**FORM 10-Q**

 

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 

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

 

**For the quarterly period ended October 2,2005**

 

**OR**

 

**o****   ****TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                                                       to                                                       **

 

**Commission file number              1-12692**

 

**MORTON’S RESTAURANT GROUP, INC.**

(Exact name of registrant as specified inits 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, includingarea code)

 

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

 

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

 

Indicate by check mark whether the registrant is a shellcompany (as defined by Rule 12b-2 of the Exchange Act). Yes o or No ý.

 

As of November 14, 2005, the registrant had 1,000 sharesof its Common Stock, $0.01 par value, outstanding.

 

 

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MORTON’S RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

INDEX

 
| Part I - Financial Information                                                                                                          |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                         |   |
| Item 1.  Financial Statements                                                                                                           |   |
|                                                                                                                                         |   |
| Consolidated Balance Sheets as of October 2,  2005 (unaudited) and January 2, 2005                                                 |   |
|                                                                                                                                         |   |
| Consolidated Statements of  Operations for the three and nine month periods ended October 2, 2005  and October 3, 2004 - unaudited |   |
|                                                                                                                                         |   |
| Consolidated Statements of Cash  Flows for the nine month periods ended October 2, 2005 and October 3,  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 - FinancialInformation

 

Item 1.  FinancialStatements

 

MORTON’S RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

Consolidated Balance Sheets

 

(amounts in thousands)

 
| ** **                                     | ** ** | **October 2,  2005** | ** ** | **January 2,  2005** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                     | ** ** | **(unaudited)**           | ** ** | ** **                | ** ** |
| Assets                                         |       |                      |       |                      |       |
| Current assets:                                |       |                      |       |                      |       |
| Cash and cash equivalents                      |       | $                         | 5,887      |                      | $          | 10,179 |   |
| Restricted cash                                |       | 417                       |       | 548                       |       |
| Marketable securities                          |       | 8,176                     |       | 4,112                     |       |
| Accounts receivable                            |       | 5,421                     |       | 4,346                     |       |
| Inventories                                    |       | 8,991                     |       | 9,302                     |       |
| Prepaid expenses and other current assets |       | 7,404                     |       | 6,600                     |       |
| Deferred income taxes                          |       | 3,864                     |       | 5,237                     |       |
|                                           |       |                      |       |                      |       |
| Total current assets                           |       | 40,160                    |       | 40,324                    |       |
|                                           |       |                      |       |                      |       |
| Property and  equipment, at cost:              |       |                      |       |                      |       |
| Furniture, fixtures and equipment              |       | 19,791                    |       | 16,499                    |       |
| Buildings and leasehold improvements           |       | 56,066                    |       | 45,139                    |       |
| Land                                           |       | 8,474                     |       | 8,474                     |       |
| Construction in progress                       |       | 258                       |       | 5,234                     |       |
|                                           |       | 84,589                    |       | 75,346                    |       |
| Less accumulated depreciation and amortization |       | 19,219                    |       | 13,859                    |       |
| Net property and equipment                     |       | 65,370                    |       | 61,487                    |       |
|                                           |       |                      |       |                      |       |
| Intangible asset                               |       | 92,000                    |       | 92,000                    |       |
| Goodwill                                       |       | 61,528                    |       | 61,789                    |       |
| Other assets and  deferred expenses, net       |       | 8,286                     |       | 8,836                     |       |
|                                           |       | $                         | 267,344    |                      | $          | 264,436 |   |

 

3

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MORTON’S RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

Consolidated Balance Sheets, Continued

 

(amounts in thousands, except share and pershare amounts)

 
| ** **                                                                                                                                           | ** ** | **October 2,  2005** | ** ** | **January 2,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                           | ** ** | **(unaudited)**           | ** ** | ** **                | ** ** |
| Liabilities and Stockholder’s Equity                                                                                                            |       |                      |       |                      |       |
|                                                                                                                                                 |       |                      |       |                      |       |
| Current liabilities:                                                                                                                                 |       |                      |       |                      |       |
| Accounts payable                                                                                                                                     |       | $                         | 6,023      |                      | $          | 6,390 |   |
| Accrued expenses                                                                                                                                     |       | 32,361                    |       | 30,902                    |       |
| Current portion of obligations to financial  institutions                                                                                            |       | 111                       |       | 521                       |       |
| Accrued income taxes                                                                                                                                 |       | 511                       |       | 379                       |       |
|                                                                                                                                                 |       |                      |       |                      |       |
| Total current liabilities                                                                                                                            |       | 39,006                    |       | 38,192                    |       |
|                                                                                                                                                 |       |                      |       |                      |       |
| 7.5% senior secured notes, net of unamortized discount  of $11,878 and  $13,283 at October 2,  2005 and January 2, 2005, respectively |       | 93,122                    |       | 91,717                    |       |
| Obligations to financial institutions, less current  maturities                                                                                      |       | 3,497                     |       | 6,636                     |       |
| Deferred income taxes                                                                                                                                |       | 21,910                    |       | 23,004                    |       |
| Other liabilities                                                                                                                                    |       | 12,489                    |       | 7,546                     |       |
|                                                                                                                                                 |       |                      |       |                      |       |
| Total liabilities                                                                                                                                    |       | 170,024                   |       | 167,095                   |       |
|                                                                                                                                                 |       |                      |       |                      |       |
| Commitments and contingencies                                                                                                                        |       |                      |       |                      |       |
|                                                                                                                                                 |       |                      |       |                      |       |
| Stockholder’s equity:                                                                                                                           |       |                      |       |                      |       |
| Common stock, $0.01 par value per share.  Authorized, issued and outstanding 1,000  shares at October 2, 2005 and January 2, 2005     |       | —                    |       | —                    |       |
| Additional paid-in capital                                                                                                                           |       | 97,077                    |       | 97,077                    |       |
| Accumulated other comprehensive income                                                                                                               |       | 205                       |       | 189                       |       |
| Retained earnings                                                                                                                                    |       | 38                        |       | 75                        |       |
|                                                                                                                                                 |       |                      |       |                      |       |
| Total stockholder’s equity                                                                                                                      |       | 97,320                    |       | 97,341                    |       |
|                                                                                                                                                 |       |                      |       |                      |       |
|                                                                                                                                                 |       | $                         | 267,344    |                      | $          | 264,436 |   |

 

See accompanying notes to unaudited consolidated financialstatements.

 

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MORTON’S RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

Consolidated Statements of Operations

 

(amounts in thousands)

 
| ** **                                           | ** ** | **Three month periods ended** | ** ** | **Nine month periods ended** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **                                           | ** ** | **October 2,  2005**     | ** ** | **October 3,  2004**    | ** ** | **October 2,  2005** | ** ** | **October 3,  2004** | ** ** |
| ** **                                           | ** ** | **(unaudited)**               | ** ** |
| Revenues                                             |       | $                             | 66,844     |                         | $          | 61,789 |   | $ | 217,122 |   | $ | 199,682 |   |
|                                                 |       |                          |       |                         |       |   |   |   |   |
| Food and  beverage costs                             |       | 22,279                        |       | 21,105                       |       | 72,328 |   | 67,566 |   |
| Restaurant  operating expenses                       |       | 34,379                        |       | 31,407                       |       | 104,109 |   | 95,457 |   |
| Pre-opening  costs, depreciation and amortization    |       | 2,622                         |       | 1,939                        |       | 7,377 |   | 5,319 |   |
| General and  administrative expenses                 |       | 5,793                         |       | 4,463                        |       | 16,431 |   | 14,011 |   |
| Marketing and  promotional expenses                  |       | 1,178                         |       | 2,133                        |       | 4,082 |   | 7,002 |   |
| Costs associated  with the repayment of certain debt |       | —                        |       | —                       |       | 174 |   | 264 |   |
| Gain on sale of  investment                          |       | —                        |       | —                       |       | (664 | ) | — |   |
| Interest  expense, net                               |       | 2,706                         |       | 2,768                        |       | 8,085 |   | 8,706 |   |
| Management fee  paid to related party                |       | 700                           |       | 700                          |       | 2,100 |   | 2,100 |   |
|                                                 |       |                          |       |                         |       |   |   |   |   |
| (Loss) income before income taxes                    |       | (2,813                        | )          | (2,726                       | )          | 3,100 |   | (743 | ) |
|                                                 |       |                          |       |                         |       |   |   |   |   |
| Income tax  (benefit) expense                        |       | (1,157                        | )          | 731                          |       | 1,681 |   | 1,326 |   |
|                                                 |       |                          |       |                         |       |   |   |   |   |
| Net (loss) income                                    |       | $                             | (1,656     | )                            | $          | (3,457 | ) | $ | 1,419 |   | $ | (2,069 | ) |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

5

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MORTON’S RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

