**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**
| x | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|-----------------------------------------------------------------------------------------------------|

 

**For the fiscal year ended December 25, 2004**

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

 

**For the transition period from**                 to                  

**CommissionFile Number 000-50845**

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

(Exact name of registrantas specified in its charter)
| **Delaware**                                                    | ** ** | **000-50845**             | ** ** | **20-1193199**                        |
|-----------------------------------------------------------------|------------|---------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (Commission File  Number) |       | (IRS Employer  Identification Number) |

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

 

**(503) 226-3440**

(Registrant’s telephonenumber, including area code)

**Securities Registered Pursuant to Section 12(b) ofthe Act:**None

**Securities Registered Pursuant to Section 12(g) ofthe Act:**Common Stock, $0.001 par value

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

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

The aggregate market valueof the voting and non-voting common stock held by non-affiliates (based on theclosing price on December 23, 2004 on The Nasdaq Stock Market’s NationalMarket) was $76.4 million. All named executive officers and directors of theregistrant and all persons filing a Schedule 13D with the Securities andExchange Commission with respect to the registrant’s common stock have beendeemed, solely for the purpose of the foregoing calculation, to be “affiliates”of the registrant.

There were 13,782,350shares of common stock outstanding as of April 5, 2005.

Certaininformation required by Items 10, 11, 12, 13 and 14 of Part III ofthis annual report on Form 10-K is incorporated by reference to theregistrant’s definitive proxy statement for the 2005 annual meeting ofstockholders.

 

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**TABLEOF CONTENTS**
| PART I   | 3                                                                                                                      |
|---------------|------------------------------------------------------------------------------------------------------------------------|
| ITEM  1.      | BUSINESS                                                                                                               | 3 |
| ITEM  2.      | PROPERTIES                                                                                                             | 16 |
| ITEM  3.      | LEGAL PROCEEDINGS                                                                                                      | 17 |
| ITEM  4.      | SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS                                                                   | 17 |
| ITEM  4A.     | EXECUTIVE OFFICER AND OTHER KEY  EMPLOYEES                                                                             | 17 |
| PART II  | 19                                                                                                                     |
| ITEM  5.      | MARKET FOR THE REGISTRANT’S COMMON  EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 19 |
| ITEM  6.      | SELECTED CONSOLIDATED FINANCIAL AND  OPERATING DATA                                                                    | 20 |
| ITEM  7.      | MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            | 26 |
| ITEM  7A.     | QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK                                                       | 51 |
| ITEM  8.      | FINANCIAL STATEMENTS AND  SUPPLEMENTARY DATA                                                                           | 52 |
| ITEM  9.      | CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                  | 85 |
| ITEM  9A.     | CONTROLS AND PROCEDURES                                                                                                | 85 |
| ITEM  9B.     | OTHER INFORMATION                                                                                                      | 86 |
| PART III | 86                                                                                                                     |
| ITEM  10.     | DIRECTORS AND EXECUTIVE OFFICERS  OF THE REGISTRANT                                                                    | 86 |
| ITEM  11.     | EXECUTIVE COMPENSATION                                                                                                 | 86 |
| ITEM  12.     | SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                        | 86 |
| ITEM  13.     | CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                                                        | 86 |
| ITEM  14.     | PRINCIPAL ACCOUNTANT FEES AND  SERVICES                                                                                | 86 |
| PART IV  | 87                                                                                                                     |
| ITEM  15.     | EXHIBITS AND FINANCIAL  STATEMENT SCHEDULES                                                                       | 87 |
|          | SIGNATURES                                                                                                             | 88 |

 

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This Annual Report on Form 10-K containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934. Forward-looking statements represent our expectations or beliefsconcerning future events, including the following: any statements regardingfuture sales, costs and expenses and gross profit percentages; any statementsregarding the continuation of historical trends; any statements regarding theexpected number of future restaurant openings and expected capital expenditures;and any statements regarding the sufficiency of our cash balances and cashgenerated from operating and financing activities for future liquidity andcapital resource needs. In addition, the words “believes,” “anticipates,” “plans,”“expects,” “should,” “estimates” and similar expressions are intended toidentify forward-looking statements. We have identified significant factorsthat could cause actual results to differ materially from those stated orimplied in the forward-looking statements in the section entitled “Factors ThatMay Affect Our Business and the Price of Our Stock” inPart II—Item 7.

Our actual resultscould differ materially from those stated or implied in the forward-looking statementsincluded in the discussion of future operating results and expansion strategyelsewhere in this report as a result, among other things, of the following:

·       Therestaurant industry is highly competitive with many well-establishedcompetitors;

·       Ourresults can be impacted by changes in consumer tastes and the level of consumeracceptance of our restaurant concepts (including consumer tolerance of priceincreases); local, regional, national and international economic conditions;the seasonality of our business; demographic trends; traffic patterns; changesin consumer dietary habits; employee availability; the cost of advertising andmedia; government actions and policies; inflation; and increases in variouscosts, including construction and real estate costs;

·       Ourresults can be affected by consumer perception of food safety;

·       Ourability to expand is dependent upon factors such as the availability ofattractive sites for new restaurants at acceptable prices, ability to obtainall required governmental permits including zoning approvals and liquorlicenses on a timely basis, impact of government moratoriums or approvalprocesses which could result in significant delays, ability to obtain allnecessary contractors and subcontractors, union activities such as picketingand hand billing which could delay construction, the ability to negotiatesuitable lease terms, the ability to generate or borrow funds to develop newrestaurants, and the ability to recruit and train skilled management andrestaurant employees;

·       Priceand availability of commodities, including but not limited to items such asseafood, shrimp, beef, chicken, pork, dairy, potatoes, onions and energysupplies are subject to fluctuation and could increase or decrease more than weexpect; and/or

·       Weatherand other acts of God could result in construction delays and also adverselyaffect the results of one or more restaurants for an indeterminate amount oftime.

**Restatement ofFinancial Statements**

We have restated the consolidated balance sheet as of December 27,2003 and the consolidated statements of operations, members’ and stockholders’equity, and comprehensive income (loss) and cash flows for the years ended December 27,2003 and December 28, 2002 in this Annual Report on Form 10-K. Inaddition, we have restated the unaudited quarterly consolidated statements ofoperations, unaudited quarterly consolidated balance sheets and unauditedquarterly statements of cash flows for the first three quarters of fiscal 2004.A detailed discussion of the impact of the restatement is in Part II—Item7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Restatement of Financial Information,” and Note 2 to theConsolidated Financial Statements in Part II—Item 8. The 

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impact of the restatementon periods prior to fiscal 2002 has been reflected as an adjustment to retainedearnings as of December 30, 2001 in the accompanying consolidatedstatements of members’ and stockholders’ equity, and comprehensive income(loss). We have also restated the selected financial information for 2000,2001, 2002 and 2003 in Part II—Item 6, “Selected Consolidated Financialand Operating Data.” The restatement corrects our historical accounting foroperating leases. The restatement adjustments are non-cash and had no impact onrevenues, comparable store sales or cash and cash equivalents.

We have not amended ourreports previously filed under the Securities Exchange Act of 1934, andtherefore the financial statements and related financial information containedin those reports should no longer be relied upon and are superceded by thefinancial statements and financial information in this Annual Report on Form 10-K.

**Reorganization inConnection with Initial Public Offering**

In connection with our initial public offering in July 2004,we converted McCormick & Schmick Holdings LLC, a Delaware limitedliability company, into McCormick & Schmick’s Seafood Restaurants, Inc.,a Delaware corporation. Because our operations are conducted by wholly ownedsubsidiaries, the conversion did not affect our financial statements, exceptwith respect to information regarding the membership units in McCormick &Schmick Holdings LLC. Except where specifically noted, references in thisAnnual Report on Form 10-K to “we” or to “the Company” meansMcCormick & Schmick Holdings LLC for periods before July 20, 2004and McCormick & Schmick’s Seafood Restaurants, Inc. for periodson and after July 20, 2004.

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**PART I**

**ITEM 1**.                BUSINESS

**Overview**

We are a leading national seafood restaurant operatorin the affordable upscale dining segment. Over the past 33 years, we havesuccessfully grown our business to 52 restaurants in 22 states by focusing onserving a broad selection of fresh seafood.

Our daily-printed menu typically contains between 85and 100 made-to-order dishes, including an extensive selection ofinternational, national, regional and local species of seafood. Our signature “FreshList,” prominently displayed at the top of our daily-printed menu, features 30to 40 varieties of fresh seafood, based on product availability, price andcustomer preferences. We also offer alternatives to seafood, including primeaged beef, creative salads and fresh pasta dishes.

Our restaurants aredesigned to capture the distinctive characteristics of each local market,positioning us to compete successfully in a sector comprised primarily oflocally owned and operated seafood restaurants. We seek to create an invitingatmosphere which allows us to attract a diverse customer base of men and women,primarily ages 30 to 60, typically college-educated and in the middle toupper-middle income brackets. We believe the combination of our restaurantatmosphere and our extensive menu offering and broad range of price pointsappeals to a diverse customer base from casual diners, families and tourists tobusiness travelers and special occasion diners.

**Restaurant IndustryOverview**

***General***

According to the National Restaurant Association (“NRA”)the restaurant industry represents approximately 4.0% of the U.S. grossdomestic product. The NRA forecasts restaurant industry sales in the UnitedStates will continue to rise in 2005, reaching $476 billion. The NRAestimates that the U.S. restaurant industry today encompasses approximately900,000 full-service restaurants, a number which is expected to grow to over1,000,000 by 2010.

The NRA alsoestimates:

·       totalsales in the U.S. restaurant industry for 2004 exceeded $453 billion,marking 13 consecutive years of growth;

·       salesin the full-service segment of the U.S. restaurant industry grew approximately5.4% between 2003 and 2004, reaching over $157 billion in 2004; and

·       salesat full-service restaurants are expected to increase approximately 5.0% in 2005to $165 billion.

Technomic, Inc., anational consulting and research firm, forecasts sales at U.S. full-servicerestaurants to grow at a compounded annual rate of 5.5% from 2002 through 2007,compared to forecasted compounded annual growth of 5.0% for the total U.S.restaurant industry for the same period. According to Technomic, the variedmenu category within the full-service restaurant segment of the U.S. restaurantindustry, which includes McCormick & Schmick’s, is projected to growat an 8.5% compounded annual growth rate from 2002 through 2007, the highestprojected compounded annual growth rate over that period for all menucategories. In addition, Technomic anticipates that the seafood marketplacewill benefit on a continuing long-term basis as consumers show a greaterinterest in better health and specialized diets.

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***The Seafood Restaurant Segment***

Americans consumed 4.7 billion pounds of seafood in2003, an increase of 4.8% compared to the previous year. The National Fisheries Institute, Inc.expects worldwide per capita consumption of seafood to grow by 40.0% over thenext ten years.

The National FisheriesInstitute, Inc. believes the growing consumption of seafood in the UnitedStates is in large part due to current increased dietary concerns amongcustomers and the general perception of seafood as a healthy dining alternative.In addition to the health attributes of seafood, we believe consumers generallyconsider the preparation of high quality seafood at home to be more challenging;hence the increased appeal of seafood restaurants.

**Our Strengths**

We believe we arethe only high quality seafood restaurant that operates on a national scale forvarious reasons, including the following:

·       developingand maintaining consistent, reliable sources of high quality, fresh seafood isdifficult;

·       itis often not possible to hedge effectively against increases in seafood costs;

·       thepreparation and handling of seafood are more complicated than for other typesof cuisine; and

·       consumertastes in seafood products vary from region to region.

We believe we havesuccessfully addressed these operational barriers and differentiated ourselvesfrom our competitors by focusing on the following core strengths of ourbusiness model.

***Fresh Seafood***

Our primary business focus for more than 33 yearshas been to consistently offer a broad selection of fresh seafood, which webelieve commands strong loyalty from our customers. Our daily-printed menutypically contains between 85 and 100 made-to-order dishes, including anextensive selection of nationally available species such as Atlantic lobster,Dungeness crab and Alaskan halibut, as well as seasonal products such as wildKing salmon, Columbia River sturgeon, Sashimi grade tuna, exotic Hawaiian catchand an extensive variety of cold water oysters. The executive chef and generalmanager at each of our restaurants tailor the menu, at least once daily, basedon the availability of different species of fresh seafood, price and customerpreferences.

We believe we successfullydifferentiate our concept from both independent local seafood restaurants andnational and regional seafood restaurant chains by including in ourdaily-printed menu our signature “Fresh List” of typically 30 to 40 freshseafood items, sourced from throughout the United States and from selectinternational locations. We are able to offer a wide variety of consistentlyfresh, high quality seafood through our close relationships with reputablelocal and national seafood vendors. We encourage our vendors to adopt preferredand sustainable fishing practices to guarantee the current and future qualityand supply of our seafood. During our daily “fresh talk,” the executive chef ateach of our restaurants educates our restaurant staff on the menu items of theday so we can effectively communicate the sourcing, freshness, quality andmethod of preparation of our products to our customers.

***Attraction of Our Full-Service Bar***

We consider our bar operations to be an integral partof the “McCormick & Schmick’s” brand and central to our broad appeal. Webelieve the success of our first restaurant, Jake’s Famous Crawfish, waslargely driven by its bar operation, which enhanced the dining room business bycreating a social forum and building clientele. Our bar operation remains acornerstone of our restaurant concept, showcasing our 

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commitment totraditionalism and quality. We attract patrons to our bar as a finaldestination, where they can enjoy a broad selection of liquors, wines and beersin a traditional yet lively environment. Our cocktail drinks are created usingtraditional methods and are hand-shaken, hand-poured and made with freshlysqueezed juices, underlining our focus on product quality. We also offervalue-priced items from our full restaurant menu at our bars, which tends toattract younger customers whom we aim to develop into regular restaurantcustomers.

As a result of our focuson our bar operations as an integral part of our business, our bars drive salesto our restaurants. We run our bar operations as a profit center. In 2004,alcohol sales, predominantly from our bar, accounted for approximately 29% ofour revenues and contributed higher gross margins than food sales, allowing usthe flexibility to offer lower prices on some of our menu items, which helps usmaintain our broad appeal.

***Broad Appeal of Our Concept***

We believe we appeal to a broad range of customers byproviding an attractive price-value proposition, with prices that are generallymore affordable than those of our upscale competitors. Additionally, we believewe offer superior service to that of most casual dining operators. The price ofa typical meal, including beverages, ranges from $17.00 to $25.00 for lunch and$31.00 to $60.00 for dinner, with an average of approximately $22.00 and $45.00,respectively. Over the past few years, we have enhanced our menu to offer ourcustomers a more affordable dining option by including a selection of lowerpriced items on our menu. For example, we offer a variety of lunch specialsstarting at $5.95. We believe even the price sensitive diner values oursuperior service, and we have received recognition from our customers andindustry awards for our service quality.

The combination of our high quality seafood, pricingstrategy and customer service enables us to attract a broad customerdemographic. Most of our customers are 30 to 60 years old, primarilycollege-educated, in the middle to upper-middle income brackets and splitrelatively evenly between male and female customers, with a significant numberof our customers comprising the post-war baby boomer generation. These babyboomers, who are the largest segment of the U.S. population (approximately 26%of the total) and a primary driver in the restaurant industry, generally havethe greatest level of disposable income and tend to be more focused on betterhealth and specialized diets than other age groups. As our core customers, webelieve baby boomers typically prefer restaurants that offer higher qualityfood items, stronger flavor profiles and wider menu diversity. In addition tothis core customer base, our bar operations allow us to also capture the 25 to35 year old professionals, positioning us to attract a younger clienteleas dedicated restaurant customers.

Our broad appeal is supportedby our catering and banquet services which we offer both in our restaurants andat other locations as customers request. Our presence in and near hotelsenables us to expand the reach of our banquet offerings. In 2004, banquetsaccounted for approximately 10% of our revenues.

***Entrepreneurial Culture with Corporate Control***

A key component of our success for over 33 yearsand under successive owners has been our commitment to promoting and sustainingan entrepreneurial culture throughout our restaurants while maintaining strongcorporate oversight and financial controls. Within this strong corporateinfrastructure, each restaurant has profit and loss responsibility and a highdegree of operating autonomy. The executive chef and general manager at each restauranthave the flexibility, within clearly defined corporate guidelines, to structuremenus to cater to customer preferences in that restaurant’s market and respondto changes in product availability and market conditions. We offer quarterlyand annual cash performance incentives to exempt employees at the restaurantlevel based on the unit’s revenues, profitability and costs, 

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compliance with corporateadministrative and payroll guidelines, and the success of other initiatives,such as local community involvement.

We believe ourentrepreneurial culture helps us to attract and retain highly qualified andmotivated individuals. We have historically retained substantially all of ourregional chefs and regional managers and our retention rate for our unit generalmanagers and executive chefs is approximately 80%. We believe ourdecentralized, employee-oriented, entrepreneurial culture creates a sense ofpride in our company and allows us to ensure quality service execution at therestaurant level. We believe the stability of our management team and operatingpersonnel, coupled with our disciplined but entrepreneurial culture, positionus for the continued success and growth of our concept.

***Portability of Our Brand***

We have expanded the McCormick & Schmick’s seafoodrestaurant concept throughout the United States and have competed successfullywith both national and regional restaurant chains and independent localoperators, due in part to the flexibility of our real estate model and ournationwide infrastructure. We operate 52 restaurants in 22 states across theUnited States and plan to open 20 to 25 additional restaurants over the nextthree years.

Our restaurants are designed to have broad consumerappeal. We customize our restaurant design and appearance to appeal to localconsumer affinities and preferences, and have many restaurants located inbuildings that have local significance, including some historic buildings. Wehave a proven track record of successfully opening restaurants in a variety ofsizes, typically ranging from 6,000 to 14,000 square feet and in a number ofreal estate formats, including both freestanding and in-line locations. Webelieve the flexibility of our real estate model is a competitive advantage,allowing us to cost-effectively and opportunistically open restaurants inattractive markets without being constrained by a standard prototype or otherlimiting real estate factors.

We compete on aunit-by-unit basis with independent local restaurant operators while leveragingthe operating strengths of our national infrastructure. We have successfullyexecuted our concept at the local level while maintaining quality andconsistency on a national basis in a manner that is not formulaic and thatenables us to celebrate the uniqueness of each of our markets. We believe thebreadth and scale of our restaurant operations and our 33 year experiencein the business gives us a competitive advantage in terms of the quality,sourcing and freshness of our menu offerings, and the flexibility of price points,making our model difficult to replicate. This competitive advantage contributesto our brand’s reputation for quality and service in the affordable upscaledining sector, which we believe commands strong loyalty from our customers.

**Our Growth Strategy**

We believe our flexiblebusiness model, combined with our fresh menu offerings, professional customerservice and inviting restaurant environment, provide us with significantopportunities to further grow our business. Key elements of our growth strategyinclude the following:

***Expansion in Existing Markets***

We remain focused on thedisciplined growth of our McCormick & Schmick’s brand in our existingmarkets. We believe we have established the necessary market analysis and siteselection procedures for identifying new unit opportunities in these markets. Inparticular, we will continue to evaluate opportunities in affluent suburbanareas near existing units in downtown areas to better diversify our presence inexisting markets. This strategy enables us to achieve a higher degree of marketpenetration and brand awareness, resulting in increased repeat business fromour broad and diverse customer base. Additionally, we will further leverage theeconomies of scale of our operations to enhance our competitive 

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advantageagainst independent local competitors, principally in the areas of advertising,purchasing and distribution infrastructure. We intend to open three additionalrestaurants in existing markets in 2005.

***Entry into New Markets***

In selecting new marketopportunities, we continue to focus on downtown and affluent suburban areasthat have large middle to upper-middle income populations, have high customertraffic from thriving businesses or retail markets, and that are convenient forand appealing to business and leisure travelers. We will continue to promotethe McCormick & Schmick’s brand image and our broad appeal by openingnew restaurants in prime real estate locations and by customizing each newrestaurant to the local market. We intend to open four additional restaurantsin new markets in 2005.

***Capture of Ancillary Business Opportunities***

We will continue to pursuesecondary opportunities that are complementary to our primary concept andfurther our growth objectives. We operate three restaurants under the nameM&S Grill and one under the name Jake’s Grill, each of which offers analternative menu to that of our seafood restaurants. These restaurants arelocated near our existing seafood restaurants to take advantage of managementand operating efficiencies. We will also continue to consider cateringopportunities and management agreements with hotels. We believe entering intomanagement agreements with hotels gives our brand additional exposure tobusiness and leisure travelers, requires minimal initial investment and istherefore low-risk, and is profitable. We currently operate two restaurantsunder management agreements with hotels.

**Unit LevelEconomics**

Our average investment per restaurant opened since1997 has been approximately $2.9 million, including leaseholdimprovements, furniture, fixtures and equipment, and net of landlord incentiveallowances. As a result of the reduction in the size of our restaurantprototype, to facilitate our entry into a greater variety of markets andprovide us with increased flexibility with site selection, we anticipate thatour average investment per restaurant will be approximately $2.4 milliongoing forward, consistent with the average investment incurred for therestaurants we opened in 2004. We believe our focus on a traditional décor hasallowed us to benefit from lower restaurant-level maintenance or upgrade coststhan those incurred by our competitors.

Average unit volume forrestaurants opened from 1997 through 2001 was approximately $5.5 millionby the third year of operations. These restaurants were, on average,approximately 10,800 square feet each. Since the beginning of 2002, we haveopened 15 new restaurants, which averaged approximately 7,900 square feet each.Consequently, our growth model assumes average unit volumes for our new,smaller restaurants of $4.4 million by the third year of operations.

**Menu, FoodPreparation, Quality Control and Purchasing**

Most of our menu items are prepared from scratch dailyat each restaurant and each order is assembled when the order is placed withthe kitchen staff. Each restaurant has an executive chef responsible foroverseeing kitchen operations, including planning the daily-printed menu andordering necessary ingredients and supplies. Each executive chef is assisted bytwo to four sous chefs, who help to manage food preparation and service timing.

We maintain strict quality standards at all of ourrestaurants. We expect each of our employees to adhere to these standards, andit is the responsibility of the general manager and the executive chef at eachrestaurant to ensure these standards are upheld. We are committed to providingour guests with high quality, fresh products and superior service. We regularlyhold senior management meetings designed to 

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re-emphasize McCormick &Schmick’s philosophy, culture, standards of operation and culinary development.Through use of our standard training materials and our commitment to thehiring, development and training of chefs, we are able to maintain highstandards and guidelines for our regularly purchased seafood species.

At the restaurant level, purchasing is primarilydirected by the executive chef, who is trained in our purchasing practices andphilosophy and is supervised by an experienced regional chef. To provide thefreshest ingredients and products and to improve operating efficiencies betweenpurchase and use, each executive chef determines the daily requirements forfood ingredients, products and supplies. The executive chef orders accordinglyfrom local suppliers and regional and national distributors. Fresh seafood issourced through multiple vendors in varying geographic regions and delivereddaily to each restaurant.

We encourage each of ourrestaurants to purchase seafood from a network of preferred vendors we haveidentified as consistently supplying seafood that meets our high standards. Theidentification and selection of seafood suppliers is reviewed regularly basedon product quality, sanitation, fishing practices, pricing and customer service.We prefer suppliers who use day-boats rather than those who are at sea formultiple days because their product is typically fresher. Our national andregional presence allows us to achieve better quality and pricing terms for keyproducts, such as fresh fin fish and shellfish, than most of our competitors. Otherfood products, such as prime beef and dry goods, are sourced primarily fromSYSCO Corporation, a national food distributor, while liquor, beer and wine arepurchased from local distributors. SYSCO accounted for approximately 13% of ourfood purchases in 2004. No other vendor accounted for more than 10% of ourpurchases in 2004.

**Restaurant Designand Atmosphere**

Our restaurant designs and décor are intended tocapture distinctive attributes of each local market, varying from traditionalNew England-style fish houses to contemporary dinner houses with waterfrontviews. Some of our restaurants are located in historic buildings, whichreinforces our commitment to local design elements and further promotes theappeal and ambience of our restaurants. Our flexible approach to our restaurantdesigns contributes to the uniqueness of each restaurant and allows us tosuccessfully compete in a sector comprised primarily of independent,locally-owned and operated seafood restaurants.

Our restaurants aregenerally modeled after two styles:

·       “turn-of-the-century”style, which blends different types and colors of wood; and

·       classicart deco style.

Additionally, our interior décor fosters an invitingatmosphere that we believe is equally appealing to both men and women.

Our wait staff andbartenders are typically uniformed in traditional white jackets and black tiesand are committed to providing our guests with service to further enhance theirdining experience.

***Our Full Service Bar***

We believe the success of our first restaurant, Jake’sFamous Crawfish, was largely driven by its bar operation, which enhanced therestaurant’s dining room business by serving as a social forum and buildingclientele. Our bar operation remains a cornerstone of our restaurant conceptand central to our broad appeal. We seek to attract patrons to our bar as afinal destination, where they can enjoy a broad selection of liquors, wines andbeers in a traditional yet lively environment. Our focus on traditional mixingmethods reinforces our appeal and underlines our focus on product quality andprofessional service. Our cocktail drinks are hand-poured and shaken and allour juices are freshly squeezed. We also offer value-priced 

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items from our full restaurantmenu at our bars, which tends to attract younger customers whom we aim todevelop into regular restaurant customers.

We operate our bars todrive sales to our restaurants. Each bar is a profit center, rather than a mereholding area for diners. In 2004, alcohol sales accounted for approximately 29%of our revenues in our restaurants and contributed higher gross margins thanfood sales, allowing us the flexibility to offer lower prices on some of ourmenu items, which helps us maintain our broad appeal.

