**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

 

ý                        **QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended September  25,2004**

 

**OR**

 

**o****                      ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934**

 

**For thetransition period from                          to                          **

 

 

**McCormick & Schmick’s SeafoodRestaurants, Inc.**

(Exactname of registrant as specified in its charter)

 

 

| **Delaware**                     | ** ** | **000-50845**     | ** ** | **20-1193199**          |
|----------------------------------|------------|-------------------|------------|-------------------------|
| (State  or other jurisdiction of |       | (Commission  File |       | (IRS  Employer          |
| incorporation  or organization)  |       | Number)           |       | Identification  Number) |

 

| **720 SW Washington Street, Suite 550**   | ** **  | **Portland, Oregon** | ** ** | **97205** |
|-------------------------------------------|-------------|----------------------|------------|-----------|
| (Address  of principal executive offices) | (Zip  Code) |                 |
|                                           |             |                      |            |           |  |  |

 

**(503) 226-3440**

(Registrant’s telephone number, including area code)

 

 

 

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

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).  Yes oNo ý

 

The number of shares ofCommon Stock outstanding on September 25, 2004 was 13,179,358.

 

 

 

 

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**ExplanatoryNote**

McCormick &Schmick’s Seafood Restaurants, Inc., the registrant whose name appears onthe cover of this report, is the survivor of a merger with McCormick &Schmick Holdings LLC that occurred on July 20, 2004, prior to our initialpublic offering.  The financialstatements for the period covered by this report are those of McCormick &Schmick’s Seafood Restaurants, Inc. for periods beginning after July 19, 2004and those of McCormick & Schmick Holdings LLC for periods ended on orbefore  July 19, 2004.  Because McCormick & Schmick Holdings LLCwas a holding company, giving retroactive effect to the merger would not affectthe financial statements contained in this report, except with respect to theinformation regarding the membership units in the LLC.  We do not differentiate between the operationsand financial results of McCormick & Schmick’s SeafoodRestaurants, Inc. and the operations and financial results of the LLC andwe refer to these entities as “the Company” throughout this report.

 

 

2

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**McCormick& Schmick’s Seafood Restaurants, Inc.**

Quarter Ended September 25, 2004

 

 

**INDEXTO FORM 10-Q**

 
| ** **                                                                                                                   | **Page** |
|------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I. FINANCIAL  INFORMATION**                                                                                           | 4        |
|                                                                                                                         |     |
| Item 1 - Financial  Statements — McCormick & Schmick’s Seafood Restaurants, Inc. and  Subsidiaries (Unaudited) | 4        |
|                                                                                                                         |     |
| Consolidated Balance  Sheets                                                                                                 | 4        |
|                                                                                                                         |     |
| Consolidated  Statements of Operations                                                                                  | 5        |
|                                                                                                                         |     |
| Consolidated  Statement of Changes in Stockholders’ / Members’ Equity                                              | 6        |
|                                                                                                                         |     |
| Consolidated  Statements of Cash Flows                                                                                  | 7        |
|                                                                                                                         |     |
| Notes  to Unaudited Consolidated Financial Statements                                                                        | 8        |
|                                                                                                                         |     |
| Item  2 - Management’s Discussion and Analysis of Financial Condition and Results  of Operations                        | 14       |
|                                                                                                                         |     |
| Item  3 - Quantitative and Qualitative Disclosures About Market Risk                                                         | 28       |
|                                                                                                                         |     |
| Item 4 - Controls and  Procedures                                                                                            | 28       |
|                                                                                                                         |     |
| **PART II. OTHER  INFORMATION**                                                                                              | 29       |
|                                                                                                                         |     |
| Item 1 - Legal Proceedings                                                                                                   | 29       |
|                                                                                                                         |     |
| Item  2 - Unregistered Sales of Equity Securities and Use of Proceeds                                                        | 29       |
|                                                                                                                         |     |
| Item 3 -  Defaults Upon Senior Securities                                                                                    | 29       |
|                                                                                                                         |     |
| Item  4 - Submissions of Matters to a Vote of Security Holders                                                               | 29       |
|                                                                                                                         |     |
| Item 5 - Other Information                                                                                                   | 29       |
|                                                                                                                         |     |
| Item 6 - Exhibits                                                                                                            | 29       |
|                                                                                                                         |     |
| Signatures                                                                                                                   | 30       |

 

 

 

 

3

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**PART I - FINANCIALINFORMATION**

 

**ITEM 1.   FINANCIAL STATEMENTS.**

 

**McCormick & Schmick’s Seafood Restaurants, Inc. and Subsidiaries**

**Consolidated BalanceSheets**

**(Inthousands, except share data)**

** **
| ** **                                                                                       | ** **   | **September 25, 2004**  | ** **   | **December 27, 2003** | ** **   |
|--------------------------------------------------------------------------------------------------|--------------|-------------------------|--------------|-----------------------|--------------|
| *** ***                                                                                     | *** *** | ***(Unaudited)***       | *** *** | *** ***          | *** *** |
| ** **                                                                                       | *** *** | ***See Notes 1 and 2*** | *** *** |
| **ASSETS**                                                                                       | *** *** | *** ***            | *** *** |
| Current assets:                                                                                  |         |                    |         |                  |         |
| Cash and cash equivalents                                                                        |         | $                       | 2,573        |                  | $            | 2,453 |   |
| Trade accounts receivable, net                                                                   |         | 5,425                   |         | 3,689                 |         |
| Inventories                                                                                      |         | 3,219                   |         | 2,704                 |         |
| Prepaid expenses and other current assets                                                        |         | 2,891                   |         | 2,367                 |         |
| Deferred income taxes                                                                            |         | 96                      |         | 96                    |         |
| Total current assets                                                                             |         | 14,204                  |         | 11,309                |         |
| Equipment and leasehold improvements, net                                                        |         | 86,534                  |         | 74,829                |         |
| Other assets                                                                                     |         | 53,707                  |         | 54,470                |         |
| Goodwill                                                                                         |         | 21,209                  |         | 21,209                |         |
| Total assets                                                                                     |         | $                       | 175,654      |                  | $            | 161,817 |   |
|                                                                                             |         |                    |         |                  |         |
| **LIABILITIES AND STOCKHOLDERS’/MEMBERS’ EQUITY**                                      |         |                    |         |                  |         |
| Current liabilities:                                                                             |         |                    |         |                  |         |
| Book overdraft                                                                                   |         | $                       | 2,596        |                  | $            | 5,052 |   |
| Accounts payable                                                                                 |         | 10,839                  |         | 11,216                |         |
| Accrued expenses                                                                                 |         | 15,305                  |         | 12,698                |         |
| Capital lease obligations, current portion                                                       |         | 435                     |         | 415                   |         |
| Derivative instrument-interest rate swap                                                         |         | 174                     |         | 805                   |         |
| Total current liabilities                                                                        |         | 29,349                  |         | 30,186                |         |
|                                                                                             |         |                    |         |                  |         |
| Revolving credit facility                                                                        |         | 17,000                  |         | 38,500                |         |
| Mandatorily redeemable preferred stock (liquidation preference of $0  and $27,002)               |         | 0                       |         | 23,137                |         |
| Other long-term liabilities                                                                      |         | 5,121                   |         | 4,635                 |         |
| Capital lease obligations, non-current portion                                                   |         | 812                     |         | 1,141                 |         |
| Deferred income taxes                                                                            |         | 4,331                   |         | 4,312                 |         |
| Total liabilities                                                                                |         | 56,613                  |         | 101,911               |         |
| Stockholders’ / Members’ equity                                                        |         |                    |         |                  |         |
| Members equity in McCormick & Schmick Holdings LLC (See Note 8)                              |         | 0                       |         | 62,819                |         |
| Common stock, $.001 par value, 120,000,000 shares authorized,  13,782,349 issued and outstanding |         |                    |         |                  |         |
|                                                                                             | 14           |                    | 0            |                  |
| Additional paid-in capital                                                                       |         | 127,695                 |         | 0                     |         |
| Acccumulated deficit                                                                             |         | (8,604                  | )            | (2,425                | )            |
| Accumulated other comprehensive loss, interest rate swap                                         |         | (64                     | )            | (488                  | )            |
| Total stockholders’ / members’ equity                                                  |         | 119,041                 |         | 59,906                |         |
| Total liabilities and stockholders’ / members’ equity                                  |         | $                       | 175,654      |                  | $            | 161,817 |   |

 

 

The accompanying notes arean integral part of these unaudited consolidated financial statements.

** **

 

4

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** **

**McCormick & Schmick’s Seafood Restaurants, Inc. and Subsidiaries**

**ConsolidatedStatements of Operations**

** (In thousands)**

**(Unaudited)**

 
| ** **                                                                                                             | ** **   | **Thirteen week periods ended** | ** **   | **Thirty-nine week periods ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|--------------|---------------------------------|--------------|------------------------------------|------------|
| *** ***                                                                                                           | *** *** | ***See Notes 1 and 2***         | *** *** |
| ** **                                                                                                             | ** **   | **September  25,  2004**        | ** **   | **September  27,  2003**           | ** ** | **September  25,  2004** | ** ** | **September  27,  2003** | ** ** |
| Revenues                                                                                                               |         | $                               | 59,597       |                               | $          | 48,895 |   | $ | 173,833 |   | $ | 142,586 |   |
| Restaurant operating costs                                                                                             |         |                            |         |                               |       |   |   |   |   |
| Food and beverage                                                                                                      |         | 17,776                          |         | 14,522                             |       | 51,993 |   | 42,082 |   |
| Labor                                                                                                                  |         | 19,013                          |         | 15,488                             |       | 55,555 |   | 45,061 |   |
| Operating costs                                                                                                        |         | 8,947                           |         | 7,274                              |       | 25,557 |   | 21,167 |   |
| Occupancy                                                                                                              |         | 5,137                           |         | 3,938                              |       | 14,780 |   | 11,513 |   |
| Total restaurant operating costs                                                                                       |         | 50,873                          |         | 41,222                             |       | 147,885 |   | 119,823 |   |
| General and administrative expenses                                                                                    |         | 3,298                           |         | 2,126                              |       | 8,469 |   | 6,083 |   |
| Restaurant pre-opening costs                                                                                           |         | 95                              |         | 635                                |       | 2,083 |   | 746 |   |
| Depreciation and amortization                                                                                          |         | 2,647                           |         | 2,406                              |       | 8,110 |   | 7,078 |   |
| Management fees and covenants not to compete                                                                           |         | 0                               |         | 637                                |       | 4,240 |   | 1,911 |   |
| Total costs and expenses                                                                                               |         | 56,913                          |         | 47,026                             |       | 170,787 |   | 135,641 |   |
| Operating income                                                                                                       |         | 2,684                           |         | 1,869                              |       | 3,046 |   | 6,945 |   |
| Interest expense                                                                                                       |         | 569                             |         | 703                                |       | 2,366 |   | 2,303 |   |
| Accrued dividends and accretion on mandatorily redeemable preferred  stock                                             |         | 3,693                           |         | 950                                |       | 5,759 |   | 950 |   |
| Write-off of deferred loan costs on early extinguishment of debt                                                       |         | 1,288                           |         | 0                                  |       | 1,288 |   | 0 |   |
| Income (loss) before income tax expense and accrued dividends and  accretion on mandatorily redeemable preferred stock |         | (2,866                          | )            | 216                                |       | (6,367 | ) | 3,692 |   |
| Income tax expense (benefit)                                                                                           |         | 228                             |         | 809                                |       | (188 | ) | 3,220 |   |
| Accrued dividends and accretion on mandatorily redeemable preferred  stock                                             |         | 0                               |         | 0                                  |       | 0 |   | 1,832 |   |
| Net loss                                                                                                               |         | $                               | (3,094       | )                                  | $          | (593 | ) | $ | (6,179 | ) | $ | (1,360 | ) |
|                                                                                                                   |         |                            |         |                               |       |   |   |   |   |
| Actual / pro forma net loss per common share                                                                           |         |                            |         |                               |       |   |   |   |   |
| Basic and diluted                                                                                                      |         | $                               | (0.25        | )                                  | $          | (0.08 | ) | $ | (0.67 | ) | $ | (0.17 | ) |
| Shares used in computing actual / pro forma net loss per share                                                         |         |                            |         |                               |       |   |   |   |   |
| Basic and diluted                                                                                                      |         | 12,299                          |         | 7,782                              |       | 9,255 |   | 7,782 |   |
|                                                                                                                        |              |                                 |              |                                    |            |  |  |  |  |  |  |  |  |  |

 

 

 

The accompanying notes are an integral part of theseunaudited consolidated financial statements.