(amounts in thousands)

 
| ** **                                                                                | ** ** | **Nine month periods ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                | ** ** | **October 2, 2005**     | ** ** | **October 3, 2004** | ** ** |
| ** **                                                                                | ** ** | **(unaudited)**              | ** ** |
| Cash flows from  operating activities:                                                    |       |                         |       |   |   |
| Net income (loss)                                                                         |       | $                            | 1,419      |   | $ | (2,069 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                         |       |   |   |
| Depreciation, amortization and other non-cash  charges                                    |       | 8,238                        |       | 8,025 |   |
| Gain on sale of investment                                                                |       | (664                         | )          | — |   |
| (Gain) loss on marketable securities                                                      |       | (96                          | )          | 110 |   |
| Deferred income taxes                                                                     |       | 540                          |       | 946 |   |
| Change in assets and liabilities:                                                         |       |                         |       |   |   |
| Accounts receivable                                                                       |       | (1,073                       | )          | (1,126 | ) |
| Inventories                                                                               |       | 316                          |       | 570 |   |
| Prepaid expenses and other assets                                                         |       | (1,090                       | )          | (928 | ) |
| Accounts payable, accrued expenses and other  liabilities                                 |       | 5,342                        |       | (497 | ) |
| Accrued income taxes                                                                      |       | 143                          |       | (159 | ) |
| Net cash provided by operating activities                                                 |       | 13,075                       |       | 4,872 |   |
|                                                                                      |       |                         |       |   |   |
| Cash flows from  investing activities:                                                    |       |                         |       |   |   |
| Purchases of property and equipment                                                       |       | (9,192                       | )          | (6,438 | ) |
| Proceeds from sale of investment                                                          |       | 674                          |       | — |   |
| Purchase of marketable securities                                                         |       | (3,968                       | )          | (7,295 | ) |
| Proceeds from sale of marketable securities                                               |       | —                       |       | 6,217 |   |
| Net cash used in investing activities                                                     |       | (12,486                      | )          | (7,516 | ) |
|                                                                                      |       |                         |       |   |   |
| Cash flows from  financing activities:                                                    |       |                         |       |   |   |
| Principal reduction on obligations to financial  institutions                             |       | (3,549                       | )          | (5,652 | ) |
| Payment of deferred financing costs                                                       |       | —                       |       | (550 | ) |
| Dividends paid                                                                            |       | (1,456                       | )          | (6,789 | ) |
| Decrease in restricted cash                                                               |       | 131                          |       | 323 |   |
| Net cash used in financing activities                                                     |       | (4,874                       | )          | (12,668 | ) |
|                                                                                      |       |                         |       |   |   |
| Effect of  exchange rate changes on cash                                                  |       | (7                           | )          | 3 |   |
|                                                                                      |       |                         |       |   |   |
| Net decrease in  cash and cash equivalents                                                |       | (4,292                       | )          | (15,309 | ) |
|                                                                                      |       |                         |       |   |   |
| Cash and cash  equivalents at beginning of period                                         |       | 10,179                       |       | 17,997 |   |
|                                                                                      |       |                         |       |   |   |
| Cash and cash  equivalents at end of period                                               |       | $                            | 5,887      |   | $ | 2,688 |   |

 

See accompanying notes tounaudited consolidated financial statements.

 

6

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MORTON’S RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

Notes to UnauditedConsolidated Financial Statements

 

October 2, 2005 and October 3, 2004

 

**1)****                                     Basis ofPresentation**

 

The accompanying unaudited consolidated financial statementsof Morton’s Restaurant Group, Inc. and its subsidiaries (the “Company,” “we,”“us” and “our”) have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and with the instructions to Form 10-Q.****Accordingly, they do not include allinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements and should beread in conjunction with the Annual Report on Form 10-K for the fiscalyear ended January 2, 2005.

 

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

 

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

 

Certain reclassifications have been made to prior yearamounts to conform to the current year presentation.

 

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 on April 4, 2002.

 

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

 

During 2005, the Company received proceeds ofapproximately $674,000 from the sale of stock in Charlie Brown’s AcquisitionCorp., an affiliate of Castle Harlan, Inc., and recorded a gain on thesale of its investment of approximately $664,000 in the consolidated statementof operations for the nine month period ended October 2, 2005.

 

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

 

For the purposes of the consolidated statements ofcash flows, the Company considers all highly liquid instruments purchased withan original maturity of three months or less to be cash equivalents.  The Company paid cash interest ofapproximately $4,566,000 (which includes capitalized interest of approximately$151,000) and $5,322,000 (which includes capitalized interest of approximately$46,000), and income taxes, net of refunds, of approximately $1,004,000 and$542,000, for the nine month periods ended October 2, 2005 and October 3,2004, respectively.

 

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

 

Restricted cash of $417,000 and $548,000 as of October 2,2005 and January 2, 2005, respectively, represents cash collateralrelating to an interest rate swap agreement with Bank of America, formerlyFleet National Bank (“B of A”). See Note 6.

 

**5)****                                     IntangibleAsset and Goodwill**

 

The identifiable intangible asset acquired representsthe Company’s trade name “Morton’s,” which has an indefinite life andaccordingly is not subject to amortization, but is subject to impairmenttesting. The trade name is used in the advertising and marketing of therestaurants and is widely recognized and accepted by consumers in itsrespective market as an indication of and recognition of service, value andquality. Goodwill represents the excess of costs over fair value of assets of thebusiness acquired. During fiscal 2005, goodwill was reduced by $261,000 whichrepresents an adjustment in purchase accounting as a result of a revision to adeferred tax asset valuation allowance assumed at the time of purchase.

 

**6)****                                    ****DerivativeFinancial Instruments**

 

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 andreporting standards for derivative instruments, including certain derivativeinstruments embedded in other contracts, and for hedging activities.  It requires that an entity recognize allderivatives as either assets or liabilities in the statement of financialposition and measures those instruments at fair value.  As of October 2, 2005, the Company’sderivative financial instrument consists of one interest rate swap agreementwith a notional amount of $20,000,000, which expired on October 24, 2005.Additionally, one interest rate swap agreement with a notional amount of$20,000,000 expired in October 2004. The Company’s interest rate swapagreements are accounted for as speculative instruments and resulting changesin fair market value have been charged or credited to interest expense, net inthe consolidated statements of operations. As of October 2, 2005, in accordance with SFAS No. 133 thereceivable was approximately $25,000. As of January 2, 2005, in accordancewith SFAS No. 133, the liability was approximately $77,000.

 

**7)****                                    ****ComprehensiveIncome**

 

The components of comprehensiveincome for the nine month periods ended October 2, 2005 and October 3,2004 are as follows (amounts in thousands):

 
| ** **                          | ** ** | **Nine month periods ended** | ** ** |
|-------------------------------------|------------|------------------------------|------------|
| ** **                          | ** ** | **October 2, 2005**     | ** ** | **October 3, 2004** | ** ** |
|                                |       |                         |       |   |   |
| Net income  (loss)                  |       | $                            | 1,419      |   | $ | (2,069 | ) |
| Other  comprehensive income (loss): |       |                         |       |   |   |
| Foreign currency translation        |       | 16                           |       | (1 | ) |
| Total  comprehensive income (loss)  |       | $                            | 1,435      |   | $ | (2,070 | ) |

 

**8)****                                     Dividend**

 

On June 4, 2004,MHCI completed a $40,000,000 14% senior secured notes offering. The notes aresecured by the assets of MHCI, which include the stock of MRG.  The notes are not secured by the assets of,nor are they guaranteed by, MRG or any of its subsidiaries.

 

Pursuant to the MHCInotes, if at the end of a fiscal quarter the Company has cash and cashequivalents and marketable securities in excess of $5,000,000, excluding up to$750,000 of cash and cash equivalents held by one or more of the Company’sforeign subsidiaries, and is permitted to pay a dividend under the RestrictedPayments covenant of the 7.5% senior secured notes (defined therein), theCompany is required to pay a dividend, to the extent permitted, to MHCI torepay outstanding Paid In Kind (“PIK”)

 

8

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notes that had beenissued in lieu of interest payments.  Thedividend will be in the amount of the lesser of the excess cash and cashequivalents and marketable securities over the $5,000,000 threshold or theaggregate outstanding PIK notes. On May 12, 2005 and August 17, 2005,the Company paid such dividends of approximately $995,000 and $461,000,respectively, to MHCI.

 

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

 

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 common units available for grant of which 1,497,585, 28,600,20,800, 1,600 and 150,000 were granted in fiscal 2003, fiscal 2004, on January 25,2005, on May 24, 2005 and on July 26, 2005, respectively.  The fair value of each common unit grantedduring fiscal 2003, fiscal 2004, on January 25, 2005, on May 24, 2005and on July 26, 2005 was $0.01. Common units granted to an employee pursuant to employee subscriptionagreements are granted at no cost to the employee. These common units aresubject to vesting.  Fifty percent of thegranted common units vest upon certain dates if the employee is employed as ofsuch date.  However, if the employee hasbeen continuously employed by the Company from the date of grant to the date ofa change of control, any unvested time vesting units will immediately vestsimultaneously with the consummation of the change of control. In addition,fifty percent of the common units will vest upon certain change of control orliquidation events if, upon the occurrence of such an event, Castle HarlanPartners III, L.P. achieves an internal rate of return of at least 30% and theemployee is employed as of such date. Upon termination of employment, unvested common units will be forfeitedand vested common units will be subject to repurchase pursuant to the terms ofMHLLC’s operating agreement.  Stock-basedemployee compensation expense related to this plan is charged to the Companybased on the recognition and measurement provisions of Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations.  Accordingly,the Company recognized compensation expense relating to the vesting of commonunits granted in our consolidated statements of operations for the three andnine month periods ended October 2, 2005 and October 3, 2004.  The compensation expense recorded during thethree and nine month periods ended October 2, 2005 and October 3,2004, represents the straight-line amortization of the difference between thefair value at the date of grant of $0.01 per common unit and the exercise price(which is zero) of the common units of the outstanding time-vesting commonunits for the respective period.  Theremaining compensation expense that was measured at the date of grant will beamortized on a straight-line basis over the remaining vesting period.  Compensation expense relating to the other50% of common units granted, which vest upon certain change of control orliquidation events if, upon the occurrence of such an event, Castle HarlanPartners III, L.P. achieves an internal rate of return of at least 30%, will bemeasured and recognized if and when these events occur.