***Layout and Use of Space***

Our restaurantmodel offers us the flexibility to open restaurants in prime downtown orsuburban areas. We have a proven track record of opening restaurants in sizestypically ranging from 6,000 to 14,000 square feet and in a range of realestate formats, including both freestanding and in-line locations. We believethe flexibility of our real estate model is a competitive advantage, allowingus to cost-effectively and opportunistically open restaurants in attractivemarkets without being constrained by a standard prototype or other limitingreal estate factors. Space in an 8,000 square foot restaurant, which representsa typical size for our current, smaller restaurant prototype, generally wouldbe allocated in the following manner:

·       2,900square feet dining room;

·       1,000square feet bar area;

·       1,450square feet food preparation and kitchen area;

·       950square feet of storage and office space;

·       300square feet customer entry/hostess area;

·       500square feet of restrooms; and

·       900square feet of circulation space.

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**RestaurantLocations, Lease Arrangements and Management Fee Arrangements**

Weoperate 52 restaurants in 22 states. We lease all of our restaurant sitesexcept for the two we operate under management agreements. Terms vary byrestaurant, but we generally lease space for 10 to 20 years and negotiateone to three five-year renewal options.
| **Restaurant Name**                                     | ** ** | ** **     | ** ** | **City** | ** ** | **Year Opened** | ** ** |
|--------------------------------------------------------------|------------|----------------|------------|----------|------------|----------------------|------------|
| **Alabama**                                                  |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Birmingham     |       |     | 2004       | *** ***         |       |
| **Arizona**                                                  |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Phoenix        |       |     | 1999       | *** ***         |       |
| **California**                                               |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Irvine         |       |     | 1989       | *** ***         |       |
| McCormick &  Kuleto’s Seafood Restaurant       |       | San  Francisco |       |     | 1991       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Los  Angeles   |       |     | 1992       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Pasadena       |       |     | 1993       | *** ***         |       |
| McCormick &  Schmick’s A Pacific Seafood Grill |       | Beverly  Hills |       |     | 1994       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | El  Segundo    |       |     | 1998       | *** ***         |       |
| Spenger’s Fresh  Fish Grotto                            |       | Berkeley       |       |     | 1999       | *** ***         |       |
| The Seafood  Brasserie*                                      |       | Santa  Rosa    |       |     | 2002       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | San  Jose      |       |     | 2004       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant*     |       | San  Diego     |       |     | 2004       | *** ***         |       |
| **Colorado**                                                 |       |           |       |     |       | *** ***         |       |
| McCormick’s Fish  House & Bar                  |       | Denver         |       |     | 1987       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Denver         |       |     | 2004       | *** ***         |       |
| **District  of Columbia**                                    |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Washington     |       |     | 1996       | *** ***         |       |
| M&S Grill                                                |       | Washington     |       |     | 1998       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Washington     |       |     | 2004       | *** ***         |       |
| **Florida**                                                  |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Orlando        |       |     | 2002       | *** ***         |       |
| **Georgia**                                                  |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Atlanta        |       |     | 2000       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Atlanta        |       |     | 2002       | *** ***         |       |
| **Illinois**                                                 |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Chicago        |       |     | 1998       | *** ***         |       |
| **Maryland**                                                 |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Baltimore      |       |     | 1998       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Bethesda       |       |     | 1999       | *** ***         |       |
| M&S Grill                                                |       | Baltimore      |       |     | 2003       | *** ***         |       |
| **Massachusetts**                                            |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Boston         |       |     | 2000       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Boston         |       |     | 2001       | *** ***         |       |
| **Michigan**                                                 |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Troy           |       |     | 2001       | *** ***         |       |
| **Minnesota**                                                |       |           |       |     |       | *** ***         |       |
| McCormick &  Schmick’s Seafood Restaurant      |       | Minneapolis    |       |     | 2000       | *** ***         |       |

 

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| **Restaurant Name**                                                         | ** ** | ** **   | ** ** | **City** | ** ** | **Year Open** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|----------|------------|--------------------|------------|
| **Missouri**                                                                     |       |         |       |     |       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Kansas  City |       |     | 2000       | *** ***       |       |
| **Nevada**                                                                       |       |         |       |     |       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Las  Vegas   |       |     | 1998       | *** ***       |       |
| **New  Jersey**                                                                  |       |         |       |     |       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Hackensack   |       |     | 2002       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Bridgewater  |       |     | 2003       | *** ***       |       |
| **New  York**                                                                    |       |         |       |     |       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | New  York    |       |     | 2004       | *** ***       |       |
| **Oregon**                                                                       |       |         |       |     |       | *** ***       |       |
| Jake’s Famous  Crawfish                                                     |       | Portland     |       |     | 1972       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Portland     |       |     | 1979       | *** ***       |       |
| McCormick’s Fish  House & Bar                                      |       | Beaverton    |       |     | 1981       | *** ***       |       |
| McCormick &  Schmick’s Harborside at the Marina                    |       | Portland     |       |     | 1985       | *** ***       |       |
| Jake’s Grill /  Jake’s Catering                                        |       | Portland     |       |     | 1994       | *** ***       |       |
| The Heathman  Restaurant                                                         |       | Portland     |       |     | 2000       | *** ***       |       |
| **Pennsylvania**                                                                 |       |         |       |     |       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Philadelphia |       |     | 2001       | *** ***       |       |
| **Rhode  Island**                                                                |       |         |       |     |       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Providence   |       |     | 2004       | *** ***       |       |
| **Texas**                                                                        |       |         |       |     |       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Houston      |       |     | 1999       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Dallas       |       |     | 2003       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Austin       |       |     | 2004       | *** ***       |       |
| **Virginia**                                                                     |       |         |       |     |       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Reston       |       |     | 1997       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | McLean       |       |     | 2000       | *** ***       |       |
| M&S Grill                                                                    |       | Reston       |       |     | 2004       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Arlington    |       |     | 2004       | *** ***       |       |
| **Washington**                                                                   |       |         |       |     |       | *** ***       |       |
| McCormick’s Fish  House & Bar                                      |       | Seattle      |       |     | 1977       | *** ***       |       |
| McCormick &  Schmick’s Seafood Restaurant                          |       | Seattle      |       |     | 1984       | *** ***       |       |
| McCormick &  Schmick’s Catering at the Museum of Flight in Seattle |       | Seattle      |       |     | 1994       | *** ***       |       |
| McCormick &  Schmick’s Harborside on Lake Union                    |       | Seattle      |       |     | 1996       | *** ***       |       |

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*Weoperate these restaurants under management agreements.

**Site Selection**

We believe our siteselection strategy is critical to our growth strategy. We carefully considerpotential markets and we devote substantial time and effort to evaluating eachpotential restaurant site. We identify new restaurant development opportunitiesthrough an established real estate broker network and developer relationships. Oursite specifications are flexible and we believe we consider a broader range ofpossible locations than most of our regional and national competitors. Thecriteria we consider in developing our expansion plans and in siting newrestaurants include:

·       populationdensity and the income and educational level of the population;

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·       competitiveconditions and price points;

·       estimatesof the return on investment;

·       availablesquare footage and lease economics;

·       theproximity of hotels and office space and the density of pedestrian and vehicletraffic;

·       thesuitability of the site for an affordable, upscale restaurant with atraditional ambience;

·       capacityexpansion possibilities; and

·       management’sexperience in the market and the locations of our existing restaurants.

A majority of our restaurants are located inhigh-traffic, metropolitan areas and several are located in historic buildings.We believe there are many additional markets that meet our demographic andgeographic profiles.

Of our 52 restaurants,including the two we operate under management agreements, seventeen were openedwithin the last three years and twenty-six were opened within the last fiveyears. Although our expansion has increased in the last five years, we believeit has been steady, controlled and prudent. We opened ten restaurants in 2004and our plan for 2005 includes the opening of seven restaurants. We anticipateopening seven, eight and nine restaurants in 2006, 2007 and 2008, respectively.The typical lead-time from the selection of a location to the opening of arestaurant at that location is approximately twelve to fifteen months.

**Marketing andAdvertising**

The goals of ourmarketing efforts are to:

·       increasecomparable restaurant sales by attracting new guests;

·       increasethe frequency of visits by our current guests;

·       supportnew restaurant openings to achieve sales and profit goals; and

·       communicateand promote the uniqueness, appeal, quality and consistency of our brand.

In 2004, our annualmarketing expenditures, 93.0% of which were allocated at the local level,constituted approximately 2.3% of revenues.

***Local Marketing***

Approximately 60 days before a scheduledrestaurant opening, our local public relations firms collaborate with the localmedia to publicize our restaurant opening and to generate awareness of ourbrand. For example, we typically host several social events in the localcommunity to generate publicity before the official opening of a restaurant. Post-opening,we maintain a strong relationship with our public relations firms and remainfocused on our commitment to promoting our brand in the local market throughvarious programs, such as cooking demonstrations by our chefs or discussions onseafood and related offerings on local news broadcasts. We also advertise withlocal business journals in most urban markets, in addition to using local dailypublications in almost all our markets.

We expect each of ourrestaurants to actively promote our special holiday programs and sponsorcommunity events, such as donations, charitable organizations, non-profitorganizations and visual and performing cultural arts activities. We believethat, in addition to benefiting our local communities, these activitiesgenerate positive media attention and publicity for our brand and enhance ourlocal public image.

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***National Marketing***

In 2004, we incurred approximately 20.0% of ouradvertising expenditures at the national level. Our national campaign focuseson national periodicals such as United Airlines’, Southwest Airlines’ andAlaska Airlines’ in-flight magazines and WHERE Magazine. Additionally, weadvertise across the national network of *The Business Journal*publication.

To reinforce our broaddifferentiation, we highlight the breadth and freshness of our seafood, in bothlocal and national advertising. We periodically offer promotional discountcertificates and maintain contact with organizations in the travel andconvention industries, such as hotels, travel agents, convention centers andlocal shops, to further enhance both brand and restaurant location awarenessand to target specific guest groups.

**Operations**

***Restaurant Management***

Our restaurant operations are organized into threeregions (West Coast, Southeast and Northeast), each with a vice president ofoperations overseeing all aspects of restaurant operations within thedesignated region, including financial performance, new restaurant openings,capital expenditure requests, management development and marketing.

Eleven regional managers, of whom five are operationalmanagers and six are regional chefs, are each responsible for five to elevenrestaurants and report to a vice president of operations. Both operationalmanagers and regional chefs are responsible for overall restaurant operations,but have an increased focus on their respective areas of expertise. Forexample, regional chefs focus more heavily on negotiating food costs, ensuringhigh food quality, developing and nurturing executive and sous chefs and beingresponsive to overall kitchen staff needs. Regional managers focus primarily onrevenues, profitability, front-of-house management and marketing issues.

Our typical restaurant management team consists of ageneral manager and an executive chef, two to four assistant managers, two tothree sous chefs and, in some cases, a meeting planner/banquet coordinator. Theremaining restaurant-level employees are non-salaried personnel varying innumber based on restaurant size. Our typical restaurant employs 80 to 90full-time and part-time employees. The general manager is responsible for allmanagement functions, including purchasing (other than food), hiring and firingand oversight of restaurant-level bookkeeping and cash controls. The executivechef is responsible for managing all kitchen functions, including training,menu design and food purchasing, quality and presentation.

We emphasize frequent interaction between our vicepresidents, regional managers and restaurant level management. As a result,neither vice presidents nor regional managers operate out of our corporate officeand are routinely accessible to restaurant staff.

All management levels inoperations, from vice presidents to assistant managers, participate inincentive bonus programs. These incentive programs are designed to establishspecific goals and objectives and to ensure accountability and rewardperformance.

***Restaurant Operations***

Our restaurants are generally open 365 days eachyear, serve lunch and dinner and are generally open from 11:00 a.m. to11:00 p.m. Sunday through Thursday and 11:00 a.m. to 1:00 a.m.Friday and Saturday. In 2004, dinner comprised approximately 75% of ourrevenues, while lunch comprised approximately 25% of revenues, and ourrestaurants served an average of 1,100 guests per week during lunch and 1,750guests 

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per week during dinner. Toaccommodate guests who have limited time available during lunch, we offer a45-minute lunch guarantee.

Additionally, we offercatering and banquet services both in our restaurants and at other locations ascustomers request. Our presence in and near hotels enables us to expand thereach of our banquet offerings. In 2004, banquets accounted for approximately10% of our revenues.

***Training***

We strive tomaintain quality and consistency at each of our restaurants through thedisciplined training and supervision of our staff. We require all newmanagement employees to participate in formal training programs that generallylast 60 to 120 days, depending on their prior experience in the industry,and which focus on the following general areas:

·       servicepositions, including bartender and waiter;

·       managementaccounting, personnel management and dining room and bar operations; and

·       kitchenmanagement.

Management positions at new restaurants are typicallystaffed with personnel who have previous management experience from one of ourrestaurants or from a competitor. We also have an experienced opening team thatis responsible both for conducting intensive training sessions for all newpersonnel and for facilitating each new restaurant opening.

At the restaurant level,we require all staff employees to follow our operating manual to ensure theconsistency and quality of our food, beverage and customer service. We alsohold monthly seminars designed to keep our staff current on menu changes andindustry trends. In addition, our executive chefs conduct daily “fresh talks”with our restaurant staff to discuss the menu items of the day, so we caneffectively communicate the sourcing, freshness, quality and method ofpreparation of our seafood to customers. The wait staff samples each of the day’sofferings during these meetings.

***Recruiting, Retention and Advancement***

We believe our entrepreneurial culture helps us toattract and retain highly qualified and motivated individuals. We seek to hiretalented and highly motivated managers and chefs. To this end, we activelyemploy recruiting services to identify talent and we also frequently hireindividuals who approach us because of their familiarity with our brand.

Our restaurants operate on a decentralized basis witheach restaurant having profit and loss responsibility and a high degree ofoperating autonomy within clearly defined corporate guidelines. This philosophyallows the general manager and executive chef at each of our restaurants theflexibility to operate the restaurant with significant independence and, webelieve, helps us to attract managers and chefs who are creative and entrepreneurialand who have a desire to operate their own restaurants.

We have historically retained substantially all of ourregional chefs and regional managers and our retention rate for our unitgeneral managers and executive chefs is approximately 80%, which we believe isamong the highest retention rates for salaried staff in the restaurant industry.We strive to create a professional, pleasant and efficient work environment forour restaurant managers encouraging a 50-hour, five day work week.

We aim to motivate and retain our employees byproviding them with opportunities for increased responsibilities andadvancement. It is our policy to promote from within our organization wheneverpossible based on employee performance and contribution to our business. Wealso provide performance-

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based cash incentives toall of our exempt restaurant managers based on performance, revenues, profitability,costs and the success of other operational initiatives.

We support our employeesby offering competitive wages and benefits, including a 401(k) plan andmedical insurance. In addition, we provide equity incentives to our seniormanagers under our 2004 Stock Incentive Plan.

***Employees***

As of December 25,2004 we employed 4,705 persons, of whom 469 were salaried and 4,236 were hourlypersonnel. None of our employees are represented by unions and we consider ourrelationship with our employees to be good. Our employees are summarized bymajor functional area in the table below.
| **Functional Area**              | ** ** | ** ** | ** ** | **Number of  Employees** | ** ** |
|---------------------------------------|------------|------------|------------|-------------------------------|------------|
| VPs/regional  managers/regional chefs |       |       | 14         |                          |       |
| General managers                      |       |       | 64         |                          |       |
| Assistant  managers                   |       |       | 160        |                          |       |
| Executive chefs                       |       |       | 57         |                          |       |
| Sous chefs                            |       |       | 133        |                          |       |
| Non-salaried  restaurant staff        |       |       | 4,202      |                          |       |
| Corporate  salaried                   |       |       | 41         |                          |       |
| Corporate  non-salaried               |       |       | 34         |                          |       |
| **Total**                             | ** ** | ** ** | **4,705**  |                          |       |

 

**ManagementInformation Systems**

All of our informationprocessing is managed from our headquarters in Portland, Oregon. Point-of-saleterminals at each unit allow us to generate the daily reports needed to manageour restaurants and our business. These reports include, among other things,daily and weekly revenues, guest counts, meal period sales breakouts and foodand liquor consumption. The data from the point of sale system iselectronically transferred each night to a third party intranet provider, withthe data then accessible by us through the Internet. Financial operatingresults are reviewed at the corporate office and studied by unit level andregional management. Variances from expectations are analyzed and addressed atfrequent financial meetings.

**Industry andCompetition**

***Industry***

We operate in ahighly competitive industry that is affected by changes in consumer eatinghabits and dietary preferences, population trends and traffic patterns, andlocal and national economic conditions. Key competitive factors in the industryinclude the taste, quality and price of the food products offered, quality andspeed of guest service, brand name identification, attractiveness offacilities, restaurant location, and overall dining experience. We believe wecompete favorably with respect to each of these factors and have successfullyovercome the following barriers faced by seafood restaurants:

·       developingand maintaining consistent, reliable sources of high quality, fresh seafood;

·       itis often not possible to hedge against increases in seafood costs;

·       thepreparation and handling of seafood are more complicated than for other typesof cuisine; and

·       consumer tastes in seafoodproducts vary from region to region.

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***Competition***

While we competewith a range of restaurant operators for consumers’ dining preferences and withboth restaurants and retailers for site locations and personnel requirements,we consider our principal competitors to include the following:

·       independent,local seafood houses;

·       regionalseafood restaurant concepts, such as California Beach Restaurants, King’sSeafood, Landry’s Seafood, Legal Sea Foods, Oceanaire and Roy’s; and

·       upscale“steak and chop” houses such as Capital Grille, Morton’s, Ruth’s Chris, Smith &Wollensky and The Palm, among others.

*Independent, Local SeafoodRestaurants.  *These restaurants, generally operated bysmall local companies or families, typically offer a narrow selection of widelyavailable seafood items and, in some cases, a selection of local seafoodspecies. The appeal of these restaurants is the operators’ knowledge of thelocal community, their local restaurant design and their “family-style”customer service. We successfully compete with such independent, local seafoodhouses by maintaining a decentralized management structure which allows theexecutive chef at each of our restaurants to tailor the menu to local tastes. Wealso localize the design of our restaurants, which affords us the appeal of alocal seafood operator, rather than a more formulaic national chain. Additionally,given our national scale and sophisticated sourcing capabilities, we are ableto offer a more extensive selection of seafood on our menu at lower prices.

*Regional Seafood Restaurants.  *Theselarger regional restaurant chains typically offer a broader selection ofseafood items than the local independent restaurants, and strive to offer afresher quality product at price points that may be comparable to ours. Wesuccessfully compete with such larger, regional chains by leveraging our longtrack record in the business, as well as our national infrastructure andpurchasing power, which enables us to offer a broader selection of highquality, fresh seafood at affordable price points.

*Upscale“Steak and Chop” Restaurants.  *These restaurants, whileprimarily focused on beef, lamb and other meat items at higher price points,also offer a selection of higher quality seafood items. Our restaurants aredesigned to appeal to a broader customer profile than these “steak and chop” chainsby ensuring that the décor and atmosphere of our restaurants are equallyappealing to men and women, by being price friendly and by offering a broadermenu selection of high quality seafood items.

**AvailableInformation**

We make available free ofcharge on or through our website at *www.msmg.com*our annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and amendments to these reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Exchange Actas soon as reasonably practicable after we file these materials with theSecurities and Exchange Commission. These materials are also available on theSecurity and Exchange Commission’s website at *www.sec.gov*.

**ITEM 2**.                PROPERTIES

Our corporate headquartersare located in Portland, Oregon. We occupy this facility under a lease thatterminates in December 2009. We lease all of our restaurant facilities,except for two that we operate under management agreements.

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**ITEM 3**.                LEGALPROCEEDINGS

Occasionally, we are adefendant in litigation arising in the ordinary course of our business,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. None of these types oflitigation, most of which are covered by insurance, has had a material effecton our business, results of operations, financial position or cash flows.

**ITEM 4**.                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submittedto a vote of stockholders during the fourth quarter of the fiscal year coveredby this report.

**ITEM 4A**.        EXECUTIVEOFFICER AND OTHER KEY EMPLOYEES

*William P. McCormick*(age 65) co-founded McCormick & Schmick’s in 1972 and served aspresident until 1994. He served as the chairman of the board from May 2003through April 2004, when he retired, and currently serves as our chairmanemeritus. Mr. McCormick attended Santa Clara University, the University ofRhode Island, Boston University and the Harvard Graduate School ofBusiness—Executive Management Program.

*Douglas L. Schmick*(age57) co-founded McCormick & Schmick’s in 1972 and has been our presidentsince March 1997. From 1997 through 1999, he was also chief executiveofficer and served as secretary, treasurer, and chief executive officer from1974 through 1997. Mr. Schmick has served on the board of directors since August 22,2001. Mr. Schmick received his Bachelor of Science degree from theUniversity of Idaho.

*Saed Mohseni*(age42) has been our chief executive officer since January 2000 andbecame a director in June 2004. Mr. Mohseni joined McCormick &Schmick’s in 1986 as a general manager. He has also held the positions ofsenior manager (1988-1993), vice president of operations-California (1993-1997),and senior vice president of operations (1997-1999).

*Emanuel (Manny) N. Hilario*(age37) joined McCormick & Schmick’s in April 2004 as chieffinancial officer. For the four years before joining us, Mr. Hilario waswith Angelo and Maxie’s, Inc. (formerly Chart House Enterprises, Inc.)most recently as vice president of finance and chief financial officer. From December 1997until April 2000, Mr. Hilario was with ACCO North America, a whollyowned subsidiary of Fortune Brands, where he held various positions, mostrecently Group Director of Finance and Cost Management. Previously, he spentnine years with McDonald’s Corporation serving in various capacities. Mr. Hilarioreceived his Bachelor of Science and Commerce degree in accounting from SantaClara University and is a certified public accountant.

*Jerry R. Kelso*(age 51) has been the chief internal audit and compliance officer of theCompany since April 2004. Mr. Kelso joined us in 1984 as ourcontroller and was vice president of finance and chief financial officer from1988 to April 2004. He previously worked for nearly seven years with tworegional and local certified public accounting firms. Mr. Kelso receivedhis Bachelor of Arts degree from Central Washington State College and became acertified public accountant in 1983.

*Jeffrey H. Skeele*(age 50) has been a vice president of operations of McCormick &Schmick’s since 1998. He also has held the positions of senior manager (1991-1996)and general manager (1986-1988). From 1988 to 1991, Mr. Skeele was avice president at West Group Partners. Mr. Skeele graduated from theUniversity of Oregon.

*David E. Jenkins*(age 58) has been a vice president of operations since joining McCormick &Schmick’s in 1997. Before that, Mr. Jenkins was a regional manager ofIsland Restaurants (1992-1996), the 

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owner and operator ofSanta Fe East (1988-1991), a general manager of Landi Brothers (1982-1987),and the general manager of Hamburger Hamlet (1978-1981). Mr. Jenkinsreceived his Bachelor of Arts degree from the University of Tampa.

*Michael B. Liedberg*(age42) joined McCormick & Schmick’s in January 2004 as a vicepresident of operations. Mr. Liedberg has over 20 years of managementexperience in the restaurant industry including service as the president andchief executive officer of Desert Moon Restaurants from December 2001 to January 2004.Before 2001, Mr. Liedberg served for thirteen years with Avado Brands, Inc.in various executive capacities. Mr. Liedberg’s education includes acertificate from the Management Program at Georgia Institute of Technology anda Human Resources Certificate from the University of Georgia.

*Raymond E. Bean, Jr.*(age47) has held the position of controller since joining McCormick &Schmick’s in 1991. Mr. Bean also became our chief accounting officer in1997. Before joining us, Mr. Bean worked in the audit department of aregional certified public accounting firm for eleven years. Mr. Beanreceived his Bachelor of Science degree from Central Washington University andbecame a certified public accountant in 1980.

 

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**PART II**

**ITEM 5**.                MARKETFOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

**Market Information**

Ourcommon stock is listed on The Nasdaq Stock Market’s National Market under thesymbol MSSR. The table below sets forth the high and low closing price pershare sales prices for our common stock within the third and fourth quarters offiscal 2004 as reported by The Nasdaq Stock Market’s National Market System. Ourinitial public offering occurred in July 2004. There was no establishedpublic trading market for our common stock prior to that date. 
| ** **  | ** ** | **Sales Price** | ** ** |
|-------------|------------|----------------------|------------|
| **2004**    | ** ** | ** **           | ** ** | **High** | ** ** | **Low** | ** ** |
| 4th Quarter |       | $                    | 17.00      |   | $ | 10.75 |   |
| 3rd Quarter |       | 13.20                |       | 9.80 |   |
|             |            |                      |            |  |  |  |  |  |  |

 

**Holders of Record**

As of April 5, 2005there were approximately 64 holders of record of our common stock.

**Dividend Policy**

We expect to retain all of our earnings to finance theexpansion and development of our business and, except as described below, wehave not paid and have no plans to pay cash dividends to our stockholders afterthis offering for the foreseeable future. The payment of dividends is withinthe discretion of our board of directors and will depend upon our earnings,capital requirements and operating and financial condition, among other factors.Our revolving credit agreement restricts our ability to pay dividends. See Part II—Item7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources.”

From August 23, 2001to July 23, 2004 we accrued dividends on the 13% senior exchangeable preferredstock of McCormick & Schmick Acquisition Corp. II, our wholly ownedsubsidiary. In connection with our initial public offering and reorganization,on July 23, 2004 we paid $28.9 million, including payment for accrueddividends, to redeem all of the outstanding mandatorily redeemable 13% senior exchangeablepreferred stock.