 

 

5

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**McCormick & Schmick’s Seafood Restaurants, Inc. and Subsidiaries**

**ConsolidatedStatement of Changes in Stockholders’ / Members’ Equity**

** (In thousands)**

**(Unaudited)**

 
| *** ***                          | *** *** | ***See Notes 1 and 2***   | *** *** |
|---------------------------------------|--------------|---------------------------|--------------|
| ** **                            | ** **   | **Members Equity of LLC** | ** **   | **Common Stock** | ** ** | **Additional Paid-in Capital** | ** ** | **Accumulated Deficit** | ** ** | **Accumulated Other Comprehensive Loss** | ** ** | **Totals** | ** ** |
| Balance, December 27, 2003            |         | $                         | 62,819       |   | $ | 0 |   | $ | 0 |   | ($2,425 | ) | ($488 | ) | $ | 59,906 |   |
| Comprehensive loss:                   |         |                      |         |   |   |   |   |   |   |   |   |   |   |
| Net loss                              |         | 0                         |         | 0 |   | 0 |   | (6,179 | ) | 0 |   | (6,179 | ) |
| Net unrealized gain                   |         | 0                         |         | 0 |   | 0 |   | 0 |   | 424 |   | 424 |   |
| Total comprehensive loss              |         | 0                         |         | 0 |   | 0 |   | (6,179 | ) | 424 |   | (5,755 | ) |
| Amortization of unearned compensation |         | 42                        |         | 0 |   | 0 |   | 0 |   | 0 |   | 42 |   |
| Purchase of Class B units             |         | (6                        | )            | 0 |   | 0 |   | 0 |   | 0 |   | (6 | ) |
| Issuance of common stock              |         | (62,855                   | )            | 14 |   | 127,695 |   | 0 |   | 0 |   | 64,854 |   |
| Balance, September 25, 2004           |         | $                         | 0            |   | $ | 14 |   | $ | 127,695 |   | ($8,604 | ) | ($64 | ) | $ | 119,041 |   |

 

 

 

The accompanying notes are an integral part of theseunaudited consolidated financial statements.

 

 

6

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** McCormick & Schmick’sSeafood Restaurants, Inc. and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

** (In thousands, except per share data)**

**(Unaudited)**

 
| ** **                                                                         | ** **   | **Thirty-nine week periods ended** | ** **   |
|------------------------------------------------------------------------------------|--------------|------------------------------------|--------------|
| *** ***                                                                       | *** *** | ***See Notes 1 and 2***            | *** *** |
| ** **                                                                         | ** **   | **September 25, 2004**             | ** **   | **September 27, 2003** | ** ** |
| **Operating activities**                                                           | * *     | * *                           | * *     | * * | * * |
| Net loss                                                                           |         | $                                  | (6,179       | ) | $ | (1,360 | ) |
| Adjustments to reconcile net loss to cash flows provided by operating  activities: |         |                               |         |   |   |
| Depreciation and amortization                                                      |         | 8,068                              |         | 7,078 |   |
| Amortization of unearned compensation                                              |         | 42                                 |         | 5 |   |
| Deferred income taxes                                                              |         | (188                               | )            | 3,220 |   |
| Accrued dividends and accretion on mandatorily redeemable preferred  stock         |         | 5,759                              |         | 2,782 |   |
| Write off deferred loan costs on early extiguishment of debt                       |         | 1,288                              |         | 0 |   |
| Changes in operating assets and liabilities                                        |         |                               |         |   |   |
| Trade accounts receivable                                                          |         | (1,122                             | )            | (327 | ) |
| Inventories                                                                        |         | (515                               | )            | (249 | ) |
| Prepaid expenses and other current assets                                          |         | (524                               | )            | (389 | ) |
| Accounts payable                                                                   |         | (377                               | )            | 179 |   |
| Accrued expenses                                                                   |         | 2,607                              |         | 1,090 |   |
| Other-long-term liabilities                                                        |         | 486                                |         | 776 |   |
| Cash provided by operating activities                                              |         | 9,345                              |         | 12,805 |   |
| **Investing activities**                                                           |         |                               |         |   |   |
| Acquisition of equipment and leasehold improvements                                |         | (19,407                            | )            | (9,456 | ) |
| Change in accounts receivable for tenant improvement allowances                    |         | (614                               | )            | (1,298 | ) |
| Other assets                                                                       |         | (116                               | )            | (363 | ) |
| Net cash used in investing activities                                              |         | (20,137                            | )            | (11,117 | ) |
| **Financing activities**                                                           |         |                               |         |   |   |
| (Decrease) increase in book overdraft                                              |         | (2,456                             | )            | 1,118 |   |
| Payments on long-term debt                                                         |         | 0                                  |         | (5,037 | ) |
| Borrowings made on revolving credit facility                                       |         | 62,500                             |         | 38,500 |   |
| Payments made on revolving credit facility                                         |         | (84,000                            | )            | (36,500 | ) |
| Loan costs                                                                         |         | (775                               | )            | 0 |   |
| Payments on capital lease obligations                                              |         | (309                               | )            | (291 | ) |
| Payments on redemption of senior preferred stock                                   |         | (28,896                            | )            | 0 |   |
| Proceeds from issuance of common stock, net of offering costs of  $7,146           |         | 64,854                             |         | 0 |   |
| Purchase of Class B units                                                          |         | (6                                 | )            | 0 |   |
| Net cash provided by (used in) financing activities                                |         | 10,912                             |         | (2,210 | ) |
| Increase (decrease) in cash                                                        |         | 120                                |         | (522 | ) |
| Cash and cash equivalents, beginning of period                                     |         | 2,453                              |         | 2,945 |   |
| Cash and cash equivalents, end of period                                           |         | $                                  | 2,573        |   | $ | 2,423 |   |

 

 

 

The accompanying notes are an integral part of theseunaudited consolidated financial statements.

 

 

7

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**McCormick & Schmick’s SeafoodRestaurants, Inc. and Subsidiaries**

**Notes to Unaudited Consolidated Financial Statements**

**September 25, 2004**

 

**(1)           BASIS OF PRESENTATION**

 

The accompanyingunaudited consolidated financial statements of McCormick & Schmick’s SeafoodRestaurants, Inc. and its wholly owned subsidiaries (and including itspredecessor, McCormick & Schmick Holdings LLC, the “Company”) for thethirteen week and thirty-nine periods ended September 25, 2004 and September27, 2003, respectively (see Note 2, “Corporate Reorganization and InitialPublic Offering”),  have been prepared bythe management of the Company and include all adjustments (consisting of anormal and recurring nature) that are, in the opinion of management, necessaryfor a fair presentation of the financial condition, results of operations, andcash flows for such periods.  Thefinancial statements have been prepared in accordance with generally acceptedaccounting principles, except that certain information and footnotes have beencondensed or omitted pursuant to rules and regulations of the Securities andExchange Commission.  Operating resultsfor the thirteen week and thirty-nine week periods ended September 25, 2004 arenot necessarily indicative of the results that may be expected for the yearending December 25, 2004.

 

                The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates under different assumptions or conditions.

 

                 Management believes that the disclosures included in the accompanyinginterim financial statements comply with the requirements of Section 13(a) ofthe Securities Exchange Act of 1934, (the “Exchange Act”) for a QuarterlyReport on Form 10-Q and  are adequate tomake the information presented not misleading. The financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in Amendment No. 5to the registration statement on Form S-1 filed by the Company under theSecurities Act of 1933 dated July 20, 2004.

 

**(2)           CORPORATE REORGANIZATION AND INITIALPUBLIC OFFERING**

 

**               **TheCompany was the survivor of a merger with McCormick & Schmick Holdings LLC(the “LLC”) that occurred on July 20, 2004, prior to our initial publicoffering (the “IPO”).  The financialstatements for the period covered by this report are those of McCormick &Schmick’s Seafood Restaurants, Inc. for periods beginning after July 19, 2004and those of the LLC for periods ended on or before July 19, 2004.  Except with respect to information regardingthe membership units in McCormick & Schmick Holdings LLC and the commonstock issued upon the reorganization, there is no impact to the financialstatements as a result of converting from a limited liability company to acorporation. Before July 20, 2004, the Company’s operations were conducted inMcCormick & Schmick Acquisition Corp. and its subsidiaries, which arecorporations. Accordingly, the financial statements of the Company have historicallyincluded a provision for income taxes and related deferred income taxes.  Throughout this report, McCormick &Schmick’s Seafood Restaurants, Inc. and the LLC are referred to collectively as“the Company.”

 

Actual and proforma basic and diluted net loss per share have been computed by dividing thenet loss for each of the periods presented by the actual or pro forma weightedaverage shares outstanding for the respective periods.  The weighted average shares outstanding wascomputed assuming that the 7,179,357 shares issued in connection with mergerand reorganization discussed below and the 602,992 shares issuable uponexercise of certain warrants at a nominal exercise price were outstanding forall periods presented.  The weightedaverage shares outstanding for the 2004 periods additionally included theshares issued in connection with the IPO from the date of issuance.  See Note 9, “Subsequent Events.” There are nopotential dilutive securities.****On June 2,2004, the Company approved agreements to terminate effective on June 25, 2004management agreements with Bruckmann, Rosser Sherrill & Co., L.L.C. (“BRS”)and Castle Harlan, Inc. (“Castle Harlan”) and covenant not to competeagreements with the Company’s co-founders, William P. McCormick and Douglas L.Schmick. BRS and Castle Harlan are each affiliates of significant stockholdersof the Company.

 

In connection with thereorganization and IPO, the Company:

 

•      Issued 7,179,357 shares of common stock inthe merger to the holders of the LLC’s units, not including 602,992 sharesissuable upon the exercise of warrants at a nominal price to The Bell AtlanticMaster Trust.  See Note 8, “Members’Equity of McCormick & Schmick Holdings LLC,” and Note 9, “SubsequentEvents.”

 

•      Issued 6,000,000 shares at $12.00 pershare, raising approximately $64.9 million after underwriting discounts andtransaction costs.

 

8

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•     Repaid $51.5 million of indebtedness on its thenexisting credit facility with the proceeds raised in the IPO and from $18.3million in loans under a new  revolvingcredit facility.  See Note 3, “Debt.”

 

•     Paid $28.9 million to The Bell Atlantic MasterTrust to redeem all of the 13% senior exchangeable preferred stock of a Companysubsidiary.  See Note 7, “MandatorilyRedeemable Preferred Stock.”

 

•     Paid $2.8 million in connection with thetermination of the management agreements and covenant not to competeagreements.  See Note 4, “Related-PartyTransactions.”

 

**(3)           DEBT**

 

**               **OnJuly 23, 2004, the Company repaid the outstanding balance on its amended andrestated revolving credit facility in the amount of $51.5 million with netproceeds from the IPO and $18.3 million in loans pursuant to a new revolvingcredit facility agreement, which provides among other things for $50.0 millionin revolving credit loans. See Note 9, “Subsequent Events.”  Loans under the facility are collateralizedby a first priority security interest in all of the assets of the Company andmature on July 22, 2009.  For thethirteen weeks ended September 25, 2004, the Company recognized a $1.3 millionexpense ($0.9 million net of tax) related to the write-off of unamortizeddeferred loan costs related to the prior revolving credit facility.  As of September 25, 2004, the outstanding balanceon the Company’s revolving credit facility was $17.0 million. The interest rateon the credit facility is based on the financial institution’s prime rate plusa margin of 0.25% to 0.75% or the Eurodollar rates plus a margin of 1.75% to2.25%, with margins determined by certain financial ratios.  Under its revolving credit facility, theCompany is subject to certain financial and non-financial covenants, includingan adjusted leverage ratio, a consolidated cash flow ratio and growth capitalexpenditures limitations.   The Companywas in compliance with these covenants as of September 25, 2004.

 

The Company’s prior revolving credit facility, entered into on October28, 2003, provided for a $70.0 million revolving credit loan. Loans underthis facility were collateralized by a first priority security interest in allof the assets of the Company, were scheduled to mature April 2007 and boreinterest based on the financial institution’s prime rate plus a margin of 1.75%to 2.25% or the Eurodollar rate plus a margin of 3.25% to 3.75%, with marginsdetermined by certain financial ratios. ..

 

Before October 28, 2003, the Company had term loans and a $15.0 millionrevolving credit facility payable to financial institutions.  The term loans had quarterly principal paymentsdue in amounts ranging from $0.3 million to $1.7 million and were scheduled tomature between June 2006 and June 2008. The interest rates on these term loanswas based on the financial institution’s prime rate plus a margin of 1.5% to3.0% or the Eurodollar rate plus a margin of 3.0% to 4.25% determined bycertain financial ratios.  As ofSeptember 27, 2003 the balance of the term loans was $38.5 million.  The interest rates on the revolving creditfacility were based on the financial institution’s prime rate plus a margin of1.7% to 2.2% or the Eurodollar rate plus a margin of 3.2% to 3.7% determined bycertain financial ratios.  As ofSeptember 27, 2003 there was no amount outstanding under the $15.0 millionrevolving credit facility.