 

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

 
| ** **                                           | ** ** | **Unvested  Common Units** | ** ** | **Vested  Common Units** | ** ** | **Total  Common Units** | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|-------------------------|------------|
| Common units  outstanding as of January 4, 2004 |       | 1,482,385                  |       | —                   |       | 1,482,385               |       |
| Granted units                                        |       | 28,600                     |       | —                   |       | 28,600                  |       |
| Vested units                                         |       | —                     |       | —                   |       | —                  |       |
| Forfeited units                                      |       | (17,600                    | )          | —                   |       | (17,600                 | )          |
| Common units  outstanding as of January 2, 2005 |       | 1,493,385                  |       | —                   |       | 1,493,385               |       |
| Granted units                                        |       | 172,400                    |       | —                   |       | 172,400                 |       |
| Vested units                                         |       | (255,850                   | )          | 255,850                  |       | —                  |       |
| Forfeited units                                      |       | (175,254                   | )          | —                   |       | (175,254                | )          |
| Common units  outstanding as of October 2, 2005 |       | 1,234,681                  |       | 255,850                  |       | 1,490,531               |       |

 

9

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As of October 2, 2005, there were 220,813 commonunits available for grant.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation-Transition and Disclosure.” SFAS No. 148provides alternative methods of transition for a voluntary change to the fairvalue method 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.

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), “Share-Based Payment.” This statement replaces SFAS No. 123,“Accounting for Stock-Based Compensation” and supersedes APB 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 a material impact on the Company’s consolidatedfinancial statements.

 

**10)****                              FinancialInformation about Geographic Areas**

 

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

 
| ** ** | ** ** | **Three month periods ended** | ** ** | **Nine month periods ended** | ** ** |
|------------|------------|-------------------------------|------------|------------------------------|------------|
| ** ** | ** ** | **October 2,  2005**     | ** ** | **October 3,  2004**    | ** ** | **October 2,  2005** | ** ** | **October 3,  2004** | ** ** |
|       |       |                          |       |                         |       |   |   |   |   |
| Domestic   |       | $                             | (3,375     | )                            | $          | (2,905 | ) | $ | 1,363 |   | $ | (1,581 | ) |
| Foreign    |       | 562                           |       | 179                          |       | 1,737 |   | 838 |   |
| Total      |       | $                             | (2,813     | )                            | $          | (2,726 | ) | $ | 3,100 |   | $ | (743 | ) |

 

**11)****                              RestaurantActivity**

 

During July 2004, a new Morton’s steakhouse wasopened in White Plains, New York. During the first quarter of 2005, new Morton’ssteakhouses were opened in Bethesda, Maryland; Charlotte, North Carolina andChicago, Illinois. During August 2005, a new Morton’s steakhouse wasopened in Atlantic City, New Jersey. With the exception of the Morton’ssteakhouse in New Orleans, which has been closed temporarily due to the effectsof Hurricane Katrina, no restaurants were closed during the nine month periodsended October 2, 2005 and October 3, 2004.

 

As a result of the impact of Hurricane Katrina, theMorton’s steakhouse located in New Orleans is currently closed. The Company isdeveloping a plan to re-open the restaurant. Currently, the restaurant isexpected to re-open during the first quarter of fiscal 2006. During the thirdquarter of fiscal 2005, the Company recorded an insurance receivable ofapproximately $265,000 relating to the write-off of inventory and other costswhich is included in “Prepaid expenses and other current assets” in theaccompanying consolidated balance sheet. Based on its insurance coverage, theCompany believes that additional insurance recoveries will be recorded in thefourth quarter of fiscal

 

10

----

 

2005 and possibly in future periods, although there is no assurancethat any future recoveries will be received.

 

The Company has signed leases to open new Morton’ssteakhouses in Troy, Michigan; Coral Gables, Florida, Northbrook, Illinois andFort Lauderdale, Florida. During August 2005, the Company entered atermination agreement relating to the lease for its current Chicagoheadquarters, which will be relocated in downtown Chicago.

 

The Company records rental expense on a straight-linebasis from the date that the Company takes control of the premises over thelease term. Any difference between the calculated expense and the amountsactually paid are reflected as a deferred rent liability included in otherliabilities in the consolidated balance sheets. The Company also includeslandlord allowances for leasehold improvements, furniture, fixtures andequipment in the deferred rent liability. These amounts are amortized as areduction of rent expense on a straight-line basis from the date that theCompany takes control of the premises over the lease term. The Company has apolicy of capitalizing the portion of deferred rent during the constructionperiod in leasehold improvements. During October 2005, the FASB issuedFASB Staff Position No. FAS 13-1 (“FSP 13-1”) which requires a lessee tocease capitalizing rental costs during the construction period as of the firstreporting period beginning after December 15, 2005, which is the effectivedate of FSP 13-1. In accordance with FSP 13-1, beginning January 2, 2006rental costs incurred during the construction period will be recognized asrental expense.

 

**12)****                              LegalMatters and Contingencies**

 

Since August 2002, a number of the Company’scurrent and former employees in New York, Boston and Florida have initiatedarbitrations with the American Arbitration Association in their respectivestates alleging that the Company has violated state (Boston arbitration), stateand federal (New York arbitrations) and federal (Florida arbitrations) wage andhour laws regarding the sharing of tips with other employees and failure to payfor all hours worked. There are two group arbitrations pending in Florida. Oneis proceeding in Palm Beach as a collective action (hereafter referred to as “PalmBeach arbitration”) with approximately thirty-five claimants. The second isproceeding in Miami as a consolidated action (hereafter “Miami arbitration”)with approximately six claimants.  Potentialclass members in the Palm Beach arbitration were sent notices notifying them ofthe arbitration and advising them if they wish to participate in thearbitration they must sign and return a consent form. The plaintiff receivedeight opt-in notices but of the eight, five were already claimants, thereforethere are only 3 new claimants.  Inaddition, there are two individual demands for arbitration pending in Floridawhich may ultimately be joined to the Miami arbitration.

 

In general, the complainants are seeking restitutionof tips, the difference between the tip credit wage and the minimum wage,payment for hours worked off the clock (in the Miami arbitration and in theindividual Florida arbitrations only), liquidated damages and attorneys’ feesand costs. The arbitrator in the New York arbitrations has permitted thecomplainants to consolidate their arbitrations into one action and proceed as acollective action. The Miami claimants are also seeking to consolidate theirarbitrations. The arbitrator has ruled that the claims cannot be consolidatedbut is allowing the case to proceed as a collective action. The Bostonarbitrator has ruled that the claimants may proceed as a class, but to datethere are only three people in the class and recently ruled that there would beno automatic certification. The Company intends to and is contesting thesematters vigorously. Management believes an adverse opinion in any one of thesecases would not have a material adverse impact on the Company’s financialcondition.

 

In November 2004, current and former employees ofthe Sacramento Morton’s steakhouse commenced a federal lawsuit assertingindividual, representative and class claims against the Sacramento Morton’ssteakhouse and several other Morton’s steakhouses.  The plaintiffs asserted claims based on theCompany’s alleged failure to provide them with meal and rest periods, and forunlawful tip sharing and unfair competition. The plaintiffs seek restitution of tips, meal and break periodcompensation and 

 

11

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attorneys’ fees. Dismissals with prejudice for all defendants, exceptthe Sacramento Morton’s steakhouse, were granted.  The claims against the Sacramento Morton’ssteakhouse have been moved to arbitration.

 

In May 2005, a former employee of the Bostonrestaurant filed a nationwide class action complaint in federal court inMassachusetts alleging that the tip out violates the Fair Labor Standards Act.The Company moved to dismiss the complaint and compel arbitration.  While the motion was pending, the plaintifffiled a nationwide collective action demand for arbitration with the AmericanArbitration Association.  The demand forarbitration alleges the same facts as the lawsuit filed in federal court.  The motion to dismiss is still pending infederal court.

 

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

 

**13)****                              SupplementalCondensed Consolidating Financial Information**

 

The obligations of Morton’s Restaurant Group, Inc.(the “Issuer”) related to the 7.5% senior secured notes are fully andunconditionally guaranteed on a joint and several basis and on a senior basisby certain of the Company’s wholly-owned domestic subsidiaries (the “Guarantors”).These guarantees are senior secured obligations of the Guarantors, subject toliens permitted under the indenture governing the 7.5% senior secured notes,rank senior in right of payment to all subordinated indebtedness of theGuarantors and rank *pari passu* inright of payment with all existing and future senior indebtedness of theGuarantors. There are no restrictions on the Company’s ability to obtain cashdividends or other distributions of funds from the Guarantors, except thoseimposed by applicable law and certain contractual restrictions, which do notexceed 25% of consolidated net assets of any Guarantor, that are permittedunder the indenture governing the 7.5% senior secured notes. The followingsupplemental financial information sets forth, on a condensed consolidatingbasis, balance sheets, statements of operations and statements of cash flowsfor the Issuer, domestic subsidiaries of the Company that are Guarantors andforeign subsidiaries and domestic subsidiaries of the Company that are notGuarantors (collectively, the “Non-Guarantor Subsidiaries”). The Company hasnot presented separate financial statements and other disclosures concerningthe Guarantor Subsidiaries because management has determined that suchinformation is not material to investors.