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

Thefollowing table provides information about compensation plans (includingindividual compensation arrangements) under which our equity securities areauthorized for issuance to employees or non-employees (such as directors andconsultants), at December 25, 2004.
| **Plan Category**                                   | ** ** | ** ** | ** ** | **Number of  securities to be  issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column(a))** | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                      | ** ** | **(c)**                                                                                                 | ** ** |
| Equity compensation  plans approved by security holders: |       |       |       |                                                                                                                                         |       |                                                                                                    |       |                                                                                                                                                                                                   |       |   |   |   |   |
| 2004 Stock  Incentive Plan                               |       |       | 870,500    |                                                                                                                                         |       |                                                                                                    | $          | 12.00                                                                                                                                                                                                  |       |   |   | 629,500 |   |   |
|                                                          |            |            |            |                                                                                                                                              |            |                                                                                                         |            |                                                                                                                                                                                                        |            |  |  |  |  |  |  |  |

 

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**Issuer Purchases ofEquity Securities**

We did not repurchase anyof our equity securities during 2004.

**ITEM 6**.                SELECTEDCONSOLIDATED FINANCIAL AND OPERATING DATA

Like many other restaurant companies and retailers, wehave conducted a review of our accounting policies applicable to leases,leasehold improvements, rent commencement, deferred rent, and other relateditems. This review was prompted in part by a February 7, 2005 letter fromthe Office of the Chief Accountant of the Securities and Exchange Commission (“SEC”)to the American Institute of Certified Public Accountants regarding properaccounting for certain operating lease matters under generally acceptedaccounting principles (“GAAP”).

We have determined that we have incorrectly accountedfor certain operating lease transactions under GAAP. Consequently, we haverestated our financial statements for the first three quarters of fiscal 2004(unaudited) and for the fiscal years ended December 28, 2002 and December 27,2003. We have also restated the unaudited selected financial information forthe fiscal period from August 23, 2001 to December 29, 2001, and the selectedfinancial information of our Predecessor for the fiscal period from December 31,2000 to August 22, 2001 and the fiscal year ended December 30, 2000. Therestatement adjustments are non-cash and had no impact on revenues or cash andcash equivalents.

Additional details regarding the restatement areincluded in Part II—Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Restatement of Financial Information,” andNote 2, “Restatement of Financial Information,” to the ConsolidatedFinancial Statements included in Part II—Item 8.

The selectedconsolidated financial and operating data below are derived from the followingsources:

·        Theunaudited financial statements of the Company while operated as a division ofAvado Brands, Inc. (which we refer to as our “Predecessor”) for the fiscalyear 2000 and for the period from December 31, 2000 to August 22,2001. The unaudited Predecessor financial statements, represent the financialposition and results of operations of the McCormick & Schmickdivision, which have been “carved-out” from the consolidated financialstatements of Avado Brands.

·        Ourunaudited consolidated financial statements for the period from August 23,2001 to December 29, 2001 and our consolidated financial statements for thefiscal years 2002, 2003 and 2004, which have been audited by an independentregistered public accounting firm.

We have also included in Item 6. “SelectedConsolidated Financial and Operating Data” the Consolidated Balance Sheets asof December 28, 2002, December 27, 2003 and December 25, 2004 and theConsolidated Statements of Cash Flows for the years ended December 28, 2002,December 27, 2003 and December 25, 2004.

20

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Theselected consolidated financial and operating data below represent portions ofour financial statements which should be read together with Part II—Item 7“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and our consolidated financial statements and the related notesincluded in Part II—Item 8. Historical results are not necessarilyindicative of future performance.
| ** **                                                                                                       | ** ** | **Fiscal Year**                                               | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2000(1)**                                                        | ** ** | **2001(1)** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                                                       | ** ** | **Predecessor**                                                    | ** ** | **Successor** | ** ** |
| ** **                                                                                                       | ** ** | ** **                                                         | ** ** | **December 31,  2000 -  August 22,  2001** | ** ** | **August 23,  2001 -  December 29,  2001** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                       | ** ** | **Restated**                                                       | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| ** **                                                                                                       | ** ** | **(In thousands, except per share data)** | ** ** |
| **Statement of Income Data:**                                                                                    |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                                         |       | $                                                                  | 159,490    |   |   | $ | 113,875 |   |   |   | $ | 59,760 |   |   | $ | 180,104 |   | $ | 196,717 |   | $ | 238,757 |   |
| Restaurant operating  costs                                                                                      |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Food and beverage                                                                                                |       | 48,142                                                             |       |   | 34,150 |   |   |   | 17,408 |   |   | 53,168 |   | 57,959 |   | 70,873 |   |
| Labor                                                                                                            |       | 49,292                                                             |       |   | 36,263 |   |   |   | 18,213 |   |   | 56,147 |   | 61,644 |   | 75,081 |   |
| Operating                                                                                                        |       | 21,305                                                             |       |   | 16,387 |   |   |   | 8,887 |   |   | 26,406 |   | 29,244 |   | 35,204 |   |
| Occupancy                                                                                                        |       | 13,412                                                             |       |   | 9,727 |   |   |   | 5,114 |   |   | 15,349 |   | 16,890 |   | 21,401 |   |
| Total restaurant operating costs                                                                                 |       | 132,151                                                            |       |   | 96,527 |   |   |   | 49,622 |   |   | 151,070 |   | 165,737 |   | 202,559 |   |
| General and administrative expenses                                                                              |       | 8,024                                                              |       |   | 4,732 |   |   |   | 2,555 |   |   | 7,576 |   | 9,769 |   | 12,062 |   |
| Restaurant pre-opening costs                                                                                     |       | 1,903                                                              |       |   | 671 |   |   |   | 319 |   |   | 1,006 |   | 1,219 |   | 2,393 |   |
| Depreciation and amortization                                                                                    |       | 4,969                                                              |       |   | 3,810 |   |   |   | 2,761 |   |   | 8,808 |   | 9,853 |   | 10,723 |   |
| Management fees and covenants not to compete                                                                     |       | —                                                             |       |   | — |   |   |   | 778 |   |   | 2,550 |   | 2,550 |   | 4,241 |   |
| Impairment of assets                                                                                             |       | —                                                             |       |   | — |   |   |   | — |   |   | — |   | 1,513 |   | — |   |
| Total costs and expenses                                                                                         |       | 147,047                                                            |       |   | 105,740 |   |   |   | 56,035 |   |   | 171,010 |   | 190,641 |   | 231,978 |   |
| Operating income                                                                                                 |       | 12,443                                                             |       |   | 8,135 |   |   |   | 3,725 |   |   | 9,094 |   | 6,076 |   | 6,779 |   |
| Interest expense                                                                                                 |       | 8,842                                                              |       |   | 5,711 |   |   |   | 1,626 |   |   | 3,720 |   | 3,069 |   | 2,680 |   |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock                                       |       | —                                                             |       |   | — |   |   |   | — |   |   | — |   | 1,901 |   | 5,759 |   |
| Write off of deferred loan costs on early  extinguishment of debt                                                |       | —                                                             |       |   | — |   |   |   | — |   |   | — |   | 2,313 |   | 1,288 |   |
| Income (loss) before income taxes and accrued  dividends and accretion on mandatorily redeemable preferred stock |       | 3,601                                                              |       |   | 2,424 |   |   |   | 2,099 |   |   | 5,374 |   | (1,207 | ) | (2,948 | ) |
| Income tax expense (benefit)                                                                                     |       | 1,404                                                              |       |   | 946 |   |   |   | 647 |   |   | 2,570 |   | 1,323 |   | (3,651 | ) |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock                                       |       | —                                                             |       |   | — |   |   |   | 1,111 |   |   | 3,347 |   | 1,832 |   | — |   |
| Net income (loss)                                                                                                |       | $                                                                  | 2,197      |   |   | $ | 1,478 |   |   |   | $ | 341 |   |   | $ | (543 | ) | $ | (4,362 | ) | $ | 703 |   |
| Net income (loss) per  share(1)                                                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                                                                                |       | $                                                                  | 0.28       |   |   | $ | 0.19 |   |   |   | $ | 0.04 |   |   | $ | (0.07 | ) | $ | (0.56 | ) | $ | 0.07 |   |
| Shares used in computing  net income (loss) per share(1)                                                         |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                            |       | 7,782                                                              |       |   | 7,782 |   |   |   | 7,782 |   |   | 7,782 |   | 7,782 |   | 10,387 |   |
| Diluted                                                                                                          |       | 7,782                                                              |       |   | 7,782 |   |   |   | 7,782 |   |   | 7,782 |   | 7,782 |   | 10,416 |   |

----

(1)   Theerrors identified in 2000 and 2001 are of the same nature as those described inNote 2 “Restatement of Financial Information” in the Consolidated FinancialStatements included in Part II—Item 8. The impact of the adjustments forthe fiscal year ended December 30, 2000, the 

21

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period from December 31,2000 to August 22, 2001, and the period from August 23, 2001 to December 29,2001 were to decrease net income $539,000, $392,000 and $207,000, respectivelyand decrease earnings per share by $0.07, $0.05, and $0.03, respectively.

 
| ** **                                                                                                 | ** ** | **Fiscal Year End** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                 | ** ** | **2000**                 | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                                                 | ** ** | **Predecessor**          | ** ** | **Successor** | ** ** |
| ** **                                                                                                 | ** ** | ** **               | ** ** | **December 31,  2000 -  August 22,  2001** | ** ** | **August 23,  2001 -  December 29,  2001** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                 | ** ** | **Restated**             | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| ** **                                                                                                 | ** ** | **(In thousands)**  | ** ** |
| **Balance Sheet Data:**                                                                                    |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                  |       | $                        | 224        |   |   | $ | 385 |   |   |   | $ | 2,028 |   |   | $ | 2,945 |   | $ | 2,453 |   | $ | 451 |   |
| Total assets                                                                                               |       | 122,987                  |       |   | 126,317 |   |   |   | 158,581 |   |   | 157,953 |   | 161,792 |   | 179,060 |   |
| Long-term debt, revolving credit facility and  obligations under capital leases, including current portion |       | 348                      |       |   | — |   |   |   | 54,000 |   |   | 46,983 |   | 40,056 |   | 13,140 |   |
| Mandatorily redeemable preferred stock                                                                |       | —                   |       |   | — |   |   |   | 16,057 |   |   | 19,404 |   | 23,137 |   | — |   |
| Total members’/stockholders’ equity                                                              |       | 91,060                   |       |   | 95,428 |   |   |   | 63,151 |   |   | 61,860 |   | 57,767 |   | 124,070 |   |
|                                                                                                            |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                         | ** ** | **Fiscal Year**    | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                         | ** ** | **2000**                | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **Predecessor**         | ** ** | **Successor** | ** ** |
| ** **                                                         | ** ** | ** **              | ** ** | **December 31,  2000 -  August 22,  2001** | ** ** | **August 23,  2001 -  December 29,  2001** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **Restated**            | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| ** **                                                         | ** ** | **(In thousands)** | ** ** |
| **Other Data:**                                                    |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Restaurants open at end of period (including managed  restaurants) |       | 32                      |       |   | 34 |   |   |   | 35 |   |   | 39 |   | 42 |   | 52 |   |
| Net cash provided by operating activities                     |       | $                       | 17,561     |   |   | $ | 5,838 |   |   |   | $ | 4,745 |   |   | $ | 14,582 |   | $ | 20,652 |   | $ | 21,452 |   |
| Net cash used in investing activities                              |       | (22,893                 | )          |   | (8,529 | ) |   |   | (134,473 | ) |   | (8,779 | ) | (14,956 | ) | (27,284 | ) |
| Net cash provided by (used in) financing activities                |       | 5,283                   |       |   | 2,852 |   |   |   | 131,756 |   |   | (4,886 | ) | (6,188 | ) | 3,830 |   |
| EBITDA(2)                                                          |       | 17,412                  |       |   | 11,945 |   |   |   | 6,486 |   |   | 17,902 |   | 15,929 |   | 17,502 |   |
|                                                                    |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)           For periods prior to the initial publicoffering, we have given retroactive effect to the completion of our corporatereorganization in calculating common shares outstanding. See Part II—Item8, Note 3, “Summary of Significant Accounting Policies”.

(2)           EBITDA represents earnings beforeinterest, taxes, depreciation and amortization, write off of deferred loancosts on early extinguishment of debt and accrued dividends and accretion onmandatorily redeemable preferred stock. We are presenting EBITDA because itprovides an additional measure to view our operations which, when consideredwith both our GAAP results and the reconciliation to net income (loss), webelieve provides a more complete understanding of our business than could beobtained absent this disclosure. EBITDA is presented because we believe itis a useful measure for investors to assess our ability to incur indebtedness,and to compare the operating performance of our business against the operatingperformance of our competitors. EBITDA is not a measurement determined inaccordance with GAAP and should not be considered in isolation or as analternative to net income (loss), net cash provided by operating, investing orfinancing activities or other financial statement data presented as indicatorsof financial performance or liquidity. EBITDA as presented may not becomparable to other similarly titled measures of other companies. Areconciliation of EBITDA to net income (loss) is provided below.

22

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| ** **                                                                 | ** ** | **Fiscal Year**    | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                 | ** ** | **2000**                | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                 | ** ** | **Predecessor**         | ** ** | **Successor** | ** ** |
| ** **                                                                 | ** ** | ** **              | ** ** | **December 31,  2000 -  August 22,  2001** | ** ** | **August 23,  2001 -  December 29,  2001** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                 | ** ** | **Restated**            | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| ** **                                                                 | ** ** | **(In thousands)** | ** ** |
| Net income (loss)                                                          |       | $                       | 2,197      |   |   | $ | 1,478 |   |   |   | $ | 341 |   |   | $ | (543 | ) | $ | (4,362 | ) | $ | 703 |   |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock |       | —                  |       |   | — |   |   |   | 1,111 |   |   | 3,347 |   | 3,733 |   | 5,759 |   |
| Income tax expense (benefit)                                               |       | 1,404                   |       |   | 946 |   |   |   | 647 |   |   | 2,570 |   | 1,323 |   | (3,651 | ) |
| Interest expense                                                           |       | 8,842                   |       |   | 5,711 |   |   |   | 1,626 |   |   | 3,720 |   | 3,069 |   | 2,680 |   |
| Depreciation and amortization                                              |       | 4,969                   |       |   | 3,810 |   |   |   | 2,761 |   |   | 8,808 |   | 9,853 |   | 10,723 |   |
| Write off of deferred loan costs on early  extinguishment of debt          |       | —                  |       |   | — |   |   |   | — |   |   | — |   | 2,313 |   | 1,288 |   |
| EBITDA                                                                     |       | $                       | 17,412     |   |   | $ | 11,945 |   |   |   | $ | 6,486 |   |   | $ | 17,902 |   | $ | 15,929 |   | $ | 17,502 |   |

 

23

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**McCormick &Schmick’s Seafood Restaurants, Inc. and SubsidiariesConsolidated Balance Sheets(In thousands, except per share data)**
| ** **                                                                                            | ** ** | **Dec. 28, 2002** | ** ** | **Dec. 27, 2003** | ** ** | **Dec. 25, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                            | ** ** | **(Restated)**              | ** ** | **(Restated)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                            |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Current assets                                                                                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                            |       |                        | $          | 2,945                       |       |                        |       | $ | 2,453 |   |   |   | $ | 451 |   |   |
| Trade accounts  receivable, net                                                                       |       |                        | 3,517      |                        |       |                        | 3,689      |   |   |   | 4,988 |   |   |
| Inventories                                                                                           |       |                        | 2,317      |                        |       |                        | 2,704      |   |   |   | 3,384 |   |   |
| Prepaid expenses and  other current assets                                                            |       |                        | 1,872      |                        |       |                        | 2,367      |   |   |   | 2,846 |   |   |
| Deferred income taxes                                                                                 |       |                        | —     |                        |       |                        | 96         |   |   |   | 830 |   |   |
| Total current assets                                                                                  |       |                        | 10,651     |                        |       |                        | 11,309     |   |   |   | 12,499 |   |   |
| Equipment and leasehold  improvements, net                                                            |       |                        | 71,926     |                        |       |                        | 76,017     |   |   |   | 92,744 |   |   |
| Other assets                                                                                          |       |                        | 55,380     |                        |       |                        | 54,470     |   |   |   | 53,821 |   |   |
| Goodwill                                                                                              |       |                        | 19,996     |                        |       |                        | 19,996     |   |   |   | 19,996 |   |   |
| Total assets                                                                                          |       |                        | $          | 157,953                     |       |                        |       | $ | 161,792 |   |   |   | $ | 179,060 |   |   |
| **Liabilities and Members’/Stockholders’ Equity**                                           |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Current liabilities                                                                                   |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Book overdraft                                                                                        |       |                        | $          | 2,922                       |       |                        |       | $ | 5,052 |   |   |   | $ | 429 |   |   |
| Accounts payable                                                                                      |       |                        | 8,238      |                        |       |                        | 11,216     |   |   |   | 12,875 |   |   |
| Accrued expenses                                                                                      |       |                        | 10,388     |                        |       |                        | 12,698     |   |   |   | 15,197 |   |   |
| Current maturities of  long-term debt                                                                 |       |                        | 6,787      |                        |       |                        | —     |   |   |   | — |   |   |
| Capital lease  obligations, current portion                                                           |       |                        | 390        |                        |       |                        | 415        |   |   |   | 433 |   |   |
| Derivative instrument,  current                                                                       |       |                        | 800        |                        |       |                        | 805        |   |   |   | — |   |   |
| Deferred income taxes                                                                                 |       |                        | 374        |                        |       |                        | —     |   |   |   | — |   |   |
| Total current  liabilities                                                                            |       |                        | 29,899     |                        |       |                        | 30,186     |   |   |   | 28,934 |   |   |
| Revolving credit  facility                                                                            |       |                        | —     |                        |       |                        | 38,500     |   |   |   | 12,000 |   |   |
| Long-term debt                                                                                        |       |                        | 38,250     |                        |       |                        | —     |   |   |   | — |   |   |
| Mandatorily redeemable  preferred stock (liquidation preference of $27,002)                           |       |                        | —     |                        |       |                        | 23,137     |   |   |   | — |   |   |
| Other long-term  liabilities                                                                          |       |                        | 4,200      |                        |       |                        | 6,749      |   |   |   | 11,791 |   |   |
| Capital lease  obligations, noncurrent portion                                                        |       |                        | 1,556      |                        |       |                        | 1,141      |   |   |   | 707 |   |   |
| Deferred income taxes                                                                                 |       |                        | 2,351      |                        |       |                        | 4,312      |   |   |   | 1,558 |   |   |
| Derivative instrument,  noncurrent                                                                    |       |                        | 433        |                        |       |                        | —     |   |   |   | — |   |   |
| Total liabilities                                                                                     |       |                        | 76,689     |                        |       |                        | 104,025    |   |   |   | 54,990 |   |   |
| Mandatorily redeemable  preferred stock (liquidation preference of $23,774)                           |       |                        | 19,404     |                        |       |                        | —     |   |   |   | — |   |   |
| Members’/ Stockholders’ equity                                                              |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Members’ equity in  McCormick & Schmick Holdings LLC                                    |       |                        | 62,810     |                        |       |                        | 62,819     |   |   |   | — |   |   |
| Common stock, $0.001 par  value, 120,000 shares authorized, 13,782 shares issued and outstanding |       |                        | —     |                        |       |                        | —     |   |   |   | 14 |   |   |
| Additional paid in  capital                                                                           |       |                        | —     |                        |       |                        | —     |   |   |   | 127,917 |   |   |
| Accumulated deficit                                                                                   |       |                        | (202       | )                           |       |                        | (4,564     | ) |   |   | (3,861 | ) |   |
| Accumulated other  comprehensive loss                                                                 |       |                        | (748       | )                           |       |                        | (488       | ) |   |   | — |   |   |
| Total members’ /  stockholders’ equity                                                      |       |                        | 61,860     |                        |       |                        | 57,767     |   |   |   | 124,070 |   |   |
| Total liabilities and members’ / stockholders’  equity                                      |       |                        | $          | 157,953                     |       |                        |       | $ | 161,792 |   |   |   | $ | 179,060 |   |   |

 

24

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**McCormick &Schmick’s Seafood Restaurants, Inc. and SubsidiariesConsolidated Statements of Cash Flows(In thousands)**
| ** **                                                                               | ** ** | **Year Ended**             | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                               | ** ** | **December 28, 2002** | ** ** | **December 27, 2003** | ** ** | **December 25, 2004** | ** ** |
| ** **                                                                               | ** ** | **(Restated)**                  | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| **Operating activities**                                                                 | ** ** |                            | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income (loss)                                                                        |       |                            | $          | (543 | ) |   |   | $ | (4,362 | ) |   |   | $ | 703 |   |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                           |       |                            | 8,808      |   |   |   | 9,853 |   |   |   | 10,723 |   |   |
| Amortization of unearned  compensation                                                   |       |                            | —     |   |   |   | 9 |   |   |   | 42 |   |   |
| Provision for doubtful  accounts                                                         |       |                            | 165        |   |   |   | 48 |   |   |   | — |   |   |
| Deferred income taxes                                                                    |       |                            | 2,570      |   |   |   | 1,323 |   |   |   | (3,805 | ) |   |
| Write off of deferred  loan costs on early extinguishment of debt                        |       |                            | —     |   |   |   | 2,313 |   |   |   | 1,288 |   |   |
| Impairment of assets                                                                     |       |                            | —     |   |   |   | 1,513 |   |   |   | — |   |   |
| Accrued dividends and  accretion on mandatorily redeemable preferred stock               |       |                            | 3,347      |   |   |   | 3,733 |   |   |   | 5,759 |   |   |
| Changes in operating assets and liabilities                                              |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Trade accounts  receivable                                                               |       |                            | (392       | ) |   |   | (446 | ) |   |   | (1,299 | ) |   |
| Inventories                                                                              |       |                            | (88        | ) |   |   | (387 | ) |   |   | (680 | ) |   |
| Prepaid expenses and  other current assets                                               |       |                            | 1,941      |   |   |   | (495 | ) |   |   | (479 | ) |   |
| Accounts payable                                                                         |       |                            | (3,752     | ) |   |   | 2,978 |   |   |   | 1,659 |   |   |
| Accrued expenses                                                                         |       |                            | (636       | ) |   |   | 2,310 |   |   |   | 2,499 |   |   |
| Other long-term  liabilities                                                             |       |                            | 3,162      |   |   |   | 2,262 |   |   |   | 5,042 |   |   |
| Net cash provided by  operating activities                                               |       |                            | 14,582     |   |   |   | 20,652 |   |   |   | 21,452 |   |   |
| **Investing activities**                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Acquisition of equipment  and leasehold improvements                                     |       |                            | (8,451     | ) |   |   | (14,889 | ) |   |   | (27,017 | ) |   |
| Other assets                                                                             |       |                            | (328       | ) |   |   | (67 | ) |   |   | (267 | ) |   |
| Net cash used in  investing activities                                                   |       |                            | (8,779     | ) |   |   | (14,956 | ) |   |   | (27,284) |   |   |
| **Financing activities**                                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Increase (decrease) in  book overdraft                                                   |       |                            | 2,922      |   |   |   | 2,130 |   |   |   | (4,623 | ) |   |
| Loan costs                                                                               |       |                            | (99        | ) |   |   | (1,398 | ) |   |   | (805 | ) |   |
| Payments on long—term  debt                                                         |       |                            | (6,963     | ) |   |   | (45,056 | ) |   |   | — |   |   |
| Borrowings made on  revolving credit facility                                            |       |                            | 25,000     |   |   |   | 103,000 |   |   |   | 65,500 |   |   |
| Payments made on  revolving credit facility                                              |       |                            | (27,000    | ) |   |   | (64,500 | ) |   |   | (92,000 | ) |   |
| Proceeds from  sale/leaseback of equipment                                               |       |                            | 1,635      |   |   |   | — |   |   |   | — |   |   |
| Proceeds from issuance  of common stock, net of offering costs of $6,930                 |       |                            | —     |   |   |   | — |   |   |   | 65,076 |   |   |
| Redemption of senior  preferred stock                                                    |       |                            | —     |   |   |   | — |   |   |   | (28,896 | ) |   |
| Disbursements of notes  receivable                                                       |       |                            | (350       | ) |   |   | — |   |   |   | — |   |   |
| Proceeds from notes receivable                                                           |       |                            | 15         |   |   |   | 26 |   |   |   | — |   |   |
| Payments on capital  lease obligations                                                   |       |                            | (46        | ) |   |   | (390 | ) |   |   | (416 | ) |   |
| Purchase of Class B  units                                                          |       |                            | —     |   |   |   | — |   |   |   | (6 | ) |   |
| Net cash provided by  (used in) financing activities                                     |       |                            | (4,886     | ) |   |   | (6,188 | ) |   |   | 3,830 |   |   |
| Net increase (decrease)  in cash and cash equivalents                                    |       |                            | 917        |   |   |   | (492 | ) |   |   | (2,002 | ) |   |
| Cash and cash  equivalents, beginning of year                                            |       |                            | 2,028      |   |   |   | 2,945 |   |   |   | 2,453 |   |   |
| Cash and cash equivalents, end of year                                                   |       |                            | $          | 2,945 |   |   |   | $ | 2,453 |   |   |   | $ | 451 |   |   |

 

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**ITEM 7**.                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Restatement ofFinancial Information**

Like many other restaurantcompanies and retailers, we have conducted a review of our accounting policiesapplicable to leases, leasehold improvements, rent commencement, deferred rent,and other related items. This review was prompted in part by a February 7,2005 letter from the Office of the Chief Accountant of the Securities andExchange Commission (“SEC”) to the American Institute of Certified PublicAccountants regarding proper accounting for certain operating lease mattersunder generally accepted accounting principles (“GAAP”). Based on our review,we have determined that we have incorrectly accounted for certain operatinglease transactions under GAAP. Consequently, we have restated our financialstatements for the first three quarters of fiscal 2004 (unaudited) and for thefiscal years ended December 28, 2002 and December 27, 2003. We havealso restated the selected financial information for the fiscal period fromAugust 23, 2001 to December 29, 2001 and the selected financial informationof our Predecessor for the fiscal period from December 31, 2000 to August 22,2001 and the fiscal year ended December 30, 2000. The restatementadjustments are non-cash and had no impact on revenues or cash and cashequivalents.