 

TheCompany had entered into an interest rate swap with a notional amount totaling$29.3 million to reduce the impact of changes in interest rates on a portion ofthe revolving credit loan.  Thisagreement remained in place and was not modified as a result of the IPO and newrevolving credit agreement. The interest rate swap was designated as a cashflow hedge for purposes of Statement of Financial Accounting Standards (“SFAS”)No. 133 and allows the Company to receive floating rate receipts based onthe financial institution’s prime rate plus a margin of 1.75% to 2.25% or theEurodollar rates plus a margin of 3.25% to 3.75%, with margins determined bycertain financial ratios, in exchange for making fixed rate payments of 4.1%,plus a margin of 3.0% to 4.5%, depending on certain financial ratios. Thiseffectively changes the Company’s interest rate exposure on the revolvingcredit loan from a floating rate to a fixed rate on $29.3 million of the totalbalance outstanding on the revolving credit loan. The balance of the revolvingcredit loan above $29.3 million, if any, would remain at a floating rate ofinterest based on the prime rate or Eurodollar rate plus the aforementionedapplicable margins. The fair value of the interest rate swap as of September25, 2004 was  $0.2 million, and isrecorded as a liability (derivative instrument-interest rate swap) on thebalance sheet.

 

The Company expensed $0.6 million and $2.4 million in interest for thethirteen and the thirty-nine week periods ended September 25, 2004, respectively,and expensed $0.7 million and $2.3 million in interest for the thirteen andthirty nine week periods ended September 27, 2003, respectively under therevolving credit facility loan, capital lease and interest rate swapagreements.

 

9

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**(4)           RELATED-PARTY TRANSACTIONS**

 

Prior to theIPO, the Company paid annual management fees of $1.1 million to each of BRS andCastle Harlan.  Affiliates of each of BRSand Castle Harlan had significant ownership interests in the LLC at the time ofthe agreement terminations.  For thethirteen week period ended September 25, 2004 there were no management feesrecognized as expense because these agreements terminated on June 25, 2004.  For the thirteen week period ended September27, 2003, management fees recognized as expense totaled $0.5 million.  For the thirty-nine week periods endedSeptember 25, 2004 and September 27, 2003, management fees recognized asexpense totaled $3.3 million, including $1.1 million paid to each of BRS andCastle Harlan for the termination of the management agreements as of June 25,2004, and $1.6 million, respectively.

 

Pursuant tocovenant not to compete agreements with certain stockholders, the Companyexpensed $0.1 million for the thirteen week periods ended  September 27, 2003 and $0.9 million and $0.3million for the thirty-nine week periods ended September 25, 2004 and September27, 2003, respectively.  For the thirteenweek period ended September 25, 2004 no expense was recognized because theseagreements were terminated effective June 25, 2004.

 

The Companyleases properties from landlords controlled by certain stockholders of theCompany. Total rent paid to these landlords was $0.2 million and $0.1 millionfor the thirteen week periods ended September 25, 2004 and September 27, 2003,respectively, and $0.4 million in each of the thirty-nine week periods endedSeptember 25, 2004 and September 27, 2003, respectively.

** **

**(5)           EQUITY-BASED COMPENSATION**

 

Prior to theIPO, the Company had an equity-based compensation plan under which it couldgrant the right to purchase a fixed number of its equity units.  The Company accounted for its equity-basedcompensation plan using the intrinsic-value method prescribed by AccountingPrinciples Board (“APB”) Opinion No. 25. Accordingly, the Company computed compensation cost for employee equityunits granted as the amount by which the estimated fair value of its equityunits on the date of grant exceeded the amount the employee would have had topay to acquire the related equity units. The amount of compensation cost wascharged to income over the vesting period.

 

Under SFASNo. 123, as amended by SFAS No. 148, companies that choose to accountfor equity-based compensation plans using the intrinsic-value method arerequired to determine the fair value of employee equity grants using the fairvalue method and to disclose the impact of fair value accounting in a note tothe financial statements. There was no difference between the accounting forthe equity-based compensation plan described above under APB OpinionNo. 25 and SFAS No. 123. Accordingly, there was no difference betweenreported net income and pro forma net income determined under SFASNo. 123.

 

In connectionwith the IPO, all of the outstanding Class B units owned by employees of theCompany vested at July 20, 2004.  TheCompany accounted for the acceleration of the vesting of the units inaccordance with Financial Accounting Standards Board Interpretation (“FIN”) No.44, *Accounting for Certain Transactions Involving StockCompensation*.  This resultedin a new measurement date at the time of the acceleration and a new measurementof compensation as if the award were newly granted.  However, based on the formula used tocalculate the conversion ratios of various classes of LLC units into commonstock when the LLC merged into McCormick & Schmick’s Seafood Restaurants,Inc., the Class B units had no value and accordingly no shares of common stockwere issued for the Class B units. Shares of common stock with an aggregate value of $3.0 million wereallocated among the holders of C units, which had already vested.

 

On June 16,2004, the Company adopted a 2004 Stock Incentive Plan (the “Plan”) under which1,500,000 shares are reserved for issuance. Under the Plan, the Company maygrant stock options and other awards to employees, directors, consultants andto any parent or subsidiary of the Company. On July 20, 2004, the Company issued to officers and employees optionsto purchase an aggregate of 879,600 shares of common stock at $12.00 pershare.  These options become exerciseableover a three year period and are intended to qualify as incentive stock optionsunder Section 422 of the Internal Revenue Code. No compensation cost was charged to operations for the thirteen week andthirty nine week periods ended September 25, 2004.  Additional awards granted under the Plan maybe in the form of nonqualified stock options, incentive stock options, stockappreciation rights (“SARs”), restricted stock, stock bonuses and performance-basedawards.

 

Incentivestock options must have an exercise price that is at least equal to the fairmarket value of the common stock, or 110% of fair market value of the commonstock for any greater than 10% owner of the Company’s common stock, on the dateof grant. Vesting of awards under the Plan may vary. Each award granted underthe Plan may, at the discretion of the board of directors of the Company,become fully exercisable or payable, as applicable, upon a change of control ofthe Company.

 

10

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Each awardshall expire on such date as shall be determined at the date of grant, however,the maximum term of options, SARs and other rights to acquire common stockunder the plan is 10 years after the initial date of the award, subject toprovisions for further deferred payment in certain circumstances. These andother awards may also be issued solely or in part for services. Any sharessubject to awards that are not paid or exercised before they expire or areterminated will become available for other award grants under the 2004 StockIncentive Plan. If not sooner terminated by the Company’s board of directors,the Plan will terminate on June 16, 2014. As of September 25, 2004, options toacquire a total of 879,600 shares of the Company’s common stock have beengranted under the Plan at a price equal to $12.00, the fair market value on thedate of grant (July 20, 2004).

 

The tablebelow summarizes the status of the Company’s stock based compensation plans asof September 25, 2004:

 
| ** **                        | ** ** | **As of September 25, 2004** | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **Shares**                   | ** ** | **Weighted Average  Exercise Price** | ** ** |
| Outstanding at July 20, 2004      |       | —                       |       | $ | — |   |
| Awards granted                    |       | 879,600                      |       | 12.00 |   |
| Awards forfeited                  |       | (6,500                       | )          | 12.00 |   |
| Awards exercised                  |       | —                       |       | — |   |
| Outstanding at September 25, 2004 |       | 873,100                      |       | $ | 12.00 |   |

 

The tablebelow summarizes information about stock options outstanding at September 25,2004:

 
| ** **                     | ** ** | ** **            | ** ** | **Outstanding**                                          | ** ** | ** **                          | ** ** | **Exercisable**       | ** ** |
|--------------------------------|------------|-----------------------|------------|----------------------------------------------------------|------------|-------------------------------------|------------|-----------------------|------------|
| **Range of   Exercise Prices** | ** ** | **Number of Options** | ** ** | **Weighted Average Remaining Years of Contractual Life** | ** ** | **Weighted Average Exercise price** | ** ** | **Number of Options** | ** ** | **Weighted Average Exercise price** | ** ** |
| $12.00                         |       | 873,100               |       | 10                                                       |       | $12.00                              |       | —                |       | $— |   |
|                           |       |                  |       |                                                     |       |                                |       |                  |       |   |   |

 

The tablebelow shows the effects on net loss and net loss per share had compensationcost been measured with the fair value method pursuant to SFAS No. 123:

 
| ** **                                          | ** ** | **Thirteen week  period ended  September 25, 2004** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                          |
| Net loss, as reported                               |       | $                                                   | (3,094     | ) |
| Compensation cost based on the fair value  method   |       | (141                                                | )          |
| Pro forma net loss                                  |       | $                                                   | (3,235     | ) |
|                                                |       |                                                |       |
| Basic and fully diluted net loss per share          |       |                                                |       |
| As reported                                         |       | $                                                   | (0.25      | ) |
| Pro forma                                           |       | $                                                   | (0.26      | ) |
| Shares used in computing net loss per  common share |       |                                                |       |
| Basic and fully diluted                             |       | 12,299                                              |       |

 

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**(6)           COMMITMENTS AND CONTINGENCIES**

 

During 2003,the Company was a defendant in a labor code class action lawsuit filed in theSuperior Court of California, Orange County. In January 2004, the Companyresolved this matter in principal by agreeing to pay $1.2 million, which wasaccrued as of December 27, 2003 and is currently included in currentaccrued expenses.

 

The Company issubject to various other claims, possible legal actions, and other mattersarising out of the normal course of business. Management does not expect dispositionof these other matters to have a material adverse effect on the Company’sresults of operations, financial position or cash flows.

** **

**(7)           MANDATORILY REDEEMABLE PREFERREDSTOCK**

 

McCormick& Schmick Acquisition Corp II (“Acquisition Corp II”) is a subsidiary ofthe Company. Acquisition Corp II’s mandatorily redeemable 13% seniorexchangeable preferred stock is reflected as mandatorily redeemable preferredstock in the consolidated financial statements. In connection with the reorganization and IPO, on July 23, 2004 theCompany paid $28.9 million to redeem all of the outstanding mandatorilyredeemable 13% senior exchangeable preferred stock.  See Note 2, “Corporate Reorganization andInitial Public Offering.”

 

**(8)           MEMBERS’ EQUITY OF MCCORMICK &SCHMICK HOLDINGS LLC**

 

Prior to theIPO, the Company had outstanding the following equity units: preferred units,Class A-1 units, Class A-2 units, Class B units and Class Cunits. All of the units were converted into common stock as the result of theIPO. The holders of the Class A-1 units had voting rights; theClass A-2 units, Class B units, Class C units and preferredunits did not have voting rights.  AtDecember 27, 2003 members’ equity consisted of the following (dollars inthousands):

 
| Preferred units, 57,000 units issued and  outstanding (liquidation preference of $77,385)  |   | $     | 57,000 |   |
|--------------------------------------------------------------------------------------------|--------|-------|--------|--------|
| Warrant to acquire 4,956.52 Preferred  units, entitled to liquidation preference of $6,772 |   | 4,951 |   |
| Class A units, 1,000,000 units issued and  outstanding                                     |   | 756   |   |
| Warrant to acquire 103,896.1 Class A-2  units                                              |   | 103   |   |
| Class B units, 171,428.57 units issued and  outstanding                                    |   | 37    |   |
| Class C units, 13.20 units issued and  outstanding                                         |   | 14    |   |
| Unearned compensation                                                                      |   | (42   | )      |
|                                                                                       |   | $     | 62,819 |   |

 

In connectionwith the issuance of the senior exchangeable preferred stock ofMcCormick & Schmick Acquisition Corp II discussed in Note 7,the Company also sold for $102,857 a warrant to purchase 103,896.10Class A-2 units and sold for $4,951,563 a warrant to purchase 4,956.52preferred units.  In connection with thecorporate reorganization, the warrants became exercisable for 602,992 shares ofcommon stock for an aggregate exercise price of $5,995.00.  These warrants had not been exercised atSeptember 25, 2004.  See Note 2, “CorporateReorganization and Initial Public Offering,” and Note 9, “Subsequent Events.”

 

**(9)****                SUBSEQUENT EVENTS**

 

On October 12,2004, the Company requested and was granted an additional commitment of $10.0million under its revolving credit facility, raising the borrowing capacityfrom $40.0 million to $50.0 million.  Noadditional borrowings were made as a result of this additional commitment.

