terms and conditions set forth in theindenture.

 

The7.5% senior secured notes and the guarantees are secured by substantially allof our, and our domestic restricted subsidiaries’ tangible and intangibleassets, as well as by a pledge of a portion of the stock of the subsidiariesowned by us and by our domestic restricted subsidiaries, in each case subjectto the prior ranking claims on such assets by the lender under our workingcapital facility and holders of any capital lease obligations and certain othersecured indebtedness. The indenture governing the 7.5% senior secured notespermits us to incur other senior secured indebtedness and to grant liens on ourassets under certain circumstances.

 

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Wepay interest on the 7.5% senior secured notes semi-annually in cash, inarrears, on January 1 and July 1 at an annual rate of 7.5%. Theindenture 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 other thanPermitted Indebtedness (defined therein) unless on the date of the incurrenceof additional indebtedness our Consolidated Fixed Charge Coverage Ratio(defined therein) will be, after giving effect to the incurrence thereof andthe application of the proceeds thereof, greater than 2.25 to 1.0. Theindenture defines Consolidated Fixed Charge Coverage Ratio as the ratio ofConsolidated EBITDA to Consolidated Fixed Charges (defined therein).

 

Theindenture governing the 7.5% senior secured notes contains various events ofdefault, including but not limited to those related to non-payment ofprincipal, interest or fees; violations of certain covenants; certainbankruptcy-related events; invalidity of liens; non-payment of certain legaljudgments; and cross defaults with certain other indebtedness. As of April 3,2005, we were in compliance with all of our financial covenants.

 

Wecan redeem the 7.5% senior secured notes on or after July 1, 2007, exceptwe may redeem up to 35% of the 7.5% senior secured notes prior to July 1,2006 with the proceeds of one or more public equity offerings. We are requiredto redeem the 7.5% senior secured notes under certain circumstances involvingchanges of control. Additionally, if we or any of our domestic restricted subsidiariesengage in asset sales, we generally must either invest the net cash proceedsfrom such sales in our business within 360 days, prepay the debt under ourworking capital facility or certain other secured debt or make an offer topurchase a portion of the 7.5% senior secured notes having an accreted valueequal to the excess net cash proceeds.

 

*Working Capital Facility.*On July 7, 2003, we entered into a $15.0million senior secured working capital facility with Wells Fargo Foothill, Inc.Our working capital facility matures on July 7, 2007. Availability underour working capital facility is limited to the lesser of (i) $15.0 millionand (ii) the borrowing base amount, in each case, less the sum of (a) therevolving loans then outstanding (including letters of credit) and (b) reservesrequired by the lender. The borrowing base amount is defined as the lesser of (A) 80%of our twelve-month trailing EBITDA, as determined in accordance with the mostrecently delivered financial statements, or (B) 25% of our “enterprisevalue,” determined to be $168.0 million as of July 7, 2003, and thereafterto be the amount determined by a third party appraiser. We are permitted torepay and reborrow such advances until the maturity date. As of April 3,2005, we had no borrowings outstanding under our working capital facility. Atour option, up to $7.5 million of the facility can consist of one or moreletters of credit issued by the lender. As of April 3, 2005, $1.0 millionwas restricted for letters of credit under our working capital facility. Ourworking capital facility is guaranteed by all of our domestic restrictedsubsidiaries and secured by a first priority perfected security interest in allof the collateral securing the 7.5% senior secured notes. Interest will accrueon borrowings under our working capital facility at a floating rate of interestper annum equal to the rate of interest announced from time to time within thelender’s principal office in San Francisco as its “prime rate” plus 1.75%, or aLIBOR-based equivalent thereof. Interest is calculated on the basis of a 360-dayyear and will be payable monthly for base rate loans and at the end of eachinterest period for LIBOR loans (but not less frequently than quarterly). Ourworking capital facility contains certain customary fees, including a closingfee, anniversary fees, servicing fees and pre-payment fees.

