**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC  20549**

 
| **ý**                                                                         | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
| ** **                                                                         |
| **For the quarterly period  ended     July 4, 2004** |
| ** **                                                                         |
| **OR**                                                                             |
| ** **                                                                         |
| **o**                                                                              | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom                    to                    **

 

**Commission file****number          1-12692**

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

 

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

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes oor No ý.

 

As ofAugust 17, 2004, the registrant had 1,000 shares of its Common Stock,$0.01 par value, outstanding.

 

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

INDEX

 
| Part I - Financial Information                                                                                                         |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                   |   |
| Item 1.  Financial Statements                                                                                                     |   |
|                                                                                                                                   |   |
| Consolidated Balance Sheets as of July 4, 2004 and  January 4, 2004 - unaudited                                              | 3      |
|                                                                                                                                   |   |
| Consolidated Statements of Operations for  the three and six month periods ended July 4, 2004 and June 29,  2003 - unaudited | 5      |
|                                                                                                                                   |   |
| Consolidated Statements of Cash Flows for  the six month periods ended July 4, 2004 and June 29, 2003 - unaudited            | 6      |
|                                                                                                                                   |   |
| Notes to Unaudited  Consolidated Financial Statements                                                                                  | 7      |
|                                                                                                                                   |   |
| Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations                             | 20     |
|                                                                                                                                   |   |
| Item 3.   Quantitative and Qualitative Disclosure about Market Risk                                                               | 28     |
|                                                                                                                                   |   |
| Item 4.   Controls and Procedures                                                                                                 | 28     |
|                                                                                                                                   |   |
| Part II - Other Information                                                                                                            | 29     |
|                                                                                                                                   |   |
| Item 1.  Legal Proceedings                                                                                                        | 29     |
|                                                                                                                                   |   |
| Item 6.   Exhibits and Reports on Form 8-K                                                                                        | 29     |
|                                                                                                                                   |   |
| Signatures                                                                                                                             | 30     |

 

2

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Part I -Financial Information

 

Item 1. Financial Statements

 

MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

ConsolidatedBalance Sheets

 

(amounts in thousands)

 
| ** **                                      | ** ** | **July 4,  2004** | ** ** | **January 4,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **(unaudited)**        | ** ** | ** **                | ** ** |
| Assets                                          |       |                   |       |                      |       |
| Current assets:                                 |       |                   |       |                      |       |
| Cash and cash equivalents                       |       | $                      | 2,278      |                      | $          | 17,997 |   |
| Restricted cash                                 |       | 1,021                  |       | 1,100                     |       |
| Marketable securities                           |       | 1,741                  |       | —                    |       |
| Accounts receivable                             |       | 3,042                  |       | 3,829                     |       |
| Inventories                                     |       | 9,483                  |       | 9,094                     |       |
| Prepaid expenses and other current assets       |       | 5,887                  |       | 5,069                     |       |
| Deferred income taxes                           |       | 6,523                  |       | 7,076                     |       |
|                                            |       |                   |       |                      |       |
| Total current assets                            |       | 29,975                 |       | 44,165                    |       |
|                                            |       |                   |       |                      |       |
| Property and equipment, at cost:                |       |                   |       |                      |       |
| Furniture, fixtures and equipment               |       | 15,133                 |       | 14,131                    |       |
| Buildings and leasehold improvements            |       | 39,088                 |       | 38,667                    |       |
| Land                                            |       | 8,474                  |       | 8,474                     |       |
| Construction in progress                        |       | 2,294                  |       | 338                       |       |
|                                            |       | 64,989                 |       | 61,610                    |       |
| Less accumulated depreciation and  amortization |       | 10,352                 |       | 7,500                     |       |
| Net property and equipment                      |       | 54,637                 |       | 54,110                    |       |
|                                            |       |                   |       |                      |       |
| Intangible asset                                |       | 92,000                 |       | 92,000                    |       |
| Goodwill                                        |       | 61,552                 |       | 61,552                    |       |
| Other assets and deferred expenses, net         |       | 9,791                  |       | 10,360                    |       |
|                                            |       | $                      | 247,955    |                      | $          | 262,187 |   |

 

3

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MORTON’S RESTAURANT GROUP, INC. ANDSUBSIDIARIES

 

Consolidated Balance Sheets, Continued

 

(amounts inthousands, except share and per share amounts)

 
| ** **                                                                                                                                     | ** ** | **July 4,  2004** | ** ** | **January 4,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                     | ** ** | **(unaudited)**        | ** ** | ** **                | ** ** |
| Liabilities and Stockholder’s Equity                                                                                                      |       |                   |       |                      |       |
|                                                                                                                                           |       |                   |       |                      |       |
| Current liabilities:                                                                                                                           |       |                   |       |                      |       |
| Accounts payable                                                                                                                               |       | $                      | 5,980      |                      | $          | 6,111 |   |
| Accrued expenses                                                                                                                               |       | 23,393                 |       | 27,955                    |       |
| Current portion of obligations to financial  institutions                                                                                      |       | 497                    |       | 658                       |       |
| Accrued income taxes                                                                                                                           |       | 47                     |       | 296                       |       |
|                                                                                                                                           |       |                   |       |                      |       |
| Total current liabilities                                                                                                                      |       | 29,917                 |       | 35,020                    |       |
|                                                                                                                                           |       |                   |       |                      |       |
| 7.5% senior secured notes, net of  unamortized discount of $14,157 and $14,987 at July 4, 2004 and  January 4, 2004                  |       | 90,843                 |       | 90,013                    |       |
| Obligations to financial institutions, less  current maturities                                                                                |       | 6,903                  |       | 12,274                    |       |
| Deferred income taxes                                                                                                                          |       | 20,471                 |       | 20,471                    |       |
| Other liabilities                                                                                                                              |       | 2,957                  |       | 2,087                     |       |
|                                                                                                                                           |       |                   |       |                      |       |
| Total liabilities                                                                                                                              |       | 151,091                |       | 159,865                   |       |
|                                                                                                                                           |       |                   |       |                      |       |
| Commitments and contingencies                                                                                                                  |       |                   |       |                      |       |
|                                                                                                                                           |       |                   |       |                      |       |
| Stockholder’s equity:                                                                                                                     |       |                   |       |                      |       |
| Common stock, $0.01 par value per  share.  Authorized, issued and  outstanding 1,000 shares at July 4, 2004 and January 4, 2004 |       | —                 |       | —                    |       |
| Additional paid-in capital                                                                                                                     |       | 97,076                 |       | 97,075                    |       |
| Accumulated other comprehensive income                                                                                                         |       | 70                     |       | 128                       |       |
| (Accumulated deficit) retained earnings                                                                                                        |       | (282                   | )          | 5,119                     |       |
|                                                                                                                                           |       |                   |       |                      |       |
| Total stockholder’s equity                                                                                                                |       | 96,864                 |       | 102,322                   |       |
|                                                                                                                                           |       |                   |       |                      |       |
|                                                                                                                                           |       | $                      | 247,955    |                      | $          | 262,187 |   |

 

Seeaccompanying notes to unaudited consolidatedfinancial statements.

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

ConsolidatedStatements of Operations

 

(amounts in thousands)

 

 
| ** **                                                          | ** ** | **Three month periods ended** | ** ** | **Six month periods ended** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** **                                                          | ** ** | **July 4,  2004**        | ** ** | **June 29,  2003**     |       | **July 4,  2004** | ** ** | **June 29,  2003** | ** ** |
| ** **                                                          | ** ** | ** **                    | ** ** | ** **                  | ** ** | **Restated  (see Note 2)** | ** ** |
| ** **                                                          |
| ** **                                                          | ** ** | ** **                    | ** ** | **(unaudited)**             | ** ** | ** ** | ** ** |
| Revenues                                                            |       | $                             | 64,911     |                        | $          | 59,746 |   | $ | 137,892 |   | $ | 124,862 |   |
|                                                                |       |                          |       |                        |       |   |   |   |   |
| Food and beverage costs                                             |       | 21,988                        |       | 19,865                      |       | 46,462 |   | 41,860 |   |
| Restaurant operating expenses                                       |       | 31,042                        |       | 29,226                      |       | 63,242 |   | 59,351 |   |
| Pre-opening costs, depreciation,  amortization and non-cash charges |       | 2,157                         |       | 1,858                       |       | 4,187 |   | 4,296 |   |
| General and administrative expenses                                 |       | 4,662                         |       | 3,781                       |       | 9,548 |   | 7,817 |   |
| Marketing and promotional expenses                                  |       | 2,240                         |       | 1,108                       |       | 4,869 |   | 2,575 |   |
| Costs associated with the repayment of  certain debt                |       | —                        |       | —                      |       | 264 |   | — |   |
| Interest expense, net                                               |       | 2,866                         |       | 1,435                       |       | 5,937 |   | 3,076 |   |
| Management fee paid to related party                                |       | 700                           |       | 700                         |       | 1,400 |   | 1,400 |   |
|                                                                |       |                          |       |                        |       |   |   |   |   |
| (Loss) income before income taxes                                   |       | (744                          | )          | 1,773                       |       | 1,983 |   | 4,487 |   |
|                                                                |       |                          |       |                        |       |   |   |   |   |
| Income tax (benefit) expense                                        |       | (223                          | )          | 532                         |       | 595 |   | 1,334 |   |
|                                                                |       |                          |       |                        |       |   |   |   |   |
| Net (loss) income                                                   |       | $                             | (521       | )                           | $          | 1,241 |   | $ | 1,388 |   | $ | 3,153 |   |

 

Seeaccompanying notes to unaudited consolidatedfinancial statements.