 

12

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**Supplemental Consolidating BalanceSheet**

**October 2, 2005**

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Assets                                    |       |       |       |                        |       |                            |       |             |       |             |       |
| Current assets:                           |       |       |       |                        |       |                            |       |             |       |             |       |
| Cash and cash equivalents                 |       | $          | 1,764      |                        | $          | 3,779                           |       | $                | 344        |             | $          | — |   | $ | 5,887 |   |
| Restricted cash                           |       | 417        |       | —                      |       | —                          |       | —           |       | 417              |       |
| Marketable securities                     |       | 8,176      |       | —                      |       | —                          |       | —           |       | 8,176            |       |
| Accounts receivable                       |       | —     |       | 5,132                       |       | 289                             |       | —           |       | 5,421            |       |
| Inventories                               |       | —     |       | 8,425                       |       | 566                             |       | —           |       | 8,991            |       |
| Prepaid expenses and other current assets |       | 626        |       | 6,750                       |       | 28                              |       | —           |       | 7,404            |       |
| Deferred income taxes                     |       | 1,958      |       | 1,906                       |       | —                          |       | —           |       | 3,864            |       |
|                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total current assets                      |       | 12,941     |       | 25,992                      |       | 1,227                           |       | —           |       | 40,160           |       |
|                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Property and  equipment, net              |       | 137        |       | 64,416                      |       | 817                             |       | —           |       | 65,370           |       |
| Intangible asset                          |       | —     |       | 92,000                      |       | —                          |       | —           |       | 92,000           |       |
| Goodwill                                  |       | —     |       | 61,528                      |       | —                          |       | —           |       | 61,528           |       |
| Other assets and  deferred expenses, net  |       | 6,941      |       | 3,564                       |       | 301                             |       | (2,520           | )          | 8,286            |       |
| Amounts due from  affiliates              |       | 103,186    |       | —                      |       | 1,808                           |       | (104,994         | )          | —           |       |
|                                      |       | $          | 123,205    |                        | $          | 247,500                         |       | $                | 4,153      |             | $          | (107,514 | ) | $ | 267,344 |   |

 

13

----

 

**Supplemental Consolidating BalanceSheet**

**October 2, 2005**

**(unaudited)**

 

**(amounts in thousands, except shareand per share amounts)**

 
| ** **                                                                                | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Liabilities and Stockholder’s Equity                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Current liabilities:                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Accounts payable and accrued expenses                                                     |       | $          | 5,687      |                        | $          | 31,744                          |       | $                | 953        |             | $          | — |   | $ | 38,384 |   |
| Current portion of obligations to financial  institution                                  |       | —     |       | 111                         |       | —                          |       | —           |       | 111              |       |
| Accrued income taxes                                                                      |       | (8,399     | )          | 9,789                       |       | (879                            | )          | —           |       | 511              |       |
| Amounts due to affiliates                                                                 |       | —     |       | 104,994                     |       | —                          |       | (104,994         | )          | —           |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total current liabilities                                                                 |       | (2,712     | )          | 146,638                     |       | 74                              |       | (104,994         | )          | 39,006           |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| 7.5% senior secured notes, net of unamortized  discount of $11,878                        |       | 93,122     |       | —                      |       | —                          |       | —           |       | 93,122           |       |
| Obligations to financial institution, less current  maturities                            |       | —     |       | 3,497                       |       | —                          |       | —           |       | 3,497            |       |
| Deferred income taxes                                                                     |       | —     |       | 21,910                      |       | —                          |       | —           |       | 21,910           |       |
| Other liabilities                                                                         |       | (27        | )          | 12,399                      |       | 117                             |       | —           |       | 12,489           |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total liabilities                                                                         |       | 90,383     |       | 184,444                     |       | 191                             |       | (104,994         | )          | 170,024          |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| 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)                                             |       | —     |       | 425                         |       | (220                            | )          | —           |       | 205              |       |
| (Accumulated deficit) retained earnings                                                   |       | (64,255    | )          | 60,111                      |       | 4,182                           |       | —           |       | 38               |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total stockholder’s equity                                                           |       | 32,822     |       | 63,056                      |       | 3,962                           |       | (2,520           | )          | 97,320           |       |
|                                                                                      |       |       |       |                        |       |                            |       |             |       |             |       |
|                                                                                      |       | $          | 123,205    |                        | $          | 247,500                         |       | $                | 4,153      |             | $          | (107,514 | ) | $ | 267,344 |   |

 

14

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**Supplemental Consolidating BalanceSheet**

**January 2, 2005**

 

**(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 |   |

 

15

----

 

**Supplemental Consolidating BalanceSheet**

**January 2, 2005**

 

**(Amounts in thousands, except share andper share amounts)**

 
| ** **                                                                                | ** ** | **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 |   |

 

16

----

 

**Supplemental Consolidating Statementof Operations**

**Three month period ended October 2,2005**

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                       | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                         |       | $          | 3,996      |                        | $          | 63,239                          |       | $                | 3,605      |             | $          | (3,996 | ) | $ | 66,844 |   |
|                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and beverage costs                          |       | —     |       | 21,051                      |       | 1,228                           |       | —           |       | 22,279           |       |
| Restaurant operating expenses                    |       | —     |       | 32,665                      |       | 1,714                           |       | —           |       | 34,379           |       |
| Pre-opening costs, depreciation and amortization |       | 15         |       | 2,546                       |       | 61                              |       | —           |       | 2,622            |       |
| General and administrative expenses              |       | 5,793      |       | 3,996                       |       | —                          |       | (3,996           | )          | 5,793            |       |
| Marketing and promotional expenses               |       | —     |       | 1,138                       |       | 40                              |       | —           |       | 1,178            |       |
| Interest expense, net                            |       | 2,668      |       | 38                          |       | —                          |       | —           |       | 2,706            |       |
| Management fee paid to related party             |       | 700        |       | —                      |       | —                          |       | —           |       | 700              |       |
|                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss) income before income taxes                |       | (5,180     | )          | 1,805                       |       | 562                             |       | —           |       | (2,813           | )          |
|                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax benefit                               |       | (1,157     | )          | —                      |       | —                          |       | —           |       | (1,157           | )          |
|                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss) income                                |       | $          | (4,023     | )                           | $          | 1,805                           |       | $                | 562        |             | $          | — |   | $ | (1,656 | ) |

 

**Supplemental Consolidating Statementof Operations**

**Three month period ended October 3,2004**

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                       | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                         |       | $          | 3,700      |                        | $          | 58,836                          |       | $                | 2,953      |             | $          | (3,700 | ) | $ | 61,789 |   |
|                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and  beverage costs                         |       | —     |       | 20,097                      |       | 1,008                           |       | —           |       | 21,105           |       |
| Restaurant  operating expenses                   |       | —     |       | 29,879                      |       | 1,528                           |       | —           |       | 31,407           |       |
| Pre-opening costs, depreciation and amortization |       | 3          |       | 1,790                       |       | 146                             |       | —           |       | 1,939            |       |
| General and  administrative expenses             |       | 4,463      |       | 3,700                       |       | —                          |       | (3,700           | )          | 4,463            |       |
| Marketing and  promotional expenses              |       | —     |       | 2,041                       |       | 92                              |       | —           |       | 2,133            |       |
| Interest  expense, net                           |       | 2,643      |       | 125                         |       | —                          |       | —           |       | 2,768            |       |
| Management fee  paid to related party            |       | 700        |       | —                      |       | —                          |       | —           |       | 700              |       |
|                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss) income before income taxes                |       | (4,109     | )          | 1,204                       |       | 179                             |       | —           |       | (2,726           | )          |
|                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax  expense                              |       | 731        |       | —                      |       | —                          |       | —           |       | 731              |       |
|                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss) income                                |       | $          | (4,840     | )                           | $          | 1,204                           |       | $                | 179        |             | $          | — |   | $ | (3,457 | ) |

 

17

----

 

 

**Supplemental Consolidating Statementof Operations**

**Nine month period ended October 2,2005**

**(unaudited)**

** **

**(amounts in thousands)**

** **
| ** **                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                             |       | $          | 12,980     |                        | $          | 206,285                         |       | $                | 10,837     |             | $          | (12,980 | ) | $ | 217,122 |   |
|                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and  beverage costs                             |       | —     |       | 68,785                      |       | 3,543                           |       | —           |       | 72,328           |       |
| Restaurant  operating expenses                       |       | —     |       | 99,060                      |       | 5,049                           |       | —           |       | 104,109          |       |
| Pre-opening  costs, depreciation and amortization    |       | 45         |       | 6,975                       |       | 357                             |       | —           |       | 7,377            |       |
| General and  administrative expenses                 |       | 16,431     |       | 12,980                      |       | —                          |       | (12,980          | )          | 16,431           |       |
| Marketing and  promotional expenses                  |       | —     |       | 3,931                       |       | 151                             |       | —           |       | 4,082            |       |
| Costs associated  with the repayment of certain debt |       | 174        |       | —                      |       | —                          |       | —           |       | 174              |       |
| Gain on sale of  investment                          |       | (664       | )          | —                      |       | —                          |       | —           |       | (664             | )          |
| Interest  expense, net                               |       | 7,938      |       | 147                         |       | —                          |       | —           |       | 8,085            |       |
| Management fee  paid to related party                |       | 2,100      |       | —                      |       | —                          |       | —           |       | 2,100            |       |
|                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss) income  before income taxes                   |       | (13,044    | )          | 14,407                      |       | 1,737                           |       | —           |       | 3,100            |       |
|                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax  expense                                  |       | 1,681      |       | —                      |       | —                          |       | —           |       | 1,681            |       |
|                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss)  income                                   |       | $          | (14,725    | )                           | $          | 14,407                          |       | $                | 1,737      |             | $          | — |   | $ | 1,419 |   |