 

On October 20, 2004, The Bell Atlantic Master Trust exercised itswarrants to purchase 602,992 share of common stock for $5,995.00.

 

12

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**(10)         NEW ACCOUNTING PRONOUNCEMENTS**

 

In January 2003, the FASB issued FIN No. 46, *Consolidation of Variable Interest Entities*. FIN No. 46clarifies the application of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, to certain entities inwhich equity investors do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties. Application of this interpretation is required in financialstatements for periods ending after March 15, 2004. We have not identifiedany variable interest entities for which the Company is the primary beneficiaryor has significant involvement.

 

In April 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity*. SFAS No. 150 changes theaccounting for certain financial instruments that, under previous guidance,could be classified as equity or “mezzanine” equity, by requiring thoseinstruments to be classified as liabilities (or assets in some circumstances)in the statement of financial position. SFAS No. 150 requires disclosureregarding the terms of those instruments and settlement alternatives. Thisstatement was effective for all financial instruments entered into or modifiedafter May 31, 2003, and was otherwise effective at the beginning of thefirst interim period beginning after June 15, 2003. The restatement offinancial statements for earlier years presented is not permitted. The Companyadopted SFAS No. 150 effective June 29, 2003 (the beginning of our2003 third quarter). Effective with the adoption of SFAS No. 150, theCompany reported the mandatorily redeemable preferred stock on the balancesheet as a liability and the accrued dividends and accretion on mandatorilyredeemable preferred stock prior to income (loss) before income taxes on thestatement of operations. Prior to the adoption of SFAS No. 150, inaccordance with previous guidance, the Company reported the mandatorilyredeemable preferred stock on the balance sheet as mezzanine equity and theaccrued dividends and accretion on mandatorily redeemable preferred stock belowincome taxes on the statement of operations.

 

 

 

 

 

 

 

 

 

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS.**

 

**FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report,including Items 1 and 2 of Part I, contains forward-looking statements that aresubject to substantial risks and uncertainties. These statements relate tofuture events or our future financial performance. We have attempted toidentify forward-looking statements by terminology including “anticipate,” “believe,”“can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,”“predict,” “should” or “will” or the negative of these terms or othercomparable terminology. The expectations reflected in these forward-lookingstatements may prove to be incorrect.

 

Important factors thatcould cause actual results to differ materially from our expectations includethose discussed below under “Factors That May Affect Our Business and the Priceof Our Common Stock.”  We do notundertake any duty to update forward-looking statements after the date they aremade or to conform them to actual results or to changes in circumstances orexpectations.

 

**OVERVIEW**

 

Since our first restaurant opened in 1972, we have focused on prudentgrowth without sacrificing the quality or appeal of our restaurants or ourseafood.  We have grown our business byoffering our customers a daily-printed menu with a broad selection ofaffordable fresh seafood in an upscale, comfortable setting.  Our revenues are generated by sales at ourrestaurants, including banquets. In the quarter ended September 25, 2004,banquets accounted for approximately 8.0% of our revenues. Food andnonalcoholic beverage sales account for approximately 70.0% of revenues and theremaining 30.0% of revenues are from the sale of alcoholic beverages.

 

We opened five restaurants in the first quarter of 2004, opened threerestaurants and began operating an additional restaurant under a managementcontract in the second quarter of 2004 and opened one restaurant in October2004.  We anticipate opening sevenrestaurants in 2005 and at least eight restaurants in 2006.  We believe there is substantial opportunityfor our continued growth and we remain committed to pursuing our strategy ofleveraging our infrastructure in existing markets, in particular by sitingadditional restaurants in suburban areas near our downtown restaurants,selectively entering into new markets, and pursuing opportunities thatcomplement our seafood restaurant operations such as catering, managementagreements with hotels, and expansion of our M&S Grill concept.

 

                The following are highlights of our financialperformance for the thirteen week period ended September 25, 2004 (“2004Q3”) compared to the thirteen week period ended September 27, 2003 (“2003Q3”).

 

•                    Net loss increased $2.5million to ($3.1) million in 2004 Q3 from ($0.6) million in2003 Q3. The increase was primarily due to the following:

 

1- $3.4 million non-recurring expense for theredemption of all of the 13% senior exchangeable preferred stock of a Companysubsidiary in 2004 Q3;

2- $1.3 million ($0.9 million after tax)non-recurring expense for the write-off of deferred loan costs related to theexpensing of previously capitalized costs from our terminated credit facilityin 2004 Q3;

3- $1.2 million in incremental generaland administrative expenses incurred to support restaurant openings subsequentto 2003 Q3 and higher administrative operating costs of being a public company;

4- Partially offset by the benefit of higherrevenues and lower income taxes.

•                    Comparable restaurant salesin 2004 Q3 increased 1.6% compared to a 2.7% increase in 2003 Q3.•

•                    Revenues increased 21.9% in2004 Q3 primarily due to the revenues generated by the nine company-ownedrestaurants opened since 2003 Q3 coupled with our 1.6% positive comparablerestaurant sales.

•                    General and administrativeexpenses as a percentage of revenues increased to 5.5% in 2004 Q3 from4.3% in 2003 Q3 due to incremental expenses, consisting primarily ofadditional salary expenses associated with the oversight and administrative supportof nine additional company-owned restaurants opened since 2003 Q3 andhigher administrative and operating costs of being a public company.

 

                The following are highlights of our financialperformance for the thirty-nine week period ended September 25, 2004 (“YTD 2004Q3”) compared to the thirty-nine week period ended September 27, 2003 (“YTD2003 Q3”).

 

 

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•                  Net lossincreased $4.8 million to ($6.2) million in YTD 2004 Q3 from($1.4) million in YTD 2003 Q3. The increase was primarily due to thefollowing:

1- $3.4 million non-recurring expense for theredemption of all of the 13% senior exchangeable preferred stock of a Companysubsidiary in 2004 Q3;

2- $1.3 million ($0.9million after tax) non-recurring expense for the write-off of deferred loancosts related to the expensing of previously capitalized costs from ourterminated credit facility in 2004 Q3;

3- $2.8 million for thetermination of the management and covenant not to compete agreements;

4- $1.3 millionincrease in pre-opening costs associated with eight new company-ownedrestaurants in YTD 2004 Q3 as compared to two new company-owned restaurants inYTD 2003 Q3;

5- $2.4 million inincremental general and administrative expenses incurred to support restaurantopenings subsequent to 2003 Q3 and higher administrative and operating costs ofbeing a public company;

6- Partially offset by thebenefit of higher revenues and lower income taxes.

•                  Comparablerestaurant sales in YTD 2004 Q3 increased 3.6%, an improvement over the(0.1%) decrease in YTD 2003 Q3.

•                  Revenuesincreased 21.9% in YTD 2004 Q3 primarily due to the revenues generated bythe nine company-owned additional restaurants opened since YTD 2003Q3 coupled with our 3.6% positive comparable restaurant sales.

•                  General and administrativeexpenses as a percentage of revenues increased to 4.9% in YTD 2004 Q3 from4.3% in YTD 2003 Q3 due to incremental expenses, consisting primarily ofadditional salary expenses associated with the oversight and administrativesupport of nine additional company-owned restaurants opened since 2003 Q3and higher administrative and operating costs of being a public company.

 

**Corporate Reorganization andInitial Public Offering**

 

In connection with ourreorganization merger on July 20, 2004 and initial public offering on July 23,2004, we:

 

•                    Issued7,179,357 shares of common stock to the former holders of units of  McCormick & Schmick Holdings LLC, notincluding 602,992 shares issuable upon exercise of warrants at a nominalexercise price to The Bell Atlantic Master Trust.

 

•                    Issued6,000,000 shares at $12.00 per share, raising approximately $64.9 million afterunderwriting discounts and transaction costs.

 

•                    Repaid $51.5 million ofindebtedness on our then existing credit facility with the proceeds raised inthe public offering and from $18.3 million in loans under our new $50.0 millioncredit facility.

 

•                    Paid $28.9million to The Bell Atlantic Master Trust to redeem all of the 13% seniorexchangeable preferred stock of our subsidiary.

 

•                    Paid $2.8million in connection with the termination of management agreements with BRSand Castle Harlan and covenant not to compete agreements with our founders,William P. McCormick and Douglas L. Schmick.

 

We incurred expenses relatingto the redemption of all of the 13% senior exchangeable preferred stock of oursubsidiary in the amount of $3.4 million and wrote-off previously capitalizedcosts from our terminated revolving credit facility in the amount of $1.3million ($0.9 million net of tax) in Q3 2004.

 

**RESULTS OF OPERATIONS**

 

The following table presents the results of operations, in dollars andas a percentage of revenues, for each of the thirteen week and thirty-nine weekperiods ended September 25, 2004 and September 27, 2003.

 

 

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| ** **                                                                                                              | ** ** | **Thirteen week periods ended** | ** ** | **Thirty nine week periods ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                              | ** ** | **September 25, 2004**          | ** ** | **September 27, 2003**             | ** ** | **September 25, 2004** | ** ** | **September 27, 2003** | ** ** |
| ***(Unaudited,  dollars in thousands)***                                                                                | ** ** | **Amount**                      | ** ** | **%**                              | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                                                                                                    |       |                            |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                                                |       | $                               | 59,597     |                               | 100.0      |   | $ | 48,895 |   | 100.0 |   | $ | 173,833 |   | 100.0 |   | $ | 142,586 |   | 100.0 |   |
| Restaurant  operating costs                                                                                             |       |                            |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Food and beverage                                                                                                       |       | 17,776                          |       | 29.8                               |       | 14,522 |   | 29.7 |   | 51,993 |   | 29.9 |   | 42,082 |   | 29.5 |   |
| Labor                                                                                                                   |       | 19,013                          |       | 31.9                               |       | 15,488 |   | 31.7 |   | 55,555 |   | 32.0 |   | 45,061 |   | 31.6 |   |
| Operating costs                                                                                                         |       | 8,947                           |       | 15.0                               |       | 7,274 |   | 14.9 |   | 25,557 |   | 14.7 |   | 21,167 |   | 14.8 |   |
| Occupancy                                                                                                               |       | 5,137                           |       | 8.6                                |       | 3,938 |   | 8.1 |   | 14,780 |   | 8.5 |   | 11,513 |   | 8.1 |   |
| Total restaurant  operating costs                                                                                       |       | 50,873                          |       | 85.4                               |       | 41,222 |   | 84.3 |   | 147,885 |   | 85.1 |   | 119,823 |   | 84.0 |   |
| General and  administrative expenses                                                                                    |       | 3,298                           |       | 5.5                                |       | 2,126 |   | 4.3 |   | 8,469 |   | 4.9 |   | 6,083 |   | 4.3 |   |
| Restaurant  pre-opening costs                                                                                           |       | 95                              |       | 0.2                                |       | 635 |   | 1.3 |   | 2,083 |   | 1.2 |   | 746 |   | 0.5 |   |
| Depreciation and  amortization                                                                                          |       | 2,647                           |       | 4.4                                |       | 2,406 |   | 4.9 |   | 8,110 |   | 4.7 |   | 7,078 |   | 5.0 |   |
| Management fees  and covenants not to compete                                                                           |       | 0                               |       | 0                                  |       | 637 |   | 1.3 |   | 4,240 |   | 2.4 |   | 1,911 |   | 1.3 |   |
| Total costs and  expenses                                                                                               |       | 56,913                          |       | 95.5                               |       | 47,026 |   | 96.2 |   | 170,787 |   | 98.2 |   | 135,641 |   | 95.1 |   |
| Operating income                                                                                                        |       | 2,684                           |       | 4.5                                |       | 1,869 |   | 3.8 |   | 3,046 |   | 1.8 |   | 6,945 |   | 4.9 |   |
| Interest expense                                                                                                        |       | 569                             |       | 1.0                                |       | 703 |   | 1.4 |   | 2,366 |   | 1.4 |   | 2,303 |   | 1.6 |   |
| Accrued dividends  and accretion on mandatorily redeemable   preferred stock                                       |       | 3,693                           |       | 6.2                                |       | 950 |   | 1.9 |   | 5,759 |   | 3.3 |   | 950 |   | 0.7 |   |
| Write-off of  deferred loan costs on early extinguishment of debt                                                       |       | 1,288                           |       | 2.2                                |       | 0 |   | 0 |   | 1,288 |   | 0.7 |   | 0 |   | 0 |   |
| Income (loss)  before income tax expense and accrued dividends and accretion on mandatorily redeemable  preferred stock |       | (2,866                          | )          | (4.8                               | )          | 216 |   | 0.4 |   | (6,367 | ) | (3.7 | ) | 3,692 |   | 2.6 |   |
| Income tax  expense (benefit)                                                                                           |       | 228                             |       | 0.4                                |       | 809 |   | 1.7 |   | (188 | ) | (0.1 | ) | 3,220 |   | 2.3 |   |
| Accrued dividends  and accretion on mandatorily redeemable preferred stock                                              |       | 0                               |       | 0                                  |       | 0 |   | 0 |   | 0 |   | 0 |   | 1,832 |   | 1.3 |   |
| Net loss                                                                                                                |       | $                               | (3,094     | )                                  | (5.2       | ) | $ | (593 | ) | (1.2 | ) | $ | (6,179 | ) | (3.6 | ) | $ | (1,360 | ) | (1.0 | ) |

 

**Description of Terms**

 

                *Revenues* consist of revenues from comparable restaurants,new restaurants and management agreements. For purposes of comparablerestaurant sales, a restaurant is included in the comparable restaurant base inthe first full quarter following the eighteenth month of operations. Newrestaurant revenues include revenues from restaurants we opened during theperiod under discussion.