*Lease term*

Historically, we haveamortized our leasehold improvements on leased properties over the shorter ofthe combined initial term and all option periods of the lease (generallyranging from 20 to 30 years) or the useful life of the asset. In addition,we had recognized rent expense on the straight-line basis from the opening dateof the restaurant through the initial term of the lease. We have concluded thatour calculation of straight line rent expense should be based on the lease termas defined in Statement of Financial Accounting Standards (SFAS) No. 13, *Accounting for Leases*, as amended, which in most casesexceeds the initial term of the lease. As a result, we have restated ourfinancial statements to recognize rent expense on the straight-line basis overthe lease term, including option periods which are reasonably assured ofrenewal due to the presence of certain economic penalties. For purposes of calculatingstraight line rents, the lease term commences on the date the lessee obtainscontrol over the property, which is generally when the lessor’s property issubstantially complete and ready for tenant improvements. In addition, we willamortize leasehold improvements over the shorter of the lease term or theuseful life of the assets. As a result of these changes, deferred rent creditliability included in other long-term liabilities, pre-opening costs and rentexpense in the accompanying financial statements have increased on a restatedbasis.

*Tenant improvementallowances*

We have historically netted all tenant improvementallowances against the capitalized cost of leasehold improvements. We havedetermined that certain tenant improvement allowances should be consideredlease incentives and recorded as a deferred rent credit and amortized as areduction to rent expense over the lease term. This change increasescapitalized leasehold improvements and the deferred rent credit liability,which results in increases in amortization expense and decreases in rentexpense.

These restatement adjustments reduced net income by $1,182,000and $750,000 and diluted earnings per share by ($0.15) and ($0.10) for theyears ended December 27, 2003 and December 28, 2002, respectively,and resulted in a $207,000 reduction in opening retained earnings as of December 30,2001. See Part-II Item 8, Note 2, “Restatement of Financial Information,” foradditional information on the restatement adjustments.

**We have not amended our reports previously filed underthe Securities Exchange Act of 1934 and therefore the financial statements andrelated financial information contained in those reports should no**

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**longer be relied upon and are superceded by thefinancial statements and financial information in this Annual Report on Form 10-K.**

**Overview**

Our company was founded in 1972 with William P. McCormick’sacquisition of Jake’s Famous Crawfish in Portland, Oregon. We grew our familyof restaurants slowly through the next two decades and in 1994, when we owned14 restaurants, a majority interest in our company was purchased by CastleHarlan Partners II, L.P., a private investment firm. Avado Brands purchased usin 1997. We operated as a division of Avado Brands and added 18 new restaurantsin just under four and a half years. In August 2001, Avado Brands sold ourcompany to Castle Harlan Partners III, L.P. (“Castle Harlan”) and Bruckmann,Rosser, Sherrill & Co., II, L.P. (“BRS”), private equityinvestment firms that actively invest in restaurant companies. We have expandedour restaurant base to 52 restaurants, including two restaurants operated undermanagement contracts.

We have grown our business by offering our customers adaily-printed menu with a broad selection of affordable, quality fresh seafoodin an upscale environment, serviced by knowledgeable and professionalmanagement and staff. Our revenues are generated by sales at our restaurants,including banquets. In 2004, banquets accounted for approximately 10% of ourrevenues. In 2004, food and nonalcoholic beverage sales accounted forapproximately 71% of revenues and the remaining 29% of revenues was from thesale of alcoholic beverages.

We measure performance using key operating indicatorssuch as comparable restaurant sales, food and beverage costs, and restaurantoperating expenses, with a focus on labor as a percentage of revenues and totaloccupancy costs. We also track trends in average weekly revenues at both therestaurant level and on a consolidated basis as an indicator of our performance.The key operating measure used by management in evaluating our operatingresults is operating income. Operating income is calculated by deductingrestaurant operating costs, general and administrative expenses, restaurantpre-opening costs, depreciation and amortization and other corporate costs fromrevenues. We monitor general and administrative expenses as a percentage ofrevenues, which we target to be approximately 5% of revenues. Restaurantpre-opening costs are analyzed based on the number and timing of restaurantopenings and by comparison to budgeted amounts, with an overall target ofapproximately $0.3 to $0.4 million per restaurant opening, which may include upto $0.1 million in non-cash rent expense during the construction period.

The most significant restaurant operating costs arefood and beverage costs and labor and related employee benefits. We believe ournational and regional presence allows us to achieve better quality and pricingon key products than most of our competitors. We closely monitor food andbeverage costs and regularly review our selection of preferred vendors on thebasis of several key metrics, including pricing. In addition, because we printour menu daily, we are able to adapt the seafood items we offer to changes invendor pricing to optimize our revenue mix and mitigate the impact of costincreases in any particular seafood item by substituting a lower-costalternative on our menu or by adjusting the price. With respect to labor costs,we believe the combination of future growth in revenues and the resultinggreater leverage of our vice presidents of operations and regional managerswill allow us to better leverage payroll expenses over time. Our employeebenefits include health insurance, the cost of which continues to increasefaster than the general rate of inflation. We continually monitor this cost andreview strategies to effectively control increases but we are subject to theoverall trend of increases in healthcare costs.

General and administrative expenses are controlled inabsolute amounts and monitored as a percentage of revenues. As we have continuedour growth, we have incurred substantial training costs and made significantinvestments in infrastructure, including our information systems. As wecontinue to grow 

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and are able to leverageinvestments made in our people and systems, we expect these expenses todecrease as a percentage of revenues over time.

Identification ofappropriate new restaurant sites is essential to our growth strategy. Weevaluate and invest in new restaurants based on site-specific projected returnson investment. We believe our store model and flexible real estate strategyprovide us with continued opportunities to find attractive real estatelocations on favorable terms.

**Strategic Focus andOperating Outlook**

Our primary business focus for over 33 years hasbeen to consistently offer a broad selection of high quality, fresh seafood,which we believe commands strong loyalty from our customers. We havesuccessfully expanded our McCormick & Schmick’s seafood restaurantconcept throughout the United States and have competed effectively with bothnational and regional restaurant chains as well as with local operators. Weopened three, three and nine new company-owned restaurants in 2002, 2003 and2004, respectively, and entered into management contracts for one restaurant in2002 and one restaurant in 2004, growing from 35 to 52 restaurants during thisthree year period.

Our objective is tocontinue to prudently grow McCormick & Schmick’s seafood restaurantsin existing and new markets. Our 2005 plan includes the opening of seven newrestaurants. In addition to new unit growth, we are committed to improvingcomparable restaurant sales over the levels achieved in 2004 by drivingincreased customer counts as well as restaurant level operating margins.

**Results ofOperations**

We have restated our financial statements for thefirst three quarters of fiscal 2004 (unaudited) and for the fiscal years 2002 and2003. We have also restated the selected financial information for the fiscalperiod from August 23, 2001 to December 29, 2001 and the selected financialinformation of our Predecessor for the fiscal period from December 31,2000 to August 22, 2001 and the fiscal year ended December 30, 2000. Therestatement adjustments are non-cash and had no impact on revenues or cash andcash equivalents. Additional details regarding the restatement are included in Part II—Item 7,“Management’s Discussion and Analysis—Restatement of Financial Information,”and in Note 2 to the Consolidated Financial Statements in Part II—Item 8.

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Ouroperating results for the fiscal years 2002, 2003 and 2004 are expressed as apercentage of revenues below:
| ** **                                                                                                       | ** ** | **Fiscal Year** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                       | ** ** | **2002**             | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                                                                                       | ** ** | **Restated**         | ** ** | **Restated** | ** ** | ** ** | ** ** |
| Revenues                                                                                                         |       |                 | 100.0      | % |   |   | 100.0 | % |   | 100.0 | % |
| Restaurant operating  costs                                                                                      |       |                 |       |   |   |   |   |   |   |   |   |
| Food and beverage                                                                                                |       |                 | 29.5       | % |   |   | 29.5 | % |   | 29.7 | % |
| Labor                                                                                                            |       |                 | 31.2       | % |   |   | 31.3 | % |   | 31.4 | % |
| Operating                                                                                                        |       |                 | 14.7       | % |   |   | 14.9 | % |   | 14.7 | % |
| Occupancy                                                                                                        |       |                 | 8.5        | % |   |   | 8.6 | % |   | 9.0 | % |
| Total restaurant operating costs                                                                                 |       |                 | 83.9       | % |   |   | 84.3 | % |   | 84.8 | % |
| General and  administrative expenses                                                                             |       |                 | 4.2        | % |   |   | 5.0 | % |   | 5.1 | % |
| Restaurant  pre-opening costs                                                                                    |       |                 | 0.6        | % |   |   | 0.6 | % |   | 1.0 | % |
| Depreciation and  amortization                                                                                   |       |                 | 4.8        | % |   |   | 4.9 | % |   | 4.5 | % |
| Management fees  and covenants not to compete                                                                    |       |                 | 1.4        | % |   |   | 1.3 | % |   | 1.8 | % |
| Impairment of  assets                                                                                            |       |                 | —     |   |   |   | 0.8 | % |   | — |   |
| Total costs and expenses                                                                                         |       |                 | 94.9       | % |   |   | 96.9 | % |   | 97.2 | % |
| Operating income                                                                                                 |       |                 | 5.1        | % |   |   | 3.1 | % |   | 2.8 | % |
| Interest expense                                                                                                 |       |                 | 2.1        | % |   |   | 1.6 | % |   | 1.1 | % |
| Accrued dividends  and accretion on mandatorily redeemable preferred stock                                       |       |                 | —     |   |   |   | 1.0 | % |   | 2.4 | % |
| Write off of  deferred loan costs on early extinguishment of debt                                                |       |                 | —     |   |   |   | 1.2 | % |   | 0.5 | % |
| Income (loss) before income taxes and accrued  dividends and accretion on mandatorily redeemable preferred stock |       |                 | 3.0        | % |   |   | (0.7 | )% |   | (1.2 | )% |
| Income tax  expense (benefit)                                                                                    |       |                 | 1.4        | % |   |   | 0.6 | % |   | (1.5 | )% |
| Accrued dividends  and accretion on mandatorily redeemable preferred stock                                       |       |                 | 1.9        | % |   |   | 0.9 | % |   | — |   |
| Net income (loss)                                                                                                |       |                 | (0.3       | )% |   |   | (2.2 | )% |   | 0.3 | % |

 

**Description ofTerms**

*Revenues* consistof revenues from comparable restaurants, new restaurants and managementagreements. For purposes of comparable restaurant sales, a restaurant isincluded in the comparable restaurant base in the first full quarter followingthe eighteenth month of operations. New restaurant revenues include revenuesfrom restaurants we opened during the period under discussion.

*Restaurantoperating costs* consist of:

·       foodand beverage costs;

·       laborcosts, consisting of restaurant management salaries, hourly staff payroll andother payroll-related items including taxes and fringe benefits;

·       operatingcosts, consisting of advertising, maintenance, utilities, 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.

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*General and administrative expenses*consist of expenses associated with corporate administrative functions thatsupport development and restaurant operations and provide an infrastructure tosupport future growth, including management and staff salaries, employeebenefits, travel, legal and professional fees, technology and market research.

*Restaurant pre-opening costs*,which are expensed as incurred, consist of costs incurred prior to opening anew restaurant and are comprised principally of manager salaries andrelocation, employee payroll and related training costs for new employees,including practice and rehearsal of service activities. Restaurant pre-openingcosts also include non-cash rent expense during the construction period.

*Depreciationand amortization* consists of depreciation of equipment andamortization of leasehold improvements and capitalized loan costs.

**FinancialPerformance Overview**

The following arehighlights of our financial performance over the three-year period ended December 25,2004:

·       Yearover year comparable restaurant sales in 2004 increased 3.8%, a significantimprovement over the 1.1% increase in 2003 and the 2.7% decline in 2002.

·       Revenuesincreased 21.4% in 2004 compared to 2003 to a record high of$238.8 million. The increase was primarily due to revenues generated bythe nine company-owned restaurants opened in 2004 coupled with our 3.8%positive comparable restaurant sales. Revenues increased 9.2% to$196.7 million in 2003 compared to 2002. The increase was primarily due torevenues generated by the three company-owned restaurants opened in 2003 andthe incremental sales by the three company-owned restaurants opened in 2002,coupled with our 1.1% positive comparable restaurant sales.

·       Wereported net income of $0.7 million in 2004 primarily due to thefollowing;

·        Operatingincome was $6.8 million, an increase of $0.7 million compared to 2003 primarilydue to the higher revenues, partially offset by a decrease in the operatingmargin as a percentage of revenues;

·        Redemptioncosts for the 13% senior exchangeable preferred stock of our wholly ownedsubsidiary, including $5.8 million in accretion and dividends, all of which wasredeemed in 2004 in connection with our initial public offering;

·        $4.2 millionrelated to management fees and non-compete payments, which were terminated in2004 in connection with our initial public offering;

·        $1.3 millionrelated to the write-off of deferred loan costs of previously capitalized costsfrom our terminated credit facility in 2004;

·        Generaland administrative expenses as a percentage of revenues were 5.1% in 2004 and 5.0%in 2003, an increase from 4.2% in 2002. Although general and administrativeexpenses as a percentage of revenues remained relatively flat in 2004 comparedto 2003, the 2004 expenses reflect increases in salary and related expensesassociated with the oversight and administrative support of additionalrestaurants coupled with costs of being a publicly traded company, partiallyoffset by a decrease due to a $1.2 million expense in 2003 to settle aCalifornia labor dispute; and

·        Atax benefit of $3.7 million primarily related to the recognition of certaindeferred tax assets.

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**2004 (52 weeks)Compared to 2003 (52 weeks)**

*Revenues.  *Revenuesincreased by $42.0 million, or 21.4%, to $ 238.8 million in 2004 from$196.7 million in 2003. This increase was attributable to revenues of$25.9 million generated by nine company-owned restaurants opened in 2004,a $9.7 million increase in revenues in 2004 from restaurants opened in2003, and a $6.4 million increase from restaurants opened prior to 2003. Comparablerestaurant sales were positive 3.8% in 2004, primarily as the result of higherpricing.

*Food and Beverage Costs.  *Foodand beverage costs increased by $12.9 million, or 22.3%, to$70.9 million in 2004 from $58.0 million in 2003. This increase wasprimarily due to the nine company-owned restaurants opened in 2004. Food andbeverage costs as a percentage of revenues increased to 29.7% in 2004 comparedto 29.5% in 2003 primarily related to product handling inefficiency at the ninecompany-owned restaurants opened in 2004.

*Labor Costs.  *Laborcosts increased by $13.4 million, or 21.8%, to $75.1 million in 2004from $61.6 million in 2003. This increase was primarily due to the ninecompany-owned restaurants opened in 2004. Labor costs as a percentage ofrevenues increased to 31.4% in 2004 from 31.3% in 2003. Labor costs as apercentage of revenues decreased for the comparable restaurants primarily dueto leverage resulting from the higher average volumes for 2004. This was offsetby the impact of the new restaurants that typically experience lowerproductivity and higher training costs during the first and second year ofoperations as the new employees learn our operating model.

*Operating Costs.  *Operatingcosts increased by $6.0 million, or 20.4%, to $35.2 million in 2004 from$29.2 million in 2003. This increase was primarily due to the ninecompany-owned restaurants opened in 2004. We also experienced higher energycosts in 2004. Operating costs as a percentage of revenues decreased to 14.7%in 2004 from 14.9% in 2003. Several of the operating costs included in thiscost category are either fixed or semi-variable. As a result, operating costsas a percentage of revenues decreased due to the 3.8% comparable restaurantsales increase in 2004.

*Occupancy Costs.  *Occupancycosts increased by $4.5 million, or 26.7%, to $21.4 million in 2004 from $16.9million in 2003 primarily due to the occupancy costs of the restaurants openedin 2004. Occupancy costs as a percentage of revenues increased to 9.0% in 2004from 8.6% in 2003 primarily due to occupancy costs as a percentage of revenuesfor the restaurants opened in 2004 being higher than occupancy costs as apercentage of revenues for the comparable restaurants. Non-cash rents were $1.9 million,or 0.8% of revenues and $1.7 million, or 0.9% of revenues for 2004 and2003, respectively.

*General and Administrative Expenses.  *Generaland administrative expenses increased by $2.3 million, or 23.5%, to $12.1 millionin 2004 from $9.8 million in 2003. General and administrative expenses asa percentage of revenues were 5.1% in 2004 and 5.0% in 2003. Although generaland administrative expenses as a percentage of revenues remained relatively flatin 2004 as compared to 2003, the 2004 expenses reflect increases in salary andrelated expenses associated with the oversight and administrative support ofadditional restaurants coupled with costs of being a publicly traded company,partially offset by a decrease due to a $1.2 million expense in 2003 tosettle a California labor dispute.

*Restaurant Pre-Opening Costs.  *Therewere nine and three company-owned restaurants opened in 2004 and 2003,respectively. Restaurant pre-opening costs increased by $1.2 million, or 96.3%,to $2.4 million in 2004 from $1.2 million in 2003, primarily due to theincreased number of restaurants opened in 2004 compared to 2003.

*Depreciation and Amortization.  *Depreciationand amortization increased by $0.9 million, or 8.8%, to $10.7 million in 2004from $9.9 million in 2003. The increase was primarily due to the addition ofnine company-owned restaurants in 2004.

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*Management Fees and Covenants Not toCompete.  *Prior to our initial public offering, we paidannual management fees of $1.1 million to each of BRS and Castle Harlan. Affiliatesof each of BRS and Castle Harlan had significant ownership interests in theCompany at the time of the agreement terminations. Management fees recognizedas expenses totaled $3.3 million and $2.2 million for 2004 and 2003,respectively. The amount of $3.3 million paid for 2004 includes$1.1 million paid to each of BRS and Castle Harlan for the termination ofthe management agreements as of June 25, 2004. Pursuant to covenant not tocompete agreements with certain stockholders, we expensed $0.9 million and$0.35 million for 2004 and 2003, respectively. The management feeagreements and all but one of the covenants not to compete agreements wereterminated in connection with our initial public offering.

*Interest Expense.  *Interestexpense decreased by $0.4 million, or 12.7%, to $2.7 million in 2004,from $3.1 million in 2003 primarily due to a $12.1 million decreasein the average outstanding debt balance as a result of the payoff of our priorcredit facility in connection with our initial public offering.

*Accrued Dividends and Accretion onMandatorily Redeemable Preferred Stock.  *Dividends andaccretive rights of a subsidiary’s redeemable preferred stock are reflected asaccrued dividends and accretion on mandatorily redeemable preferred stock inthe consolidated financial statements. Proceeds from our initial publicoffering were used to redeem all of the preferred stock. See “Liquidity andCapital Resources.”

*Write Off of Deferred Loan Costs onEarly Extinguishment of Debt.  *In connection with a newrevolving credit facility, in July 2004 we wrote off deferred loan costsrelating to the prior credit facility in the amount of $1.3 million. Inconnection with a then new revolving credit facility, in October 2003 wewrote off deferred loan costs relating to the prior credit facility in theamount of $2.3 million.

*Income Tax (Benefit) Expense*.   In2004, the Company recognized an income tax benefit of $3.7 million primarilyrelated to a reduction in the deferred tax asset valuation allowance of $1.2million and FICA Tip Credits of $3.7 million (net of reduction in net operatingloss carry forward), offset by the income tax expense of $1.1 million oncurrent earnings before the “accrued dividends and accretion on mandatorilyredeemable preferred stock.” In 2003, our income tax expense was $1.3 million.Our effective tax rate in 2004 and 2003 was (123.8%) and 109.6%, respectively.The effective tax rate in 2004 and 2003 was significantly impacted by thechange in the valuation allowance, the accrued dividends and accretion onmandatorily redeemable preferred stock which is not deductible for income taxpurposes, and in 2004 by the FICA Tip Credits. We expect our effective incometax rate to be approximately 31% in 2005.

*NetIncome (Loss).  *Net income was $0.7 million in 2004compared to a net loss of ($4.4) million in 2003. The increase was primarilydue to a $3.7 million tax benefit primarily from the recognition of deferredtax assets and a 21.4% increase in revenues primarily due from the opening of ninecompany-owned restaurants in 2004.

**2003 (52 weeks)Compared to 2002 (52 weeks)**

*Revenues.  *Revenuesincreased by $16.6 million, or 9.2%, to $196.7 million in 2003 from$180.1 million in 2002. This increase was attributable to revenues of$4.5 million generated by three restaurants opened in 2003, a$9.8 million increase in revenues in 2003 for restaurants that opened in2002, and a $2.3 million increase for restaurants opened prior to 2002. Comparablerestaurant sales were positive 1.1% in 2003. Approximately 0.3% of thecomparable restaurant sales increase was attributable to an increased customercount and the remainder was attributable to increased per meal spending.

*Food and Beverage Costs.  *Foodand beverage costs increased by $4.8 million, or 9.0%, to$58.0 million in 2003 from $53.2 million in 2002. This increase wasprimarily due to the three restaurants opened in 2003. Food and beverage costsas a percentage of revenues remained unchanged at 29.5% for both 2002 and 2003.

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*Labor Costs.  *Laborcosts increased by $5.5 million, or 9.8%, to $61.6 million in 2003from $56.1 million in 2002. This increase was primarily due to the threerestaurants opened in 2003. Labor costs as a percentage of revenues increasedslightly to 31.3% in 2003 from 31.2% in 2002, primarily due to increased worker’scompensation insurance rates.

*Operating Costs.  *Operatingcosts increased by $2.8 million, or 10.7%, to $29.2 million in 2003from $26.4 million in 2002. This increase was primarily due to the threerestaurants opened in 2003. The increase in operating costs as a percentage ofrevenues reflected increased marketing expenses, coupled with the impact ofhigher utility rates. We increased restaurant-level marketing to support localcommunity activities in an effort to offset decreases in customer trafficcaused by the weak economic environment. Operating costs as a percentage ofrevenues increased slightly from 14.7% in 2002 to 14.9% in 2003.

*Occupancy Costs.  *Occupancycosts increased by $1.6 million, or 10.0%, to $16.9 million in 2003 from $15.3million in 2002 primarily due to the occupancy costs of the restaurants openedin 2003. Occupancy costs as a percentage of revenues increased to 8.6% in 2003from 8.5% in 2002 primarily due to occupancy costs as a percentage of revenuesfor the restaurants opened in 2003 being higher than occupancy costs as apercentage of revenues for the comparable restaurants. Non-cash rents were $1.7 million,or 0.9% of revenues and $1.8 million, or 1.0% of revenues for 2003 and2002, respectively.

*General and Administrative Expenses.  *Generaland administrative expenses increased by $2.2 million, or 28.9%, to$9.8 million in 2003 from $7.6 million in 2002. This increase wasprimarily due to a $1.2 million expense to settle a California labordispute, coupled with higher training costs to ready new management for theseven new restaurant openings in the first half of 2004. General andadministrative expenses as a percentage of revenues increased from 4.2% in 2002to 5.0% in 2003.

*Restaurant Pre-Opening Costs.  *Therewere three company-owned restaurants opened in each of 2003 and 2002. Restaurantpre-opening costs increased $0.2 million, or 21.2%, to $1.2 millionin 2003 from $1.0 million in 2002 primarily due to pre-opening costsincurred in the fourth quarter of 2003 related to the opening of fourrestaurants early in the first quarter of 2004.

*Depreciation and Amortization.  *Depreciationand amortization increased by $1.0 million, or 11.9%, to $9.9 millionin 2003 from $8.8 million in 2002. The increase was primarily due to afull year’s depreciation as compared to partial year’s depreciation on the threecompany-owned restaurants opened in 2002 and a partial year’s depreciation onthe three company-owned restaurants opened in 2003.

*Management Fees and Covenants Not toCompete.  *We paid an aggregate amount of$2.2 million in management fees to BRS and Castle Harlan, Inc. in2003, both of which have ownership interests in our company. In addition, wepaid an aggregate amount of $0.35 million to William P. McCormick andDouglas L. Schmick pursuant to covenants not to compete. We expensed$2.6 million in both 2003 and 2002. The management fee agreements and thecovenants not to compete were terminated in connection with our publicoffering.

*Impairment of Assets.  *Wereview property and equipment (which includes leasehold improvements) forimpairment when events or circumstances indicate these assets might be impaired.We test impairment using historical cash flow and other relevant facts andcircumstances as the primary basis for our estimates of future cash flows. During2003, we recorded a loss on impairment of long-lived assets in the amount of$1.5 million. The charge was related to the partial impairment of fixturesand equipment and leasehold improvements at one restaurant. This restaurant hasexperienced a decline in cash flows due to the location of the restaurant.

*Write Off of Deferred Loan Costs onEarly Extinguishment of Debt.  *In connection with a thennew revolving credit facility, in October 2003 we wrote off deferred loancosts relating to the prior credit facility in the amount of $2.3 millionand capitalized loan costs relating to the then new revolving credit facilityin the amount of $1.6 million.