 

5

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

ConsolidatedStatements of Cash Flows

 

(amounts in thousands)

 
| ** **                                                                         | ** ** | **Six month periods ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **July 4, 2004**       | ** ** | **June 29, 2003** | ** ** |
| ** **                                                                         | ** ** | ** **                  | ** ** | **Restated  (see Note 2)** | ** ** |
| ** **                                                                         | ** ** | **(unaudited)**             | ** ** |
| Cash flows from operating activities:                                              |       |                        |       |   |   |
| Net income                                                                         |       | $                           | 1,388      |   | $ | 3,153 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                        |       |   |   |
| Depreciation, amortization and other  non-cash charges                             |       | 5,338                       |       | 3,426 |   |
| Deferred income taxes                                                              |       | 553                         |       | 1,108 |   |
| Change in assets and liabilities:                                                  |       |                        |       |   |   |
| Accounts receivable                                                                |       | 784                         |       | 2,679 |   |
| Income taxes receivable                                                            |       | —                      |       | 251 |   |
| Inventories                                                                        |       | (399                        | )          | 216 |   |
| Prepaid expenses and other assets                                                  |       | (792                        | )          | 1,548 |   |
| Accounts payable, accrued expenses and  other liabilities                          |       | (4,158                      | )          | (7,718 | ) |
| Accrued income taxes                                                               |       | (254                        | )          | (103 | ) |
| Net cash provided by operating activities                                          |       | 2,460                       |       | 4,560 |   |
|                                                                               |       |                        |       |   |   |
| Cash flows from investing activities:                                              |       |                        |       |   |   |
| Purchases of property and equipment                                                |       | (3,638                      | )          | (2,360 | ) |
| Increase in marketable securities                                                  |       | (1,741                      | )          | — |   |
| Net cash used in investing activities                                              |       | (5,379                      | )          | (2,360 | ) |
|                                                                               |       |                        |       |   |   |
| Cash flows from financing activities:                                              |       |                        |       |   |   |
| Principal reduction on obligations to  financial institutions and capital leases   |       | (5,532                      | )          | (7,853 | ) |
| Proceeds from obligations to financial  institutions                               |       | —                      |       | 5,900 |   |
| Payment of deferred financing costs                                                |       | (550                        | )          | — |   |
| Dividends paid                                                                     |       | (6,789                      | )          | — |   |
| Decrease in restricted cash                                                        |       | 79                          |       | — |   |
| Net cash used in financing activities                                              |       | (12,792                     | )          | (1,953 | ) |
|                                                                               |       |                        |       |   |   |
| Effect of exchange rate changes on cash                                            |       | (8                          | )          | 42 |   |
|                                                                               |       |                        |       |   |   |
| Net (decrease) increase in cash and cash  equivalents                              |       | (15,719                     | )          | 289 |   |
|                                                                               |       |                        |       |   |   |
| Cash and cash equivalents at beginning of  period                                  |       | 17,997                      |       | 1,703 |   |
|                                                                               |       |                        |       |   |   |
| Cash and cash equivalents at end of period                                         |       | $                           | 2,278      |   | $ | 1,992 |   |

 

Seeaccompanying notes to unaudited consolidatedfinancial statements.

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Notes to Unaudited Consolidated Financial Statements

 

July 4,2004 and June 29, 2003

 

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

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

 

Theaccompanying consolidated financial statements are unauditedand include all adjustments (consisting of normal recurring adjustments andaccruals) that management considers necessary for a fair presentation of itsfinancial position and results of operations for the interim periodspresented.  The results of operations forthe interim periods are not necessarily indicative of the results that may beexpected for the full year.

 

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

 

The Companyuses a 52/53 week fiscal year which ends on the Sunday closest toJanuary 1. Approximately every six or seven years, a 53rd week will beadded.  Fiscal 2003 was a 53 week year.

 

**2)**            **Restatement of ConsolidatedFinancial Statements**

The effect of therestatement discussed herein on the Company’s results as of and for the fiscalyear ended January 4, 2004 was reflected in the Company’s Annual Report onForm 10-K. The Company has restated its consolidated financial statements forthe three month period ended March 30, 2003 and six month period endedJune 29, 2003 as a result of having incorrectly provided estimates forexpirations and non-redemption of gift certificates that it had sold.  The effect of the restatement was to reducerevenues for the three month period ended March 30, 2003 in the amount of$137,000 and accordingly reduce revenues for the six month period endedJune 29, 2003 in the amount of $137,000. The restatement had no effect on the Company’s net operating cashposition.  The impact of theabove-mentioned restatement on the consolidated statement of operations for thesix month period ended June 29, 2003 is as follows (amounts in thousands):

 
| ** **                 | ** ** | **Six month period ended  June 29, 2003** | ** ** |
|----------------------------|------------|------------------------------------------------|------------|
| ** **                 | ** ** | **Reported**                                   | ** ** | **Restated** | ** ** |
| Revenues                   |       | $                                              | 124,999    |   | $ | 124,862 |   |
| Income before income taxes |       | 4,624                                          |       | 4,487 |   |
| Income tax expense         |       | 1,387                                          |       | 1,334 |   |
| Net income                 |       | 3,237                                          |       | 3,153 |   |
|                            |            |                                                |            |  |  |  |  |

 

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

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

 

7

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OnJune 4, 2004, Morton’s Holding Company, Inc. (“MHCI”), a newly formedwholly-owned subsidiary of MHLLC, became an intermediate holding company andthe direct parent of the Company. Subsequently, MHCI completed a $40,000,00014% senior secured notes offering. The notes are secured by the assets of MHCI,which include the stock of the Company. The notes are not secured by the assets of, nor are they guaranteed by,the Company or any of its subsidiaries. MHCI used the proceeds of the offering to make a distribution to MHLLC’s equity holders and to pay fees and expenses relatedto the issuance.

 

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

For thepurposes of the consolidated statements of cash flows, the Company considersall highly liquid instruments purchased with a maturity of three months or lessto be cash equivalents.  The Company paidcash interest, net of amounts capitalized, of approximately $4,811,000 and$3,455,000, and income taxes of approximately $318,000 and $202,000, for thesix month periods ended July 4, 2004 and June 29, 2003, respectively.

 

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

Restrictedcash of $1,021,000 and $1,100,000 as of July 4, 2004 and January 4,2004, respectively, represents cash collateral relating to two interest rateswap agreements with Bank of America, formerly Fleet National Bank (“B of A”).See Note 8.

 

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

The Companyaccounts for its marketable securities in accordance with Statement ofFinancial Accounting Standard (“SFAS”) No. 115, “Accounting for CertainInvestments in Debt and Equity Securities.” In accordance with SFAS No. 115, marketable securities of approximately$1,741,000 as of July 4, 2004 are accounted for as tradingsecurities.  Securities held by theCompany are bought and held principally for the purpose of selling them in thenear term and are recorded at fair value. Unrealized gains and losses on suchsecurities have been recognized in interest expense, net in the consolidatedstatements of operations.

 

**7)****            Intangible Asset andGoodwill**

Theidentifiable intangible asset acquired represents the Company’s trade name“Morton’s,” which has an indefinite life and accordingly is not subject toamortization, but is subject to impairment testing. The trade name is used inthe advertising and marketing of the restaurants and is widely recognized andaccepted by consumers in its respective market as an indication of andrecognition of service, value and quality. Goodwill represents the excess ofcosts over fair value of assets of the business acquired.

 

**8)****            Derivative FinancialInstruments**

The Companyaccounts for its derivative financial instruments in accordance with SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities,” as amendedby SFAS No. 137 and SFAS No. 138.  SFASNo. 133 establishes accounting and reporting standards for derivativeinstruments, including certain derivative instruments embedded in othercontracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets orliabilities in the statement of financial position and measures thoseinstruments at fair value.  As of July 4,2004, the Company’s derivative financial instruments consist of two interestrate swap agreements with notional amounts of $20,000,000 each. Prior to theJuly 7, 2003 repayment of our prior credit facility with a portion of theproceeds from our 7.5% senior secured notes offering, the interest rate swapagreements were originally designated as cash flow hedges for purposes of SFASNo. 133. As a result of such repayment, these two interest rate swapagreements, which are due to expire on October 24, 2004 andOctober 24, 2005, are accounted for as speculative instruments andresulting changes in their fair market value have been charged or credited tothe consolidated statement of operations. As of July 4, 2004 and January 4, 2004, in accordance with SFASNo. 133, liabilities were approximately $385,000 and $723,000,respectively.  The change in the fairmarket value has been

 

8

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recognizedin interest expense, net in the consolidated statement of operations for thethree and six month periods ended July 4, 2004.