 

Ourworking capital facility contains various affirmative and negative covenantscustomary for similar working capital facilities, including but not limited tocovenants pertaining to mergers and sales of assets outside the ordinary courseof business; use of proceeds; granting of liens; incurrence of indebtedness;

 

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restricted payments;voluntary prepayment of indebtedness, including the 7.5% senior secured notes;payment of dividends; business activities; investments and acquisitions;transactions with affiliates; certain restrictions affecting subsidiaries;fundamental changes; and amendments or modifications to instruments governingcertain indebtedness. Our working capital facility also requires us to achieveand maintain a twelve-month trailing EBITDA (as defined therein) of not lessthan $16.0 million. As of April 3, 2005, we were in compliance with all ofour financial covenants.

 

Ourworking capital facility contains customary events of default, including butnot limited 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.

 

*CNL Loan*.  In March 1997, one of oursubsidiaries entered into a $2.5 million loan agreement with CNL Financial I, Inc.(“CNL”).  We repaid this loan in February 2005.This loan was scheduled to mature on April 1, 2007 and bore interest at10.002% per annum.  This loan was securedby a security interest in the assets of the Morton’s steakhouses located inChicago (State Street) and Denver (downtown). Principal and interest payments were due monthly over the term of theloan. On January 2, 2005, the outstanding principal balance of the CNLloan was approximately $0.8 million, of which approximately $0.3 million ofprincipal was included in “Current portion of obligations to financialinstitutions” in the accompanying consolidated balance sheet.

 

*Mortgages*.  During 1998 and 1999, certainof our subsidiaries entered into a total of six mortgage loans with GE CapitalFranchise Finance aggregating $18.9 million, the proceeds of which were used tofund the purchases of land and construction of restaurants.  The loans generally require monthly paymentsof principal and interest.  On April 3,2005 and January 2, 2005 the aggregate outstanding principal balance dueon these loans was approximately $3.7 million and $6.4 million, respectively,of which approximately $0.1 million and $0.2 million, respectively, ofprincipal is included in “Current portion of obligations to financialinstitutions” in the accompanying consolidated balance sheets.  We repaid one mortgage in May 2003, onein September 2003, two mortgages in April 2004 and one mortgage in February 2005.  The remaining mortgage outstanding as of April 3,2005 bears interest at 7.68% and is scheduled to mature in March 2021.

 

*Restaurant Operating Leases*.  Ourobligations for restaurant operating leases include certain restaurantoperating leases for which we, or one of our subsidiaries guarantees, for aportion of the lease term, the performance of the lease by the operatingcompany that is a party thereto.

 

*Contractual Commitments*.  Thefollowing table represents our contractual commitments associated with our debtand other obligations disclosed above as of April 3, 2005:

 
| ** **                                                           | ** ** | **Remainder of  2005**     | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| ** **                                                           | ** ** | **(amounts in thousands)** | ** ** |
| 7.5% senior  secured notes, including interest                       |       | $                          | 7,875      |     | $          | 7,875    |       | $        | 7,875      |     | $          | 7,875          |       | $         | 7,875      |   | $ | 108,938 |   | $ | 148,313 |   |
| Mortgage  loan with GE Capital Franchise Finance, including interest |       | 334                        |       | 436      |       | 436      |       | 435      |       | 435      |       | 4,888          |       | 6,964     |       |
| Subtotal                                                             |       | 8,209                      |       | 8,311    |       | 8,311    |       | 8,310    |       | 8,310    |       | 113,826        |       | 155,277   |       |
| Operating  leases                                                    |       | 14,087                     |       | 19,192   |       | 19,288   |       | 19,005   |       | 18,511   |       | 107,871        |       | 197,954   |       |
| Purchase  commitments                                                |       | 18,602                     |       | —   |       | —   |       | —   |       | —   |       | —         |       | 18,602    |       |
| Letters of  credit                                                   |       | 1,000                      |       | —   |       | —   |       | —   |       | —   |       | —         |       | 1,000     |       |
| Total                                                                |       | $                          | 41,898     |     | $          | 27,503   |       | $        | 27,599     |     | $          | 27,315         |       | $         | 26,821     |   | $ | 221,697 |   | $ | 372,833 |   |