 

**Supplemental Consolidating Statementof Operations**

**Nine month period ended October 3,2004**

**(unaudited)**

** **

**(amounts in thousands)**

 
| ** **                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                             |       | $          | 11,958     |                        | $          | 190,286                         |       | $                | 9,396      |             | $          | (11,958 | ) | $ | 199,682 |   |
|                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and  beverage costs                             |       | —     |       | 64,430                      |       | 3,136                           |       | —           |       | 67,566           |       |
| Restaurant  operating expenses                       |       | —     |       | 90,680                      |       | 4,777                           |       | —           |       | 95,457           |       |
| Pre-opening  costs, depreciation and amortization    |       | 9          |       | 4,938                       |       | 372                             |       | —           |       | 5,319            |       |
| General and  administrative expenses                 |       | 14,011     |       | 11,958                      |       | —                          |       | (11,958          | )          | 14,011           |       |
| Marketing and  promotional expenses                  |       | —     |       | 6,729                       |       | 273                             |       | —           |       | 7,002            |       |
| Costs associated  with the repayment of certain debt |       | 264        |       | —                      |       | —                          |       | —           |       | 264              |       |
| Interest  expense, net                               |       | 8,124      |       | 582                         |       | —                          |       | —           |       | 8,706            |       |
| Management fee  paid to related party                |       | 2,100      |       | —                      |       | —                          |       | —           |       | 2,100            |       |
|                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss) income  before income taxes                   |       | (12,550    | )          | 10,969                      |       | 838                             |       | —           |       | (743             | )          |
|                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax  expense                                  |       | 1,326      |       | —                      |       | —                          |       | —           |       | 1,326            |       |
|                                                 |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss)  income                                   |       | $          | (13,876    | )                           | $          | 10,969                          |       | $                | 838        |             | $          | — |   | $ | (2,069 | ) |

 

18

----

 

**Supplemental Consolidating Statementof Cash Flows**

**Nine month period ended October 2,2005**

**(unaudited)**

** **

**(amounts in thousands)**

 
| ** **                                                                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| Cash flows from operating activities:                                                                |       |       |       |                        |       |                            |       |             |       |
| Net (loss) income                                                                                    |       | $          | (14,725    | )                           | $          | 14,407                          |       | $                | 1,737      |   | $ | 1,419 |   |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities: |       |       |       |                        |       |                            |       |             |       |
| Depreciation,  amortization and other non-cash charges                                               |       | 2,273      |       | 5,588                       |       | 377                             |       | 8,238            |       |
| Gain on sale of  investment                                                                          |       | (664       | )          | —                      |       | —                          |       | (664             | )          |
| Gain on  marketable securities                                                                       |       | (96        | )          | —                      |       | —                          |       | (96              | )          |
| Deferred income  taxes                                                                               |       | (2,949     | )          | 3,489                       |       | —                          |       | 540              |       |
| Change in assets  and liabilities:                                                                   |       |       |       |                        |       |                            |       |             |       |
| Accounts  receivable                                                                                 |       | 1          |       | (961                        | )          | (113                            | )          | (1,073           | )          |
| Inventories                                                                                          |       | —     |       | 294                         |       | 22                              |       | 316              |       |
| Prepaid expenses  and other assets                                                                   |       | 16,759     |       | (16,229                     | )          | (1,620                          | )          | (1,090           | )          |
| Accounts  payable, accrued expenses and other liabilities                                            |       | 1,354      |       | 4,358                       |       | (370                            | )          | 5,342            |       |
| Accrued income  taxes                                                                                |       | (4,549     | )          | 4,962                       |       | (270                            | )          | 143              |       |
| Net cash (used  in) provided by operating activities                                                 |       | (2,596     | )          | 15,908                      |       | (237                            | )          | 13,075           |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash flows from investing activities:                                                                |       |       |       |                        |       |                            |       |             |       |
| Purchases of  property and equipment                                                                 |       | (35        | )          | (9,115                      | )          | (42                             | )          | (9,192           | )          |
| Proceeds from  sale of investment                                                                    |       | 674        |       | —                      |       | —                          |       | 674              |       |
| Purchase of  marketable securities                                                                   |       | (3,968     | )          | —                      |       | —                          |       | (3,968           | )          |
| Net cash used in  investing activities                                                               |       | (3,329     | )          | (9,115                      | )          | (42                             | )          | (12,486          | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash flows from financing activities:                                                                |       |       |       |                        |       |                            |       |             |       |
| Principal  reduction on obligations to financial institutions                                        |       | —     |       | (3,549                      | )          | —                          |       | (3,549           | )          |
| Dividends paid                                                                                       |       | (1,456     | )          | —                      |       | —                          |       | (1,456           | )          |
| Decrease in  restricted cash                                                                         |       | 131        |       | —                      |       | —                          |       | 131              |       |
| Net cash used in  financing activities                                                               |       | (1,325     | )          | (3,549                      | )          | —                          |       | (4,874           | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Effect of exchange rate changes on cash                                                              |       | —     |       | —                      |       | (7                              | )          | (7               | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Net (decrease) increase in cash and cash equivalents                                                 |       | (7,250     | )          | 3,244                       |       | (286                            | )          | (4,292           | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash and cash equivalents at beginning of period                                                     |       | 9,014      |       | 535                         |       | 630                             |       | 10,179           |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash and cash equivalents at end of period                                                           |       | $          | 1,764      |                        | $          | 3,779                           |       | $                | 344        |   | $ | 5,887 |   |

 

19

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**Supplemental Consolidating Statementof Cash Flows**

**Nine month period ended October 3,2004**

**(unaudited)**

** **

**(amounts in thousands)**

** **
| ** **                                                                                           | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| Cash flows from  operating activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Net (loss)  income                                                                                   |       | $          | (13,876    | )                           | $          | 10,969                          |       | $                | 838        |   | $ | (2,069 | ) |
| Adjustments to  reconcile net (loss) income to net cash (used in) provided by operating  activities: |       |       |       |                        |       |                            |       |             |       |
| Depreciation,  amortization and other non-cash charges                                               |       | 2,105      |       | 5,489                       |       | 431                             |       | 8,025            |       |
| Loss on  marketable securities                                                                       |       | 110        |       | —                      |       | —                          |       | 110              |       |
| Deferred income  taxes                                                                               |       | 2,919      |       | (1,973                      | )          | —                          |       | 946              |       |
| Change in assets  and liabilities:                                                                   |       |       |       |                        |       |                            |       |             |       |
| Accounts  receivable                                                                                 |       | (62        | )          | (1,025                      | )          | (39                             | )          | (1,126           | )          |
| Inventories                                                                                          |       | —     |       | 482                         |       | 88                              |       | 570              |       |
| Prepaid expenses  and other assets                                                                   |       | 9,403      |       | (9,187                      | )          | (1,144                          | )          | (928             | )          |
| Accounts  payable, accrued expenses and other liabilities                                            |       | 1,469      |       | (1,765                      | )          | (201                            | )          | (497             | )          |
| Accrued income  taxes                                                                                |       | (10,630    | )          | 10,663                      |       | (192                            | )          | (159             | )          |
| Net cash (used  in) provided by operating activities                                                 |       | (8,562     | )          | 13,653                      |       | (219                            | )          | 4,872            |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash flows from  investing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Purchases of property  and equipment                                                                 |       | (61        | )          | (6,348                      | )          | (29                             | )          | (6,438           | )          |
| Purchase of  marketable securities                                                                   |       | (7,295     | )          | —                      |       | —                          |       | (7,295           | )          |
| Proceeds from  sale of marketable securities                                                         |       | 6,217      |       | —                      |       | —                          |       | 6,217            |       |
| Net cash used in  investing activities                                                               |       | (1,139     | )          | (6,348                      | )          | (29                             | )          | (7,516           | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash flows from  financing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Principal  reduction on obligations to financial institutions                                        |       | —     |       | (5,652                      | )          | —                          |       | (5,652           | )          |
| Payment of  deferred financing costs                                                                 |       | (550       | )          | —                      |       | —                          |       | (550             | )          |
| Dividends paid                                                                                       |       | (6,789     | )          | —                      |       | —                          |       | (6,789           | )          |
| Decrease in  restricted cash                                                                         |       | 323        |       | —                      |       | —                          |       | 323              |       |
| Net cash used in  financing activities                                                               |       | (7,016     | )          | (5,652                      | )          | —                          |       | (12,668          | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Effect of  exchange rate changes on cash                                                             |       | —     |       | —                      |       | 3                               |       | 3                |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Net (decrease)  increase in cash and cash equivalents                                                |       | (16,717    | )          | 1,653                       |       | (245                            | )          | (15,309          | )          |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash and cash  equivalents at beginning of period                                                    |       | 17,911     |       | (614                        | )          | 700                             |       | 17,997           |       |
|                                                                                                 |       |       |       |                        |       |                            |       |             |       |
| Cash and cash  equivalents at end of period                                                          |       | $          | 1,194      |                        | $          | 1,039                           |       | $                | 455        |   | $ | 2,688 |   |

 

20

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

Results of Operations

 

Our net loss for the three monthperiod ended October 2, 2005 was $1.7 million compared to a net loss of$3.5 million for the three month period ended October 3, 2004.  The change is primarily due to an increase incomparable restaurant revenues and the impact of new restaurants, net of therelated food and beverage costs as discussed below.  Our net income for the nine month periodended October 2, 2005 was $1.4 million compared to a net loss of $2.1million for the nine month period ended October 3, 2004.  The increase is primarily due to an increasein comparable restaurant revenues and the impact of new restaurants, net of therelated food and beverage costs, and a decrease in marketing and promotionalexpenses partially offset by increases in pre-opening costs as discussed below.