 

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

The componentsof comprehensive income for the six month periods ended July 4, 2004 andJune 29, 2003 are as follows (amounts in thousands):

 
| ** **                                             | ** ** | **Six month periods ended** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **July 4, 2004**       | ** ** | **June 29, 2003** | ** ** |
|                                                   |       |                        |       | **Restated** |   |
|                                                   |       |                        |       |   |   |
| Net income                                             |       | $                           | 1,388      |   | $ | 3,153 |   |
| Other comprehensive income (loss):                     |       |                        |       |   |   |
| Foreign currency translation                           |       | (58                         | )          | (1 | ) |
| Change in fair value of interest rate swap  agreements |       | —                      |       | (200 | ) |
| Total comprehensive income                             |       | $                           | 1,330      |   | $ | 2,952 |   |

 

**10)****         ****Morton’s 90 West Street, NY**

As a result of the impact ofthe World Trade Center terrorist attacks on September 11, 2001, theMorton’s steakhouse restaurant located at 90 West Street, New York, New York,two blocks from the World Trade Center was closed permanently due to structuraldamage.  During the six month periodended June 29, 2003, the Company recorded a benefit in “Restaurantoperating expenses” in the accompanying consolidated statement of operations ofapproximately $862,000 representing business interruption insurance recoveryrelated to costs incurred from the closing of that restaurant.  There were no comparable benefits recordedduring the six month period ended July 4, 2004.  During March 2004, the Company receivedapproximately $1,007,000 for such insurance. As of July 4, 2004, cumulative benefits recorded were approximately$3,619,000 and cumulative amounts received were approximately $3,619,000 forthis insurance. Based on the insurance policy coverage, the Company believesthat additional benefits will be recorded in fiscal 2004 and possibly in futureperiods relating to future insurance recoveries, although there is no assurancethat any future recoveries will be received.

 

**11)****         ****Employee SubscriptionAgreements**

Certain of our executivesand other employees have been granted common units of MHLLC, which represent anownership interest in MHLLC, pursuant to employee subscription agreements.  MHLLC’s Boardapproved 1,711,344 units available for grant of which 1,497,585 and 26,200 weregranted on August 26, 2003 and June 21, 2004, respectively.  On August 26, 2003 and June 21,2004, the fair value of each common unit granted was $0.01.  Common units granted to an employee pursuantto employee subscription agreements are granted at no cost to the employee.These common units are subject to vesting. Fifty percent of the granted common units vest upon certain dates if theemployee is employed as of such date.  Inaddition, fifty percent of the common units will vest upon certain change ofcontrol or liquidation events if, upon the occurrence of such an event, CastleHarlan Partners III, L.P. achieves an internal rate of return of at least 30%and the employee 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 of MHLLC’s operating agreement.  Stock-based employee compensation expenserelated to this plan will be charged to the Company based on the recognitionand measurement provisions of Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations.  Accordingly, the Company recognized compensationexpense relating to the vesting of common units granted in our consolidatedstatement of operations for the three and six month periods ended July 4,2004.  The compensation expense recordedduring the three and six month periods ended July 4, 2004, represents thestraight-line amortization of the difference between the fair value at the dateof grant of $0.01 per common unit and the exercise price (which is zero) of thecommon units of the outstanding time-vesting common units for the respectiveperiod.  The remaining compensationexpense that was measured at the

 

9

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date of grant will be amortized on astraight-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.

 

Activity relating to thecommon units granted pursuant to employee subscription agreements during thesix month period ended July 4, 2004 is as follows:

 
| Unvested common units outstanding as of  January 4, 2004 |   | 1,482,385 |   |
|---------------------------------------------------------------|--------|-----------|--------|
| Granted units                                                 |   | 26,200    |   |
| Vested units                                                  |   | —    |   |
| Forfeited units                                               |   | (16,600   | )      |
| Unvested common units outstanding as of  July 4, 2004    |   | 1,491,985 |   |

 

As ofJuly 4, 2004, there were 219,359 common units available for grant.

 

InDecember 2002, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 148, “Accounting for Stock-Based Compensation-Transition andDisclosure.”  SFAS No. 148 providesalternative methods of transition for a voluntary change to the fair valuemethod of accounting for stock-based employee compensation as originallyprovided by SFAS No. 123, “Accounting for Stock-Based Compensation.”  Additionally, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosure in boththe annual and interim financial statements about the method of accounting forstock-based compensation and the effect of the method used on reportedresults.  The transitional requirementsof SFAS No. 148 are effective for all financial statements for fiscal yearsending after December 15, 2002.  Theapplication of the disclosure portion of this standard did not have any impacton our consolidated financial statements. The financial and accounting standards board recently indicated that itwill require stock-based employee compensation to be recorded as a charge toearnings pursuant to a standard it is currently deliberating, which it believeswill become effective during 2004.  Wewill continue to monitor its progress on the issuance of this standard as wellas evaluate our position with respect to current guidance.

 

**12)****          Financial Informationabout Geographic Areas**

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

 
| ** ** | ** ** | **Three month periods ended** | ** ** | **Six month periods ended** | ** ** |
|------------|------------|-------------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | **July 4,  2004**        | ** ** | **June 29,  2003**     | ** ** | **July 4,  2004** | ** ** | **June 29,  2003** | ** ** |
| ** ** | ** ** | ** **                    | ** ** | ** **                  | ** ** | ** ** | ** ** | **Restated** | ** ** |
|       |       |                          |       |                        |       |   |   |   |   |
| Domestic   |       | $                             | (1,020     | )                           | $          | 2,096 |   | $ | 1,324 |   | $ | 4,697 |   |
| Foreign    |       | 276                           |       | (323                        | )          | 659 |   | (210 | ) |
| Total      |       | $                             | (744       | )                           | $          | 1,773 |   | $ | 1,983 |   | $ | 4,487 |   |

 

**13)****          Restaurant Activity**

InJanuary 2003, the Company closed the Morton’s steakhouse in Hong KongCentral. In August 2003, the Company closed the Morton’s steakhouse inAddison, Texas. No restaurants were opened or closed during the six monthperiod ended July 4, 2004. During July 2004, a new Morton’s steakhouseopened in White Plains, New York.

 

10

----

 

**14)****          Legal Matters andContingencies**

SinceAugust 2002, a number of the Company’s current and former employees in NewYork and Florida have initiated arbitrations with the American ArbitrationAssociation in their respective states alleging that the Company has violatedstate and federal (New York arbitrations) and federal (Florida arbitrations)wage and hour laws regarding the sharing of tips with other employees andfailure to pay for all hours worked. In general, the complainants are seekingrestitution of tips, the difference between the tip credit wage and the minimumwage, payment for hours worked off the clock, liquidated damages and attorneys’fees and costs. The arbitrator in the New York arbitrations has permitted thecomplainants to consolidate their arbitrations into one action and proceed as acollective action. The Florida complainants are also seeking to consolidatetheir arbitrations, but there has been no determination to date. The Companybelieves that the allegations are without merit and intends to contest themvigorously.

 

The Company isinvolved in various other claims and legal actions arising in the ordinarycourse of business. Management does not believe that the ultimate resolution ofthese actions will have a material adverse effect on the Company’s consolidatedfinancial position, results of operations, liquidity and capital resources.

 

**15)****          Supplemental CondensedConsolidating Financial Information**

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

 

11

----

 

**Supplemental Consolidating Balance Sheet**

**July 4, 2004**

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Assets                                    |       |       |       |                        |       |                            |       |             |       |             |       |
| Current assets:                           |       |       |       |                        |       |                            |       |             |       |             |       |
| Cash and cash equivalents                 |       | $          | 695        |                        | $          | 1,074                           |       | $                | 509        |             | $          | — |   | $ | 2,278 |   |
| Restricted cash                           |       | 1,021      |       | —                      |       | —                          |       | —           |       | 1,021            |       |
| Marketable securities                     |       | 1,741      |       | —                      |       | —                          |       | —           |       | 1,741            |       |
| Accounts receivable                       |       | 57         |       | 2,839                       |       | 146                             |       | —           |       | 3,042            |       |
| Inventories                               |       | —     |       | 8,949                       |       | 534                             |       | —           |       | 9,483            |       |
| Prepaid expenses and other current assets |       | 329        |       | 5,519                       |       | 39                              |       | —           |       | 5,887            |       |
| Deferred income taxes                     |       | 3,210      |       | 3,313                       |       | —                          |       | —           |       | 6,523            |       |
|                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Total current assets                      |       | 7,053      |       | 21,694                      |       | 1,228                           |       | —           |       | 29,975           |       |
|                                      |       |       |       |                        |       |                            |       |             |       |             |       |
| Property and equipment, net               |       | 135        |       | 53,292                      |       | 1,210                           |       | —           |       | 54,637           |       |
| Intangible asset                          |       | —     |       | 92,000                      |       | —                          |       | —           |       | 92,000           |       |
| Goodwill                                  |       | —     |       | 61,552                      |       | —                          |       | —           |       | 61,552           |       |
| Other assets and deferred expenses, net   |       | 8,343      |       | 3,721                       |       | 247                             |       | (2,520           | )          | 9,791            |       |
| Amounts due from affiliates               |       | 140,174    |       | 505                         |       | —                          |       | (140,679         | )          | —           |       |
|                                      |       | $          | 155,705    |                        | $          | 232,764                         |       | $                | 2,685      |             | $          | (143,199 | ) | $ | 247,955 |   |