 

                *Restaurant operating costs* consist of:

 

•                    food and beverage costs;

•                    labor costs, consisting ofrestaurant management salaries, hourly staff payroll and other payroll-relateditems including taxes and fringe benefits;

•                    operating costs, consistingof advertising, maintenance, utilities, depreciation, insurance, bank andcredit card charges, and any other restaurant level expenses; and

•                    occupancycosts, consisting of both fixed and variable portions of rent, common areamaintenance charges, property insurance premiums, and real property taxes.

 

                *General and administrative expenses* consist of expensesassociated with corporate administrative functions that support development andrestaurant operations and provide an infrastructure to support future growth,including management and staff salaries, employee benefits, travel, legal andprofessional fees, technology and market research.

 

 

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                *Restaurantpre-opening costs*, which are expensed as incurred, consist of costsincurred prior to opening a new restaurant and are comprised principally ofmanager salaries and relocation, employee payroll and related training costsfor new employees, including practice and rehearsal of service activities.

 

                *Depreciationand amortization* consist of depreciation of fixed assets and theamortization of capitalized loan costs.

 

 

**2004 Q3 Compared to 2003 Q3**

 

*                Revenues.*    Revenuesincreased by $10.7 million, or 21.9%, to $59.6 million in2004 Q3 from $48.9 million in 2003 Q3. This increase wasattributable to revenues of $7.4 million generated by the eightrestaurants opened in 2004, and $3.3 million in incremental revenues from restaurantsopened before 2004, including comparable restaurants. Comparable restaurantsales were positive 1.6% in 2004 Q3. We experienced a 3.5% decrease incustomer counts.

 

*Food andBeverage Costs.*    Food andbeverage costs increased by $3.3 million, or 22.4%, to $17.8 millionin 2004 Q3 from $14.5 million in 2003 Q3. This increase wasprimarily related to the nine company-owned restaurants opened since2003 Q3. Food and beverage costs as a percentage of revenues increasedslightly to 29.8% in 2004 Q3 from 29.7% in 2003 Q3. The increase wasprimarily related to product handling inefficiency at the eight company-ownedrestaurants opened in 2004. Typically, new restaurants experience lower rawproduct yields during the first year of operations as the new employees learnour operating model. Due to the higher number of restaurant openings in 2004compared to 2003, we expect this trend in food and beverage cost to continuefor the remainder of 2004.

 

*                Labor Costs.*    Laborcosts increased by $3.5 million, or 22.8%, to $19.0 million in 2004Q3 from $15.5 million in 2003 Q3. This increase was primarily relatedto the nine company-owned restaurants opened since 2003 Q3. Labor costs asa percentage of revenues increased to 31.9% in 2004 Q3 from 31.7% in2003 Q3. The increase was primarily related to labor inefficienciesexperienced by the eight company-owned restaurants opened in 2004. Typically,new restaurants experience lower productivity and higher training costs duringthe first year of operations as the new employees learn our operating model.

 

*                Operating Costs.*    Operatingcosts increased by $1.7 million, or 23.0%, to $8.9 million in2004 Q3 from $7.3 million in 2003 Q3. This increase wasprimarily related to the nine company-owned restaurants opened since 2003 Q3.Operating costs as a percentage of revenues was 15.0%and 14.9% for 2004 Q3 and2003 Q3, respectively.

 

*                Occupancy Costs.*    Occupancycosts increased by $1.2 million, or 30.4%, to $5.1 million in2004 Q3 from $3.9 million in 2003 Q3. This increase wasprimarily related to the nine company-owned restaurants opened since2003 Q3. Occupancy costs as a percentage of revenues increased to 8.6% in2004 Q3 from 8.1% in 2003 Q3. Occupancy costs for the ninecompany-owned restaurants opened after 2003 Q3 are running higher as apercentage of revenues. Due to their early stage of maturity, these restaurantsare experiencing lighter sales resulting in a higher rent expense as apercentage of revenues. We expect occupancy costs as a percentage of revenue todecrease as the new restaurants mature and their revenues increase.

 

*                General and Administrative Expenses.*    Generaland administrative expenses increased by $1.2 million, or 55.1%, to$3.3 million in 2004 Q3 from $2.1 million in 2003 Q3. Thisincrease was primarily due to higher corporate expenses, such as director andofficers insurance premiums, investor support services, and regulatory andexchange fees, resulting from being a public company, and the addition ofcorporate, administrative and senior operations personnel to accommodate ourgrowth in 2003 and 2004. In addition, general and administrative costs wereimpacted by higher training costs to prepare new management for the nine newcompany-owned restaurant openings since 2003 Q3.  General and administrative expenses as apercentage of revenues increased to 5.5% in 2004 Q3 from 4.3% in2003 Q3.

 

*                Restaurant Pre-Opening Costs.*    Therewere no restaurant openings in 2004 Q3 and the $0.1 million in pre-openingcosts relate to the one company-owned restaurant opened in October 2004. Ourtarget is to keep total pre-opening costs per restaurant at approximately$350,000 per opening. 2003 Q3 pre-opening costs relating to the twocompany-owned restaurants opened in 2003 Q3 were $0.6 million.

 

*                Depreciation and Amortization.*    Depreciationand amortization increased by $0.2 million, or 10.0%, to $2.6 millionin 2004 Q3 from $2.4 million in 2003 Q3. This increase wasprimarily related to the nine company-owned restaurants opened since2003 Q3.

 

*                Management Fees and Covenants Not to Compete.*    In2004 Q3 there were no management fees or covenant not to compete payments paidto BRS and Castle Harlan, Inc. or to William P. McCormick andDouglas L. Schmick because these agreements were 

 

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terminated effective June 25, 2004 inconnection with our public offering.  In2003 Q3, we recognized as expense an aggregate of $0.5 million inmanagement fees paid to BRS and Castle Harlan, Inc. and an aggregate of$0.1 million paid to William P. McCormick and Douglas L. Schmickpursuant to covenant not to compete agreements.

 

*                Income Tax Expense.*    Werecorded a tax expense of $0.2 million in 2004 Q3 which is approximately 28.0%of our income  for the quarterly periodprior to accrued dividends and accretion on Mandatorily Redeemable PreferredStock, which is not deductible for income tax purposes.

 

*                Accrued Dividends and Accretion on Mandatorily Redeemable PreferredStock.*    Dividends and accretiverights of our subsidiary’s redeemable preferred stock are reflected as accrueddividends and accretion on mandatorily redeemable preferred stock in theconsolidated financial statements. Proceeds from our public offering were usedto redeem the preferred stock. See “Liquidity and Capital Resources.”  We recognized expenses of $3.7 millionincluding $3.4 million for the redemption of the preferred stock and $0.9million in 2004 Q3 and 2003 Q3, respectively, relating to the dividends andaccretive rights.

 

                *Net Loss.*    Net loss increased $2.5million to ($3.1) million in 2004 Q3 from ($0.6) million in2003 Q3. The increase was primarily due to the $3.4 million and $1.3million ($0.9 million net of tax) non-recurring expenses for the redemption ofall of the 13% senior exchangeable preferred stock of our subsidiary andwrite-off of deferred loan costs related to the expensing of previouslycapitalized costs from our terminated credit facility respectively, coupledwith $1.2 million in incremental general and administrative expensesincurred to support restaurant openings subsequent to 2003 Q3 coupled withhigher costs associated with being a public company, partially offset by thebenefit of higher revenues and lower income taxes.

 

**YTD 2004 Q3 Compared to YTD 2003 Q3**

 

*Revenues.*   Revenuesincreased by $31.2 million, or 21.9%, to $173.8 million in YTD 2004 Q3from $142.6 million in YTD 2003 Q3. This increase was attributable torevenues of $17.0 million generated by the eight restaurants opened in2004, and $14.2 million in incremental revenues from restaurants opened before2004, including comparable restaurants. Comparable restaurant sales werepositive 3.6% in YTD 2004 Q3.  Weexperienced a 0.4% decrease in customer counts.

 

*Food and Beverage Costs.*    Foodand beverage costs increased by $9.9 million, or 23.6%, to $52.0 millionin YTD 2004 Q3 from $42.1 million in YTD 2003 Q3. This increase wasprimarily related to the nine company-owned restaurants opened since Q3 2003.Food and beverage costs as a percentage of revenues increased slightly to 29.9%in YTD 2004 Q3 from 29.5% in YTD 2003 Q3. The increase was primarily related to product handling inefficiency atthe eight company-owned restaurants opened in 2004. Typically, new restaurantsexperience lower raw product yields during the first year of operations as thenew employees learn our operating model. Due to the higher number of restaurantopenings in 2004 compared to 2003, we expect this trend in food and beveragecost to continue for the remainder of 2004.

 

*                Labor Costs.*    Laborcosts increased by $10.5 million, or 23.3%, to $55.6 million in YTD2004 Q3 from $45.1 million in YTD 2003 Q3. This increase was primarilyrelated to the nine company-owned restaurants opened since 2003 Q3. Laborcosts as a percentage of revenues increased to 32.0% in YTD 2004 Q3 from 31.6%in YTD 2003 Q3. The increase was primarily related to labor inefficienciesexperienced by the eight company-owned restaurants opened in 2004. Typically,new restaurants experience lower productivity and higher training costs duringthe first year of operations as the new employees learn our operating model.

 

*                Operating Costs.*    Operatingcosts increased by $4.4 million, or 20.7%, to $25.6 million in YTD2004 Q3 from $21.2 million in YTD 2003 Q3. This increase wasprimarily related to the nine company-owned restaurants opened since2003 Q3. Operating costs as a percentage of revenues decreased to 14.7% inYTD 2004 Q3 from 14.8% in YTD 2003 Q3. Several of the operating costs included in this cost category are eitherfixed or semi-variable. As a result, operating costs as a percentage ofrevenues decreased due to the 3.6% increase in comparable restaurant sales inYTD 2004 Q3.

 

*                Occupancy Costs.*    Occupancycosts increased by $3.3 million, or 28.4%, to $14.8 million in YTD2004 Q3 from $11.5 million in YTD 2003 Q3. This increase wasprimarily related to the nine company-owned restaurants opened since2003 Q3. Occupancy costs as a percentage of revenues increased to 8.5% inYTD 2004 Q3 from 8.1% in YTD 2003 Q3. Occupancy costs for the nine new company-ownedrestaurants opened after 2003 Q3 are running higher as a percentage ofrevenues. Due to their early stage of maturity, these restaurants areexperiencing lighter sales resulting in a higher rent expense as a percentageof revenue. We expect occupancy costs as a percentage of revenue to decrease asthe new restaurants mature and their revenues increase.

 

*                General and Administrative Expenses.*    Generaland administrative expenses increased by $2.4 million, or 39.2%, to$8.5 million in YTD 2004 Q3 from $6.1 million in YTD 2003 Q3.This increase was primarily due to higher corporate expenses, such 

 

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as director and officers insurance premiums,investor support services, and regulatory and exchange fees, resulting frombeing a publicly traded company, and the addition of corporate, administrativeand senior operations personnel to accommodate our growth in 2003 and 2004. Inaddition, general and administrative costs were impacted by higher trainingcosts to prepare new management for the eight new company-owned restaurantopenings in YTD 2004 Q3.  General andadministrative expenses as a percentage of revenues increased to 4.9% in YTD2004 Q3 from 4.3% in YTD 2003 Q3.

 

*                Restaurant Pre-Opening Costs.*    YTD2004 Q3 pre-opening costs relating to the eight company-owned restaurantsopened in the period were $2.1 million. We have opened an additionalcompany-owned restaurant in October 2004. Our target is to keep totalpre-opening costs per restaurant at approximately $350,000 per opening. Therewere $0.7 million in expenses related to the two restaurants we opened in YTD2003 Q3.