 

Revenuesincreased $5.1 million, or 8.2%, to $66.8 million for the three month periodended October 2, 2005 from $61.8 million for the three month period ended October 3,2004. Revenues increased $1.0 million due to an increase in comparable revenuesfrom restaurants open all of both fiscal years. Revenues increased $4.3 milliondue to the opening of five new restaurants (four in fiscal 2005 and one infiscal 2004). Revenues decreased $0.2 million due to the temporary closing ofthe Morton’s steakhouse located in New Orleans as a result of the impact ofHurricane Katrina. Average revenue per restaurant open all of either periodincreased 3.3%. Revenues for the three month period ended October 2, 2005also reflect the impact of an aggregate menu price increase of approximately 0.5%in May 2005.

 

Revenuesincreased $17.4 million, or 8.7%, to $217.1 million for the nine month periodended October 2, 2005 from $200.0 million for the nine month period ended October 3,2004. Revenues increased $4.4 million due to an increase in comparable revenuesfrom restaurants open all of both fiscal years. Revenues increased $13.0million due to the opening of five new restaurants (four in fiscal 2005 and onein fiscal 2004). Average revenue per restaurant open all of either periodincreased 2.9%. Revenues for the nine month period ended October 2, 2005also reflect the impact of aggregate menu price increases of approximately 3%in February 2004 and approximately 0.5% in May 2005.

 

Percentagechanges in comparable restaurant revenues for the three and nine month periodsended October 2, 2005 versus October 3, 2004 for restaurants open allof both periods are as follows:

 

| ** **       | ** ** | **Three month period  ended October 2,  2005 vs. October 3,  2004  Percentage Change** | ** ** | **Nine month period  ended October 2,  2005 vs. October 3,  2004  Percentage Change** | ** ** |
|------------------|------------|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
|             |       |                                                                                             |       |                                                                                            |       |
| Morton’s    |       | 1.7                                                                                              | %          | 2.3                                                                                             | %          |
| Bertolini’s |       | 3.4                                                                                              | %          | 2.7                                                                                             | %          |
| Total            |       | 1.8                                                                                              | %          | 2.3                                                                                             | %          |

 

Our business is somewhat seasonal in nature, withrevenues generally being less in the third quarter primarily due to our reducedsummer volume.

 

Foodand beverage costs increased $1.2 million, or 5.6%, to $22.3 million for thethree month period ended October 2, 2005 from $21.1 million for the threemonth period ended October 3, 2004. These costs increased $4.8 million, or7.0%, to $72.3 million for the nine month period ended October 2, 2005from

 

21

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$67.6 million for the nine month period ended October 3, 2004.This increase was primarily due to the opening of four additional restaurantsin fiscal 2005. These costs as a percentage of revenues decreased by 0.9 % to33.3% for the three month period ended October 2, 2005 from 34.2% for thethree month period ended October 3, 2004 and decreased by 0.5% to 33.3%for the nine month period ended October 2, 2005 from 33.8% for the ninemonth period ended October 3, 2004. During fiscal 2004 high demand for U.S. beef products decreased theavailability of USDA prime beef which resulted in increased food costs.  We were generally able to offset such costincreases with the benefit of menu price increases, which resulted in a slightincrease in food and beverage costs as a percentage of revenues for fiscal2004.

 

Restaurant operatingexpenses, which include labor, occupancy and other operating expenses, increased$3.0 million, or 9.5%, to $34.4 million for the three month period ended October 2,2005 from $31.4 million for the three month period ended October 3, 2004.These costs increased $8.7 million, or 9.1%, to $104.1 million for the ninemonth period ended October 2, 2005 from $95.5 million for the nine monthperiod ended October 3, 2004. Restaurant operating expenses as a percentage of revenues increased 0.6%to 51.4% for the three month period ended October 2, 2005 from 50.8% forthe three month period ended October 3, 2004 and increased 0.1% to 47.9%for the nine month period ended October 2, 2005 from 47.8% for the ninemonth period ended October 3, 2004. These increases were primarily due to the opening of four additionalrestaurants in fiscal 2005 and increases in labor and benefit costs.  Included in the three month periods ended October 2,2005 and October 3, 2004 is non-cash rent recorded in accordance with SFASNo. 13 of $0.2 million and $0.4 million, respectively.  Included in the nine month periods ended October 2,2005 and October 3, 2004 is non-cash rent recorded in accordance with SFASNo. 13 of $0.7 million and $1.2 million, respectively.

 

Pre-opening costs,depreciation and amortization increased $0.7 million, or 35.2%, to $2.6 millionfor the three month period ended October 2, 2005 from $1.9 million for thethree month period ended October 3, 2004. These costs as a percentage ofrevenues increased by 0.8% to 3.9% for the three month period ended October 2,2005 from 3.1% for the three month period ended October 3, 2004.  These costs increased $2.1 million, or 38.7%,to $7.4 million for the nine month period ended October 2, 2005 from $5.3million for the nine month period ended October 3, 2004. These costs as apercentage of revenues increased by 0.7% to 3.4% for the nine month periodended October 2, 2005 from 2.7% for the nine month period ended October 3,2004.  We expense all costs incurredduring start-up activities, including pre-opening costs, as incurred.Pre-opening costs incurred and recorded as expense increased $0.4 million to$0.7 million for the three month period ended October 2, 2005 from $0.3million for the three month period ended October 3, 2004 and increased$1.5 million to $2.1 million for the nine month period ended October 2,2005 from $0.6 for the nine month period ended October 3, 2004. The numberof restaurants opened, the timing of restaurant openings and the costs perrestaurant opened affected the amount of these costs.

 

General andadministrative expenses increased $1.3 million, or 29.8%, to $5.8 million forthe three month period ended October 2, 2005 from $4.5 million for thethree month period ended October 3, 2004. These costs increased $2.4million, or 17.3%, to $16.4 million for the nine month period ended October 2,2005 from $14.0 million for the nine month period ended October 3, 2004.These costs as a percentage of revenues increased 1.5% to 8.7% for the threemonth periods ended October 2, 2005 from 7.2% for the three month periodended October 3, 2004 and increased 0.6% to 7.6% for the nine month periodended October 2, 2005 from 7.0% for the nine month period ended October 3,2004.  These increases were primarily dueto increased legal and professional costs and salary, bonus and benefit costs.

 

Marketing and promotionalexpenses decreased $1.0 million, or 44.8%, to $1.2 million for the three monthperiod ended October 2, 2005 from $2.1 million for the three month periodended October 3, 2004. These costs decreased $2.9 million, or 41.7%, to$4.1 million for the nine month period ended October 2, 2005 from $7.0million for the nine month period ended October 3, 2004. These costs as apercentage of revenues decreased 1.7% to 1.8% for the three month period ended October 2,2005 from 3.5% for the three

 

22

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month period endedOctober 3, 2004 and decreased 1.6% to 1.9% for the nine month period endedOctober 2, 2005 from 3.5% for the nine month period ended October 3,2004. These decreases were primarily due to decreased spending for print mediaadvertising.

 

Costs associated with therepayment of certain debt of $0.2 million and $0.3 million for the nine monthperiods ended October 2, 2005 and October 3, 2004, respectively,represent prepayment penalties that were incurred with the early repayment ofcertain mortgages.

 

Gain on sale ofinvestment of $0.7 million for the nine month period ended October 2, 2005represents a gain from the sale of stock in a privately owned company.

 

Interest expense, net,decreased $0.1 million, or 2.2%, to $2.7 million for the three month periodended October 2, 2005 from $2.8 million for the three month period ended October 3,2004 and decreased $0.6 million, or 7.1%, to $8.1 million for the nine monthperiod ended October 2, 2005 from $8.7 million for the nine month periodended October 3, 2004.  Thesedecreases are primarily due to the repayment of certain mortgages in April 2004and February 2005. Interest income was not significant in any of theseperiods.

 

Management fee paid torelated party was $0.7 million for the three month periods ended October 2,2005 and October 3, 2004 and $2.1 million for the nine month periods endedOctober 2, 2005 and October 3, 2004. We paid this fee pursuant toMHLLC’s management agreement with Castle Harlan, Inc.

 

Provision for incometaxes consisted of income tax expense of $1.7 million and $1.3 million for thenine month periods ended October 2, 2005 and October 3, 2004,respectively. Our 2005 effective tax rate differs from the statutory rate dueto non-deductible interest relating to our 7.5% senior secured notes and othernon-deductible items. Our 2005 effective tax rate differs from our 2004effective tax rate due to the fact that during the third quarter of fiscal2004, the Company determined it would elect to treat certain of itsemployee-portion FICA tax payments as current income tax deductions rather thanincome tax credits.

 

Recent Events

 

On October 25,2005, the Company announced that Allen J. Bernstein, Chairman, Chief ExecutiveOfficer and President will step down from the Company and its affiliatedentities effective by December 31, 2005. The Company also announced thatThomas J. Baldwin, currently the Company’s Executive Vice President and ChiefFinancial Officer, will replace Mr. Bernstein.  On the effective date of Mr. Bernstein’sdeparture, Mr. Baldwin will become Chairman, Chief Executive Officer andPresident of the Company.  The Company iscurrently negotiating a separation agreement with Mr. Bernstein.  Upon completion of the agreement, the Companyexpects to incur a charge with respect to separation payments to Mr. Bernstein.