 

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Duringthe first three months of fiscal 2005, our net investment in fixed assets andrelated investment costs, including pre-opening costs, approximated $4.6million. We estimate that we will spend up to approximately $19.0 million infiscal 2005, including the $4.6 million recorded in the first three months offiscal 2005, to finance ordinary refurbishment of existing restaurants andcapital expenditures for new restaurants, which is expected to be reduced bylandlord development allowances of approximately $5.0 million. We anticipatethat funds generated through operations and through borrowings under ourworking capital facility will be sufficient to fund planned expansion.  We cannot be sure, however, that this will bethe case.

 

NewAccounting Standards

 

InDecember 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-BasedPayment.” This statement replaces SFAS No. 123, “Accounting forStock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires allstock-based employee compensation to be recorded as an expense in theconsolidated statement of operations and that such cost be measured accordingto the fair value of stock options. SFAS No. 123(R) will be effective thefirst annual reporting period that begins after June 15, 2005.  As the Company already charges stock-basedemployee compensation expense related to units issued pursuant to employeesubscription agreements based on the fair value of such units the adoption ofthis statement will not have any effect on the Company’s consolidated financialstatements. See Note 8 to our unaudited consolidated financial statements.

 

InJanuary 2003, the FASB issued FASB Interpretation No. (“FIN”) 46, “Consolidationof Variable Interest Entities, an interpretation of ARB No. 51.” FIN 46was subject to significant interpretation by the FASB, and was revised andreissued in December 2003 (“FIN 46R”). FIN 46R states that if an entity has a controlling financial interest ina variable interest entity, the assets, the liabilities and results ofactivities of the variable interest entity should be included in theconsolidated financial statements to the entity.  The adoption of FIN 46 and FIN 46R did nothave any effect on the Company’s consolidated financial statements, as theCompany does not have any special purpose entities and no other arrangementsthat meet the definition of a variable interest entity which would requireconsolidation.

 

InMarch 2005, the FASB issued FIN 47, “Accounting for Conditional AssetRetirement Obligations.” FIN 47 clarifies that a conditional asset retirementobligation, as used in SFAS 143, “Accounting for Asset Retirement Obligations,”refers to a legal obligation to perform an asset retirement activity in whichthe timing and/or method of the settlement are conditional on a future eventthat may or may not be within the control of the entity. Accordingly, an entityis required to recognize a liability for the fair value of a conditional assetretirement obligation if the fair value can be reasonably estimated. FIN 47 iseffective January 1, 2006, with early adoption allowed. We have not yetdetermined the impact, if any, FIN 47 will have on the Company’s consolidatedfinancial statements.

 

Forward-LookingStatements

 

Thisquarterly report contains various “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended.  Forward-looking statements, written, oral orotherwise made, represent the Company’s expectation or belief concerning futureevents.  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

 

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competitive environment andindustry with many well-established competitors with greater financial andother resources 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 reports filed with the Securities and Exchange Commission.  In addition, the Company’s ability to expandis dependent upon various factors, such as the availability of attractive sitesfor new restaurants, the ability to negotiate suitable lease terms, the abilityto generate or borrow funds to develop new restaurants and obtain variousgovernment permits and licenses and the recruitment and training of skilledmanagement and restaurant employees. Accordingly, such forward-looking statements do not purport to be predictionsof future events or circumstances and therefore there can be no assurance thatany forward-looking statement contained herein will prove to be accurate. TheCompany assumes no obligation to update the forward-looking statements.

 

Item 3.  Quantitative and Qualitative Disclosure aboutMarket Risk

 

Theinherent risk in market risk sensitive instruments and positions primarilyrelates to potential losses arising from adverse changes in foreign currencyexchange rates and interest rates.

 

Asof April 3, 2005, we owned and operated four international restaurants,one in Hong Kong, one in Singapore, one in Toronto, Canada and one inVancouver, Canada. As a result, we are subject to risk from changes in foreignexchange rates. These changes result in cumulative translation adjustments,which are included in accumulated other comprehensive income (loss). We do notconsider the potential loss resulting from a hypothetical 10% adverse change inquoted foreign currency exchange rates, as of April 3, 2005, to bematerial.