 

12

----

 

**Supplemental Consolidating Balance Sheet**

**July 4, 2004**

**(unaudited)**

 

**(amounts in thousands, exceptshare and per share amounts)**

 
| ** **                                                                                       | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Liabilities and Stockholder’s Equity                                                        |       |       |       |                        |       |                            |       |             |       |             |       |
| Current liabilities:                                                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Accounts payable and accrued expenses                                                            |       | $          | 5,131      |                        | $          | 23,216                          |       | $                | 1,026      |             | $          | — |   | $ | 29,373 |   |
| Current portion of obligations to financial  institutions                                        |       | —     |       | 497                         |       | —                          |       | —           |       | 497              |       |
| Accrued income taxes                                                                             |       | (2,307     | )          | 2,813                       |       | (459                            | )          | —           |       | 47               |       |
| Amounts due to affiliates                                                                        |       | —     |       | 140,174                     |       | 505                             |       | (140,679         | )          | —           |       |
|                                                                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Total current liabilities                                                                        |       | 2,824      |       | 166,700                     |       | 1,072                           |       | (140,679         | )          | 29,917           |       |
|                                                                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| 7.5% senior secured notes, net of  unamortized discount of $14,157                               |       | 90,843     |       | —                      |       | —                          |       | —           |       | 90,843           |       |
| Obligations to financial institutions, less  current maturities                                  |       | —     |       | 6,903                       |       | —                          |       | —           |       | 6,903            |       |
| Deferred income taxes                                                                            |       | —     |       | 20,471                      |       | —                          |       | —           |       | 20,471           |       |
| Other liabilities                                                                                |       | (32        | )          | 2,911                       |       | 78                              |       | —           |       | 2,957            |       |
|                                                                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Total liabilities                                                                                |       | 93,635     |       | 196,985                     |       | 1,150                           |       | (140,679         | )          | 151,091          |       |
|                                                                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Commitments and contingencies                                                                    |       |       |       |                        |       |                            |       |             |       |             |       |
|                                                                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Stockholder’s equity:                                                                       |       |       |       |                        |       |                            |       |             |       |             |       |
| Common stock, $0.01 par value per  share.  Authorized, issued and  outstanding 1,000 shares |       | —     |       | —                      |       | —                          |       | —           |       | —           |       |
| Additional paid-in capital                                                                       |       | 97,076     |       | 2,520                       |       | —                          |       | (2,520           | )          | 97,076           |       |
| Accumulated other comprehensive income  (loss)                                                   |       | —     |       | 225                         |       | (155                            | )          | —           |       | 70               |       |
| (Accumulated deficit) retained earnings                                                          |       | (35,006    | )          | 33,034                      |       | 1,690                           |       | —           |       | (282             | )          |
|                                                                                             |       |       |       |                        |       |                            |       |             |       |             |       |
| Total stockholder’s equity                                                                  |       | 62,070     |       | 35,779                      |       | 1,535                           |       | (2,520           | )          | 96,864           |       |
|                                                                                             |       |       |       |                        |       |                            |       |             |       |             |       |
|                                                                                             |       | $          | 155,705    |                        | $          | 232,764                         |       | $                | 2,685      |             | $          | (143,199 | ) | $ | 247,955 |   |

 

13

----

 

**Supplemental Consolidating Balance Sheet**

**January 4, 2004**

 

**(amounts in thousands)**

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

 

14

----

 

**Supplemental Consolidating Balance Sheet**

**January 4, 2004**

 

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

 

15

----

 

**Supplemental Consolidating Statement of Operations**

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

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                                          | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                            |       | $          | 3,887      |                        | $          | 61,745                          |       | $                | 3,166      |             | $          | (3,887 | ) | $ | 64,911 |   |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and beverage costs                                             |       | —     |       | 20,929                      |       | 1,059                           |       | —           |       | 21,988           |       |
| Restaurant operating expenses                                       |       | —     |       | 29,455                      |       | 1,587                           |       | —           |       | 31,042           |       |
| Pre-opening costs, depreciation,  amortization and non-cash charges |       | 3          |       | 2,000                       |       | 154                             |       | —           |       | 2,157            |       |
| General and administrative expenses                                 |       | 4,662      |       | 3,887                       |       | —                          |       | (3,887           | )          | 4,662            |       |
| Marketing and promotional expenses                                  |       | —     |       | 2,150                       |       | 90                              |       | —           |       | 2,240            |       |
| Interest expense, net                                               |       | 2,693      |       | 173                         |       | —                          |       | —           |       | 2,866            |       |
| Management fee paid to related party                                |       | 700        |       | —                      |       | —                          |       | —           |       | 700              |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss) income before income taxes                                   |       | (4,171     | )          | 3,151                       |       | 276                             |       | —           |       | (744             | )          |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax benefit                                                  |       | (223       | )          | —                      |       | —                          |       | —           |       | (223             | )          |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss) income                                                   |       | $          | (3,948     | )                           | $          | 3,151                           |       | $                | 276        |             | $          | — |   | $ | (521 | ) |

 

 

**Supplemental Consolidating Statement of Operations**

**Three month period ended June 29, 2003**

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                                          | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                            |       | $          | 3,574      |                        | $          | 57,934                          |       | $                | 1,812      |             | $          | (3,574 | ) | $ | 59,746 |   |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and beverage costs                                             |       | —     |       | 19,209                      |       | 656                             |       | —           |       | 19,865           |       |
| Restaurant operating expenses                                       |       | —     |       | 27,942                      |       | 1,284                           |       | —           |       | 29,226           |       |
| Pre-opening costs, depreciation,  amortization and non-cash charges |       | 5          |       | 1,732                       |       | 121                             |       | —           |       | 1,858            |       |
| General and administrative expenses                                 |       | 3,781      |       | 3,574                       |       | —                          |       | (3,574           | )          | 3,781            |       |
| Marketing and promotional expenses                                  |       | —     |       | 1,044                       |       | 64                              |       | —           |       | 1,108            |       |
| Interest expense, net                                               |       | 972        |       | 453                         |       | 10                              |       | —           |       | 1,435            |       |
| Management fee paid to related party                                |       | 700        |       | —                      |       | —                          |       | —           |       | 700              |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss) income before income taxes                                   |       | (1,884     | )          | 3,980                       |       | (323                            | )          | —           |       | 1,773            |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax expense                                                  |       | 532        |       | —                      |       | —                          |       | —           |       | 532              |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss) income                                                   |       | $          | (2,416     | )                           | $          | 3,980                           |       | $                | (323       | )                | $          | — |   | $ | 1,241 |   |

 

16

----

 

**Supplemental Consolidating Statement of Operations**

**Six month period ended July 4, 2004**

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                                          | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                            |       | $          | 8,258      |                        | $          | 131,449                        |       | $                | 6,443      |             | $          | (8,258 | ) | $ | 137,892 |   |
|                                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| Food and beverage costs                                             |       | —     |       | 44,334                      |       | 2,128                          |       | —           |       | 46,462           |       |
| Restaurant operating expenses                                       |       | —     |       | 60,015                      |       | 3,227                          |       | —           |       | 63,242           |       |
| Pre-opening costs, depreciation,  amortization and non-cash charges |       | 6          |       | 3,933                       |       | 248                            |       | —           |       | 4,187            |       |
| General and administrative expenses                                 |       | 9,548      |       | 8,258                       |       | —                         |       | (8,258           | )          | 9,548            |       |
| Marketing and promotional expenses                                  |       | —     |       | 4,688                       |       | 181                            |       | —           |       | 4,869            |       |
| Costs associated with the repayment of  certain debt                |       | 264        |       | —                      |       | —                         |       | —           |       | 264              |       |
| Interest expense, net                                               |       | 5,481      |       | 456                         |       | —                         |       | —           |       | 5,937            |       |
| Management fee paid to related party                                |       | 1,400      |       | —                      |       | —                         |       | —           |       | 1,400            |       |
|                                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| (Loss) income before income taxes                                   |       | (8,441     | )          | 9,765                       |       | 659                            |       | —           |       | 1,983            |       |
|                                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| Income tax expense                                                  |       | 595        |       | —                      |       | —                         |       | —           |       | 595              |       |
|                                                                |       |       |       |                        |       |                           |       |             |       |             |       |
| Net (loss) income                                                   |       | $          | (9,036     | )                           | $          | 9,765                          |       | $                | 659        |             | $          | — |   | $ | 1,388 |   |

 

 

**Supplemental Consolidating Statement of Operations**

**Six month period ended June 29, 2003**

**(unaudited)**

**Restated**

 