 

Liquidity andCapital Resources

 

Ourprincipal liquidity requirements are to service our debt and meet our workingcapital and capital expenditure needs. Subject to our operating performance,which, if significantly adversely affected, would adversely affect theavailability of funds, we expect to be able to meet our liquidity requirementsfor the foreseeable future through cash provided by operations and throughborrowings available under our working capital facility. We cannot be sure,however, that this will be the case. As of October 2, 2005, we had cashand cash equivalents of $5.9 million compared to $10.2 million as of January 2,2005.

 

*WorkingCapital and Cash Flows*

* *

In thepast 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

 

23

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supplies. Funds available from cash sales not neededimmediately to pay for food and supplies or to finance receivables orinventories historically have typically been used for noncurrent capitalexpenditures and or to pay a dividend, to the extent permitted, to MHCI torepay outstanding PIK notes. See Note 8 to our unaudited consolidated financialstatements.

 

*OperatingActivities*.  Cash flowsprovided by operating activities for the nine month period ended October 2,2005 were $13.1 million, consisting primarily of a net increase in cash of $9.7million resulting from net income before depreciation, amortization and othernon-cash charges and an increase in accounts payable, accrued expenses andother liabilities of $5.3 million.

 

*InvestingActivities*.  Cash flowsused in investing activities for the nine month period ended October 2,2005 were $12.5 million primarily due to purchases of property and equipment of$9.2 million, which include capital expenditures related to the three Morton’ssteakhouses opened during the first quarter of fiscal 2005 and the one Morton’ssteakhouse opened during the third quarter of fiscal 2005 and $4.0 millionrelated to the purchase of marketable securities.

 

*FinancingActivities*.  Cash flowsused in financing activities for the nine month period ended October 2,2005 were $4.9 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, and the payment of adividend of $1.5 million.

 

*Debtand Other Obligations*.

 

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

 

Our domestic restrictedsubsidiaries presently consist of all of our domestic subsidiaries that eitherown restaurants or own subsidiaries that own restaurants. As restrictedsubsidiaries, each of these guarantors of the 7.5% senior secured notes issubject to all of the terms, conditions and covenants contained in the indenturegoverning the 7.5% senior secured notes that apply to restricted subsidiaries.The 7.5% senior secured notes are not guaranteed by our foreign subsidiariesdue to the tax implications of providing such guarantees, or by ourunrestricted subsidiaries, which presently consist of subsidiaries that have nomaterial assets. Our unrestricted subsidiaries are not subject to the terms,conditions or covenants contained in the indenture, and must interact with MRGand our restricted subsidiaries on the same basis as unrelated third parties.From time to time, we may designate other subsidiaries as unrestrictedsubsidiaries subject to the terms and conditions set forth in the indenture.

 

The 7.5% senior securednotes and the guarantees are secured by substantially all of our, and ourdomestic restricted subsidiaries’, tangible and intangible assets, as well asby a pledge of a portion of the stock of the subsidiaries owned by us and byour domestic restricted subsidiaries, in each case subject to the prior rankingclaims on such assets by the lender under our working capital facility andholders of any capital lease obligations and certain other securedindebtedness. The indenture governing the 7.5% senior 

 

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secured notespermits us to incur other senior secured indebtedness and to grant liens on ourassets under certain circumstances.

 

We pay interest on the7.5% senior secured notes semi-annually in cash, in arrears, on January 1and July 1 at an annual rate of 7.5%. The indenture governing the 7.5%senior secured notes contains various affirmative and negative covenants,subject to a number of important limitations and exceptions, including but notlimited to those limiting our ability to incur additional indebtedness or enterinto sale and leaseback transactions; pay dividends, redeem stock or make otherdistributions; issue stock of our subsidiaries; make certain investments oracquisitions; grant liens on assets; enter into transactions with affiliates;merge, consolidate or transfer substantially all of our assets; and transferand sell assets. Our indenture has a covenant that limits our incurrence ofadditional indebtedness other than Permitted Indebtedness (defined therein)unless on the date of the incurrence of additional indebtedness ourConsolidated Fixed Charge Coverage Ratio (defined therein) will be, aftergiving effect to the incurrence thereof and the application of the proceedsthereof, greater than 2.25 to 1.0. The indenture defines Consolidated Fixed ChargeCoverage Ratio as the ratio of Consolidated EBITDA to Consolidated FixedCharges (defined therein).

 

The indenture governingthe 7.5% senior secured notes contains various events of default, including butnot limited to those related to non-payment of principal, interest or fees;violations of certain covenants; certain bankruptcy-related events; invalidityof liens; non-payment of certain legal judgments; and cross defaults withcertain other indebtedness. As of October 2, 2005, we were in compliancewith all of our financial covenants.

 

We can redeem the 7.5%senior secured notes on or after July 1, 2007, except we may redeem up to35% of the 7.5% senior secured notes prior to July 1, 2006 with theproceeds of one or more public equity offerings. We are required to redeem the7.5% senior secured notes under certain circumstances involving changes ofcontrol. Additionally, if we or any of our domestic restricted subsidiariesengage in asset sales, we generally must either invest the net cash proceeds fromsuch sales in our business within 360 days, prepay the debt under our workingcapital facility or certain other secured debt or make an offer to purchase aportion of the 7.5% senior secured notes having an accreted value equal to theexcess net cash proceeds.

 

*WorkingCapital Facility.*On July 7, 2003, we entered into a$15.0 million 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 October 2,2005, 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 October 2, 2005, $0.3million was restricted for letters of credit under our working capitalfacility. Our working capital facility is guaranteed by all of our domesticrestricted subsidiaries and secured by a first priority perfected securityinterest in all of the collateral securing the 7.5% senior secured notes.Interest will accrue on borrowings under our working capital facility at afloating rate of interest per annum equal to the rate of interest announcedfrom time to time within the lender’s principal office in San Francisco as its “primerate” plus 1.75%, or a LIBOR-based equivalent thereof. Interest is calculatedon the basis of a 360-day year and will be payable monthly for base rate loansand at the end of each interest period for LIBOR loans (but not less frequentlythan quarterly). Our working capital facility contains certain customary fees,including a closing fee, anniversary fees, servicing fees and pre-payment fees.

 

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Our working capitalfacility contains various affirmative and negative covenants customary forsimilar working capital facilities, including but not limited to covenantspertaining to mergers and sales of assets outside the ordinary course ofbusiness; use of proceeds; granting of liens; incurrence of indebtedness;restricted payments; voluntary prepayment of indebtedness, including the 7.5%senior secured notes; payment of dividends; business activities; investmentsand acquisitions; transactions with affiliates; certain restrictions affectingsubsidiaries; fundamental changes; and amendments or modifications toinstruments governing certain indebtedness. Our working capital facility alsorequires us to achieve and maintain a twelve-month trailing EBITDA (as definedtherein) of not less than $16.0 million. As of October 2, 2005, we were incompliance with all of our financial covenants.

 

Our working capitalfacility contains customary events of default, including but not limited tothose related to non-payment of principal, interest or fees; violations ofcertain covenants; change of control; certain bankruptcy-related events;inaccuracy of representations and warranties in any material respect; and crossdefaults with certain other indebtedness and agreements, including withoutlimitation the indenture governing the 7.5% senior secured notes.

 

*CNLLoan*.  In March 1997,one of our subsidiaries entered into a $2.5 million loan agreement with CNLFinancial I, Inc. (“CNL”).  Werepaid this loan in February 2005. This loan was scheduled to mature on April 1,2007 and bore interest at 10.002% per annum. This loan was secured by a security interest in the assets of the Morton’ssteakhouses located in Chicago (State Street) and Denver (downtown).  Principal and interest payments were duemonthly over the term of the loan. On January 2, 2005, the outstandingprincipal balance of the CNL loan was approximately $0.8 million, of whichapproximately $0.3 million of principal was included in “Current portion ofobligations to financial institutions” in the accompanying consolidated balancesheet.

 

*Mortgages*.  During 1998 and 1999, certain of oursubsidiaries 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 October 2,2005 and January 2, 2005 the aggregate outstanding principal balance dueon these loans was approximately $3.6 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 October 2,2005 bears interest at 8.98% and is scheduled to mature in March 2021.

 

*RestaurantOperating 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.

 

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*ContractualCommitments*.  Thefollowing table represents our contractual commitments associated with our debtand other obligations disclosed above as of October 2, 2005:

 
| ** **                                                           | ** ** | **Remainder of**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                                                           | ** ** | **2005**                   | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| ** **                                                           | ** ** | **(amounts in thousands)** | ** ** |
| 7.5% senior  secured notes, including interest                       |       | $                          | 3,938      |       | $          | 7,875      |       | $          | 7,875      |       | $          | 7,875          |       | $          | 7,875      |   | $ | 108,938 |   | $ | 144,376 |   |
| Mortgage loan  with GE Capital Franchise Finance, including interest |       | 109                        |       | 436        |       | 436        |       | 435        |       | 435        |       | 4,888          |       | 6,739      |       |
| Subtotal                                                             |       | 4,047                      |       | 8,311      |       | 8,311      |       | 8,310      |       | 8,310      |       | 113,826        |       | 151,115    |       |
| Operating leases                                                     |       | 4,792                      |       | 19,348     |       | 20,262     |       | 20,054     |       | 19,560     |       | 123,982        |       | 207,998    |       |
| Purchase  commitments                                                |       | 9,064                      |       | 2,310      |       | —     |       | —     |       | —     |       | —         |       | 11,374     |       |
| Letters of  credit                                                   |       | 275                        |       | —     |       | —     |       | —     |       | —     |       | —         |       | 275        |       |
| Total                                                                |       | $                          | 18,178     |       | $          | 29,969     |       | $          | 28,573     |       | $          | 28,364         |       | $          | 27,870     |   | $ | 237,808 |   | $ | 370,762 |   |

 

During the first nine months of fiscal 2005, our netinvestment in fixed assets and related investment costs, including pre-openingcosts, approximated $11.2 million. We estimate that we will spend up toapproximately $17.0 million in fiscal 2005, including the $11.2 millionrecorded in the first nine months of fiscal 2005, to finance ordinaryrefurbishment of existing restaurants and capital expenditures for newrestaurants, which is expected to be reduced by landlord development allowancesof approximately $3.1 million. We anticipate that funds generated throughoperations and through borrowings under our working capital facility will besufficient to fund planned expansion.  Wecannot be sure, however, that this will be the case.