 

*                Depreciation and Amortization.*    Depreciationand amortization increased by $1.0 million, or 14.6%, to $8.1 millionin YTD 2004 Q3 from $7.1 million in YTD 2003 Q3. This increase wasprimarily related to the nine company-owned restaurants opened since2003 Q3.

 

*                Management Fees and Covenants Not to Compete.*    InYTD 2004 Q3, we expensed an aggregate of $3.3 million in management feesto BRS and Castle Harlan, Inc. and an aggregate of $0.9 million toWilliam P. McCormick and Douglas L. Schmick pursuant to covenant notto compete agreements. These agreements were terminated effective June 25, 2004in connection with our public offering for an aggregate payment of $2.8 millionand expensed in the second quarter of 2004. In YTD 2003 Q3, we expensed$1.6 million in management fees to BRS and Castle Harlan, and an aggregateof $0.3 million to William P. McCormick and Douglas L. Schmickpursuant to these agreements.  We willnot incur any future expenses related to these agreements.

 

*                Income Tax Expense.*    Werecorded a tax benefit of $0.2 million in YTD 2004 Q3, which is approximately31.0% of our estimated tax loss for the period prior to accrued dividends andaccretion on Mandatorily Redeemable Preferred Stock, which is not deductiblefor income tax purposes.  We recorded atax expense of $3.2 million in YTD 2003 Q3.

 

*                Accrued Dividends and Accretion on Mandatorily Redeemable PreferredStock.*    Dividends and accretiverights of a subsidiary’s redeemable preferred stock are reflected as accrueddividends and accretion on mandatorily redeemable preferred stock in theconsolidated financial statements. Proceeds from our public offering were usedto redeem the preferred stock. See “Liquidity and Capital Resources.”  We recorded $5.8 million and $1.0 million ofexpenses in YTD 2004 Q3 and YTD 2003 Q3, respectively, including $3.4 millionfor the additional accretion  related tothe redemption of the preferred stock.

 

                *Net Loss.*    Netloss increased $4.8 million to ($6.2) million in YTD 2004 Q3 from($1.4) million in YTD 2003 Q3. The increase was primarily due to the $3.4million and $1.3 million non-recurring expenses for the redemption of all ofthe 13% senior exchangeable preferred stock of our subsidiary and write-off ofdeferred loan costs related to the expensing of previously capitalized costsfrom our terminated credit facility respectively, the $2.8 millionnon-recurring expense for the termination of the covenant not to competeagreements, the increase of $1.3 million in pre-opening costs associatedwith eight new company-owned restaurants in YTD 2004 Q3, coupled with a$2.4 million incremental general and administrative expenses incurred tosupport restaurant openings subsequent to 2003 Q3 coupled with higher costsassociated with being a publicly traded company, partially offset by thebenefit of higher revenues and lower income taxes.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our primaryliquidity and capital requirements have been for new restaurant construction,working capital and general corporate needs. Historically, our main sources ofliquidity and capital have been cash provided by operating activities andborrowings under credit facilities.  OnJuly 23, 2004 we completed our initial public offering in which we sold6,000,000 shares at $12.00 per share, raising approximately $64.9 million afterunderwriting discounts and transaction costs. With the proceeds and an $18.3 million loan from a new revolving creditfacility, we retired our then existing revolving facility of $51.5 million,redeemed all of the outstanding 13% senior exchangeable preferred stock of oursubsidiary for $28.9 million, and paid $2.8 million to terminate, as of June25, 2004, management and covenant not to compete agreements with affiliatedparties.

 

 

The tablebelow summarizes our sources and uses of cash for the 39 weeks ended September25, 2004 and September 27, 2003, respectively.

 
| ** **                                          | ** ** | **Thirty-nine week periods ended** | ** ** |
|-----------------------------------------------------|------------|------------------------------------|------------|
| **(Unaudited, dollars in thousands)**               | ** ** | **September 25, 2004**             | ** ** | **September 27, 2003** | ** ** |
| ** **                                          | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Net cash provided by operating activities           |       | $                                  | 9,345      |   | $ | 12,805 |   |
| Net cash used in investing activities               |       | (20,137                            | )          | (11,117 | ) |
| Net cash provided by (used in) financing activities |       | 10,912                             |       | (2,210 | ) |
| Net increase (decrease) in cash                     |       | $                                  | 120        |   | $ | (522 | ) |

 

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                Net cash provided by operating activities was $9.3 million for YTD2004 Q3 compared to $12.8 million for YTD 2003 Q3. The decrease in netcash provided by operating activities was primarily due to a $3.9 milliondecrease in operating income resulting from a $2.3 million increase inmanagement fees and covenant not to compete payments coupled with a $1.3million increase in pre-opening expenses in the YTD 2004 Q3 period.

 

                Net cash used in investing activities was $20.1 million for YTD2004 Q3 compared to $11.1 million for YTD 2003 Q3. The increase innet cash used in investing activities in YTD 2004 Q3 resulted mainly fromthe acquisition of equipment and leasehold improvements for eight company-ownedrestaurants opened in the period. We opened two restaurants in YTD 2003 Q3. Weuse cash for tenant improvements and equipment to open new restaurants and toupgrade and add capacity to existing restaurants. Net cash used in investingactivities varied in the periods presented based on the number of newrestaurants opened and/or existing restaurant capacity expanded during theperiod. Purchases of property and equipment also include purchases ofinformation technology systems and expenditures relating to our corporateheadquarters.

 

                Net cash provided by financing activities was $10.9 million in YTD2004 Q3 compared to $2.2 million net cash used by financing activities inYTD 2003 Q3.  In our initial publicoffering, 6,000,000 common shares were issued at $12.00 per share, providingcash of approximately $64.9 million after underwriting discounts andtransaction costs.   Additionally, weused $28.9 million to redeem all of the 13% senior exchangeable preferred stockof a LLC subsidiary.  There was$21.5 million of net payments under our revolving credit facility in YTD2004 Q3 compared to $2.0 million of net borrowings in YTD 2003 Q3. In YTD 2004Q3,   we used $2.5 million to reducebook overdrafts. In YTD 2003 Q3, we used $5.0 million to reduce long-termdebt.

 

                Like many restaurant companies that have financing terms withsuppliers, we operate with a working capital deficit. The deficit primarilyresults from the difference between the frequency of our inventory turns (everyfew days) and the negotiated settlement cycle of our accounts payable(typically, between 21 and 36 days). We do not believe our working capitaldeficit has a negative impact on our liquidity.

 

In connectionwith our public offering, on July 23, 2004 we secured a new facility underwhich the maximum amount we may borrow is $50.0 million. In connectionwith the termination of our prior revolving credit facility, we recognized asexpense the remaining deferred financing costs of approximately $1.3 million in2004 Q3. We borrowed approximately $18.3 million under the new creditfacility at the closing of our initial public offering.  Loans under this revolving credit facilitybear interest at either a “base rate,” which is the higher of Fleet’s announcedannual variable interest “prime rate” or 0.25% plus the weighted average rateon overnight federal funds transactions with members of the Federal ReserveSystem, or a rate based on the Eurodollar rate. At our option, we may convertloans from one type of rate to the other. Loans are scheduled to mature on July23, 2009.

 

                We have opened one restaurant in October 2004, for a total in 2004 of10 (including one we began operating under a management agreement), and weexpect to open seven restaurants in 2005 and at least eight in 2006.  We estimate that the pre-opening costsassociated with each of these new restaurants will be approximately $350,000and that restaurants generally ramp up to anticipated operating level by theend of their third year of operations. We believe the net cash provided by operating activities and fundsavailable from our revolving credit facility will be sufficient to satisfy ourworking capital and capital expenditure requirements, including restaurant construction,pre-opening costs and potential initial operating losses related to restaurantopenings, for the next 24 months.

 

 

**CRITICALACCOUNTING POLICIES**

 

                Our significant accounting policies are thosethat we believe are both important to the portrayal of our financial conditionand results and require our most difficult, subjective or complex judgments,often as a result of the need to make estimates about the effect of mattersthat are inherently uncertain. We believe our critical accounting policies andestimates used in the preparation of our consolidated financial statements arethe following:

 

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***Equipment and Leasehold Improvements***

 

                Equipment and leasehold improvements are stated at cost less accumulateddepreciation and amortization. Equipment consists primarily of restaurantequipment, furniture, fixtures and smallwares. Depreciation is generallycalculated using the straight-line method over the estimated useful lives ofthe related assets. Leasehold improvements are amortized using thestraight-line method over the shorter of the lease term, including renewalperiods, or the estimated useful life of the asset. Repairs and maintenance areexpensed as incurred; renewals and betterments are capitalized. Estimateduseful lives are generally as follows: equipment—3 to 10 years; furnitureand fixtures—5 to 7 years. Judgments and estimates made by us related tothe expected useful lives of these assets are affected by factors such aschanges in economic conditions and changes in operating performance. If theseassumptions change in the future, we may be required to record impairmentcharges for these assets.

 

***Impairment of Long-Lived Assets***

 

                We review property and equipment (whichincludes leasehold improvements) for impairment when events or circumstancesindicate these assets might be impaired. We test impairment using historicalcash flow and other relevant facts and circumstances as the primary basis forour estimates of future cash flows. The analysis is performed at the restaurantlevel for indicators of permanent impairment. In determining future cash flows,significant estimates are made by us with respect to future operating resultsof each restaurant over its remaining lease term. If assets are determined tobe impaired, the impairment charge is measured by calculating the amount bywhich the asset carrying amount exceeds its fair value. The determination ofasset fair value is also subject to significant judgment. This process requiresthe use of estimates and assumptions, which are subject to a high degree ofjudgment. If these assumptions change in the future, we may be required torecord impairment charges for these assets. In our most recent impairmentevaluation for long-lived assets, no additional impairment charge would haveresulted even if there were a permanent 5% reduction in revenues in ourrestaurants.

 

***Goodwill and Other Indefinite Lived Assets***

 

                Goodwill and other indefinite lived assetsresulted from our acquisition in 2001. Goodwill and other intangible assetswith indefinite lives are not subject to amortization. However, such assetsmust be tested for impairment whenever events or changes in circumstancesindicate that the carrying amount may not be recoverable and at least annually.We completed our most recent impairment test in December 2003, anddetermined that there were no impairment losses related to goodwill and otherindefinite lived assets. In assessing the recoverability of goodwill and otherindefinite lived assets, market values and projections regarding estimatedfuture cash flows and other factors are used to determine the fair value of therespective assets. The estimated future cash flows were projected usingsignificant assumptions, including future revenues and expenses. If theseestimates or related projections change in the future, we may be required torecord impairment charges for these assets. In our most recent impairmentevaluation for goodwill and other indefinite lived assets, no impairment chargewould have resulted even if a permanent 5% reduction in revenues were to occur.

 

 

***Insurance Liability***

 

                We maintain various insurance policies forworkers’ compensation, employee health, general liability, and property damage.Pursuant to those policies, we are responsible for losses up to certain limitsand are required to estimate a liability that represents our ultimate exposurefor aggregate losses below those limits. This liability is based on management’sestimates of the ultimate costs to be incurred to settle known claims andclaims not reported as of the balance sheet date. Our estimated liability isnot discounted and is based on a number of assumptions and factors, includinghistorical trends, actuarial assumptions, and economic conditions. If actualtrends differ from our estimates, our financial results could be impacted.

 

***Income Taxes***

 

                We have accounted for, and currently accountfor, income taxes in accordance with Statement of Financial AccountingStandards (“SFAS”) No. 109, *Accounting for IncomeTaxes*. This statement establishes financial accounting and reportingstandards for the effects of income taxes that result from an enterprise’sactivities during the current and preceding years. It requires an asset andliability approach for financial accounting and reporting of income taxes. Werecognize deferred tax liabilities and assets for the future consequences ofevents that have been recognized in our consolidated financial statements ortax returns. In the event the future consequences of differences betweenfinancial reporting bases and tax bases of our assets and liabilities result ina net deferred tax asset, an evaluation is made of the probability of beingable to realize the future benefits indicated by such asset. A valuationallowance related to a deferred tax asset is recorded when it is more likelythan not that some portion or all of a deferred tax asset will not be realized.The realization of such net deferred tax will generally depend on whether wewill have sufficient taxable income of an appropriate character within thecarry-forward period permitted by the tax law. Without sufficient taxableincome to offset the 

 

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deductibleamounts and carry-forwards, the related tax benefits will expire unused. Wehave evaluated both positive and negative evidence in making a determination asto whether it is more likely than not that all or some portion of the deferredtax asset will not be realized. Measurement of deferred items is based onenacted tax laws.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

InJanuary 2003 the FASB issued Financial Accounting Standards BoardInterpretation (“FIN”) No. 46, *Consolidation of VariableInterest Entities*. FIN No. 46 clarifies the application ofAccounting Research Bulletin No. 51, *Consolidated FinancialStatements*, to certain entities in which equity investors do nothave the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. Application ofthis interpretation is required in financial statements for periods endingafter March 15, 2004. We have not identified any variable interestentities for which we are the primary beneficiary or have significantinvolvement.