**(amounts in thousands)**

 
| ** **                                                          | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| Revenues                                                            |       | $          | 7,473      |                        | $          | 120,145                         |       | $                | 4,717      |             | $          | (7,473 | ) | $ | 124,862 |   |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Food and beverage costs                                             |       | —     |       | 40,210                      |       | 1,650                           |       | —           |       | 41,860           |       |
| Restaurant operating expenses                                       |       | —     |       | 56,476                      |       | 2,875                           |       | —           |       | 59,351           |       |
| Pre-opening costs, depreciation,  amortization and non-cash charges |       | 58         |       | 3,988                       |       | 250                             |       | —           |       | 4,296            |       |
| General and administrative expenses                                 |       | 7,817      |       | 7,473                       |       | —                          |       | (7,473           | )          | 7,817            |       |
| Marketing and promotional expenses                                  |       | —     |       | 2,444                       |       | 131                             |       | —           |       | 2,575            |       |
| Interest expense, net                                               |       | 2,124      |       | 931                         |       | 21                              |       | —           |       | 3,076            |       |
| Management fee paid to related party                                |       | 1,400      |       | —                      |       | —                          |       | —           |       | 1,400            |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| (Loss) income before income taxes                                   |       | (3,926     | )          | 8,623                       |       | (210                            | )          | —           |       | 4,487            |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Income tax expense                                                  |       | 1,334      |       | —                      |       | —                          |       | —           |       | 1,334            |       |
|                                                                |       |       |       |                        |       |                            |       |             |       |             |       |
| Net (loss) income                                                   |       | $          | (5,260     | )                           | $          | 8,623                           |       | $                | (210       | )                | $          | — |   | $ | 3,153 |   |

 

17

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**Supplemental Consolidating Statement of Cash Flows**

**Six month period ended July 4, 2004**

**(unaudited)**

 

**(amounts in thousands)**

 
| ** **                                                                                          | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| Cash flows from operating activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Net (loss) income                                                                                   |       | $          | (9,036     | )                           | $          | 9,765                           |       | $                | 659        |   | $ | 1,388 |   |
| Adjustments to reconcile net (loss) income  to net cash (used in) provided by operating activities: |       |       |       |                        |       |                            |       |             |       |
| Depreciation, amortization and other  non-cash charges                                              |       | 1,394      |       | 3,664                       |       | 280                             |       | 5,338            |       |
| Deferred income taxes                                                                               |       | 2,525      |       | (1,972                      | )          | —                          |       | 553              |       |
| Change in assets and liabilities:                                                                   |       |       |       |                        |       |                            |       |             |       |
| Accounts receivable                                                                                 |       | (55        | )          | 826                         |       | 13                              |       | 784              |       |
| Inventories                                                                                         |       | —     |       | (437                        | )          | 38                              |       | (399             | )          |
| Prepaid expenses and other assets                                                                   |       | 10,360     |       | (10,293                     | )          | (859                            | )          | (792             | )          |
| Accounts payable, accrued expenses and  other liabilities                                           |       | (385       | )          | (3,567                      | )          | (206                            | )          | (4,158           | )          |
| Accrued income taxes                                                                                |       | (12,968    | )          | 12,798                      |       | (84                             | )          | (254             | )          |
| Net cash (used in) provided by operating  activities                                                |       | (8,165     | )          | 10,784                      |       | (159                            | )          | 2,460            |       |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Cash flows from investing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
|   Purchases of property and equipment                                                     |       | (50        | )          | (3,564                      | )          | (24                             | )          | (3,638           | )          |
|   Increase in marketable securities                                                       |       | (1,741     | )          | —                      |       | —                          |       | (1,741           | )          |
| Net cash used in investing activities                                                               |       | (1,791     | )          | (3,564                      | )          | (24                             | )          | (5,379           | )          |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Cash flows from financing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
|   Principal  reduction on obligations to financial institutions                           |       | —     |       | (5,532                      | )          | —                          |       | (5,532           | )          |
|   Payment of deferred financing costs                                                     |       | (550       | )          | —                      |       | —                          |       | (550             | )          |
|   Dividends paid                                                                          |       | (6,789     | )          | —                      |       | —                          |       | (6,789           | )          |
|   Decrease in restricted cash                                                             |       | 79         |       | —                      |       | —                          |       | 79               |       |
| Net cash used in financing activities                                                               |       | (7,260     | )          | (5,532                      | )          | —                          |       | (12,792          | )          |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Effect of exchange rate changes on cash                                                             |       | —     |       | —                      |       | (8                              | )          | (8               | )          |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Net (decrease) increase in cash and cash  equivalents                                               |       | (17,216    | )          | 1,688                       |       | (191                            | )          | (15,719          | )          |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Cash and cash equivalents at beginning of  period                                                   |       | 17,911     |       | (614                        | )          | 700                             |       | 17,997           |       |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Cash and cash equivalents at end of period                                                          |       | $          | 695        |                        | $          | 1,074                           |       | $                | 509        |   | $ | 2,278 |   |

 

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**Supplemental Consolidating Statement of Cash Flows**

**Six month period ended June 29, 2003**

**(unaudited)**

**Restated**

 

**(amounts in thousands)**

 
| ** **                                                                                          | ** ** | **Issuer** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|
| Cash flows from operating activities:                                                               |       |       |       |                        |       |                            |       |             |       |
| Net (loss) income                                                                                   |       | $          | (5,260     | )                           | $          | 8,623                           |       | $                | (210       | ) | $ | 3,153 |   |
| Adjustments to reconcile net (loss) income  to net cash (used in) provided by operating activities: |       |       |       |                        |       |                            |       |             |       |
| Depreciation, amortization and other  non-cash charges                                              |       | 58         |       | 3,124                       |       | 244                             |       | 3,426            |       |
| Deferred income taxes                                                                               |       | 4,939      |       | (3,831                      | )          | —                          |       | 1,108            |       |
| Change in assets and liabilities:                                                                   |       |       |       |                        |       |                            |       |             |       |
| Accounts receivable                                                                                 |       | (22        | )          | 2,667                       |       | 34                              |       | 2,679            |       |
| Income taxes receivable                                                                             |       | 250        |       | 1                           |       | —                          |       | 251              |       |
| Inventories                                                                                         |       | —     |       | 125                         |       | 91                              |       | 216              |       |
| Prepaid expenses and other assets                                                                   |       | 1,951      |       | (928                        | )          | 525                             |       | 1,548            |       |
| Accounts payable, accrued expenses and  other liabilities                                           |       | (1,791     | )          | (4,828                      | )          | (1,099                          | )          | (7,718           | )          |
| Accrued income taxes                                                                                |       | (2,010     | )          | 1,957                       |       | (50                             | )          | (103             | )          |
| Net cash (used in) provided by operating  activities                                                |       | (1,885     | )          | 6,910                       |       | (465                            | )          | 4,560            |       |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Cash flows from investing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
|   Purchases of property and equipment                                                     |       | (22        | )          | (2,275                      | )          | (63                             | )          | (2,360           | )          |
| Net cash used in investing activities                                                               |       | (22        | )          | (2,275                      | )          | (63                             | )          | (2,360           | )          |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Cash flows from financing activities:                                                               |       |       |       |                        |       |                            |       |             |       |
|   Principal  reduction on obligations to financial institutions and capital leases        |       | (3,550     | )          | (4,169                      | )          | (134                            | )          | (7,853           | )          |
|   Proceeds from obligations to financial institutions                                     |       | 5,900      |       | —                      |       | —                          |       | 5,900            |       |
| Net cash provided by (used in) financing  activities                                                |       | 2,350      |       | (4,169                      | )          | (134                            | )          | (1,953           | )          |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Effect of exchange rate changes on cash                                                             |       | —     |       | —                      |       | 42                              |       | 42               |       |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Net increase (decrease) in cash and cash  equivalents                                               |       | 443        |       | 466                         |       | (620                            | )          | 289              |       |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Cash and cash equivalents at beginning of  period                                                   |       | 243        |       | 601                         |       | 859                             |       | 1,703            |       |
|                                                                                                |       |       |       |                        |       |                            |       |             |       |
| Cash and cash equivalents at end of period                                                          |       | $          | 686        |                        | $          | 1,067                           |       | $                | 239        |   | $ | 1,992 |   |

 

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MORTON’SRESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Item2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations

 

Restatementof Consolidated Financial Statements

 

The effect of therestatement discussed herein on our results as of and for the fiscal year endedJanuary 4, 2004 was reflected in our Annual Report on Form 10-K. We haverestated our consolidated financial statements for the three month period endedMarch 30, 2003 and the six month period ended June 29, 2003 as aresult of having incorrectly provided estimates for expirations and non-redemptionof gift certificates that we sold.  Theeffect of the restatement was to reduce revenues for the three month periodended March 30, 2003 in the amount of $0.1 million and accordingly reducerevenues for the six month period ended June 29, 2003 in the amount of$0.1 million.  The restatement had noeffect on our net operating cash position. See Note 2 to our unaudited consolidated financial statements.

 

Resultsof Operations

 

Our net lossfor the three month period ended July 4, 2004 was $0.5 million compared tonet income of $1.2 million for the three month period ended June 29,2003.  Net income decreased $1.8 million,or 56.0%, to $1.4 million for the six month period ended July 4, 2004 from$3.2 million for the six month period ended June 29, 2003.  These decreases are primarily due to increasesin interest expense, net and marketing and promotional expenses discussedbelow.