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*Interest Expense.  *Interestexpense decreased by $0.7 million, or 17.5%, to $3.1 million in 2003from $3.7 million in 2002 primarily due to a 79 basis point decrease inaverage interest rates coupled with an $8.6 million decrease in theaverage outstanding debt balance.

*Income Tax Expense.  *Incometax expense decreased by $1.2 million, or 48.5%, to $1.3 million in2003 from $2.6 million in 2002 due to a decrease in income before income taxesand accrued dividends and accretion on mandatorily redeemable preferred stockas well as the recognition of a $1.2 million valuation allowance againstdeferred tax assets.

*Accrued Dividends and Accretion onMandatorily Redeemable Preferred Stock.  *Dividends andaccretive rights of a subsidiary’s redeemable preferred stock are reflected asaccrued dividends and accretion on mandatorily redeemable preferred stock inthe consolidated financial statements. Proceeds from our initial publicoffering were used to redeem the preferred stock.

*NetIncome (Loss).  *Net loss was ($4.4) million in 2003compared to a net loss of ($0.5) million in 2002. The decrease was dueprimarily to the write-off of $2.3 million in deferred loan costs, a$1.5 million charge related to the impairment of assets and the$1.2 million expense to settle a California labor dispute.

**PotentialFluctuations in Quarterly Results and Seasonality**

Our quarterly operating results may fluctuatesignificantly as a result of a variety of factors. See “Factors That May AffectOur Business and the Price of Our Stock.”

Our business is also subject to seasonal fluctuations.Historically, revenues in most of our restaurants have been higher during thespring months and winter holiday season. For the reasons and factors discussedabove our quarterly and annual operating results and comparable restaurantsales may fluctuate significantly quarterly. Accordingly, results for any onequarter are not necessarily indicative of results to be expected for any otherquarter or for any year and comparable restaurant sales for any particularfuture period may decrease. In the future, operating results may fall below theexpectations of securities analysts and investors. If this occurs, the price ofour common stock would likely decrease.

The unaudited data for the first, second and thirdquarters of 2004 and for each of the quarters in 2003 and 2002 has beenrestated to correct our historical accounting for certain lease transactions. Additionaldetails regarding the restatement are included in Part II—Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Restatementof Financial Information,” and Note 2 to Financial Statements included in Part II—Item8.

34

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Thefollowing table sets forth quarterly unaudited operating results in each of the2004 fiscal quarters:

**McCormick & Schmick’s SeafoodRestaurants, Inc. and Subsidiaries Consolidated Statements of Operations—Unaudited(In thousands, except per share data)**
| ** **                                                                                                       | ** ** | **2004**     | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|
| ** **                                                                                                       | ** ** | **Q1**       | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                                                                       | ** ** | **Restated** | ** ** | **Restated** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| Revenues                                                                                                         |       | $            | 54,513     |   | $ | 59,723 |   | $ | 59,597 |   | $ | 64,924 |   |
| Restaurant  operating costs                                                                                      |       |         |       |   |   |   |   |   |   |
| Food and beverage                                                                                                |       | 16,286       |       | 17,931 |   | 17,776 |   | 18,880 |   |
| Labor                                                                                                            |       | 17,810       |       | 18,732 |   | 19,013 |   | 19,526 |   |
| Operating                                                                                                        |       | 7,874        |       | 8,744 |   | 8,947 |   | 9,639 |   |
| Occupancy                                                                                                        |       | 4,848        |       | 5,397 |   | 5,434 |   | 5,722 |   |
| Total restaurant operating costs                                                                                 |       | 46,818       |       | 50,804 |   | 51,170 |   | 53,767 |   |
| General and  administrative expenses                                                                             |       | 2,549        |       | 2,616 |   | 3,340 |   | 3,557 |   |
| Restaurant  pre-opening costs                                                                                    |       | 994          |       | 1,120 |   | 112 |   | 167 |   |
| Depreciation and  amortization                                                                                   |       | 2,683        |       | 2,902 |   | 2,690 |   | 2,448 |   |
| Management fees  and covenants not to compete                                                                    |       | 638          |       | 3,603 |   | — |   | — |   |
| Total costs and expenses                                                                                         |       | 53,682       |       | 61,045 |   | 57,312 |   | 59,939 |   |
| Operating income  (loss)                                                                                         |       | 831          |       | (1,322 | ) | 2,285 |   | 4,985 |   |
| Interest expense                                                                                                 |       | 857          |       | 939 |   | 570 |   | 314 |   |
| Accrued dividends  and accretion on mandatorily redeemable preferred stock                                       |       | 1,012        |       | 1,054 |   | 3,693 |   | — |   |
| Write off of  deferred loan costs on early extinguishment of debt                                                |       | —       |       | — |   | 1,288 |   | — |   |
| Income (loss) before income taxes and accrued  dividends and accretion on mandatorily redeemable preferred stock |       | (1,038       | )          | (3,315 | ) | (3,266 | ) | 4,671 |   |
| Income tax  expense (benefit)                                                                                    |       | (15          | )          | (734 | ) | 71 |   | (2,973 | ) |
| Net income (loss)                                                                                                |       | $            | (1,023     | ) | $ | (2,581 | ) | $ | (3,337 | ) | $ | 7,644 |   |
| Net income (loss) per  share(1)                                                                                  |       |         |       |   |   |   |   |   |   |
| Basic and diluted                                                                                                |       | $            | (0.13      | ) | $ | (0.33 | ) | $ | (0.27 | ) | $ | 0.55 |   |
| Shares used in computing  net income (loss) per share(1)                                                         |       |         |       |   |   |   |   |   |   |
| Basic                                                                                                            |       | 7,782        |       | 7,782 |   | 12,299 |   | 13,782 |   |
| Diluted                                                                                                          |       | 7,782        |       | 7,782 |   | 12,299 |   | 13,896 |   |

----

(1)          For periods prior to our initial public offering, we have givenretroactive effect to the completion of our corporate reorganization incalculating common shares outstanding.

35

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**McCormick &Schmick’s Seafood Restaurants, Inc. and SubsidiariesConsolidated Balance Sheets—Unaudited(In thousands, except per share data)**
| ** **                                                                                                  | ** ** | **2004**       | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                                                  | ** ** | **Q1**         | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                                                                  | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| **Assets**                                                                                                  |       |           |       |   |   |   |   |   |   |
| Current assets                                                                                              |       |           |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                   |       | $              | 2,404      |   | $ | 1,101 |   | $ | 2,573 |   | $ | 451 |   |
| Trade accounts receivable, net                                                                              |       | 5,605          |       | 7,049 |   | 5,425 |   | 4,988 |   |
| Inventories                                                                                                 |       | 2,938          |       | 3,207 |   | 3,219 |   | 3,384 |   |
| Prepaid expenses and other current assets                                                                   |       | 3,067          |       | 3,673 |   | 2,891 |   | 2,846 |   |
| Deferred income taxes                                                                                       |       | 96             |       | 96 |   | 96 |   | 830 |   |
| Total current assets                                                                                        |       | 14,110         |       | 15,126 |   | 14,204 |   | 12,499 |   |
| Equipment and  leasehold improvements, net                                                                  |       | 84,958         |       | 89,305 |   | 90,574 |   | 92,744 |   |
| Other assets                                                                                                |       | 54,381         |       | 54,306 |   | 53,707 |   | 53,821 |   |
| Goodwill                                                                                                    |       | 19,996         |       | 19,996 |   | 19,996 |   | 19,996 |   |
| Total assets                                                                                                |       | $173,445       |       | $178,733 |   | $178,481 |   | $179,060 |   |
| **Liabilities  and Members’ / Stockholders’ Equity**                                              |       |           |       |   |   |   |   |   |   |
| Current  liabilities                                                                                        |       |           |       |   |   |   |   |   |   |
| Book overdraft                                                                                              |       | $              | 2,733      |   | $ | 3,147 |   | $ | 2,596 |   | $ | 429 |   |
| Accounts payable                                                                                            |       | 10,370         |       | 14,462 |   | 10,839 |   | 12,875 |   |
| Accrued expenses                                                                                            |       | 14,326         |       | 14,510 |   | 15,305 |   | 15,197 |   |
| Capital lease obligations, current portion                                                                  |       | 422            |       | 428 |   | 435 |   | 433 |   |
| Derivative instrument—interest rate swap, current                                                      |       | 642            |       | 363 |   | 174 |   | — |   |
| Total current liabilities                                                                                   |       | 28,493         |       | 32,910 |   | 29,349 |   | 28,934 |   |
| Revolving credit  facility                                                                                  |       | 50,500         |       | 51,000 |   | 17,000 |   | 12,000 |   |
| Mandatorily  redeemable preferred stock                                                                     |       | 24,149         |       | 25,203 |   | — |   | — |   |
| Other long-term  liabilities                                                                                |       | 8,064          |       | 10,529 |   | 11,338 |   | 11,791 |   |
| Capital lease  obligations, noncurrent portion                                                              |       | 1,032          |       | 923 |   | 812 |   | 707 |   |
| Deferred income  taxes                                                                                      |       | 4,356          |       | 3,711 |   | 3,841 |   | 1,558 |   |
| Total liabilities                                                                                           |       | 116,594        |       | 124,276 |   | 62,340 |   | 54,990 |   |
| Members’ / Stockholders’ equity                                                                   |       |           |       |   |   |   |   |   |   |
| Members’ equity  in McCormick & Schmick Holdings, LLC                                    |       | 62,822         |       | 62,818 |   | — |   | — |   |
| Common stock,  $0.001 par value, 120,000 shares authorized, 13,782 shares issued  and outstanding |       | —         |       | — |   | 14 |   | 14 |   |
| Additional paid  in capital                                                                                 |       | —         |       | — |   | 127,695 |   | 127,917 |   |
| Accumulated  deficit                                                                                        |       | (5,587         | )          | (8,167 | ) | (11,504 | ) | (3,861 | ) |
| Accumulated other  comprehensive loss                                                                       |       | (384           | )          | (194 | ) | (64 | ) | — |   |
| Total members’ / stockholders’ equity                                                             |       | 56,851         |       | 54,457 |   | 116,141 |   | 124,070 |   |
| Total liabilities  and members’ / stockholders’ equity                                            |       | $173,445       |       | $178,733 |   | $178,481 |   | $179,060 |   |

 

36

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**McCormick &Schmick’s Seafood Restaurants, Inc. and SubsidiariesConsolidated Statements of Cash Flows—Unaudited(In thousands)**
| ** **                                                                               | ** ** | **2004**       | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------|------------|
| ** **                                                                               | ** ** | **Q1**         | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                                               | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| **Operating activities**                                                                 | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                                        |       | $              | (1,023     | ) | $ | (2,581 | ) | $ | (3,337 | ) | $ | 7,644 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities |       |           |       |   |   |   |   |   |   |
| Depreciation and amortization                                                            |       | 2,683          |       | 2,902 |   | 2,690 |   | 2,448 |   |
| Amortization of unearned compensation                                                    |       | 3              |       | 2 |   | 37 |   | — |   |
| Deferred income taxes                                                                    |       | (15            | )          | (734 | ) | 71 |   | (3,127 | ) |
| Write off of deferred loan costs on early  extinguishment of debt                        |       | —         |       | — |   | 1,288 |   | — |   |
| Accrued dividends and accretion on mandatorily redeemable  preferred stock               |       | 1,012          |       | 1,054 |   | 3,693 |   | — |   |
| Changes in  operating assets and liabilities                                             |       |           |       |   |   |   |   |   |   |
| Trade accounts receivable                                                                |       | (1,916         | )          | 614 |   | 182 |   | (179 | ) |
| Inventories                                                                              |       | (234           | )          | (269 | ) | (12 | ) | (165 | ) |
| Prepaid expenses and other current assets                                                |       | (700           | )          | (606 | ) | 782 |   | 45 |   |
| Accounts payable                                                                         |       | (846           | )          | 4,092 |   | (3,623 | ) | 2,036 |   |
| Accrued expenses                                                                         |       | 1,628          |       | 184 |   | 796 |   | (109 | ) |
| Other long-term liabilities                                                              |       | 1,315          |       | 2,465 |   | 808 |   | 454 |   |
| Net cash provided by operating activities                                                |       | 1,907          |       | 7,123 |   | 3,375 |   | 9,047 |   |
| **Investing activities**                                                                 |       |           |       |   |   |   |   |   |   |
| Acquisition of  equipment and leasehold improvements                                     |       | (11,482        | )          | (9,164 | ) | (2,435 | ) | (3,936 | ) |
| Other assets                                                                             |       | (53            | )          | (67 | ) | 4 |   | (151 | ) |
| Net cash used in investing activities                                                    |       | (11,535        | )          | (9,231 | ) | (2,431 | ) | (4,087 | ) |
| **Financing activities**                                                                 |       |           |       |   |   |   |   |   |   |
| Increase  (decrease) in book overdraft                                                   |       | (2,319         | )          | 414 |   | (551 | ) | (2,167 | ) |
| Loan costs                                                                               |       | —         |       | — |   | (775 | ) | (30 | ) |
| Borrowings made  on revolving credit facility                                            |       | 25,500         |       | 14,500 |   | 22,500 |   | 3,000 |   |
| Payments made on  revolving credit facility                                              |       | (13,500        | )          | (14,000 | ) | (56,500 | ) | (8,000 | ) |
| Proceeds from  issuance of common stock, net of offering costs                           |       | —         |       | — |   | 64,854 |   | 222 |   |
| Payments on  redemption of senior preferred stock                                        |       | —         |       | — |   | (28,896 | ) | — |   |
| Payments on capital  lease obligations                                                   |       | (102           | )          | (103 | ) | (104 | ) | (107 | ) |
| Purchase of  Class B units                                                          |       | —         |       | (6 | ) | — |   | — |   |
| Net cash provided by (used in) financing activities                                      |       | 9,579          |       | 805 |   | 528 |   | (7,082 | ) |
| Net increase (decrease) in cash and cash equivalents                                     |       | (49            | )          | (1,303 | ) | 1,472 |   | (2,122 | ) |
| Cash and cash  equivalents, beginning of period                                          |       | 2,453          |       | 2,404 |   | 1,101 |   | 2,573 |   |
| Cash and cash  equivalents, end of period                                                |       | $              | 2,404      |   | $ | 1,101 |   | $ | 2,573 |   | $ | 451 |   |

 

37

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Thefollowing table sets forth quarterly unaudited operating results in each of the2002 and 2003 fiscal quarters:
| ** **                                                                                                       | ** ** | **2002**                                                           | ** ** | **2003**                 | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                       | ** ** | **Q1**                                                             | ** ** | **Q2**                   | ** ** | **Q3** | ** ** | **Q4** | ** ** | **Q1** | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| ** **                                                                                                       | ** ** | **(In thousands, except per share data)** | ** ** |
| ** **                                                                                                       | ** ** | ** Restated **                                           | ** ** | ** Restated ** | ** ** | ** Restated ** | ** ** | ** Restated ** | ** ** | ** Restated ** | ** ** | ** Restated ** | ** ** | ** Restated ** | ** ** | ** Restated ** | ** ** |
| Revenues                                                                                                         |       |                                                               | $          | 41,840                   |       |   |   | $ | 46,549 |   |   |   | $ | 43,600 |   |   |   | $ | 48,115 |   |   |   | $ | 45,049 |   |   |   | $ | 48,642 |   |   |   | $ | 48,895 |   |   |   | $ | 54,131 |   |   |
| Restaurant operating costs                                                                                       |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Food and beverage                                                                                                |       |                                                               | 12,353     |                     |       |   | 13,721 |   |   |   | 12,957 |   |   |   | 14,137 |   |   |   | 13,397 |   |   |   | 14,163 |   |   |   | 14,522 |   |   |   | 15,877 |   |   |
| Labor                                                                                                            |       |                                                               | 13,414     |                     |       |   | 14,456 |   |   |   | 13,786 |   |   |   | 14,491 |   |   |   | 14,464 |   |   |   | 15,109 |   |   |   | 15,488 |   |   |   | 16,583 |   |   |
| Operating                                                                                                        |       |                                                               | 6,121      |                     |       |   | 6,658 |   |   |   | 6,347 |   |   |   | 7,280 |   |   |   | 6,811 |   |   |   | 7,082 |   |   |   | 7,274 |   |   |   | 8,077 |   |   |
| Occupancy                                                                                                        |       |                                                               | 3,702      |                     |       |   | 3,929 |   |   |   | 3,732 |   |   |   | 3,986 |   |   |   | 3,923 |   |   |   | 4,170 |   |   |   | 4,213 |   |   |   | 4,584 |   |   |
| Total restaurant operating costs                                                                                 |       |                                                               | 35,590     |                     |       |   | 38,764 |   |   |   | 36,822 |   |   |   | 39,894 |   |   |   | 38,595 |   |   |   | 40,524 |   |   |   | 41,497 |   |   |   | 45,121 |   |   |
| General and administrative expenses                                                                              |       |                                                               | 1,786      |                     |       |   | 2,132 |   |   |   | 1,879 |   |   |   | 1,779 |   |   |   | 1,941 |   |   |   | 2,016 |   |   |   | 2,126 |   |   |   | 3,686 |   |   |
| Restaurant pre-opening costs                                                                                     |       |                                                               | 3          |                     |       |   | 43 |   |   |   | 441 |   |   |   | 519 |   |   |   | 4 |   |   |   | 101 |   |   |   | 712 |   |   |   | 402 |   |   |
| Depreciation and amortization                                                                                    |       |                                                               | 2,151      |                     |       |   | 2,161 |   |   |   | 2,059 |   |   |   | 2,437 |   |   |   | 2,385 |   |   |   | 2,375 |   |   |   | 2,450 |   |   |   | 2,643 |   |   |
| Management fees and covenants not to compete                                                                     |       |                                                               | 637        |                     |       |   | 637 |   |   |   | 637 |   |   |   | 639 |   |   |   | 637 |   |   |   | 637 |   |   |   | 637 |   |   |   | 639 |   |   |
| Impairment of assets                                                                                             |       |                                                               | —     |                     |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,513 |   |   |
| Total costs and expenses                                                                                         |       |                                                               | 40,167     |                     |       |   | 43,737 |   |   |   | 41,838 |   |   |   | 45,268 |   |   |   | 43,562 |   |   |   | 45,653 |   |   |   | 47,422 |   |   |   | 54,004 |   |   |
| Operating income                                                                                                 |       |                                                               | 1,673      |                     |       |   | 2,812 |   |   |   | 1,762 |   |   |   | 2,847 |   |   |   | 1,487 |   |   |   | 2,989 |   |   |   | 1,473 |   |   |   | 127 |   |   |
| Interest expense                                                                                                 |       |                                                               | 1,048      |                     |       |   | 948 |   |   |   | 914 |   |   |   | 810 |   |   |   | 832 |   |   |   | 768 |   |   |   | 703 |   |   |   | 766 |   |   |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock                                       |       |                                                               | —     |                     |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 950 |   |   |   | 951 |   |   |
| Write off of deferred loan costs on early  extinguishment of debt                                                |       |                                                               | —     |                     |       |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,313 |   |   |
| Income (loss) before income taxes and accrued  dividends and accretion on mandatorily redeemable preferred stock |       |                                                               | 625        |                     |       |   | 1,864 |   |   |   | 848 |   |   |   | 2,037 |   |   |   | 655 |   |   |   | 2,221 |   |   |   | (180 | ) |   |   | (3,903 | ) |   |
| Income tax expense (benefit)                                                                                     |       |                                                               | 307        |                     |       |   | 883 |   |   |   | 416 |   |   |   | 964 |   |   |   | 572 |   |   |   | 1,545 |   |   |   | 709 |   |   |   | (1,503 | ) |   |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock                                       |       |                                                               | 818        |                     |       |   | 818 |   |   |   | 855 |   |   |   | 856 |   |   |   | 916 |   |   |   | 916 |   |   |   | — |   |   |   | — |   |   |
| Net income (loss)                                                                                                |       |                                                               | $          | (500                     | )          |   |   | $ | 163 |   |   |   | $ | (423 | ) |   |   | $ | 217 |   |   |   | $ | (833 | ) |   |   | $ | (240 | ) |   |   | $ | (889 | ) |   |   | $ | (2,400 | ) |   |
| Net income (loss) per share(1)                                                                                   |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                                                                                |       |                                                               | $          | (0.06                    | )          |   |   | $ | 0.02 |   |   |   | $ | (0.05 | ) |   |   | $ | 0.03 |   |   |   | $ | (0.11 | ) |   |   | $ | (0.03 | ) |   |   | $ | (0.11 | ) |   |   | $ | (0.31 | ) |   |
| Shares used in computing net income (loss) per share(1)                                                          |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                                                                                |       |                                                               | 7,782      |                     |       |   | 7,782 |   |   |   | 7,782 |   |   |   | 7,782 |   |   |   | 7,782 |   |   |   | 7,782 |   |   |   | 7,782 |   |   |   | 7,782 |   |   |

----

(1)             For periods prior to our initial public offering, wegive retroactive effect to the completion of our corporate reorganization incalculating common shares outstanding.

38

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**Liquidity and Capital Resources**

Our primary cash needs have been for new restaurantconstruction, working capital and general corporate purposes, includingpayments under credit facilities. Our main sources of cash have been issuanceof common stock, net cash provided by operating activities and borrowings undercredit facilities.

On July 20,2004, we completed our initial public offering. In connection with the initialpublic offering, we:

·       Issued7,179,357 shares of common stock in the merger to the holders of McCormick &Schmick Holdings LLC’s units, not including 602,992 shares issuable upon theexercise of warrants at a nominal price to The Bell Atlantic Master Trust. SeeNote 14, “Members’ Equity,” to our Financial Statements.

·       Sold6,000,000 shares at $12.00 per share, raising approximately $65.1 millionafter underwriting discounts and transaction costs.

·       Repaid$51.5 million of indebtedness on our then existing credit facility withthe proceeds raised in the initial public offering and from $18.1 millionin loans under a new revolving credit facility, which provides, amongother things, for $50.0 million in revolving credit loans.

·       Paid$28.9 million to The Bell Atlantic Master Trust to redeem all of the 13%senior exchangeable preferred stock of a wholly owned subsidiary.

·       Paid $2.8 million inconnection with the termination of the management agreements and covenant notto compete agreements. 
| ** **                                          | ** ** | **Fiscal Year**    | ** ** |
|-----------------------------------------------------|------------|-------------------------|------------|
| ** **                                          | ** ** | **2002**                | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                                          | ** ** | **Restated**            | ** ** | **Restated** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **(In thousands)** | ** ** |
| Net cash provided  by operating activities          |       | $                       | 14,582     |   | $ | 20,652 |   | $ | 21,452 |   |
| Net cash used in  other investing activities:       |       |                    |       |   |   |   |   |
| Acquisition of equipment and other assets           |       | (8,779                  | )          | (14,956 | ) | (27,284 | ) |
| Net cash provided by (used in) financing activities |       | (4,886                  | )          | (6,188 | ) | 3,830 |   |
| Net increase  (decrease) in cash                    |       | $                       | 917        |   | $ | (492 | ) | $ | (2,002 | ) |

 

Net cash provided by operating activities was $21.5million in 2004, compared to $20.7 million in 2003 and $14.6 million in 2002. Theincrease in net cash provided by operating activities in 2004 compared to 2003was primarily due to an increase in cash received from landlords for leaseincentives. The increase in 2003 consisted primarily of improvements in workingcapital due to better management of payables as well as incremental revenuesfrom the addition of new restaurants.

Net cash used in investing activities was $27.3million in 2004, $15.0 million in 2003 and $8.8 million in 2002. We usecash 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 $3.8million in 2004. Net cash used by financing activities was $6.2 million in2003 and $4.9 million in 2002. Net cash provided by financing activitiesin 2004 consisted primarily of net proceeds from issuance of common stock inconnection with our initial public offering of $65.1 million, offset bypayments on redemption of senior preferred stock of $28.9 million and 

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net proceeds and paymentson our revolving credit facilities of $26.5 million. The net cash used byfinancing activities during 2003 and 2002 was primarily related to financingthe property and equipment purchases for restaurant openings.

On July 23, 2004, we repaid the outstandingbalance on our amended and restated revolving credit facility in the amount of$51.5 million with net proceeds from our initial public offering and$18.3 million in loans under a new revolving credit facility agreement,which provides among other things for $50.0 million in revolving creditloans. Loans under the facility are collateralized by a first priority securityinterest in all of our assets and mature on July 23, 2009. For the yearended December 25, 2004, we recognized a $1.3 million expense relatedto the write-off of unamortized deferred loan costs related to the priorrevolving credit facility.

As of December 25, 2004, the outstanding balanceon our revolving credit facility was $12.0 million. The interest rate onthe credit facility is based on the financial institution’s prime rate plus amargin of 0.25% to 0.75% or the Eurodollar rate plus a margin of 1.75% to2.25%, with margins determined by certain financial ratios. Under our revolvingcredit facility, we are subject to certain financial and non-financialcovenants, including an adjusted leverage ratio, a consolidated cash flow ratioand growth capital expenditures limitations. We were in compliance with thesecovenants as of December 25, 2004.

Our prior revolving credit facility, entered into on October 28,2003, provided for a $70.0 million revolving credit loan. Loans under thisfacility were collateralized by a first priority security interest in all ofthe 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, we had term loans and a$15.0 million revolving credit facility payable to financial institutions.The term loans had quarterly principal payments due in amounts ranging from$0.3 million to $2.1 million and were scheduled to mature between June 2006and June 2008. The interest rates on these term loans were based on thefinancial institution’s prime rate plus a margin of 1.5% to 3.0% or theEurodollar rate plus a margin of 3.0% to 4.25% determined by certain financialratios.