 

New Accounting Standards

 

In December 2004,the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment.” Thisstatement replaces SFAS No. 123, “Accounting for Stock-Based Compensation”and supersedes Accounting Principles Board Opinion No. 25, “Accounting forStock 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-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 a material impact on the Company’s consolidatedfinancial statements. See Note 9 to our unaudited consolidated financialstatements.

 

In December 2004,the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – anamendment of APB Opinion No. 29.” SFAS No. 153 addresses themeasurement of exchanges of non-monetary assets. It eliminates the exceptionfrom fair value measurement for non-monetary exchanges of similar productiveassets in paragraph 21(b) of Accounting Principles Board (“APB”) Opinion No. 29“Accounting for Non-monetary Transactions” and replaces it with an exceptionfor exchanges that do not have commercial substance. A non-monetary exchangehas commercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange. SFAS No. 153 will beeffective for nonmonetary asset exchanges occurring in fiscal periods beginningafter June 15, 2005.  The adoptionof this statement will not have any effect on the Company’s consolidatedfinancial statements.

 

In January 2003, the FASB issued FASBInterpretation No. (“FIN”) 46, “Consolidation of Variable InterestEntities, an interpretation of ARB No. 51.” FIN 46 was subject tosignificant interpretation by the FASB, and was revised and reissued in December 2003(“FIN 46R”).  FIN 46R states that if anentity has a

 

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controlling financialinterest in a variable interest entity, the assets, the liabilities and resultsof activities 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.

 

In March 2005, theFASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations.”FIN 47 clarifies that a conditional asset retirement obligation, as used inSFAS No. 143, “Accounting for Asset Retirement Obligations,” refers to alegal obligation to perform an asset retirement activity in which the timingand/or method of the settlement are conditional on a future event that may ormay not be within the control of the entity. Accordingly, an entity is requiredto recognize a liability for the fair value of a conditional asset retirementobligation if the fair value can be reasonably estimated. FIN 47 is effective January 1,2006, with early adoption allowed. We have not yet determined the impact, ifany, FIN 47 will have on the Company’s consolidated financial statements.

 

In June 2005, theFASB issued Emerging Issues Task Force (“EITF”) 05-06 “Determining theAmortization Period for Leasehold Improvements.” EITF 05-06 addresses theamortization period for leasehold improvements in operating leases that areeither placed in service significantly after and not contemplated at or nearthe beginning of the initial lease term or acquired in a business combination.The adoption of EITF 05-06 will not have a material effect on the Company’sconsolidated financial statements.

 

DuringOctober 2005, the FASB issued FASB Staff Position No. FAS 13-1 (“FSP13-1”) which requires a lessee to cease capitalizing rental costs during theconstruction period as of the first reporting period beginning after December 15,2005, which is the effective date of FSP 13-1. In accordance with FSP 13-1, beginningJanuary 2, 2006 rental costs incurred during the construction period willbe recognized as rental expense.

 

Forward-Looking Statements

 

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 competitive environment and industrywith many well-established competitors with greater financial and otherresources than the Company, and the impact of changes in consumer tastes,local, regional and national economic and market conditions, restaurantprofitability levels, expansion plans, demographic trends, traffic patterns,employee availability and benefits, cost increases, product safety andavailability, government regulation and other risks detailed from time to timein the Company’s reports filed with the Securities and ExchangeCommission.  In addition, the Company’sability to expand is dependent upon various factors, such as the availabilityof attractive sites for new restaurants, the ability to negotiate suitablelease terms, the ability to generate or borrow funds to develop new restaurantsand obtain various government permits and licenses and the recruitment andtraining of skilled management and restaurant employees.  Accordingly, such forward-looking statementsdo not purport to be predictions of future events or circumstances and thereforethere can be no assurance that any forward-looking statement contained hereinwill prove to be accurate. The Company assumes no obligation to update theforward-looking statements.

 

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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.

 

As of October 2,2005, we owned and operated four international restaurants, one in Hong Kong,one in Singapore, one in Toronto, Canada and one in Vancouver, Canada. As aresult, we are subject to risk from changes in foreign exchange rates. Thesechanges result in cumulative translation adjustments, which are included inaccumulated other comprehensive income (loss). We do not consider the potentialloss resulting from a hypothetical 10% adverse change in quoted foreigncurrency exchange rates, as of October 2, 2005, to be material.

 

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 ofinterest. Our other indebtedness, our 7.5% senior secured notes and ourmortgage, are payable at a fixed rate of interest. As of October 2, 2005,there were no borrowings outstanding under our floating rate working capitalfacility. As a result, a hypothetical 10% fluctuation in interest rates wouldnot have any impact on earnings for the nine month period ended October 2,2005.

 

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Item 4.  Controls and Procedures

 

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

 

Since August 2002, a number of the Company’scurrent and former employees in New York, Boston and Florida have initiatedarbitrations with the American Arbitration Association in their respectivestates alleging that the Company has violated state (Boston arbitration), stateand federal (New York arbitrations) and federal (Florida arbitrations) wage andhour laws regarding the sharing of tips with other employees and failure to payfor all hours worked. There are two group arbitrations pending in Florida. Oneis proceeding in Palm Beach as a collective action (hereafter referred to as “PalmBeach arbitration”) with approximately thirty-five claimants. The second isproceeding in Miami as a consolidated action (hereafter “Miami arbitration”)with approximately six claimants. Potential class members in the Palm Beach arbitration were sent noticesnotifying them of the arbitration and advising them if they wish to participatein the arbitration they must sign and return a consent form. The plaintiffreceived eight opt-in notices but of the eight, five were already claimants,therefore there are only 3 new claimants. In addition, there are two individual demands for arbitration pending inFlorida which may ultimately be joined to the Miami arbitration.

 

In general, the complainants are seeking restitutionof tips, the difference between the tip credit wage and the minimum wage,payment for hours worked off the clock (in the Miami arbitration and in theindividual Florida arbitrations only), liquidated damages and attorneys’ feesand costs. The arbitrator in the New York arbitrations has permitted thecomplainants to consolidate their arbitrations into one action and proceed as acollective action. The Miami claimants are also seeking to consolidate theirarbitrations. The arbitrator has ruled that the claims cannot be consolidatedbut is allowing the case to proceed as a collective action. The Bostonarbitrator has ruled that the claimants may proceed as a class, but to datethere are only three people in the class and the arbitrator recently ruled thatthere would be no automatic certification. The Company intends to and iscontesting these matters vigorously. Management believes an adverse opinion inany one of these cases would not have a material adverse impact on the Company’sfinancial condition.

 

In November 2004, current and former employees ofthe Sacramento Morton’s commenced a federal lawsuit asserting individual,representative and class claims against the Sacramento Morton’s and severalother Morton’s restaurants.  Theplaintiffs asserted claims based on the Company’s alleged failure to providethem with meal and rest periods, and for unlawful tip sharing and unfaircompetition.  The plaintiffs seekrestitution of tips, meal and break period compensation and attorneys’ fees.Dismissals with prejudice for all defendants, except the Sacramento Morton’ssteakhouse, were granted.  The claimsagainst the Sacramento Morton’s steakhouse have been moved to arbitration.

 

In May 2005, a former employee of the Boston restaurantfiled a nationwide class action complaint in federal court in Massachusettsalleging that the tip out violates the Fair Labor Standards Act. The Companymoved to dismiss the complaint and compel arbitration.  While the motion was pending, the plaintifffiled a nationwide collective action demand for arbitration with the AmericanArbitration Association.  The demand forarbitration alleges the same facts as the lawsuit filed in federal court.  The motion to dismiss is still pending infederal court.

 

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

 

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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 therequirements of the Securities Exchange Act of 1934, as amended, the Registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

 
|   | MORTON’S  RESTAURANT GROUP, INC. |
|--------|---------------------------------------|
|   | (Registrant)                          |
|   |                                  |
|   |                                  |
| Date   | November 14,  2005               |   | By: | /s/ ALLEN J.  BERNSTEIN |   |
|   |                                  |   |   | Allen J.  Bernstein |
|   |                                  |   |   | Chairman of the  Board, President |
|   |                                  |   |   | and Chief  Executive Officer |
|   |                                  |   |   |
|   |                                  |   |   |
| Date   | November 14,  2005               |   | By: | /s/ THOMAS J.  BALDWIN |   |
|   |                                  | Thomas J.  Baldwin |
|   |                                  | Executive Vice  President, |
|   |                                  | Chief  Financial Officer and Director |

 

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