 

Revenues increased $5.2million, or 8.6%, to $64.9 million for the three month period endedJuly 4, 2004 from $59.7 million for the three month period endedJune 29, 2003. Revenues increased $5.9 million due to an increase incomparable revenues from restaurants open all of both fiscal years. Revenuesdeclined $0.4 million due to the closing of the Morton’s steakhouse formerly locatedin Addison, Texas (closed since August 2003). This steakhouse was closeddue to its comparatively low revenues and negative cash flows. Revenuesdecreased $0.3 million due to a decline in revenues attributable to the one newrestaurant opened in fiscal 2003. Average revenue per restaurant open all ofeither period increased 10.3%. Revenues for the three month period endedJuly 4, 2004 also reflect the impact of aggregate menu price increases ofapproximately 3% in November 2003 and approximately 3% inFebruary 2004.

 

Revenues increased $13.0million, or 10.4%, to $137.9 million for the six month period endedJuly 4, 2004 from $124.9 million for the six month period endedJune 29, 2003. Revenues increased $14.2 million due to an increase incomparable revenues from restaurants open all of both fiscal years. Revenuesdeclined $1.1 million due to the closing of the Morton’s steakhouses formerlylocated in Hong Kong Central (closed since January 2003) and Addison,Texas (closed since August 2003). These steakhouses were closed due totheir comparatively low revenues and negative cash flows. Revenues decreased$0.1 million due to a decline in revenues attributable to the one newrestaurant opened in fiscal 2003. Average revenue per restaurant open all of eitherperiod increased 11.8%. Revenues for the six month period ended July 4,2004 also reflect the impact of aggregate menu price increases of approximately3% in November 2003 and approximately 3% in February 2004.

 

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Percentage changes incomparable restaurant revenues for the three and six month periods endedJuly 4, 2004 versus June 29, 2003 for restaurants open all of bothperiods are as follows:

 
| ** **       | ** ** | **Three Month Period  Ended July 4, 2004  Percentage Change** | ** ** | **Six Month Period  Ended July 4, 2004  Percentage Change** | ** ** |
|------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
|             |       |                                                               |       |                                                             |       |
| Morton’s    |       | 10.6                                                               | %          | 11.9                                                             | %          |
| Bertolini’s |       | 4.7                                                                | %          | 8.5                                                              | %          |
| Total            |       | 10.1                                                               | %          | 11.7                                                             | %          |

 

During the first and secondquarters of fiscal 2003, we believe that the war in Iraq and the weak economicenvironment, adversely affected many of the markets in which we operate which,in turn, contributed to weak revenue trends and negative comparable restaurantrevenues. Additionally, during the first and second quarters of fiscal 2003,the outbreak of “severe acute respiratory syndrome” materially affected theresults of our three restaurants located in Hong Kong, Singapore and Toronto.During the first and second quarters of fiscal 2004, an improved economy hascontributed to stronger revenue trends.

 

Our business is somewhatseasonal in nature, with revenues generally being less in the second and thirdquarters primarily due to our reduced summer volume.  We believe we may incur a net loss in thethird quarter of fiscal 2004.

 

Food and beverage costsincreased $2.1 million, or 10.7%, to $22.0 million for the three month periodended July 4, 2004 from $19.9 million for the three month period endedJune 29, 2003. These costs increased $4.6 million, or 11.0%, to $46.5million for the six month period ended July 4, 2004 from $41.9 million forthe six month period ended June 29, 2003. These costs as a percentage ofrevenues increased by 0.7% to 33.9% for the three month period endedJuly 4, 2004 from 33.2% for the three month period ended June 29,2003 and increased by 0.2% to 33.7% for the six month period ended July 4,2004 from 33.5% for the six month period ended June 29, 2003. During thethree and six month periods ended July 4, 2004 high demand for U.S. beefproducts has decreased the availability of USDA prime beef which resulted inincreased food costs. We were generally able to offset such cost increases withthe benefit of menu price increases, which resulted in an increase in food andbeverage costs as a percentage of revenue for the three and six month periods endedJuly 4, 2004 compared to the three and six month periods endedJune 29, 2003.  We cannot assure youthat we would be able or willing to increase menu prices or take other actionsto offset increases in such costs in the future.

 

Restaurant operating expenses,which include labor, occupancy and other operating expenses, increased $1.8million, or 6.2%, to $31.0 million for the three month period endedJuly 4, 2004 from $29.2 million for the three month period endedJune 29, 2003. These costs increased $3.9 million, or 6.6%, to $63.2million for the six month period ended July 4, 2004 from $59.4 million forthe six month period ended June 29, 2003. These increases were primarilydue to increases in labor and benefit costs and the opening of an additional restaurant.Restaurant operating expenses as a percentage of revenues decreased 1.1% to47.8% for the three month period ended July 4, 2004 from 48.9% for thethree month period ended June 29, 2003 and decreased 1.6% to 45.9% for thesix month period ended July 4, 2004 from 47.5% for the six month periodended June 29, 2003. The decreases in restaurant operating expenses as apercentage of revenue are primarily due to the benefit of menu price increases.Included in the three and six month periods ended June 29, 2003 arerecoveries of approximately $0.4 million and $0.9 million for businessinterruption insurance benefits related to the closing of the Morton’ssteakhouse formerly located at 90 West Street, New York, New York, two blocksfrom the World Trade Center, which was closed permanently due to structuraldamages. There were no comparable benefits recorded during the three and sixmonth periods ended July 4, 2004. As of July 4, 2004, cumulative benefits recorded were $3.6 millionand cumulative amounts received were $3.6 million for this insurance. Based onour insurance policy coverage, we believe that additional

 

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benefits will be recorded in fiscal 2004 relating tofuture insurance recoveries, although we cannot assure you that we will receiveany future recoveries. Additionally, at this time, the total amount of anyfuture recoveries is unknown.

 

Pre-opening costs,depreciation, amortization and non-cash charges increased $0.3 million, or16.1%, to $2.2 million for the three month period ended July 4, 2004 from$1.9 million for the three month period ended June 29, 2003. These costsincreased as a percentage of revenues by 0.2% to 3.3% for the three monthperiod ended July 4, 2004 from 3.1% for the three month period endedJune 29, 2003.  These costsdecreased $0.1 million, or 2.5%, to $4.2 million for the six month period endedJuly 4, 2004 from $4.3 million for the six month period ended June 29,2003. These costs decreased as a percentage of revenues by 0.4% to 3.0% for thesix month period ended July 4, 2004 from 3.4% for the six month periodended June 29, 2003. We expense all costs incurred during start-upactivities, including pre-opening costs, as incurred. Pre-opening costs incurredand recorded as expense remained consistent at $0.2 million for the three monthperiods ended July 4, 2004 and June 29, 2003 and decreased $0.7million to $0.2 million for the six month period ended July 4, 2004 from$0.9 million for the six month period ended June 29, 2003. The number ofrestaurants opened, the timing of restaurant openingsand the costs per restaurant opened affected the amount of these costs.

 

General and administrativeexpenses increased $0.9 million, or 23.3%, to $4.7 million for the three monthperiod ended July 4, 2004 from $3.8 million for the three month periodended June 29, 2003. These costs increased $1.7 million, or 22.1%, to $9.5million for the six month period ended July 4, 2004 from $7.8 million forthe six month period ended June 29, 2003. These costs as a percentage ofrevenues increased 0.9% to 7.2% for the three month period ended July 4,2004 from 6.3% for the three month period ended June 29, 2003 andincreased 0.6% to 6.9% for the six month period ended July 4, 2004 from6.3% for the six month period ended June 29, 2003.  The increases were primarily due to increasedsalary, bonus and benefit costs and legal and professional costs.

 

Marketing and promotionalexpenses increased $1.1 million, or 102.2%, to $2.2 million for the three monthperiod ended July 4, 2004 from $1.1 million for the three month periodended June 29, 2003. These costs increased $2.3 million, or 89.1%, to $4.9million for the six month period ended July 4, 2004 from $2.6 million forthe six month period ended June 29, 2003. These costs as a percentage ofrevenues increased 1.6% to 3.5% for the three month period ended July 4,2004 from 1.9% for the three month period ended June 29, 2003 andincreased 1.4% to 3.5% for the six month period ended July 4, 2004 from 2.1%for the six month period ended June 29, 2003. These increases wereprimarily due to increased spending for print media advertising in conjunctionwith the introduction of our “Savor the Good Life” theme in 2004.

 

Costs associated with therepayment of certain debt of $0.3 million for the six month period endedJuly 4, 2004 represent prepayment penalties that we incurred with theearly repayment of two of our mortgages. There were no comparable costsassociated with the repayment of certain debt during the three month periodended July 4, 2004 and the three and six month periods ended June 29,2003.

 

Interest expense, net,increased $1.4 million, or 99.7%, to $2.9 million for the three month periodended July 4, 2004 from $1.4 million for the three month period endedJune 29, 2003 and increased $2.9 million, or 93.0%, to $5.9 million forthe six month period ended July 4, 2004 from $3.1 million for the sixmonth period ended June 29, 2003. These increases were primarily due to the issuance of the 7.5% seniorsecured notes in July 2003. Interest income was not significant in any ofthese periods.

 

Management fee paid torelated party was $0.7 million for the three month periods ended July 4,2004 and June 29, 2003 and $1.4 million for the six month periods endedJuly 4, 2004 and June 29, 2003. We paid this fee pursuant to MHLLC’s management agreement with Castle Harlan, Inc.