We believe the net cashprovided by operating activities and funds available from our revolving creditfacility will be sufficient to satisfy our working capital and capitalexpenditure requirements, including restaurant construction, pre-opening costsand potential initial operating losses related to new restaurant openings forat least the next 12 months. We believe the cash flows from our operatingactivities and the proceeds from our initial public offering will be sufficientto fund our operations and meet our obligations for the foreseeable future.

**Off-Balance SheetArrangements**

As of December 25,2004 we had no off balance sheet arrangements, as defined in Item 303(a)(4) ofSEC Regulation S-K.

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**ContractualObligations**

Our contractualobligations consist of long-term debt, operating leases (primarily restaurantleases) and capital leases. We lease all of our restaurants and our corporateoffices under non-cancelable operating leases. Most of our restaurants have aninitial operating lease term of 10 to 20 years and options to renew forbetween 5 and 15 additional years. Contractual obligations as of December 25,2004 were as follows:
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                 | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **More than 5 years** | ** ** |
| ** **                          | ** ** | **(in thousands)**                   | ** ** |
| Long-term debt(1)                   |       | $                                         | 12,000     |   |   | $ | — |   |   | $ | — |   | $ | 12,000 |   |   | $ | — |   |   |
| Operating leases                    |       | 183,768                                   |       |   | 16,167 |   |   | 33,986 |   | 31,612 |   |   | 102,003 |   |   |
| Capital leases,  including interest |       | 1,241                                     |       |   | 491 |   |   | 750 |   | — |   |   | — |   |   |
| Purchase obligations(2)             |       | 4,855                                     |       |   | 3,073 |   |   | 1,607 |   | 136 |   |   | 39 |   |   |
| Total                               |       | $                                         | 201,864    |   |   | $ | 19,731 |   |   | $ | 36,343 |   | $ | 43,748 |   |   | $ | 102,042 |   |   |

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(1)          Revolving creditfacility balance as of December 25, 2004 due July 23, 2009. Theinterest rate on the revolving credit facility is based on the financialinstitution’s prime rate plus a margin of 0.25% to 0.75% or the Eurodollar rateplus a margin of 1.75% to 2.25%, with margins determined by certain financialratios.

(2)          Purchaseobligations include commitments related to the construction of new restaurants.

**Critical AccountingPolicies and Use of Estimates**

Our significant accountingpolicies are those that we believe are both important to the portrayal of ourfinancial condition and results and require our most difficult, subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain. We believe our criticalaccounting policies and estimates used in the preparation of our consolidatedfinancial statements are the following:

***Equipment and Leasehold Improvements***

Equipment and leaseholdimprovements are stated at cost less accumulated depreciation and amortization.Equipment consists primarily of restaurant equipment, furniture, fixtures andsmall wares. Depreciation is generally calculated using the straight-linemethod over the estimated useful lives of the related assets. Leaseholdimprovements are amortized using the straight-line method over the shorter ofthe lease term as defined in SFAS No. 13, *Accountingfor Leases*, as amended or the estimated useful life of the asset. Asdiscussed in SFAS No. 13, the lease term includes any period covered by arenewal option where the renewal is reasonably assured because failure to renewthe lease would impose an economic penalty to the lessee. Repairs andmaintenance are expensed as incurred; renewals and betterments are capitalized.Estimated useful lives are generally as follows: equipment—5 to 10 years;furniture and fixtures—5 to 10 years and leasehold improvements—7 to 30years. Judgments and estimates made by us related to the expected useful livesof these assets are affected by factors such as changes in economic conditionsand changes in operating performance. If these assumptions change in thefuture, we may be required to record impairment charges for these assets.

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

We review property and equipment (which includesleasehold improvements) for impairment when events or circumstances indicatethese assets might be impaired. We test impairment using historical cash flowand other relevant facts and circumstances as the primary basis for ourestimates of future cash flows. 

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The analysis is performedat the restaurant level for indicators of permanent impairment. In determiningfuture cash flows, significant estimates are made by us with respect to futureoperating results of each restaurant over its remaining lease term. If assetsare determined to be impaired, the impairment charge is measured by calculatingthe amount by which the asset-carrying amount exceeds its fair value. Thedetermination of asset fair value is also subject to significant judgment. Thisprocess requires the use of estimates and assumptions, which are subject to ahigh degree of judgment. If these assumptions change in the future, we may berequired to record impairment charges for these assets. In our most recentimpairment evaluation for long-lived assets, no additional impairment chargewould have resulted even if there were a permanent 5% reduction in revenues inour restaurants.

During 2003, we recorded aloss on impairment of long-lived assets in the amount of $1.5 million. Thecharge was related to the partial impairment of fixtures and equipment andleasehold improvements at one restaurant. This restaurant has experienced adecline in cash flows due to the location of the restaurant. There were noimpairments during 2002 or 2004.

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

Goodwill and otherindefinite lived assets resulted from our acquisition in 2001. Goodwill andother intangible assets with indefinite lives are not subject to amortization. However,such assets must be tested for impairment whenever events or changes incircumstances indicate that the carrying amount may not be recoverable and atleast annually. We completed our most recent impairment test on balances as of December 25,2004, and determined that there were no impairment losses related to goodwilland other indefinite lived assets. There were no impairments of goodwill orassets with indefinite lives in 2002 or 2003. In assessing the recoverabilityof goodwill and other indefinite lived assets, market values and projectionsregarding estimated future cash flows and other factors are used to determinethe fair value of the respective assets. The estimated future cash flows wereprojected using significant assumptions, including future revenues and expenses.If these estimates or related projections change in the future, we may berequired to record impairment charges for these assets. In our most recentimpairment evaluation for goodwill and other indefinite lived assets, noimpairment charge would have resulted even if a permanent 5% reduction inrevenues were to occur.

***Insurance Liability***

We maintain variousinsurance policies for workers’ compensation, employee health, generalliability, and property damage. Pursuant to those policies, we are responsiblefor losses up to certain limits and are required to estimate a liability thatrepresents our ultimate exposure for aggregate losses below those limits. Thisliability is based on management’s estimates of the ultimate costs to beincurred to settle known claims and claims not reported as of the balance sheetdate. Our estimated liability is not discounted and is based on a number ofassumptions and factors, including historical trends, actuarial assumptions,and economic conditions. If actual trends differ from our estimates, ourfinancial results could be impacted.

***Income Taxes***

We have accounted for, andcurrently account for, income taxes in accordance with SFAS No. 109, *Accounting for Income Taxes*. ThisStatement establishes financial accounting and reporting standards for theeffects of income taxes that result from an enterprise’s activities during thecurrent and preceding years. It requires an asset and liability approach forfinancial accounting and reporting of income taxes. We recognize deferred taxliabilities and assets for the future consequences of events that have beenrecognized in our consolidated financial statements or tax returns. In theevent the future consequences of differences between financial reporting basesand tax bases of our assets and liabilities result in a net deferred tax asset,an evaluation is made of the probability of being able to realize the futurebenefits 

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indicatedby such asset. A valuation allowance related to a deferred tax asset isrecorded when it is more likely than not that some portion or all deferred taxasset will not be realized. The realization of such net deferred tax willgenerally depend on whether we will have sufficient taxable income of anappropriate character within the carry forward period permitted by the tax law.Without sufficient taxable income to offset the deductible amounts and carryforwards, the related tax benefits will expire unused. We have evaluated bothpositive and negative evidence in making a determination as to whether it ismore likely than not that all or some portion of the deferred tax asset willnot be realized. Measurement of deferred items is based on enacted tax laws. Nodeferred tax asset valuation allowance has been recorded as of December 25,2004.

***Operating Leases***

Rent expense for ouroperating leases, which generally have escalating rentals over the term of thelease, is recorded on the straight-line basis over the lease term as defined inSFAS No. 13, *Accounting for Leases*, as amended.The lease term commences on the date which is normally when the property isready for normal tenant improvements (build-out period), when no rent paymentsare typically due under the terms of the lease. The difference between rentexpense and rent paid is recorded as deferred rent liability and is included inthe consolidated balance sheets.

***Recent Accounting Pronouncements***

In December 2003, the Financial AccountingStandards Board (“FASB”) issued FASB Interpretation No. 46 Revised, “Consolidationof Variable Interest Entities—an Interpretation of ARB No. 51” (“FIN 46R”),which provided, among other things, immediate deferral of the application ofFIN 46 for entities that did not originally qualify as special purposeentities, and provided additional scope exceptions for joint ventures withbusiness operations and franchises. The Company’s adoption of FIN 46R did nothave an impact on its consolidated financial statements.

In December 2004, FASBissued SFAS No. 123(R), ‘‘Share-Based Payment’’, which is a revision ofSFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be valued at fair value on the date of grant, and to be expensedover the applicable vesting period. Pro forma disclosure of share-basedpayments effect to the statement of operations is no longer an alternative, andSFAS No. 123(R) is effective for all stock-based awards granted on orafter July 1, 2005. In addition, companies must also recognize compensationexpense related to any awards that are not fully vested as of the effectivedate. Compensation expense for the unvested awards will be measured based onthe fair value of the awards previously calculated in developing the pro formadisclosures in accordance with the provisions of SFAS No. 123. We arecurrently evaluating the effect that the adoption of SFAS No. 123(R) willhave on our financial position and results of operations. The adoption of SFAS No. 123(R) isexpected to increase compensation expense in the future.

**Effect of Inflation**

We do not believeinflation has had a significant effect on our operations during the pastseveral years. We generally have been able to substantially offset increases inour restaurant and operating costs resulting from inflation by altering ourmenu, increasing menu prices or making other adjustments.

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**Factors That May AffectOur Business and the Price 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 growth strategydepends in large part on our ability to open new restaurants and to operatethese restaurants profitably. Delays or failures in opening new restaurantscould impair our ability to meet our growth objectives. We have in the pastexperienced delays in restaurant openings and may experience similar delays inthe future. Our ability to expand our business successfully will depend uponnumerous factors, including:

·       hiring,training and retaining skilled management, chefs and other qualified personnelto open, manage and operate new restaurants;

·       locatingand securing a sufficient number of suitable new restaurant sites in new andexisting markets on acceptable lease terms;

·       managingthe amount of time and construction and development costs associated with theopening of new restaurants;

·       obtainingadequate financing for the construction of new restaurants;

·       securinggovernmental approvals and permits required to open new restaurants in a timelymanner, if at all;

·       successfullypromoting our new restaurants and competing in the markets in which our newrestaurants are located; and

·       generaleconomic conditions.

Some of these factors arebeyond our control. We may not be able to achieve our expansion goals and ournew restaurants may not be able to achieve operating results similar to thoseof our existing restaurants.

***Unexpected expenses and low market acceptance couldadversely affect the profitability of restaurants that we open in new markets.***

Our growth strategyincludes opening restaurants in markets where we have little or no meaningfuloperating experience and in which potential customers may not be familiar withour restaurants. The success of these new restaurants may be affected bydifferent competitive conditions, consumer tastes and discretionary spendingpatterns, and our ability to generate market awareness and acceptance of theMcCormick & Schmick’s brand. As a result, we may incur costs relatedto the opening, operation and promotion of these new restaurants that aregreater than those incurred in other areas. Even though we may incursubstantial additional costs with these new restaurants, they may attract fewercustomers than our more established restaurants in existing markets. Sales atrestaurants that we open in new markets may take longer to reach our averageannual sales, if at all. As a result, the results of operations at our newrestaurants may be inferior to those of our existing restaurants. We may not besuccessful in profitably opening restaurants in new markets.

***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 opened ninecompany-owned restaurants and began operating an additional restaurant under amanagement contract in 2004. We plan to open seven company-owned restaurants in2005. Our 2004 expansion and our future growth may strain our restaurantmanagement systems and resources, financial controls and information systems. Thosedemands on our infrastructure and resources may also adversely 

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affectour ability to manage our existing restaurants. If we fail to continue toimprove our infrastructure or to manage other factors necessary for us to meetour expansion objectives, our operating results could be materially andadversely affected.

***Our ability to raise capital in the future may belimited, which could adversely impact our growth.***

Changes in our operatingplans, acceleration of our expansion plans, lower than anticipated sales,increased expenses or other events described in this section may require us toseek additional debt or equity financing. Financing may not be available onacceptable terms, or at all, and our failure to raise capital when needed couldnegatively impact our growth and our financial condition and results ofoperations. Additional equity financing may be dilutive to the holders of ourcommon stock, and debt financing, if available, may involve significant cash paymentobligations and covenants that restrict our ability to operate our business.See “Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Liquidity and Capital Resources.”

***Our operations are susceptible to changes in foodavailability and costs, which could adversely affect our operating results.***

Our profitability depends significantly on our abilityto anticipate and react to changes in seafood costs. We rely on local, regionaland national suppliers to provide our seafood. Increases in distribution costsor sale prices or failure to perform by these suppliers could cause our foodcosts to increase. We could also experience significant short-term disruptionsin our supply if a significant supplier failed to meet its obligations. Thesupply of seafood is more volatile than other types of food. The type, variety,quality and price of seafood is subject to factors beyond our control,including weather, governmental regulation, availability and seasonality, eachof which may affect our food costs or cause a disruption in our supply. Changesin the price or availability of certain types of seafood could affect ourability to offer a broad menu and price offering to customers and couldmaterially adversely affect our profitability.

***Our operating results may fluctuate significantly andcould fall below the expectations of securities analysts and investors due toseasonality and other factors, resulting in a decline in our stock price.***

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

·       ourability to achieve and manage our planned expansion;

·       ourability to achieve market acceptance, particularly in new markets;

·       ourability to raise capital in the future;

·       changesin the availability and costs of food;

·       theloss of key management personnel;

·       theconcentration of our restaurants in specific geographic areas;

·       ourability to protect our name and logo and other proprietary information;

·       changesin consumer preferences or discretionary spending;

·       fluctuationsin the number of visitors or business travelers to downtown locations;

·       healthconcerns about seafood or other food products;

·       ourability to attract, motivate and retain qualified employees;

·       increasesin labor costs;

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·       theimpact of federal, state or local government regulations relating to ouremployees or the sale or preparation of food and the sale of alcoholicbeverages;

·       theimpact of litigation;

·       theeffect of competition in the restaurant industry; and

·       economictrends generally.

Our business also issubject 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 sales mayfluctuate significantly as a result of seasonality and the factors discussedabove. Accordingly, results for any one fiscal quarter are not necessarilyindicative of results to be expected for any other quarter or for any year andcomparable restaurant sales for any particular future period may decrease. Ouroperating results may also fall below the expectations of securities analystsand investors. In that event, the price of our common stock would likelydecrease.

***A decline in visitors or business travelers todowntown areas where our restaurants are located could negatively affect ourrestaurant sales.***

Many of our restaurantsare located in downtown areas. We depend on both local residents and businesstravelers to frequent these locations. We experienced a decline in revenues inour downtown locations in 2001 and 2002, caused in part by decreases inbusiness travel and the general decline in economic conditions. We mayexperience a similar decline in our revenues in the future. If the number ofvisitors to downtown areas declines due to economic or other conditions,changes in consumer preferences, changes in discretionary consumer spending orfor other reasons, our revenues could decline significantly and our results ofoperations could be adversely affected.

***If we lose the services of any of our key managementpersonnel or our founders, our business could suffer.***

We depend on the servicesof our key management personnel, including Saed Mohseni, our chief executiveofficer, 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 in local orregional areas and, as a result, we are sensitive to economic and other trendsand developments in these areas.***

We operate four restaurants in Seattle, Washington,six in the Portland, Oregon area and 10 in California; our East Coastrestaurants are concentrated in and around Washington, D.C. As a result,adverse economic conditions, weather and labor markets in any of these areascould have a material adverse effect on our overall results of operations. Forexample, ice storms in northwestern Oregon in January 2004 affected salesat six, or 12%, of our restaurants.

In addition, given ourgeographic concentrations, negative publicity regarding any of our restaurantsin these areas could have a material adverse effect on our business andoperations, 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.

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***Our success depends on our ability to protect ourproprietary information. Failure to protect our trademarks, service marks ortrade secrets could adversely affect our business.***

Our business prospects depend in part on our abilityto develop favorable consumer recognition of the McCormick & Schmick’sname. Although McCormick & Schmick’s, M&S Grill and other of ourservice marks are federally registered trademarks with the United States Patentand Trademark Office, our trademarks could be imitated in ways that we cannotprevent. In addition, we rely on trade secrets, proprietary know-how, conceptsand recipes. Our methods of protecting this information may not be adequate,however, and others could independently develop similar know-how or obtainaccess to our trade secrets, know-how, concepts and recipes. Moreover, we mayface claims of misappropriation or infringement of third parties’ rights thatcould interfere with our use of our proprietary know-how, concepts, recipes ortrade secrets. Defending these claims may be costly and, if unsuccessful, mayprevent us from continuing to use this proprietary information in the future,and may result in a judgment or monetary damages.

We do not maintainconfidentiality and non-competition agreements with all of our executives, keypersonnel or suppliers. If competitors independently develop or otherwiseobtain access to our know-how, concepts, recipes or trade secrets, the appealof our restaurants could be reduced and our business could be harmed.

***Our current insurance policies may not provideadequate levels of coverage against all claims.***

We believe we maintaininsurance coverage that is customary for businesses of our size and type. However,there are types of losses we may incur that cannot be insured against or thatwe believe are not commercially reasonable to insure. These losses, if theyoccur, could have a material and adverse effect on our business and results ofoperations.

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

Our growth strategyincludes opening restaurants in markets in which we already have existingrestaurants. 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 integrate into ourbusiness the operations of restaurants that we acquire, which may adverselyaffect 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:

·       challengesand costs associated with the acquisition and integration of restaurantoperations located in markets where we have limited or no experience;

·       possibledisruption to our business as a result of the diversion of management’sattention from its normal operational responsibilities and duties; and

·       theconsolidation of the corporate, information technology, accounting and administrativeinfrastructure and resources of the acquired restaurants into our business.

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Future acquisitions of existing restaurants, which maybe accomplished through a cash purchase transaction or the issuance of ourequity securities, or a combination of both, could result in potentiallydilutive issuances of our equity securities, the incurrence of debt andcontingent liabilities and impairment charges related to goodwill and otherintangible assets, any of which could harm our business and financial condition.

We may be unable tosuccessfully integrate the operations, or realize the anticipated benefits, ofany restaurant that we acquire. If we cannot overcome the challenges and risksthat we face in integrating the operations of newly acquired restaurants, ourbusiness, financial condition and results of operations could be adverselyaffected.

***Negative publicity concerning food quality, health andother issues and costs or liabilities resulting from litigation may have amaterial adverse effect on our results of operations.***

We are sometimes thesubject of complaints or litigation from customers alleging illness, injury orother 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 consumption of seafoodor other food products could affect consumer preferences and could negativelyimpact our results of operations.***

We may lose customersbased on health concerns about the consumption of seafood or negative publicityconcerning food quality, illness and injury generally, such as negativepublicity concerning the accumulation of mercury or other carcinogens inseafood, 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 operational controls and training willbe fully effective in preventing all food-borne illnesses. Some food-borneillness incidents could be caused by food suppliers and transporters and wouldbe outside 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 or discretionaryconsumer spending could negatively impact our results of operations.***

The restaurant industry ischaracterized by the continual introduction of new concepts and is subject torapidly changing consumer preferences, tastes and purchasing habits. Ourcontinued success depends in part upon the popularity of seafood and the styleof dining we offer. Shifts in consumer preferences away from this cuisine ordining 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.

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***Labor shortages or increases in labor costs could slowour growth or harm our business.***

Our success depends inpart upon our ability to attract, motivate and retain a sufficient number ofqualified employees, including regional operational managers and regionalchefs, restaurant general managers and executive chefs, necessary to continueour operations and keep pace with our growth. Qualified individuals whom weneed to fill these positions are in short supply and competition for theseemployees is intense. If we are unable to recruit and retain sufficientqualified individuals, our business and our growth could be adversely affected.Additionally, competition for qualified employees could require us to pay higherwages, which could result in higher labor costs. If our labor costs increase,our results of operations will be negatively affected.

***We may incur costs or liabilities and lose revenue,and our growth strategy may be adversely impacted, as a result of governmentregulation.***

Our restaurants are subject to various federal, stateand local government regulations, including those relating to employees, thepreparation and sale of food and the sale of alcoholic beverages. Theseregulations impact our current restaurant operations and our ability to opennew restaurants.

Each of our restaurants must obtain licenses fromregulatory authorities allowing it to sell liquor, beer and wine, and eachrestaurant must obtain a food service license from local health authorities. Eachrestaurant’s liquor license must be renewed annually and may be revoked at anytime for cause, including violation by us or our employees of any laws andregulations relating to the minimum drinking age, advertising, wholesalepurchasing and inventory control. In California, where we operate 10restaurants, the number of alcoholic beverage licenses available is limited andlicenses are traded at market prices.

The failure to maintain our food and liquor licensesand other required licenses, permits and approvals could adversely affect ouroperating results. Difficulties or failure in obtaining the required licensesand approvals could delay or result in our decision to cancel the opening ofnew restaurants.

We are subject to “dram shop” statutes in some states.These statutes generally allow a person injured by an intoxicated person torecover damages from an establishment that wrongfully served alcoholicbeverages to the intoxicated person. A judgment substantially in excess of ourinsurance coverage could harm our financial condition.

Various federal and state labor laws govern ourrelationship with our employees and affect operating costs. These laws includeminimum wage requirements, overtime pay, unemployment tax rates, workers’compensation rates, and citizenship requirements. Additional government-imposedincreases in minimum wages, overtime pay, paid leaves of absence and mandatedhealth benefits, increased tax reporting and tax payment requirements foremployees who receive gratuities, or a reduction in the number of states thatallow tips to be credited toward minimum wage requirements could harm ouroperating results.

The Federal Americans withDisabilities Act prohibits discrimination on the basis of disability in publicaccommodations and employment. Although our restaurants are designed to beaccessible to the disabled, we could be required to make modifications to ourrestaurants to provide service to, or make reasonable accommodations for,disabled persons.

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

We are subject to avariety of claims arising in the ordinary course of our business brought by oron behalf of our customers or employees, including personal injury claims,contract claims, and employment-related claims. In recent years, a number ofrestaurant companies have been subject to lawsuits, including class actionlawsuits, alleging violations of federal and state law regarding workplace,employment and similar matters. A number of these lawsuits have resulted in thepayment of substantial damages by the 

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defendants.Similar lawsuits have been instituted against us from time to time. Regardlessof whether any claims against us are valid or whether we are ultimatelydetermined to be liable, claims may be expensive to defend and may divert timeand money away from our operations and hurt our performance. A judgmentsignificantly in excess of our insurance coverage for any claims could materiallyadversely affect our financial condition or results of operations, and adversepublicity resulting from these allegations may materially adversely affect ourbusiness. We offer no assurance that we will not incur substantial damages andexpenses resulting from lawsuits, which could have a material adverse effect onour business.

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

Terrorist attacks and other acts of violence or warand U.S. military reactions to such attacks may negatively affect ouroperations and your investment in our shares of common stock. The terroristattacks in New York and Washington, D.C. on September 11, 2001 led to atemporary interruption in deliveries from some of our suppliers and, webelieve, contributed to the decline in average annual comparable restaurantsales in 2001 and 2002. Future acts of violence or war could cause a decreasein travel and in consumer confidence, decrease consumer spending, result inincreased volatility in the United States and worldwide financial markets andeconomy, or result in an economic recession in the United States or abroad. Theycould also impact consumer leisure habits, for example, by increasing timespent watching television news programs at home, and may reduce the number oftimes consumers dine out, which could adversely impact our revenue. Any ofthese occurrences could harm our business, financial condition or results ofoperations, and may result in the volatility of the market price for oursecurities and on the future price of our securities.

Terrorist attacks couldalso directly impact our physical facilities or those of our suppliers, andattacks or armed conflicts may make travel and the transportation of oursupplies and products more difficult and more expensive and ultimately affectour revenues.

***We may not be able to compete successfully with otherrestaurants, which could adversely affect our results of operations.***

The restaurant industry isintensely competitive with respect to price, service, location, food quality,ambiance and the overall dining experience. Our competitors include a large anddiverse group of restaurant chains and individual restaurants that range fromindependent local operators to well-capitalized national restaurant companies. Someof our competitors have been in existence for a substantially longer periodthan we have and may be better established in the markets where our restaurantsare or may be located. Some of our competitors may have substantially greaterfinancial, marketing and other resources than we do. If our restaurants areunable to compete successfully with other restaurants in new and existingmarkets, our results of operations will be adversely affected. We also competewith other restaurants for experienced management personnel and hourlyemployees, and with other restaurants and retail establishments for qualityrestaurant sites.

***Our stock price may be volatile, and you may not beable to resell your shares at or above the price you pay for them.***

The stock markethas experienced significant price and volume fluctuations. Our common stock hastraded at a price lower than $12.00, the price at which our shares of commonstock were sold in our initial public offering. The market price for our sharesmay continue to fluctuate significantly in response to a number of factors,some of which are beyond our control, including:

·       quarterlyvariations in our operating results;

·       changesin financial estimates by securities analysts;

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·       additionsor departures of our key personnel; and

·       salesof shares of our common stock in the public markets.

Fluctuations or decreasesin the trading price of our common stock may adversely affect your ability totrade your shares. In the past, following periods of volatility in the marketprice of a company’s securities, securities class action litigation has oftenbeen instituted. A securities class action suit against us could result insubstantial costs and divert management’s attention and resources that wouldotherwise be used to benefit the future performance of our operations.