 

Wealso are subject to market risk from exposure to changes in interest ratesbased on our financing activities. This exposure relates to borrowings underour working capital facility that will be payable at floating rates of interestand the 7.5% senior secured notes that are payable at a fixed rate of interestof 7.5%. As of April 3, 2005, there were no borrowings outstanding underour floating rate working capital facility. A hypothetical 10% fluctuation ininterest rates, as of April 3, 2005, would have a net impact of approximately$0.1 million on earnings for the three month period ended April 3, 2005.

 

Item 4.  Controls and Procedures

 

Asof the end of the period covered by this report, an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined under the Securities and Exchange Commission rules) wascarried out under the supervision and with the participation of the Company’smanagement, including our Chief Executive Officer and Chief FinancialOfficer.  The Company’s disclosurecontrols and procedures are designed to ensure that information that theCompany must disclose in its reports filed under the Securities Exchange Act of1934 is communicated and processed in a timely manner.  Based upon that evaluation, the ChiefExecutive Officer and the Chief Financial Officer concluded that the design andoperation of these disclosure controls and procedures were effective.  No significant changes were made in ourinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

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Part II  - Other Information

 

Item 1. Legal Proceedings

 

SinceAugust 2002, a number of the Company’s current and former employees in NewYork, Boston and Florida have initiated arbitrations with the AmericanArbitration Association in their respective states alleging that the Companyhas violated state (Boston arbitration), 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, thedifference between the tip credit wage and the minimum wage, payment for hoursworked off the clock (Florida only), liquidated damages and attorneys’ fees andcosts. The arbitrator in the New York arbitrations has permitted thecomplainants to consolidate their arbitrations into one action and proceed as acollective action. The Florida complainants are also seeking to consolidatetheir arbitrations. The arbitrator has ruled that the claims cannot beconsolidated but believes a collective action would be permitted. The Bostonarbitrator has ruled that the claimants may proceed as a class, but to datethere are only three people in the class and no class has been certified. TheCompany intends to and is contesting these matters vigorously. Managementbelieves an adverse opinion in any one of these cases would not have a materialadverse impact on the Company’s financial condition.

 

InNovember 2004, current and former employees of the Sacramento Morton’scommenced a federal lawsuit asserting individual, representative and classclaims against the Sacramento Morton’s and several other Morton’srestaurants.  The plaintiffs assertedclaims based on the Company’s alleged failure to provide them with meal andrest periods, and for unlawful tip sharing and unfair competition.  The plaintiffs seek restitution of tips, mealand break period compensation and attorney’s fees. Dismissals with prejudicefor all defendants, except the Sacramento Morton’s, have been filed.  The Sacramento Morton’s has filed motionsseeking to dismiss the claims brought against it.

 

TheCompany is involved in various other claims and legal actions arising in theordinary course of business. Management does not believe that the ultimateresolution of these actions will have a material adverse effect on the Company’sconsolidated financial position, results of operations, liquidity and capitalresources.

 

Item 6. Exhibits

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

 

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SIGNATURES

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, as amended, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                               | MORTON’S RESTAURANT GROUP,  INC. |
|------------------------------------|---------------------------------------|
|                               | (Registrant)                          |
|                               |                                  |
|                               |                                  |
| Date  May 17,  2005 | By:                                   | /s/ ALLEN J. BERNSTEIN |   |
|                               |                                  | Allen J. Bernstein |
|                               |                                  | Chairman of the Board,  President |
|                               |                                  | and Chief Executive  Officer |
|                               |                                  |
|                               |                                  |
| Date  May 17,  2005 | By:                                   | /s/ THOMAS J. BALDWIN |   |
|                               |                                  | Thomas J. Baldwin |
|                               |                                  | Executive Vice President, |
|                               |                                  | Chief Financial Officer  and Director |

 

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