 

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Provision for income taxesconsisted of income tax expense of $0.6 million and $1.3 million for the sixmonth periods ended July 4, 2004 and June 29, 2003, respectively. Oureffective tax rate differs from the statutory rate due to the establishment ofadditional deferred tax assets relating to FICA and other tax credits.

 

Liquidity and CapitalResources

 

Our principal liquidityrequirements are to service our debt and meet our working capital and capitalexpenditure needs. Subject to our operating performance, which, ifsignificantly adversely affected, would adversely affect the availability offunds, we expect to be able to meet our liquidity requirements for theforeseeable future through cash provided by operations and through borrowingsavailable under our working capital facility. We cannot assure you, however,that this will be the case. As of July 4, 2004, we had cash and cashequivalents of $2.3 million compared to $18.0 million as of January 4,2004.  The decrease in cash and cashequivalents is primarily due to the payment of a dividend of $6.8 million andthe early repayment of two mortgages aggregating $5.3 million.

 

*WorkingCapital and Cash Flows*

 

In the past wehave had, and in the future we may have, negative working capital balances. Wedo not have significant receivables and we receive trade credit based uponnegotiated terms in purchasing food and supplies. Funds available from cashsales not needed immediately to pay for food and supplies or to financereceivables or inventories historically have typically been used for noncurrent capital expenditures and/or payments oflong-term debt balances under our prior revolving credit agreement.

 

*Operating Activities*.  Cash flows provided byoperating activities for the six month period ended July 4, 2004 were $2.5million, consisting primarily of a net increase in cash of $6.7 millionresulting from net income before depreciation, amortization and other non-cashcharges partially offset by a net decrease in cash of $4.2 million resultingfrom a decrease in accounts payable, accrued expenses and other liabilities.

 

*Investing Activities*.  Cash flows used in investingactivities for the six month period ended July 4, 2004 were $5.4 milliondue to purchases of property and equipment of $3.6 million, which includecapital expenditures related to the Morton’s steakhouse scheduled to open inthe third quarter of fiscal 2004, and an increase in marketable securities of$1.7 million.

 

*Financing Activities*.  Cash flows used in financingactivities for the six month period ended July 4, 2004 were $12.8 millionprimarily consisting of the payment of a dividend of $6.8 million, netprincipal reduction on obligations to financial institutions of $5.5 million,primarily due to the early repayment of two mortgages aggregating $5.3 million,and the payment of deferred financing costs of $0.6 million relating to our7.5% senior secured notes offering and our working capital facility.

 

*Debt and Other Obligations*.

 

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

 

23

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class with the original notes. The exchange offerwas completed on January 28, 2004. We refer to these notes as our 7.5% senior secured 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 is subjectto 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 usand 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 as bya pledge of a portion of the stock of the subsidiaries owned by us and by ourdomestic 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 secured notes permits usto incur other senior secured indebtedness and to grant liens on our assetsunder certain circumstances.

 

We pay interest on the 7.5%senior secured notes semi-annually in cash, in arrears, on January 1 andJuly 1 at an annual rate of 7.5%. The indenture governing the 7.5% seniorsecured notes contains various affirmative and negative covenants, subject to anumber of important limitations and exceptions, including but not limited tothose limiting our ability to incur additional indebtedness or enter into saleand 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 FixedCharge Coverage Ratio as the ratio of Consolidated EBITDA to Consolidated FixedCharges (defined therein).

 

The indenture governing the7.5% senior secured notes contains various events of default, including but notlimited 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.

 

We can redeem the 7.5% seniorsecured notes on or after July 1, 2007, except we may redeem up to 35% ofthe 7.5% senior secured notes prior to July 1, 2006 with the proceeds ofone or more public equity offerings. We are required to redeem the 7.5% seniorsecured notes under certain circumstances involving changes of control.Additionally, if we or any of our domestic restricted subsidiaries engage inasset sales, we generally must either invest the net cash proceeds from suchsales 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.***OnJuly 7, 2003, we entered into a $15.0 million senior secured workingcapital facility with Wells Fargo Foothill, Inc. Our working capital facilitymatures on July 7, 2007. Availability under our working capital facilityis limited to the lesser of (i) $15.0 million and(ii) the borrowing base

 

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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 withthe most recently delivered financial statements, or (B) 25% of our‘‘enterprise value,’’ determined to be $168.0 million as of July 7, 2003,and thereafter to be the amount determined by a third party appraiser. We arepermitted to repay and reborrow such advances untilthe maturity date. As of July 4, 2004, we had no borrowings outstandingunder our working capital facility. At our option, up to $7.5 million of thefacility can consist of one or more letters of credit issued by the lender. Asof July 4, 2004, $1.0 million was restricted for letters of credit underour working capital facility. Our working capital facility is guaranteed by allof our domestic restricted subsidiaries and secured by a first priorityperfected security interest in all of the collateral securing the 7.5% seniorsecured notes. Interest will accrue on borrowings under our working capitalfacility at a floating rate of interest per annum equal to the rate of interestannounced from time to time within the lender’s principal office in SanFrancisco as its ‘‘prime rate’’ plus 1.75%, or a LIBOR-based equivalentthereof. Interest is calculated on the basis of a 360-day year and will bepayable monthly for base rate loans and at the end of each interest period forLIBOR loans (but not less frequently than quarterly). Our working capitalfacility contains certain customary fees, including a closing fee, anniversaryfees, servicing fees and pre-payment fees.

 

Our working capital facilitycontains various affirmative and negative covenants customary for similarworking capital facilities, including but not limited to covenants pertainingto mergers and sales of assets outside the ordinary course of business; use ofproceeds; granting of liens; incurrence of indebtedness; restricted payments;voluntary prepayment of indebtedness, including the 7.5% senior secured notes;payment of dividends; business activities; investments and acquisitions;transactions with affiliates; certain restrictions affecting subsidiaries;fundamental changes; and amendments or modifications to instruments governingcertain indebtedness. Our working capital facility also requires us to achieveand maintain a twelve-month trailing EBITDA (as defined therein) of not lessthan $16.0 million. As of July 4, 2004, we were in compliance with all ofour financial covenants.

 

Our working capital facilitycontains customary events of default, including but not limited to thoserelated to non-payment of principal, interest or fees; violations of certaincovenants; change of control; certain bankruptcy-related events; inaccuracy ofrepresentations and warranties in any material respect; and cross defaults withcertain other indebtedness and agreements, including without limitation theindenture governing the 7.5% senior secured notes.

 

*PriorCredit Facility.***Ourprior credit facility was pursuant to the Second Amended and Restated RevolvingCredit and Term Loan Agreement, dated June 19, 1995, between us and FleetNational Bank (subsequently acquired by B of A) (“Fleet”), as amended from timeto time, a portion of which had been syndicated to other lenders. OnJuly 7, 2003, we used a portion of the proceeds from the 7.5% seniorsecured notes offering to repay our prior credit facility in full. Followingrepayment, the credit facility was terminated. On April 7, 1998 and May29, 1998, we entered into interest rate swap agreements with Fleet on notionalamounts of $10.0 million each. These agreements terminated on April 7,2003 and May 29, 2003. Additionally, on October 24, 2002, we entered intotwo interest rate swap agreements with Fleet on notional amounts of $20.0million each. These agreements terminate on October 24, 2004 andOctober 24, 2005. These agreements were used to reduce the potentialimpact of interest rate fluctuations relating to $40.0 million of variable ratedebt under our prior credit facility. As a result of the July 7, 2003repayment of our prior credit facility with a portion of the proceeds from the7.5% senior secured notes offering, these interest rate swap agreements are nowaccounted for as speculative instruments and resulting changes in their fairmarket value are charged or credited to the statement of operations. As ofJuly 4, 2004 and January 4, 2004, in accordance with SFAS No. 133,liabilities were approximately $0.4 million and $0.7 million, respectively, inthe accompanying consolidated balance sheets. The change in the fair marketvalue has been

 

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recognized in interest expense, net in the consolidatedstatement of operations for the three and six month periods ended July 4,2004.

 

*CNL Loan*.  In March 1997, one of our subsidiariesentered into a $2.5 million loan agreement with CNL Financial I, Inc.(“CNL”).  This loan is scheduled tomature on April 1, 2007 and bears interest at 10.002% per annum.  This loan is secured by a security interestin the assets of the Morton’s steakhouses located in Chicago and Denver(downtown).  Principal and interestpayments are due monthly over the term of the loan.  On July 4, 2004 and January 4, 2004the outstanding principal balance of the CNL loan was approximately $1.0million and $1.1 million, respectively, of which approximately $0.3 million ofprincipal for each period is included in “Current portion of obligations tofinancial institutions” in the accompanying consolidated balance sheets.

 

*Mortgages*.  During 1998 and 1999, certain of oursubsidiaries entered into a total of six mortgage loans with GE CapitalFranchise Finance aggregating $18.9 million with interest rates range from7.68% to 9.26% per annum, the proceeds of which were used to fund the purchasesof land and construction of restaurants. The loans generally require monthly payments of principal andinterest.  On July 4, 2004 andJanuary 4, 2004 the aggregate outstanding principal balance due on theseloans was approximately $6.5 million and $11.8 million, respectively, of whichapproximately $0.2 million and $0.4 million, respectively, of principal isincluded in “Current portion of obligations to financial institutions” in theaccompanying consolidated balance sheets. We repaid one mortgage in May 2003, one in September 2003 and twoin April 2004.  The remaining twomortgages outstanding as of July 4, 2004 are scheduled to mature inFebruary 2020 and March 2021.