**ITEM 7A**.        QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk exposures are related to our cash andcash equivalents. We invest any excess cash in highly liquid short-terminvestments with maturities of less than one year. These investments are notheld for trading or other speculative purposes. Changes in interest ratesaffect the investment income we earn on our investments and, therefore, impactour cash flows and results of operations.

Under our revolving credit facility, we are exposed tomarket risk from changes in interest rates on borrowings, which bear interestat the financial institution’s prime rate plus a margin of 0.25% to 0.75% orthe Eurodollar rate plus a margin of 1.75% to 2.25%, with margins determined bycertain financial ratios. At our option, we may convert loans under ourrevolving credit facility from one type of rate to the other. At the end of2004, we had $12.0 million of variable rate borrowings, and a 1.0% changein the rate would have increased interest expense by $120,000. Loans under ourrevolving credit facility mature on July 23, 2009. To mitigate our riskfrom increases in variable rate bank indebtedness, we had entered into aninterest rate swap agreement involving an exchange of floating rate interestpayment obligations for fixed rate payment obligations for $29,250,000 of ourrevolving credit loan. This agreement expired on November 23, 2004. As of December 25,2004, the Company did not hold any interest rate swaps.

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**ITEM 8**.                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

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

**Index to FinancialStatements**
|                                                                                                                | ** ** | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|
| Report of Independent  Registered Public Accounting Firm                                                       |       |       | 53       |       |
| Consolidated  Financial Statements:                                                                            |       |       |     |       |
| Consolidated Balance Sheets                                                                                    |       |       | 54       |       |
| Consolidated Statements of  Operations                                                                         |       |       | 55       |       |
| Consolidated  Statements of Members’ and Stockholders’ Equity and Comprehensive Income  (Loss)  |       |       | 56       |       |
| Consolidated Statements of  Cash Flows                                                                         |       |       | 57       |       |
| Notes to Consolidated Financial  Statements                                                                    |       |       | 58       |       |

 

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**Report of Independent Registered Public AccountingFirm**

To the Board of Directorsand StockholdersMcCormick and Schmick’s Seafood Restaurants, Inc. and Subsidiaries

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of operations, of members’ andstockholders’ equity and comprehensive income (loss) and of cash flows presentfairly, in all material respects, the financial position of McCormick &Schmick’s Seafood Restaurants, Inc. (formerly McCormick & Schmick HoldingsLLC) and Subsidiaries (the “Company”) as of December 27, 2003 and December 25,2004 and the results of their operations and their cash flows for the yearsended December 28, 2002, December 27, 2003 and December 25, 2004in conformity with accounting principles generally accepted in the UnitedStates of America. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). These standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

Asdiscussed in Note 2 in the Notes to the Financial Statements, the Company hasrestated its financial statements as of and for the years ended December 28,2002 and December 27, 2003.
| PricewaterhouseCoopers LLP |
|----------------------------|
| Portland, Oregon           |
| April 6, 2005         |

 

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**McCormick & Schmick’s SeafoodRestaurants, Inc. and SubsidiariesConsolidated Balance Sheets(In thousands, except per share data)**
| ** **                                                                                                 | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                 | ** ** | **(Restated)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                 |       |                        |       |                        |       |   |   |   |   |
| Current assets                                                                                             |       |                        |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                  |       |                        | $          | 2,453                       |       |   |   | $ | 451 |   |   |
| Trade accounts receivable, net                                                                             |       |                        | 3,689      |                        |       |   | 4,988 |   |   |
| Inventories                                                                                                |       |                        | 2,704      |                        |       |   | 3,384 |   |   |
| Prepaid expenses and other current assets                                                                  |       |                        | 2,367      |                        |       |   | 2,846 |   |   |
| Deferred income taxes                                                                                      |       |                        | 96         |                        |       |   | 830 |   |   |
| Total current assets                                                                                       |       |                        | 11,309     |                        |       |   | 12,499 |   |   |
| Equipment and  leasehold improvements, net                                                                 |       |                        | 76,017     |                        |       |   | 92,744 |   |   |
| Other assets                                                                                               |       |                        | 54,470     |                        |       |   | 53,821 |   |   |
| Goodwill                                                                                                   |       |                        | 19,996     |                        |       |   | 19,996 |   |   |
| Total assets                                                                                               |       |                        | $161,792   |                        |       |   | $ | 179,060 |   |   |
| **Liabilities  and Members’/Stockholders’ Equity**                                               |       |                        |       |                        |       |   |   |   |   |
| Current liabilities                                                                                        |       |                        |       |                        |       |   |   |   |   |
| Book overdraft                                                                                             |       |                        | $          | 5,052                       |       |   |   | $ | 429 |   |   |
| Accounts payable                                                                                           |       |                        | 11,216     |                        |       |   | 12,875 |   |   |
| Accrued expenses                                                                                           |       |                        | 12,698     |                        |       |   | 15,197 |   |   |
| Capital lease obligations, current portion                                                                 |       |                        | 415        |                        |       |   | 433 |   |   |
| Derivative instrument—interest rate swap, current                                                     |       |                        | 805        |                        |       |   | — |   |   |
| Total current liabilities                                                                                  |       |                        | 30,186     |                        |       |   | 28,934 |   |   |
| Revolving credit facility                                                                                  |       |                        | 38,500     |                        |       |   | 12,000 |   |   |
| Mandatorily  redeemable preferred stock (liquidation preference of $27,002)                                |       |                        | 23,137     |                        |       |   | — |   |   |
| Other long-term  liabilities                                                                               |       |                        | 6,749      |                        |       |   | 11,791 |   |   |
| Capital lease  obligations, noncurrent portion                                                             |       |                        | 1,141      |                        |       |   | 707 |   |   |
| Deferred income  taxes                                                                                     |       |                        | 4,312      |                        |       |   | 1,558 |   |   |
| Total liabilities                                                                                          |       |                        | 104,025    |                        |       |   | 54,990 |   |   |
| Commitments and contingencies (Note 12)                                                                    |       |                        |       |                        |       |   |   |   |   |
| Members’/  stockholders’ equity                                                                  |       |                        |       |                        |       |   |   |   |   |
| Members’ equity  in McCormick & Schmick Holdings LLC (Note 14)                               |       |                        | 62,819     |                        |       |   | — |   |   |
| Common stock, $0.001 par value, 120,000 shares  authorized, 13,782 shares issued and outstanding |       |                        | —     |                        |       |   | 14 |   |   |
| Additional paid  in capital                                                                                |       |                        | —     |                        |       |   | 127,917 |   |   |
| Accumulated  deficit                                                                                       |       |                        | (4,564     | )                           |       |   | (3,861 | ) |   |
| Accumulated other  comprehensive loss                                                                      |       |                        | (488       | )                           |       |   | — |   |   |
| Total members’/ stockholders’ equity                                                             |       |                        | 57,767     |                        |       |   | 124,070 |   |   |
| Total liabilities  and members’/ stockholders’ equity                                            |       |                        | $161,792   |                        |       |   | $179,060 |   |   |

 

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

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**McCormick & Schmick’s SeafoodRestaurants, Inc. and Subsidiaries Consolidated Statements ofOperations(In thousands, except per share data)**
| ** **                                                                                                             | ** ** | **Year Ended**         | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                             | ** ** | **December 28,  2002** | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
| ** **                                                                                                             | ** ** | **(Restated)**              | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| Revenues                                                                                                               |       |                        | $          | 180,104 |   |   |   | $ | 196,717 |   |   |   | $ | 238,757 | ** ** |   |
| Restaurant  operating costs                                                                                            |       |                        |       |   |   |   |   |   |   |   |   | ** ** |   |
| Food and beverage                                                                                                      |       |                        | 53,168     |   |   |   | 57,959 |   |   |   | 70,873 | ** ** |   |
| Labor                                                                                                                  |       |                        | 56,147     |   |   |   | 61,644 |   |   |   | 75,081 | ** ** |   |
| Operating                                                                                                              |       |                        | 26,406     |   |   |   | 29,244 |   |   |   | 35,204 | ** ** |   |
| Occupancy                                                                                                              |       |                        | 15,349     |   |   |   | 16,890 |   |   |   | 21,401 | ** ** |   |
| Total restaurant operating costs                                                                                       |       |                        | 151,070    |   |   |   | 165,737 |   |   |   | 202,559 | ** ** |   |
| General and  administrative expenses                                                                                   |       |                        | 7,576      |   |   |   | 9,769 |   |   |   | 12,062 | ** ** |   |
| Restaurant  pre-opening costs                                                                                          |       |                        | 1,006      |   |   |   | 1,219 |   |   |   | 2,393 | ** ** |   |
| Depreciation and  amortization                                                                                         |       |                        | 8,808      |   |   |   | 9,853 |   |   |   | 10,723 | ** ** |   |
| Management fees  and covenants not to compete                                                                          |       |                        | 2,550      |   |   |   | 2,550 |   |   |   | 4,241 | ** ** |   |
| Impairment of  assets                                                                                                  |       |                        | —     |   |   |   | 1,513 |   |   |   | — | ** ** |   |
| Total costs and expenses                                                                                               |       |                        | 171,010    |   |   |   | 190,641 |   |   |   | 231,978 | ** ** |   |
| Operating income                                                                                                       |       |                        | 9,094      |   |   |   | 6,076 |   |   |   | 6,779 | ** ** |   |
| Interest expense                                                                                                       |       |                        | 3,720      |   |   |   | 3,069 |   |   |   | 2,680 | ** ** |   |
| Accrued dividends  and accretion on mandatorily redeemable preferred stock                                             |       |                        | —     |   |   |   | 1,901 |   |   |   | 5,759 | ** ** |   |
| Write off of  deferred loan costs on early extinguishment of debt                                                      |       |                        | —     |   |   |   | 2,313 |   |   |   | 1,288 | ** ** |   |
| Income (loss) before income taxes and accrued  dividends and accretion on mandatorily redeemable preferred stock  |       |                        | 5,374      |   |   |   | (1,207 | ) |   |   | (2,948 | ) |   |
| Income tax  expense (benefit)                                                                                          |       |                        | 2,570      |   |   |   | 1,323 |   |   |   | (3,651 | ) |   |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock                                             |       |                        | 3,347      |   |   |   | 1,832 |   |   |   | — | ** ** |   |
| Net income (loss)                                                                                                      |       |                        | $          | (543 | ) |   |   | $ | (4,362 | ) |   |   | $ | 703 | ** ** |   |
| Net income (loss)  per common share (Note 3)                                                                           |       |                        |       |   |   |   |   |   |   |   |   | ** ** |   |
| Basic and diluted                                                                                                      |       |                        | $          | (0.07 | ) |   |   | $ | (0.56 | ) |   |   | $ | 0.07 | ** ** |   |
| Shares used in  computing net income (loss) per share (Note 3)                                                    |       |                        |       |   |   |   |   |   |   |   |   | ** ** |   |
| Basic                                                                                                                  |       |                        | 7,782      |   |   |   | 7,782 |   |   |   | 10,387 | ** ** |   |
| Diluted                                                                                                                |       |                        | 7,782      |   |   |   | 7,782 |   |   |   | 10,416 | ** ** |   |

 

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

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**McCormick & Schmick’s Seafood Restaurants, Inc.and SubsidiariesConsolidated Statements of Members’and Stockholders’ Equity and Comprehensive Income (Loss)**

| ** **                                                                     | ** ** | **Preferred Units**  | ** ** | **Preferred Unit  Warrant**            | ** ** | **Class A Units** | ** ** | **Class A-2 Unit  Warrant**       | ** ** | **Class B Units** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                     | ** ** | **Units**                 | ** ** | **Amount**                                  | ** ** | **Units**                   | ** ** | **Amount**                                  | ** ** | **Units**                   | ** ** | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** |
| ** **                                                                     | ** ** | **($ in thousands)** | ** ** |
| Balances at December 29, 2001 (As previously  reported)                   |       | 57,000                    |       | $                                           | 57,000     |                        | 4,956      |                                        | $          | 4,951                       |       | 1,000,000 |   |   | $ | 756 |   |   | 103,896 |   |   | $ | 103 |   |   | — |   |   | $ | — |   |   |
| Cumulative effect of restatement (note 2)                                      |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Balances at December 30, 2001 (Restated)                                       |       | 57,000                    |       | 57,000                                      |       | 4,956                       |       | 4,951                                       |       | 1,000,000                   |       |   | 756 |   |   | 103,896 |   |   | 103 |   |   | — |   |   | — |   |   |
| Net loss                                                                       |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Unrealized loss on interest rate swap, net of income  tax benefit of $485 |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Total comprehensive loss                                                       |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Balances at December 28, 2002 (Restated)                                  |       | 57,000                    |       | 57,000                                      |       | 4,956                       |       | 4,951                                       |       | 1,000,000                   |       |   | 756 |   |   | 103,896 |   |   | 103 |   |   | — |   |   | — |   |   |
| Issuance of Class B and Class C units                                |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | 171,429 |   |   | 37 |   |   |
| Amortization of unearned compensation                                          |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Net loss                                                                       |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Realized gain on interest rate swap, net of income  tax expense of $168        |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Total comprehensive loss                                                       |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Balances at December 27, 2003 (Restated)                                  |       | 57,000                    |       | 57,000                                      |       | 4,956                       |       | 4,951                                       |       | 1,000,000                   |       |   | 756 |   |   | 103,896 |   |   | 103 |   |   | 171,429 |   |   | 37 |   |   |
| Net income                                                                     |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Realized gain on interest rate swap, net of income  tax expense of $317        |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Total comprehensive income                                                     |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Amortization of unearned compensation                                          |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Purchase of Class B units                                                 |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | (6 | ) |   |
| Reorganization                                                                 |       | (57,000                   | )          | (57,000                                     | )          | —                      |       | —                                      |       | (1,000,000                  | )          |   | (756 | ) |   | — |   |   | — |   |   | (171,429 | ) |   | (31 | ) |   |
| Exercise of warrants                                                           |       | —                    |       | —                                      |       | (4,956                      | )          | (4,951                                      | )          | —                      |       |   | — |   |   | (103,896 | ) |   | (103 | ) |   | — |   |   | — |   |   |
| Issuance of common stock in initial public offering,  net of offering costs    |       | —                    |       | —                                      |       | —                      |       | —                                      |       | —                      |       |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   |
| Balances at December 25,  2004                                            |       | —                    |       | $      — |       | —                      |       | $      — |       | —                      |       |   | $  — |   |   | — |   |   | $  — |   |   | — |   |   | $ — |   |   |
|                                                                                |            |                           |            |                                             |            |                             |            |                                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                                     | ** ** | **Class C Units** | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** **    | **Unearned** | ** ** | **Retained  Earnings  (Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** **    | ** **   | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|-------------------------|---------------|--------------|------------|--------------------------------------|------------|---------------------------------------|---------------|--------------|------------|
| ** **                                                                     | ** ** | **Units**                   | ** ** | **Amount**            | ** ** | **Units**               | ** **    | **Amount**   | ** ** | **Amount**                           | ** ** | **Compensation**                      | ** **    | **Deficit)** | ** ** | **Gain (Loss)** | ** ** | **Total** | ** ** |
| ** **                                                                     | ** ** | **($ in thousands)**   | ** ** |
| Balances at December 29, 2001 (As previously  reported)                        |       |                        | —     |                  |       |                    | $ — |         |       | —                               |       |                                  | $ — |         |       | $         — |   |   | $ — |   |   |   | $  548 |   |   |   | $  — |   |   | $ 63,358 |   |
| Cumulative effect of restatement (note 2)                                      |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | (207 | ) |   |   | — |   |   | (207 | ) |
| Balances at December 30, 2001 (Restated)                                  |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | 341 |   |   |   | — |   |   | 63,151 |   |
| Net loss                                                                       |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | (543 | ) |   |   | — |   |   | (543 | ) |
| Unrealized loss on interest rate swap, net of income  tax benefit of $485 |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | — |   |   |   | (748 | ) |   | (748 | ) |
| Total comprehensive loss                                                       |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   | (1,291 | ) |
| Balances at December 28, 2002 (Restated)                                  |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | (202 | ) |   |   | (748 | ) |   | 61,860 |   |
| Issuance of Class B and Class C units                                |       |                        | 13         |                  |       |                    | 14            |         |       | —                               |       |                                  | —        |         |       | — |   |   | (51 | ) |   |   | — |   |   |   | — |   |   | — |   |
| Amortization of unearned compensation                                          |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | 9 |   |   |   | — |   |   |   | — |   |   | 9 |   |
| Net loss                                                                       |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | (4,362 | ) |   |   | — |   |   | (4,362 | ) |
| Realized gain on interest rate swap, net of income  tax expense of $168        |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | — |   |   |   | 260 |   |   | 260 |   |
| Total comprehensive loss                                                       |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   | (4,102 | ) |
| Balances at December 27, 2003 (Restated)                                  |       |                        | 13         |                  |       |                    | 14            |         |       | —                               |       |                                  | —        |         |       | — |   |   | (42 | ) |   |   | (4,564 | ) |   |   | (488 | ) |   | 57,767 |   |
| Net income                                                                     |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | 703 |   |   |   | — |   |   | 703 |   |
| Realized gain on interest rate swap, net of income  tax expense of $317        |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | — |   |   |   | 488 |   |   | 488 |   |
| Total comprehensive income                                                     |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   | 1,191 |   |
| Amortization of unearned compensation                                          |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | 42 |   |   |   | — |   |   |   | — |   |   | 42 |   |
| Purchase of Class B units                                                 |       |                        | —     |                  |       |                    | —        |         |       | —                               |       |                                  | —        |         |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   | (6 | ) |
| Reorganization                                                                 |       |                        | (13        | )                     |       |                    | (14           | )            |       | 7,179,358                            |       |                                  | 7             |         |       | 57,794 |   |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Exercise of warrants                                                           |       |                        | —     |                  |       |                    | —        |         |       | 602,992                              |       |                                  | 1             |         |       | 5,059 |   |   | — |   |   |   | — |   |   |   | — |   |   | 6 |   |
| Issuance of common stock in initial public offering,  net of offering costs    |       |                        | —     |                  |       |                    | —        |         |       | 6,000,000                            |       |                                  | 6             |         |       | 65,064 |   |   | — |   |   |   | — |   |   |   | — |   |   | 65,070 |   |
| Balances at  December 25, 2004                                            |       |                        | —     |                  |       |                    | $ — |         |       | 13,782,350                           |       |                                  | $ 14     |         |       | $ 127,917 |   |   | $ — |   |   |   | $ (3,861 | ) |   |   | $  — |   |   | $ 124,070 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

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**McCormick & Schmick’s SeafoodRestaurants, Inc. and SubsidiariesConsolidated Statements ofCash Flows(In thousands)**
| ** **                                                                                | ** ** | **Year Ended**         | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                | ** ** | **December 28,  2002** | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
| ** **                                                                                | ** ** | **(Restated)**              | ** ** | **(Restated)** | ** ** | ** ** | ** ** |
| **Operating activities**                                                                  | ** ** |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income (loss)                                                                         |       |                        | $          | (543 | ) |   |   | $ | (4,362 | ) |   |   | $ | 703 | ** ** |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating  activities |       |                        |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Depreciation and  amortization                                                            |       |                        | 8,808      | ** ** |   |   | 9,853 | ** ** |   |   | 10,723 | ** ** |   |
| Amortization of unearned  compensation                                                    |       |                        | —     | ** ** |   |   | 9 | ** ** |   |   | 42 | ** ** |   |
| Provision for doubtful  accounts                                                          |       |                        | 165        | ** ** |   |   | 48 | ** ** |   |   | — | ** ** |   |
| Deferred income taxes                                                                     |       |                        | 2,570      | ** ** |   |   | 1,323 | ** ** |   |   | (3,805 | ) |   |
| Write off of deferred  loan costs on early extinguishment of debt                         |       |                        | —     | ** ** |   |   | 2,313 | ** ** |   |   | 1,288 | ** ** |   |
| Impairment of assets                                                                      |       |                        | —     | ** ** |   |   | 1,513 | ** ** |   |   | — | ** ** |   |
| Accrued dividends and  accretion on mandatorily redeemable preferred stock                |       |                        | 3,347      | ** ** |   |   | 3,733 | ** ** |   |   | 5,759 | ** ** |   |
| Changes in operating assets and liabilities                                               |       |                        |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Trade accounts receivable                                                                 |       |                        | (392       | ) |   |   | (446 | ) |   |   | (1,299 | ) |   |
| Inventories                                                                               |       |                        | (88        | ) |   |   | (387 | ) |   |   | (680 | ) |   |
| Prepaid expenses and  other current assets                                                |       |                        | 1,941      | ** ** |   |   | (495 | ) |   |   | (479 | ) |   |
| Accounts payable                                                                          |       |                        | (3,752     | ) |   |   | 2,978 | ** ** |   |   | 1,659 | ** ** |   |
| Accrued expenses                                                                          |       |                        | (636       | ) |   |   | 2,310 | ** ** |   |   | 2,499 | ** ** |   |
| Other long-term  liabilities                                                              |       |                        | 3,162      | ** ** |   |   | 2,262 | ** ** |   |   | 5,042 | ** ** |   |
| Net cash provided by  operating activities                                                |       |                        | 14,582     | ** ** |   |   | 20,652 | ** ** |   |   | 21,452 | ** ** |   |
| **Investing activities**                                                                  |       |                        |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Acquisition of  equipment and leasehold improvements                                      |       |                        | (8,451     | ) |   |   | (14,889 | ) |   |   | (27,017 | ) |   |
| Other assets                                                                              |       |                        | (328       | ) |   |   | (67 | ) |   |   | (267 | ) |   |
| Net cash used in  investing activities                                                    |       |                        | (8,779     | ) |   |   | (14,956 | ) |   |   | (27,284 | ) |   |
| **Financing activities**                                                                  |       |                        |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Increase  (decrease) in book overdraft                                                    |       |                        | 2,922      | ** ** |   |   | 2,130 | ** ** |   |   | (4,623 | ) |   |
| Loan costs                                                                                |       |                        | (99        | ) |   |   | (1,398 | ) |   |   | (805 | ) |   |
| Payments on long-term  debt                                                               |       |                        | (6,963     | ) |   |   | (45,056 | ) |   |   | — | ** ** |   |
| Borrowings made on  revolving credit facility                                             |       |                        | 25,000     |   |   |   | 103,000 |   |   |   | 65,500 | ** ** |   |
| Payments made on  revolving credit facility                                               |       |                        | (27,000    | ) |   |   | (64,500 | ) |   |   | (92,000 | ) |   |
| Proceeds from  sale/leaseback of equipment                                                |       |                        | 1,635      | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |
| Proceeds from  issuance of common stock, net of offering costs $6,930                     |       |                        | —     | ** ** |   |   | — | ** ** |   |   | 65,076 | ** ** |   |
| Redemption of  senior preferred stock                                                     |       |                        | —     | ** ** |   |   | — | ** ** |   |   | (28,896 | ) |   |
| Disbursements of notes  receivable                                                        |       |                        | (350       | ) |   |   | — | ** ** |   |   | — | ** ** |   |
| Proceeds from  notes receivable                                                           |       |                        | 15         | ** ** |   |   | 26 | ** ** |   |   | — | ** ** |   |
| Payments on  capital lease obligations                                                    |       |                        | (46        | ) |   |   | (390 | ) |   |   | (416 | ) |   |
| Purchase of  Class B units                                                           |       |                        | —     | ** ** |   |   | — | ** ** |   |   | (6 | ) |   |
| Net cash provided by  (used in) financing activities                                      |       |                        | (4,886     | ) |   |   | (6,188 | ) |   |   | 3,830 | ** ** |   |
| Net increase (decrease)  in cash and cash equivalents                                     |       |                        | 917        | ** ** |   |   | (492 | ) |   |   | (2,002 | ) |   |
| Cash and cash  equivalents, beginning of year                                             |       |                        | 2,028      | ** ** |   |   | 2,945 | ** ** |   |   | 2,453 | ** ** |   |
| Cash and cash  equivalents, end of year                                                   |       |                        | $          | 2,945 | ** ** |   |   | $ | 2,453 | ** ** |   |   | $ | 451 | ** ** |   |
| **Supplemental  disclosure of cash flow information**                                     |       |                        |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Cash paid during the year                                                                 |       |                        |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |
| Interest                                                                                  |       |                        | $          | 3,527 | ** ** |   |   | $ | 3,457 | ** ** |   |   | $ | 3,097 | ** ** |   |
| Income taxes                                                                              |       |                        | 35         | ** ** |   |   | 96 | ** ** |   |   | 57 | ** ** |   |

 

**Noncash investingand financing activities**

In 2003, accounts receivable totaling $226 were convertedto a note receivable, which is included in other assets. A liquor license waspurchased for $306 using a note payable. In 2002 equipment totaling $357 wasacquired under capital leases.

 

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

57

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**McCormick &Schmick’s Seafood Restaurants, Inc. and SubsidiariesNotes to Consolidated Financial Statements**

**1.   TheBusiness and Organization**

McCormick and Schmick’s Seafood Restaurants, Inc.is a leading national seafood restaurant operator in the affordable upscaledining segment. McCormick & Schmick’s Seafood Restaurants, Inc.is the survivor of a merger with McCormick & Schmick Holdings LLC (the“LLC”) that occurred on July 20, 2004, prior to the Company’s initialpublic offering.