 

In April 2003 the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity*. SFAS No. 150 changes theaccounting for certain financial instruments that, under previous guidance,could be classified as equity or “mezzanine” equity, by requiring thoseinstruments to be classified as liabilities (or assets in some circumstances)in the statement of financial position. SFAS No. 150 requires disclosureregarding the terms of those instruments and settlement alternatives. Thisstatement was effective for all financial instruments entered into or modifiedafter May 31, 2003, and was otherwise effective at the beginning of thefirst interim period beginning after June 15, 2003. The restatement offinancial statements for earlier years presented is not permitted. We adoptedSFAS No. 150 effective June 29, 2003 (the beginning of our 2003 thirdquarter). Effective with the adoption of SFAS No. 150, we reported the mandatorilyredeemable preferred stock on the balance sheet as a liability and the accrueddividends and accretion on mandatorily redeemable preferred stock prior toincome before income taxes on the statement of operations. Prior to theadoption of SFAS No. 150, in accordance with previous guidance, wereported the mandatorily redeemable preferred stock on the balance sheet asmezzanine equity and the accrued dividends and accretion on mandatorilyredeemable preferred stock below income taxes on the statement of operations.

 

 

 

**Factors That May Affect Our Business and thePrice of Our Stock**

 

***Our ability to expand our restaurant base isinfluenced by factors beyond our control and therefore we may not be able toachieve our planned growth***

 

Our growthstrategy depends in large part on our ability to open new restaurants and tooperate these restaurants profitably. Delays or failures in opening newrestaurants could impair our ability to meet our growth objectives. We have inthe past experienced delays in restaurant openings and may experience similardelays in the future. Our ability to expand our business successfully willdepend upon numerous factors, including:

 

•                  hiring, training andretaining skilled management, chefs and other qualified personnel to open, manageand operate new restaurants;

•                  locating and securing asufficient number of suitable new restaurant sites in new and existing marketson acceptable lease terms;

•                  managing the amount of timeand construction and development costs associated with the opening of newrestaurants;

•                  obtaining adequate financingfor the construction of new restaurants;

•                  securing governmentalapprovals and permits required to open new restaurants in a timely manner, ifat all;

•                  successfully promoting ournew restaurants and competing in the markets in which our new restaurants arelocated; and

•                  general economic conditions.

 

Some of thesefactors are beyond our control. We may not be able to achieve our expansiongoals and our new restaurants may not be able to achieve operating resultssimilar to those of our existing restaurants.

 

***Unexpected expenses and low market acceptancecould adversely affect the profitability of restaurants that we open in newmarkets***

 

Our growthstrategy includes opening restaurants in markets where we have little or nomeaningful operating experience and in which potential customers may not befamiliar with our restaurants. The success of these new restaurants may beaffected by 

 

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different competitive conditions, consumertastes and discretionary spending patterns, and our ability to generate marketawareness and acceptance of the McCormick & Schmick’s brand. As aresult, we may incur costs related to the opening, operation and promotion ofthese new restaurants that are greater than those incurred in other areas. Eventhough we may incur substantial additional costs with these new restaurants,they may attract fewer customers than our more established restaurants inexisting markets. Sales at restaurants that we open in new markets may takelonger to reach our average annual sales, if at all. As a result, the resultsof operations at our new restaurants may be inferior to those of our existingrestaurants. We may not be successful in profitably opening restaurants in newmarkets.

 

***Our growth may strain our infrastructure andresources, which could slow our development of new restaurants and adverselyaffect our ability to manage our existing restaurants***

 

We have openedeight restaurants and began operating an additional restaurant under amanagement contract in the first three quarters of 2004 and opened oneadditional restaurant in October 2004. This will be the most single-yearrestaurant openings we have had in our history. Our 2004 expansion and ourfuture growth may strain our restaurant management systems and resources,financial controls and information systems. Those demands on our infrastructureand resources may also adversely affect our ability to manage our existingrestaurants. If we fail to continue to improve our infrastructure or to manageother factors necessary for us to meet our expansion objectives, our operatingresults could be materially and adversely affected.

 

***Our ability to raise capital in the futuremay be limited, which could adversely impact our growth***

 

Changes in ouroperating plans, acceleration of our expansion plans, lower than anticipatedsales, increased expenses or other events described in this Risk Factorssection may require us to seek additional debt or equity financing. Financingmay not be available on acceptable terms, or at all, and our failure to raisecapital when needed could negatively impact our growth and our financialcondition and results of operations. Additional equity financing may bedilutive to the holders of our common stock, and debt financing, if available,may involve significant cash payment obligations and covenants that restrictour ability to operate our business. See “Management’s Discussion and Analysisof Financial Condition and Results of Operations—Liquidity and CapitalResources.”

 

***Our operations are susceptible to changes infood availability and costs, which could adversely affect our operating results***

 

Ourprofitability depends significantly on our ability to anticipate and react tochanges in seafood costs. We rely on local, regional and national suppliers toprovide our seafood. Increases in distribution costs or sale prices or failureto perform by these suppliers could cause our food costs to increase. We couldalso experience significant short-term disruptions in our supply if asignificant supplier failed to meet its obligations. The supply of seafood ismore volatile than other types of food. The type, variety, quality and price ofseafood is subject to factors beyond our control, including weather,governmental regulation, availability and seasonality, each of which may affectour food costs or cause a disruption in our supply. Changes in the price oravailability of certain types of seafood could affect our ability to offer abroad menu and price offering to customers and could materially adverselyaffect our profitability.

 

***Our operating results may fluctuatesignificantly and could fall below the expectations of securities analysts andinvestors due to seasonality and other factors, resulting in a decline in ourstock price***

 

Our operatingresults may fluctuate significantly because of several factors, including:

 

•                  our ability to achieve andmanage our planned expansion;

•                  our ability to achievemarket acceptance, particularly in new markets;

•                  our ability to raise capitalin the future;

•                  changes in the availabilityand costs of food;

•                  the loss of key managementpersonnel;

•                  the concentration of ourrestaurants in specific geographic areas;

•                  our ability to protect ourname and logo and other proprietary information;

•                  changes in consumerpreferences or discretionary spending;

•                  fluctuations in the numberof visitors or business travelers to downtown locations;

•                  health concerns aboutseafood or other food products;

•                  our ability to attract,motivate and retain qualified employees;

 

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•                  increases in labor costs;

•                  the impact of federal, stateor local government regulations relating to our employees or the sale orpreparation of food and the sale of alcoholic beverages;

•                  the impact of litigation;

•                  the effect of competition inthe restaurant industry; and

•                    economic trends generally.

 

Our businessalso is subject to seasonal fluctuations. Historically, sales in most of ourrestaurants have been higher during the second and fourth quarter of each year.As a result, our quarterly and annual operating results and restaurant salesmay fluctuate significantly as a result of seasonality and the factorsdiscussed above. Accordingly, results for any one fiscal quarter are notnecessarily indicative of results to be expected for any other quarter or forany year and comparable restaurant sales for any particular future period maydecrease. Our operating results may also fall below the expectations ofsecurities analysts and investors. In that event, the price of our common stockwould likely decrease.

 

***A decline in visitors or business travelersto downtown areas where our restaurants are located could negatively affect ourrestaurant sales***

 

Ourrestaurants are primarily located in downtown areas. We depend on both localresidents and business travelers to frequent these locations. We experienced adecline in revenues in our downtown locations in 2001 and 2002, caused in partby decreases in business travel and the general decline in economic conditions.We may experience a similar decline in our revenues in the future. If thenumber of visitors to downtown areas declines due to economic or otherconditions, changes in consumer preferences, changes in discretionary consumerspending or for other reasons, our revenues could decline significantly and ourresults of operations could be adversely affected.

 

***If we lose the services of any of our keymanagement personnel or our founders, our business could suffer***

 

We depend onthe services of our key management personnel, including Saed Mohseni, our chiefexecutive officer, and Douglas L. Schmick, our president. In addition, we haveincreasingly relied on personal appearances and interviews by our founders,William P. McCormick and Douglas L. Schmick, in our marketing and advertisingefforts. If we lose the services of any members of our senior management, keypersonnel or founders for any reason, we may be unable to replace them withqualified personnel, which could have a material adverse effect on our businessand growth. We do not carry key person life insurance on any of our executiveofficers.

 

***Many of our restaurants are concentrated inlocal or regional areas and, as a result, we are sensitive to economic andother trends and developments in these areas***

 

We operatefour restaurants in Seattle, Washington, six in the Portland, Oregon area and10 in California; our East Coast restaurants are concentrated in and aroundWashington, D.C. As a result, adverse economic conditions, weather and labormarkets in any of these areas could have a material adverse effect on ouroverall results of operations. For example, ice storms in northwestern Oregonin January 2004 affected sales at six, or 12%, of our restaurants.

 

In addition,given our geographic concentrations, negative publicity regarding any of ourrestaurants in these areas could have a material adverse effect on our businessand operations, as could other regional occurrences such as local strikes, oilspills, terrorist attacks, energy shortages or increases in energy prices,droughts or earthquakes or other natural disasters.

 

***Our success depends on our ability to protectour proprietary information. Failure to protect our trademarks, service marksor trade secrets could adversely affect our business***

 

Our businessprospects depend in part on our ability to develop favorable consumerrecognition of the McCormick & Schmick’s name. AlthoughMcCormick & Schmick’s, M&S Grill and other of our service marksare federally registered trademarks with the United States Patent and TrademarkOffice, our trademarks could be imitated in ways that we cannot prevent. Inaddition, we rely on trade secrets, proprietary know-how, concepts and recipes.Our methods of protecting this information may not be adequate, however, andothers could independently develop similar know-how or obtain access to ourtrade secrets, know-how, concepts and recipes. Moreover, we may face claims ofmisappropriation or infringement of third parties’ rights that could interferewith our use of our proprietary know-how, concepts, recipes or trade secrets.Defending these claims may be costly and, if unsuccessful, may prevent us fromcontinuing to use this proprietary information in the future, and may result ina judgment or monetary damages. We do not 

 

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maintain confidentiality and non-competitionagreements with all of our executives, key personnel or suppliers. Ifcompetitors independently develop or otherwise obtain access to our know-how,concepts, recipes or trade secrets, the appeal of our restaurants could bereduced and our business could be harmed.

 

***Our current insurance policies may notprovide adequate levels of coverage against all claims***

 

We believe wemaintain insurance coverage that is customary for businesses of our size andtype. However, there are types of losses we may incur that cannot be insuredagainst or that we believe are not commercially reasonable to insure. These losses,if they occur, could have a material and adverse effect on our business andresults of operations.

 

***Expanding our restaurant base by opening newrestaurants in existing markets could reduce the business of our existingrestaurants***

 

Our growthstrategy includes opening restaurants in markets in which we already haveexisting restaurants. We may be unable to attract enough customers to the newrestaurants for them to operate at a profit. Even if we are able to attractenough customers to the new restaurants to operate them at a profit, thosecustomers may be former customers of one of our existing restaurants in thatmarket and the opening of new restaurants in the existing market could reducethe revenue of our existing restaurants in that market.

 

***We may not be able to successfully integrateinto our business the operations of restaurants that we acquire, which mayadversely affect our business, financial condition and results of operations***

 

We may seek toselectively acquire existing restaurants and integrate them into our businessoperations. Achieving the expected benefits of any restaurants that we acquirewill depend in large part on our ability to successfully integrate theoperations of the acquired restaurants and personnel in a timely and efficientmanner. The risks involved in such restaurant acquisitions and integrationinclude:

 

•                  challenges and costsassociated with the acquisition and integration of restaurant operationslocated in markets where we have limited or no experience;

•                  possible disruption to ourbusiness as a result of the diversion of management’s attention from its normaloperational responsibilities and duties; and

•                  the consolidation of thecorporate, information technology, accounting and administrative infrastructureand resources of the acquired restaurants into our business.