 

*Restaurant Operating Leases*.  Our obligations for restaurantoperating leases include certain restaurant operating leases for which we orone of our subsidiaries guarantees, for a portion of the lease term, theperformance of the lease by the operating company that is a party thereto.

 

*Contractual Commitments*.  The following table representsour contractual commitments associated with our debt and other obligationsdisclosed above as of July 4, 2004:

 
| ** **                                        | ** ** | **Remainder of  2004**     | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
|                                              |       | **(amounts in thousands)** |       |
| 7.5% senior secured notes                         |       | $                          | —     |     | $          | —   |       | $        | —     |     | $          | —         |       | $         | —     |   | $ | 105,000 |   | $ | 105,000 |   |
| Loan agreement with CNL                           |       | 153                        |       | 329      |       | 364      |       | 104      |       | —   |       | —         |       | 950       |       |
| Mortgage loans with GE Capital Franchise  Finance |       | 81                         |       | 189      |       | 207      |       | 227      |       | 248      |       | 5,498          |       | 6,450     |       |
| Subtotal                                          |       | 234                        |       | 518      |       | 571      |       | 331      |       | 248      |       | 110,498        |       | 112,400   |       |
| Restaurant operating leases                       |       | 8,085                      |       | 16,768   |       | 16,147   |       | 15,054   |       | 14,318   |       | 94,029         |       | 164,401   |       |
| Letters of credit                                 |       | 1,000                      |       | —   |       | —   |       | —   |       | —   |       | —         |       | 1,000     |       |
| Total                                             |       | $                          | 9,319      |     | $          | 17,286   |       | $        | 16,718     |     | $          | 15,385         |       | $         | 14,566     |   | $ | 204,527 |   | $ | 277,801 |   |

 

During thefirst six months of fiscal 2004, our net investment in fixed assets and relatedinvestment costs, including pre-opening costs, approximated $3.9 million.  We estimate that we will spend up toapproximately $11.0 million in fiscal 2004, including the $3.9 million recordedin the first six months of fiscal 2004, to finance ordinary refurbishment ofexisting restaurants and capital expenditures, net of landlord developmentand/or rent allowances and net of equipment lease financing, for newrestaurants.  We anticipate that fundsgenerated through operations and through borrowings under our new workingcapital facility will be sufficient to fund planned expansion.  We cannot assure you, however that this willbe the case.

 

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New AccountingStandards

 

InDecember 2002, the FASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure.” SFAS No. 148 provides alternativemethods of transition for a voluntary change to the fair value method ofaccounting for stock-based employee compensation as originally provided by SFASNo. 123, “Accounting for Stock-Based Compensation.” Additionally, SFAS No. 148amends the disclosure requirements of SFAS No. 123 to require prominentdisclosure in both the annual and interim financial statements about the methodof accounting for stock-based compensation and the effect of the method used onreported results. The transitional requirements of SFAS No. 148 are effectivefor all financial statements for fiscal years ending after December 15,2002. The application of the disclosure portion of this standard had no impacton the Company’s consolidated financial position or results of operations. TheFASB recently indicated that it will require stock-based employee compensationto be recorded as a charge to earnings pursuant to a standard it is currentlydeliberating, which it believes will become effective during late 2004. TheCompany will continue to monitor its progress on the issuance of this standardas well as evaluate the Company’s position with respect to current guidance.

 

InJanuary 2003, the FASB issued Interpretation No. (“FIN”) 46,“Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.”FIN 46 was subject to significant interpretation by the FASB, and was revisedand reissued in December 2003 (“FIN 46R”). FIN 46R states that if an entity has a controlling financial interest ina variable interest entity, the assets, the liabilities and results ofactivities of the variable interest entity should be included in theconsolidated financial statements to the entity.  The provisions of FIN 46 and FIN 46R areapplicable for all entities that are considered special purpose entities(“SPE”) by the end of the first reporting period ending after December 15,2003.  The provisions of FIN 46R areapplicable to all other types of entities for reporting periods ending afterMarch 15, 2004.  The adoption of FIN46 and FIN 46R did not have any effect on the Company’s consolidated financialstatements, as the Company does not have any SPEs.  The Company is in the process of assessingthe applicability of all other types of entities but does not expect that theadoption of the other provision that are applicable in 2004 will have anyeffect on the Company’s consolidated financial statements.

 

Forward-LookingStatements

 

This quarterlyreport contains various “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of 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, restaurant profitabilitylevels, expansion plans, demographic trends, traffic patterns, employeeavailability and benefits, cost increases, product safety and availability,government regulation and other risks detailed from time to time in theCompany’s periodic earnings releases and reports filed with the Securities andExchange Commission.  In addition, theCompany’s ability to expand is dependent upon various factors, such as theavailability of attractive sites for new restaurants, the ability to negotiatesuitable lease terms, the ability to generate or borrow funds to develop newrestaurants and obtain various government permits and licenses and therecruitment and training of skilled management and restaurant employees.  Accordingly, such forward-looking statementsdo not purport to be predictions of future events or circumstances andtherefore there can be no assurance that any forward-

 

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lookingstatement contained herein will prove to be accurate. The Company assumes noobligation to update the forward-looking statements.

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

 

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

 

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

 

We also aresubject to market risk from exposure to changes in interest rates based on ourfinancing activities. This exposure relates to borrowings under our workingcapital facility that will be payable at floating rates of interest and the7.5% senior secured notes that are payable at a fixed rate of interest of 7.5%.As of July 4, 2004, there were no borrowings outstanding under ourfloating rate working capital facility. A hypothetical 10% fluctuation ininterest rates, as of July 4, 2004, would have a net impact ofapproximately $0.3 million on earnings for the six month period ended July 4,2004.

 

Item 4.  Controls and Procedures

 

As of the endof the period covered by this report, an evaluation of the effectiveness of thedesign and operation of our disclosure controls and procedures (as definedunder the Securities and Exchange Commission rules) was carried out under thesupervision and with the participation of the Company’s management, includingour Chief Executive Officer and Chief Financial Officer.  The Company’s disclosure controls andprocedures are designed to ensure that information that the Company mustdisclose in its reports filed under the Securities Exchange Act of 1934 iscommunicated and processed in a timely manner. Based upon that evaluation, the Chief Executive Officer and the ChiefFinancial Officer concluded that the design and operation of these disclosurecontrols and procedures were effective. No significant changes were made in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation.

 

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MORTON’S RESTAURANT GROUP, INC. AND SUBSIDIARIES

 

Part II  -  OtherInformation

 

Item 1. Legal Proceedings

 

SinceAugust 2002, a number of the Company’s current and former employees in NewYork and Florida have initiated arbitrations with the American ArbitrationAssociation in their respective states alleging that the Company has violatedstate and federal (New York arbitrations) and federal (Florida arbitrations)wage and hour laws regarding the sharing of tips with other employees andfailure to pay all hours worked. In general, the complainants are seekingrestitution of tips, the difference between the tip credit wage and the minimumwage, payment for hours worked off the clock, liquidated damages and attorneys’fees and costs. The arbitrator in the New York arbitrations has permitted thecomplainants to consolidate their arbitrations into one action and proceed as acollective action. The Florida complainants are also seeking to consolidatetheir arbitrations, but there has been no determination to date. The Companybelieves that the allegations are without merit and intends to contest themvigorously.

 

The Company isinvolved in various other claims and legal actions arising in the ordinarycourse of business. Management does not believe that the ultimate resolution ofthese actions will have a material adverse effect on the Company’s consolidatedfinancial position, results of operations, liquidity and capital resources.

 

Item 6. Exhibits and Reports on Form 8-K

 

(a) Exhibits

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

 

(b) Reportson Form 8-K

 

The Companyfiled a Current Report on Form 8-K dated June 4, 2004 with the Securitiesand Exchange Commission to report under Item 5 of Form 8-K that a press releasewas issued on June 4, 2004 announcing the completion of a $40 million 14%senior secured notes offering by its recently formed parent, Morton’s HoldingCompany, Inc.

 

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SIGNATURES

 

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

 

 
|   | MORTON’S RESTAURANT GROUP,  INC. |                                  |
|--------|---------------------------------------|---------------------------------------|
|   | (Registrant)                          |
|   |                                  |                                  |
|   |                                  |                                  |
| Date   | August 17, 2004                  |                                  | By: | /s/ ALLEN J. BERNSTEIN |   |
|   |                                  | Allen J. Bernstein                    |
|   |                                  | Chairman of the Board,  President     |
|   |                                  | and Chief Executive  Officer          |
|   |                                  |                                  |
|   |                                  |                                  |
| Date   | August 17, 2004                  |                                  | By: | /s/ THOMAS J. BALDWIN |   |
|   |                                  | Thomas J. Baldwin                     |
|   |                                  | Executive Vice President,             |
|   |                                  | Chief Financial Officer  and Director |
|        |                                       |                                       |  |  |  |  |

 

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