Futureacquisitions of existing restaurants, which may be accomplished through a cashpurchase transaction or the issuance of our equity securities, or a combinationof both, could result in potentially dilutive issuances of our equitysecurities, the incurrence of debt and contingent liabilities and impairmentcharges related to goodwill and other intangible assets, any of which couldharm our business and financial condition.

 

We may beunable to successfully integrate the operations, or realize the anticipatedbenefits, of any restaurant that we acquire. If we cannot overcome thechallenges and risks that we face in integrating the operations of newlyacquired restaurants, our business, financial condition and results ofoperations could be adversely affected.

 

***Negative publicity concerning food quality,health and other issues and costs or liabilities resulting from litigation mayhave a material adverse effect on our results of operations***

 

We are sometimesthe subject of complaints or litigation from customers alleging illness, injuryor other food quality, health or operational concerns. Litigation or adversepublicity resulting from these allegations may materially and adversely affectus or our restaurants, regardless of whether the allegations are valid orwhether we are liable. Further, these claims may divert our financial andmanagement resources from revenue-generating activities and businessoperations.

 

***Health concerns relating to the consumptionof seafood or other food products could affect consumer preferences and couldnegatively impact our results of operations***

 

We may losecustomers based on health concerns about the consumption of seafood or negativepublicity concerning food quality, illness and injury generally, such asnegative publicity concerning the accumulation of mercury or other carcinogensin seafood, e-coli, “mad cow” or “foot-and-mouth” disease, publication ofgovernment or industry findings about food products served by us or otherhealth concerns or operating issues stemming from one of our restaurants. Inaddition, we cannot guarantee that our 

 

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operational controls and training will befully effective in preventing all food-borne illnesses. Some food-borne illnessincidents could be caused by food suppliers and transporters and would beoutside of our control. Any negative publicity, health concerns or specificoutbreaks of food-borne illnesses attributed to one or more of our restaurants,or the perception of an outbreak, could result in a decrease in guest trafficto our restaurants and could have a material adverse effect on our business.

 

***Changes in consumer preferences ordiscretionary consumer spending could negatively impact our results ofoperations***

 

The restaurantindustry is characterized by the continual introduction of new concepts and issubject to rapidly changing consumer preferences, tastes and purchasing habits.Our continued success depends in part upon the popularity of seafood and thestyle of dining we offer. Shifts in consumer preferences away from this cuisineor dining style could materially and adversely affect our profitability andoperating results. Our success will depend in part on our ability to anticipateand respond to changing consumer preferences, tastes and purchasing habits, aswell as other factors affecting the restaurant industry, including new marketentrants and demographic changes. If we change our concept and menu to respondto changes in consumer tastes or dining patterns, we may lose customers who donot prefer the new concept or menu, and may not be able to attract a sufficientnew customer base to produce the revenue needed to make the restaurantprofitable. Our success also depends to a significant extent on numerousfactors affecting discretionary consumer spending, including economicconditions, disposable consumer income and consumer confidence. Adverse changesin these factors could reduce guest traffic or impose practical limits onpricing, either of which could harm our results of operations.

 

***Labor shortages or increases in labor costscould slow our growth or harm our business***

 

Our success depends in part upon our abilityto attract, motivate and retain a sufficient number of qualified employees,including regional operational managers and regional chefs, restaurant generalmanagers and executive chefs, necessary to continue our operations and keeppace with our growth. Qualified individuals whom we need to fill these positionsare in short supply and competition for these employees is intense. If we areunable to recruit and retain sufficient qualified individuals, our business andour growth could be adversely affected. Additionally, competition for qualifiedemployees could require us to pay higher wages, which could result in higherlabor costs. If our labor costs increase, our results of operations will benegatively affected.

 

***We may incur costs or liabilities and loserevenue, and our growth strategy may be adversely impacted, as a result ofgovernment regulation***

 

Ourrestaurants are subject to various federal, state and local governmentregulations, including those relating to employees, the preparation and sale offood and the sale of alcoholic beverages. These regulations impact our currentrestaurant operations and our ability to open new restaurants.

 

Each of ourrestaurants must obtain licenses from regulatory authorities allowing it tosell liquor, beer and wine, and each restaurant must obtain a food servicelicense from local health authorities. Each restaurant’s liquor license must berenewed annually and may be revoked at any time for cause, including violationby us or our employees of any laws and regulations relating to the minimumdrinking age, advertising, wholesale purchasing and inventory control. InCalifornia, where we operate 10 restaurants, the number of alcoholic beveragelicenses available is limited and licenses are traded at market prices.

 

The failure tomaintain our food and liquor licenses and other required licenses, permits andapprovals could adversely affect our operating results. Difficulties or failurein obtaining the required licenses and approvals could delay or result in ourdecision to cancel the opening of new restaurants.

 

We are subjectto “dram shop” statutes in some states. These statutes generally allow a personinjured by an intoxicated person to recover damages from an establishment thatwrongfully served alcoholic beverages to the intoxicated person. A judgmentsubstantially in excess of our insurance coverage could harm our financialcondition.

 

Variousfederal and state labor laws govern our relationship with our employees andaffect operating costs. These laws include minimum wage requirements, overtimepay, unemployment tax rates, workers’ compensation rates, and citizenshiprequirements. Additional government-imposed increases in minimum wages,overtime pay, paid leaves of absence and mandated health benefits, increasedtax reporting and tax payment requirements for employees who receivegratuities, or a reduction in the number of states that allow tips to becredited toward minimum wage requirements could harm our operating results.

 

The FederalAmericans with Disabilities Act prohibits discrimination on the basis ofdisability in public accommodations and employment. Although our restaurantsare designed to be accessible to the disabled, we could be required to makemodifications to our restaurants to provide service to, or make reasonableaccommodations for, disabled persons.

 

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***Restaurant companies have been the target ofclass-actions and other lawsuits alleging, among other things, violation offederal and state law***

 

We are subjectto a variety of claims arising in the ordinary course of our business broughtby or on behalf of our customers or employees, including personal injuryclaims, contract claims, and employment-related claims. In recent years, anumber of restaurant companies have been subject to lawsuits, including classaction lawsuits, alleging violations of federal and state law regardingworkplace, employment and similar matters. A number of these lawsuits haveresulted in the payment of substantial damages by the defendants. Similarlawsuits have been instituted against us from time to time. Regardless ofwhether any claims against us are valid or whether we are ultimately determinedto be liable, claims may be expensive to defend and may divert time and moneyaway from our operations and hurt our performance. A judgment significantly inexcess of our insurance coverage for any claims could materially adverselyaffect our financial condition or results of operations, and adverse publicityresulting from these allegations may materially adversely affect our business.We offer no assurance that we will not incur substantial damages and expensesresulting from lawsuits, which could have a material adverse effect on ourbusiness.

 

***Our operations and profitability are highlysusceptible to the effects of violence, war and economic trends***

 

Terroristattacks and other acts of violence or war and U.S. military reactions to suchattacks may negatively affect our operations and your investment in our sharesof common stock. The terrorist attacks in New York and Washington, D.C. onSeptember 11, 2001 led to a temporary interruption in deliveries from someof our suppliers and, we believe, contributed to the decline in average annualcomparable restaurant sales in 2001 and 2002. Future acts of violence or warcould cause a decrease in travel and in consumer confidence, decrease consumerspending, result in increased volatility in the United States and worldwidefinancial markets and economy, or result in an economic recession in the UnitedStates or abroad. They could also impact consumer leisure habits, for example,by increasing time spent watching television news programs at home, and mayreduce the number of times consumers dine out, which could adversely impact ourrevenue. Any of these occurrences could harm our business, financial conditionor results of operations, and may result in the volatility of the market pricefor our securities and on the future price of our securities.

 

Terroristattacks could also directly impact our physical facilities or those of oursuppliers, and attacks or armed conflicts may make travel and thetransportation of our supplies and products more difficult and more expensiveand ultimately affect our revenues.

 

***We may not be able to compete successfullywith other restaurants, which could adversely affect our results of operations***

 

The restaurantindustry is intensely competitive with respect to price, service, location,food quality, ambiance and the overall dining experience. Our competitorsinclude a large and diverse group of restaurant chains and individualrestaurants that range from independent local operators to well-capitalizednational restaurant companies. Some of our competitors have been in existencefor a substantially longer period than we have and may be better established inthe markets where our restaurants are or may be located. Some of ourcompetitors may have substantially greater financial, marketing and otherresources than we do. If our restaurants are unable to compete successfullywith other restaurants in new and existing markets, our results of operationswill be adversely affected. We also compete with other restaurants forexperienced management personnel and hourly employees, and with otherrestaurants and retail establishments for quality restaurant sites.

 

***Our stock price may be volatile, and you maynot be able to resell your shares at or above the price you pay for them***

 

The stockmarket has experienced significant price and volume fluctuations. Our commonstock has traded at a price lower than $12.00, the price at which our shares ofcommon stock were sold in our initial public offering.  The market price for our shares may continueto fluctuate significantly in response to a number of factors, some of whichare beyond our control, including:

 

•                    quarterly variations in ouroperating results;

•                    changes in financial estimatesby securities analysts;

•                    additions or departures ofour key personnel; and

•                    sales of shares of ourcommon stock in the public markets.

 

Fluctuationsor decreases in the trading price of our common stock may adversely affect yourability to trade your shares. In the past, following periods of volatility inthe market price of a company’s securities, securities class action litigationhas often been instituted. A securities class action suit against us couldresult in substantial costs and divert management’s attention and resourcesthat would otherwise be used to benefit the future performance of ouroperations.

 

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**ITEM 3. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

At September 25, 2004, the date of the interim balance sheet, there wasno material change in the market risk disclosed in Amendment No. 5 to theRegistration Statement on Form S-1 dated July 20, 2004.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

Our management hasevaluated, under the supervision and with the participation of our chiefexecutive officer and chief financial officer, the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934(the “Exchange Act”).  Based on thatevaluation, our chief executive officer and chief financial officer haveconcluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures are effective in ensuring that informationrequired to be disclosed in our Exchange Act reports is (1) recorded,processed, summarized and reported in a timely manner, and (2) accumulated andcommunicated to our management, including our chief executive officer and chieffinancial officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

There has been no change in our internalcontrol over financial reporting that occurred during our fiscal quarter endedSeptember 25, 2004 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II- OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS.**

 

**               **At September25, 2004, there was no material change in the litigation matters disclosed inour Registration Statement on Form S-1 and no new material litigation.

 

Occasionally,we are a defendant in litigation arising in the ordinary course of ourbusiness, including claims resulting from “slip and fall” accidents, employment-relatedclaims and claims from guests or employees alleging illness, injury or otherfood-quality, health or operational concerns.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS.**

 

                None.

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.**

 

**               **None.

 

**ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS.**

 

None.

 

**ITEM 5.      OTHER INFORMATION.**

 

None.

 

**ITEM 6.      EXHIBITS.**

 

 

4.1                                 Certificate ofIncorporation of the Company, as amended. Incorporated by reference to Exhibit 3.1to the Company’s Registration Statement on Form S-1, File No. 333-114977.

4.2                              Bylaws of theCompany, as amended.  Incorporated byreference to Exhibits 3.2 and 3.2a to the Company’s Registration Statement onForm S-1, File No. 333-114977.

10.1                           RevolvingCredit Agreement, dated as of July 23, 2004, by and among McCormick &Schmick Acquisition Corp. and certain of its subsidiaries, Fleet National Bank,as Administrative Agent, Banc of America Securities LLC, as Arrangers, andspecified other lenders; Amendment to Post-Closing Delivery Requirements dated October 12,2004 by and among McCormick & Schmick Acquisition Corp. and certain of itssubsidiaries and Fleet National Bank as Administrative Agent and Lender.

31.1                           Certificationof the Chief Executive Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

31.2                           Certificationof the Chief Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

32.1                           Certificationof the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2                           Certificationof the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

          Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                   |   | McCORMICK  & SCHMICK’S SEAFOOD RESTAURANTS, INC. |
|------------------------|--------|-----------------------------------------------------------|
|                   |   |                                                      |   |
|                   |   |                                                      |   |
| Date: November 5, 2004 |   | By:                                                       |  /s/ SAED MOHSENI |
|                   |   |                                                      | Saed Mohseni |
|                   |   |                                                      | Chief Executive Officer |
|                   |   |                                                      | (principal executive  officer) |
|                   |   |                                                      |   |
|                   |   |                                                      |   |
| Date: November 5, 2004 |   | By:                                                       |  /s/ EMANUEL N. HILARIO |
|                   |   |                                                      | Emanuel N. Hilario |
|                   |   |                                                      | Chief Financial Officer  and Vice President of Finance |
|                   |   |                                                      | (principal financial and  accounting officer) |
|                   |   |                                                      |   |

 

 

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