The financial statements for the period covered bythis report are those of McCormick & Schmick’s Seafood Restaurants, Inc.for periods beginning after July 19, 2004 and those of the LLC for periodsended on or before July 19, 2004. Except with respect to informationregarding the membership units in the LLC and the common stock issued upon thereorganization, there was no impact to the financial statements as a result ofconverting from a limited liability company to a corporation. Before July 20,2004, the Company’s operations were conducted in McCormick & SchmickAcquisition Corp. and its subsidiaries, which are taxable corporations. Accordingly,the financial statements of the Company have historically included a provisionfor income taxes and related deferred income taxes. Throughout this report,McCormick & Schmick’s Seafood Restaurants, Inc. and the LLC arereferred to collectively as “the Company.”

In connection withthe reorganization and initial public offering, the Company:

·       Issued7,179,357 shares of common stock in the merger to the holders of the LLC’sunits, not including 602,992 shares issuable upon the exercise of warrants at anominal price to The Bell Atlantic Master Trust. See Note 14, “Members’ Equity.”

·       Issued6,000,000 shares at $12.00 per share, raising approximately $65.1 millionafter underwriting discounts and transaction costs.

·       Repaid$51.5 million of indebtedness on its then existing credit facility withthe proceeds raised in the initial public offering and from $18.1 millionin loans under a new revolving credit facility. See Note 7, “Long TermDebt.”

·       Paid$28.9 million to The Bell Atlantic Master Trust to redeem all of the 13%senior exchangeable preferred stock of a Company subsidiary. See Note 13, “MandatorilyRedeemable Preferred Stock.”

·       Paid$2.8 million in connection with the termination of the managementagreements and covenant not to compete agreements.

The Company owns andoperates 50 restaurants in 22 states throughout the United States of America. TheCompany also provides management services to two additional restaurants. TheCompany has aggregated its operations to one reportable segment.

**2.   Restatementof Financial Information**

Like many other restaurantcompanies and retailers, the Company has conducted a review of its accountingpolicies applicable to leases, leasehold improvements, rent commencement,deferred rent, and other related items. This review was prompted in part by a February 7,2005 letter from the Office of the Chief Accountant of the Securities andExchange Commission (“SEC”) to the American Institute of Certified PublicAccountants regarding proper accounting for certain operating lease mattersunder generally accepted accounting principles (“GAAP”). The restatementadjustments are non-cash and had no impact on revenues or cash and cashequivalents.

58

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**Lease Term**

Historically, the Companyhas amortized its leasehold improvements on leased properties over the shorterof the combined initial term and all option periods of the lease (generallyranging from 20 to 30 years) or the useful life of the asset. In addition,the Company had recognized rent expense on the straight-line basis from theopening date of the restaurant through the initial term of the lease. TheCompany has concluded that its calculation of straight line rent expense shouldbe based on the lease term as defined in SFAS No. 13, *Accountingfor Leases,*as amended, which in most cases exceeds the initial termof the lease. As a result, it has restated its financial statements torecognize rent expense on the straight-line basis over the lease term,including option periods which are reasonably assured of renewal primarily dueto the presence of certain economic penalties. For purposes of calculatingstraight-line rents, the lease term commences on the date the lessee obtainscontrol over the property, which is generally when the lessor’s property issubstantially complete and is ready for tenant improvements. In addition, theCompany will amortize leasehold improvements over the shorter of the lease termor the useful life of the assets. As a result of these changes, the Company’s deferredrent credit liability included in other long-term liabilities, pre-opening costsand rent expense in the accompanying financial statements have increased on arestated basis.

**Tenant ImprovementAllowances**

The Company hashistorically netted all tenant improvement allowances against the capitalized costof leasehold improvements. It has determined that certain tenant improvementallowances should be considered lease incentives and recorded as a deferredrent credit and amortized as a reduction to rent expense over the lease term. Thischange increases capitalized leasehold improvements and the deferred rentcredit liability included in other long-term liabilities which results inincreases in amortization expense and decreases in rent expense.

**Restatement**

These restatement adjustments reduced net income by $1,182,000and $750,000 and diluted earnings per share by ($0.15) and ($0.10) for theyears ended December 27, 2003 and December 28, 2002, respectively. Therestatements had an impact on prior years whose cumulative effect was to reduceretained earnings by $207,000 as of December 30, 2001. This adjustment hasbeen presented as “cumulative effect of restatement” at December 30, 2001in the consolidated statements of members’ and stockholders’ equity and comprehensiveincome (loss).

As a result of our review of lease accounting, we eliminatedthe assumed liabilities relating to lease obligations as of the acquisitiondate of August 22, 2001. The effect was a decrease to goodwill of $1.2 million,a decrease to other long-term liabilities of $2.0 million and an increase tolong-term deferred tax liabilities of $0.8 million.

The following sets forth the effects of therestatements to the Company’s consolidated balance sheet at December 27,2003, and its consolidated statements of operations and cash flows for theyears ended December 28, 2002 and December 27, 2003. There was nochange to previously reported cash and cash equivalents.

59

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**McCormick &Schmick’s Seafood Restaurants, Inc. and SubsidiariesConsolidated Balance Sheets(In thousands)**
| ** **                                                         | ** ** | **December 27, 2003**  | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **As previously  reported** | ** ** | **Restated** | ** ** |
| **Assets**                                                         |       |                             |       |   |   |   |   |
| Current assets                                                     |       |                             |       |   |   |   |   |
| Cash and cash equivalents                                          |       |                             | $          | 2,453 |   |   | $ | 2,453 |   |
| Trade accounts receivable, net                                     |       |                             | 3,689      |   |   | 3,689 |   |
| Inventories                                                        |       |                             | 2,704      |   |   | 2,704 |   |
| Prepaid expenses and other current assets                          |       |                             | 2,367      |   |   | 2,367 |   |
| Deferred income taxes                                              |       |                             | 96         |   |   | 96 |   |
| Total current assets                                               |       |                             | 11,309     |   |   | 11,309 |   |
| Equipment and  leasehold improvements, net                         |       |                             | 74,829     |   |   | 76,017 |   |
| Other assets                                                       |       |                             | 54,470     |   |   | 54,470 |   |
| Goodwill                                                           |       |                             | 21,209     |   |   | 19,996 |   |
| Total assets                                                       |       |                             | $          | 161,817 |   |   | $161,792 |   |
| **Liabilities  and Members’ Equity**                          |       |                             |       |   |   |   |   |
| Current  liabilities                                               |       |                             |       |   |   |   |   |
| Book overdraft                                                     |       |                             | $          | 5,052 |   |   | $ | 5,052 |   |
| Accounts payable                                                   |       |                             | 11,216     |   |   | 11,216 |   |
| Accrued expenses                                                   |       |                             | 12,698     |   |   | 12,698 |   |
| Capital lease obligations, current portion                         |       |                             | 415        |   |   | 415 |   |
| Derivative instrument, current                                     |       |                             | 805        |   |   | 805 |   |
| Total current liabilities                                          |       |                             | 30,186     |   |   | 30,186 |   |
| Revolving credit  facility                                         |       |                             | 38,500     |   |   | 38,500 |   |
| Mandatorily  redeemable preferred stock                            |       |                             | 23,137     |   |   | 23,137 |   |
| Other long-term  liabilities                                       |       |                             | 4,635      |   |   | 6,749 |   |
| Capital lease  obligations, noncurrent portion                     |       |                             | 1,141      |   |   | 1,141 |   |
| Deferred income  taxes                                             |       |                             | 4,312      |   |   | 4,312 |   |
| Total liabilities                                                  |       |                             | 101,911    |   |   | 104,025 |   |
| Members’ equity                                               |       |                             |       |   |   |   |   |
| Members’ equity  in McCormick & Schmick Holdings LLC |       |                             | 62,819     |   |   | 62,819 |   |
| Accumulated  deficit                                               |       |                             | (2,425     | ) |   | (4,564 | ) |
| Accumulated other  comprehensive loss                              |       |                             | (488       | ) |   | (488 | ) |
| Total members’ equity                                         |       |                             | 59,906     |   |   | 57,767 |   |
| Total liabilities  and members’ equity                        |       |                             | $          | 161,817 |   |   | $ | 161,792 |   |

 

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**McCormick &Schmick’s Seafood Restaurants, Inc. and Subsidiaries Consolidated Statements of Operations(In thousands except per share data)**
| ** **                                                                                                       | ** ** | **Year Ended**              | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                       | ** ** | **December 28, 2002**  | ** ** | **December  27, 2003** | ** ** |
| ** **                                                                                                       | ** ** | **As previously  reported** | ** ** | **Restated** | ** ** | **As previously  reported** | ** ** | **Restated** | ** ** |
| Revenues                                                                                                         |       |                             | $          | 180,104 |   |   | $ | 180,104 |   |   | $ | 196,717 |   |   | $ | 196,717 |   |
| Restaurant  operating costs                                                                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Food and beverage                                                                                                |       |                             | 53,168     |   |   | 53,168 |   |   | 57,959 |   |   | 57,959 |   |
| Labor                                                                                                            |       |                             | 56,147     |   |   | 56,147 |   |   | 61,644 |   |   | 61,644 |   |
| Operating                                                                                                        |       |                             | 26,406     |   |   | 26,406 |   |   | 29,244 |   |   | 29,244 |   |
| Occupancy                                                                                                        |       |                             | 14,301     |   |   | 15,349 |   |   | 15,829 |   |   | 16,890 |   |
| Total restaurant operating costs                                                                                 |       |                             | 150,022    |   |   | 151,070 |   |   | 164,676 |   |   | 165,737 |   |
| General and administrative expenses                                                                              |       |                             | 7,576      |   |   | 7,576 |   |   | 9,769 |   |   | 9,769 |   |
| Restaurant pre-opening costs                                                                                     |       |                             | 911        |   |   | 1,006 |   |   | 1,110 |   |   | 1,219 |   |
| Depreciation and amortization                                                                                    |       |                             | 8,717      |   |   | 8,808 |   |   | 9,675 |   |   | 9,853 |   |
| Management fees and covenants not to compete                                                                     |       |                             | 2,550      |   |   | 2,550 |   |   | 2,550 |   |   | 2,550 |   |
| Impairment of assets                                                                                             |       |                             | —     |   |   | — |   |   | 1,513 |   |   | 1,513 |   |
| Total costs and expenses                                                                                         |       |                             | 169,776    |   |   | 171,010 |   |   | 189,293 |   |   | 190,641 |   |
| Operating income                                                                                                 |       |                             | 10,328     |   |   | 9,094 |   |   | 7,424 |   |   | 6,076 |   |
| Interest expense                                                                                                 |       |                             | 3,720      |   |   | 3,720 |   |   | 3,069 |   |   | 3,069 |   |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock                                       |       |                             | —     |   |   | — |   |   | 1,901 |   |   | 1,901 |   |
| Write off of  deferred loan costs on early extinguishment of debt                                                |       |                             | —     |   |   | — |   |   | 2,313 |   |   | 2,313 |   |
| Income (loss) before income taxes and accrued  dividends and accretion on mandatorily redeemable preferred stock |       |                             | 6,608      |   |   | 5,374 |   |   | 141 |   |   | (1,207 | ) |
| Income tax expense                                                                                               |       |                             | 3,054      |   |   | 2,570 |   |   | 1,489 |   |   | 1,323 |   |
| Accrued dividends  and accretion on mandatorily redeemable preferred stock                                       |       |                             | 3,347      |   |   | 3,347 |   |   | 1,832 |   |   | 1,832 |   |
| Net income (loss)                                                                                                |       |                             | $          | 207 |   |   | $ | (543 | ) |   | $ | (3,180 | ) |   | $ | (4,362 | ) |
| Net income (loss)  per common share (Note 3)                                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                                                                                |       |                             | $          | 0.03 |   |   | $ | (0.07 | ) |   | $ | (0.41 | ) |   | $ | (0.56 | ) |
| Shares used in computing net income (loss) per share  (Note 3)                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                                                                                |       |                             | 7,782      |   |   | 7,782 |   |   | 7,782 |   |   | 7,782 |   |

 

61

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**McCormick &Schmick’s Seafood Restaurants, Inc. and SubsidiariesConsolidated Statements of Cash Flows(In thousands)**
| ** **                                                                               | ** ** | **Year Ended**             | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                               | ** ** | **December 28, 2002** | ** ** | **December 27, 2003** | ** ** |
| ** **                                                                               | ** ** | **As  previously  reported**    | ** ** | **Restated** | ** ** | **As  previously  reported** | ** ** | **Restated** | ** ** |
| **Operating activities**                                                                 | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                                        |       | $                               | 207        |   | $ | (543 | ) | $ | (3,180 | ) | $ | (4,362 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities |       |                            |       |   |   |   |   |   |   |
| Depreciation and  amortization                                                           |       | 8,717                           |       | 8,808 |   | 9,675 |   | 9,853 |   |
| Amortization of unearned  compensation                                                   |       | —                          |       | — |   | 9 |   | 9 |   |
| Provision for doubtful  accounts                                                         |       | 165                             |       | 165 |   | 48 |   | 48 |   |
| Deferred income taxes                                                                    |       | 3,054                           |       | 2,570 |   | 1,489 |   | 1,323 |   |
| Write off of deferred  loan costs on early extinguishment of debt                        |       | —                          |       | — |   | 2,313 |   | 2,313 |   |
| Impairment of assets                                                                     |       | —                          |       | — |   | 1,513 |   | 1,513 |   |
| Accrued dividends and  accretion on mandatorily redeemable preferred stock               |       | 3,347                           |       | 3,347 |   | 3,733 |   | 3,733 |   |
| Changes in operating assets and liabilities                                              |       |                            |       |   |   |   |   |   |   |
| Trade accounts  receivable                                                               |       | (392                            | )          | (392 | ) | (446 | ) | (446 | ) |
| Inventories                                                                              |       | (88                             | )          | (88 | ) | (387 | ) | (387 | ) |
| Prepaid expenses and  other current assets                                               |       | 1,941                           |       | 1,941 |   | (495 | ) | (495 | ) |
| Accounts payable                                                                         |       | (3,752                          | )          | (3,752 | ) | 2,978 |   | 2,978 |   |
| Accrued expenses                                                                         |       | (636                            | )          | (636 | ) | 2,310 |   | 2,310 |   |
| Other long-term  liabilities                                                             |       | 810                             |       | 3,162 |   | 819 |   | 2,262 |   |
| Net cash provided by  operating activities                                               |       | 13,373                          |       | 14,582 |   | 20,379 |   | 20,652 |   |
| **Investing activities**                                                                 |       |                            |       |   |   |   |   |   |   |
| Acquisition of equipment  and leasehold improvements                                     |       | (7,242                          | )          | (8,451 | ) | (14,616 | ) | (14,889 | ) |
| Other assets                                                                             |       | (328                            | )          | (328 | ) | (67 | ) | (67 | ) |
| Net cash used in  investing activities                                                   |       | (7,570                          | )          | (8,779 | ) | (14,683 | ) | (14,956 | ) |
| **Financing activities**                                                                 |       |                            |       |   |   |   |   |   |   |
| Increase in book  overdraft                                                              |       | 2,922                           |       | 2,922 |   | 2,130 |   | 2,130 |   |
| Loan costs                                                                               |       | (99                             | )          | (99 | ) | (1,398 | ) | (1,398 | ) |
| Payments on long-term  debt                                                              |       | (6,963                          | )          | (6,963 | ) | (45,056 | ) | (45,056 | ) |
| Borrowings made on  revolving credit facility                                            |       | 25,000                          |       | 25,000 |   | 103,000 |   | 103,000 |   |
| Payments made on  revolving credit facility                                              |       | (27,000                         | )          | (27,000 | ) | (64,500 | ) | (64,500 | ) |
| Proceeds from  sale/leaseback of equipment                                               |       | 1,635                           |       | 1,635 |   | — |   | — |   |
| Disbursements of note  receivable                                                        |       | (350                            | )          | (350 | ) | — |   | — |   |
| Proceeds from notes  receivable                                                          |       | 15                              |       | 15 |   | 26 |   | 26 |   |
| Payments on capital  lease obligations                                                   |       | (46                             | )          | (46 | ) | (390 | ) | (390 | ) |
| Net cash used in financing  activities                                                   |       | (4,886                          | )          | (4,886 | ) | (6,188 | ) | (6,188 | ) |
| Net increase (decrease)  in cash and cash equivalents                               |       | 917                             |       | 917 |   | (492 | ) | (492 | ) |
| Cash and cash  equivalents, beginning of year                                            |       | 2,028                           |       | 2,028 |   | 2,945 |   | 2,945 |   |
| Cash and cash equivalents, end of year                                                   |       | $                               | 2,945      |   | $ | 2,945 |   | $ | 2,453 |   | $ | 2,453 |   |

 

62

----

**Unaudited Selected Quarterly Financial Data**

The following sets forththe effects of the restatements to the Company’s Consolidated Balance Sheets atMarch 27, 2004, June 26, 2004, and September 25, 2004 and to theCompany’s Consolidated Statements of Operations, and Consolidated Statements ofCash Flows for the quarterly periods then ended and for each of the quarterlyperiods in the fiscal year ended December 27, 2003. The Company’sConsolidated Balance Sheet, Consolidated Statement of Operations andConsolidated Statement of Cash Flows for the quarterly period ended December25, 2004 is presented for comparative purposes.

**McCormick &Schmick’s Seafood Restaurants, Inc. and SubsidiariesConsolidated Balance Sheets—Unaudited(In thousands, except per share data)**
| ** **                                                                                                  | ** ** | **Quarter Ended**           | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                  | ** ** | **March 27, 2004**     | ** ** | **June 26, 2004** | ** ** | **September 25, 2004** | ** ** | ** December 25, 2004   ** | ** ** |
| ** **                                                                                                  | ** ** | **As previously  reported** | ** ** | **Restated** | ** ** | **As previously  reported** | ** ** | **Restated** | ** ** | **As previously  reported** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| **Assets**                                                                                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets                                                                                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                                  |       |                             | $          | 2,404 |   |   | $ | 2,404 |   |   | $ | 1,101 |   |   | $ | 1,101 |   |   | $ | 2,573 |   |   | $ | 2,573 |   |   | $ | 451 |   |   |
| Trade accounts  receivable, net                                                                             |       |                             | 5,605      |   |   | 5,605 |   |   | 7,049 |   |   | 7,049 |   |   | 5,425 |   |   | 5,425 |   |   | 4,988 |   |   |
| Inventories                                                                                                 |       |                             | 2,938      |   |   | 2,938 |   |   | 3,207 |   |   | 3,207 |   |   | 3,219 |   |   | 3,219 |   |   | 3,384 |   |   |
| Prepaid expenses  and other current assets                                                                  |       |                             | 3,067      |   |   | 3,067 |   |   | 3,673 |   |   | 3,673 |   |   | 2,891 |   |   | 2,891 |   |   | 2,846 |   |   |
| Deferred income  taxes                                                                                      |       |                             | 96         |   |   | 96 |   |   | 96 |   |   | 96 |   |   | 96 |   |   | 96 |   |   | 830 |   |   |
| Total current  assets                                                                                       |       |                             | 14,110     |   |   | 14,110 |   |   | 15,126 |   |   | 15,126 |   |   | 14,204 |   |   | 14,204 |   |   | 12,499 |   |   |
| Equipment and  leasehold improvements, net                                                                  |       |                             | 82,993     |   |   | 84,958 |   |   | 85,441 |   |   | 89,305 |   |   | 86,534 |   |   | 90,574 |   |   | 92,744 |   |   |
| Other assets                                                                                                |       |                             | 54,381     |   |   | 54,381 |   |   | 54,306 |   |   | 54,306 |   |   | 53,707 |   |   | 53,707 |   |   | 53,821 |   |   |
| Goodwill                                                                                                    |       |                             | 21,209     |   |   | 19,996 |   |   | 21,209 |   |   | 19,996 |   |   | 21,209 |   |   | 19,996 |   |   | 19,996 |   |   |
| Total assets                                                                                                |       |                             | $          | 172,693 |   |   | $ | 173,445 |   |   | $ | 176,082 |   |   | $ | 178,733 |   |   | $ | 175,654 |   |   | $ | 178,481 |   |   | $ | 179,060 |   |   |
| **Liabilities  and Members’/ Stockholders’ Equity**                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                                                                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Book overdraft                                                                                              |       |                             | $          | 2,733 |   |   | $ | 2,733 |   |   | $ | 3,147 |   |   | $ | 3,147 |   |   | $ | 2,596 |   |   | $ | 2,596 |   |   | $ | 429 |   |   |
| Accounts payable                                                                                            |       |                             | 10,370     |   |   | 10,370 |   |   | 14,462 |   |   | 14,462 |   |   | 10,839 |   |   | 10,839 |   |   | 12,875 |   |   |
| Accrued expenses                                                                                            |       |                             | 14,326     |   |   | 14,326 |   |   | 14,510 |   |   | 14,510 |   |   | 15,305 |   |   | 15,305 |   |   | 15,197 |   |   |
| Capital lease  obligations, current portion                                                                 |       |                             | 422        |   |   | 422 |   |   | 428 |   |   | 428 |   |   | 435 |   |   | 435 |   |   | 433 |   |   |
| Derivative  instrument, current                                                                             |       |                             | 642        |   |   | 642 |   |   | 363 |   |   | 363 |   |   | 174 |   |   | 174 |   |   | — |   |   |
| Total current  liabilities                                                                                  |       |                             | 28,493     |   |   | 28,493 |   |   | 32,910 |   |   | 32,910 |   |   | 29,349 |   |   | 29,349 |   |   | 28,934 |   |   |
| Revolving credit  facility                                                                                  |       |                             | 50,500     |   |   | 50,500 |   |   | 51,000 |   |   | 51,000 |   |   | 17,000 |   |   | 17,000 |   |   | 12,000 |   |   |
| Mandatorily  redeemable preferred stock                                                                     |       |                             | 24,149     |   |   | 24,149 |   |   | 25,203 |   |   | 25,203 |   |   | — |   |   | — |   |   | — |   |   |
| Other long-term  liabilities                                                                                |       |                             | 4,723      |   |   | 8,064 |   |   | 4,887 |   |   | 10,529 |   |   | 5,121 |   |   | 11,338 |   |   | 11,791 |   |   |
| Capital lease  obligations, noncurrent portion                                                              |       |                             | 1,032      |   |   | 1,032 |   |   | 923 |   |   | 923 |   |   | 812 |   |   | 812 |   |   | 707 |   |   |
| Deferred income  taxes                                                                                      |       |                             | 4,532      |   |   | 4,356 |   |   | 4,045 |   |   | 3,711 |   |   | 4,331 |   |   | 3,841 |   |   | 1,558 |   |   |
| Total liabilities                                                                                           |       |                             | 113,429    |   |   | 116,594 |   |   | 118,968 |   |   | 124,276 |   |   | 56,613 |   |   | 62,340 |   |   | 54,990 |   |   |
| Members’/Stockholders’ equity                                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Members’ equity in  McCormick & Schmick Holdings LLC                                          |       |                             | 62,822     |   |   | 62,822 |   |   | 62,818 |   |   | 62,818 |   |   | — |   |   | — |   |   | — |   |   |
| Common stock,  $0.001 par value, 120,000 shares authorized, 13,782 shares issued  and outstanding |       |                             | —     |   |   | — |   |   | — |   |   | — |   |   | 14 |   |   | 14 |   |   | 14 |   |   |
| Additional paid in  capital                                                                                 |       |                             | —     |   |   | — |   |   | — |   |   | — |   |   | 127,695 |   |   | 127,695 |   |   | 127,917 |   |   |
| Accumulated  deficit                                                                                        |       |                             | (3,174     | ) |   | (5,587 | ) |   | (5,510 | ) |   | (8,167 | ) |   | (8,604 | ) |   | (11,504 | ) |   | (3,861 | ) |   |
| Accumulated other  comprehensive loss                                                                       |       |                             | (384       | ) |   | (384 | ) |   | (194 | ) |   | (194 | ) |   | (64 | ) |   | (64 | ) |   | — |   |   |
| Total members’ /  stockholders’ equity                                                       |       |                             | 59,264     |   |   | 56,851 |   |   | 57,114 |   |   | 54,457 |   |   | 119,041 |   |   | 116,141 |   |   | 124,070 |   |   |
| Total liabilities  and members’ / stockholders’ equity                                       |       |                             | $          | 172,693 |   |   | $ | 173,445 |   |   | $ | 176,082 |   |   | $ | 178,733 |   |   | $ | 175,654 |   |   | $ | 178,481 |   |   | $ | 179,060 |   |   |

 

63

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**McCormick & Schmick’s SeafoodRestaurants, Inc. and Subsidiaries Consolidated Statements of Operations—Unaudited(In thousands, except per share data)**
| ** **                                                                                                       | ** ** | **Quarter Ended**                   | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **March 27, 2004**             | ** ** | **June 26, 2004** | ** ** | **September 25, 2004** | ** ** | **December 25, 2004** | ** ** |
| ** **                                                                                                       | ** ** | **As   previously   reported** | ** ** | **  Restated  ** | ** ** | **As   previously   reported** | ** ** | **  Restated  ** | ** ** | **As   previously   reported** | ** ** | **  Restated  ** | ** ** | ** ** | ** ** |   |
| Revenues                                                                                                         |       |                                     | $          | 54,513 | ** ** |   |   | $ | 54,513 | ** ** |   |   | $ | 59,723 | ** ** |   |   | $ | 59,723 | ** ** |   |   | $ | 59,597 | ** ** |   |   | $ | 59,597 | ** ** |   |   | $ | 64,924 |   |   |
| Restaurant operating  costs                                                                                      |       |                                     |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   |   |   |
| Food and beverage                                                                                                |       |                                     | 16,286     | ** ** |   |   | 16,286 | ** ** |   |   | 17,931 | ** ** |   |   | 17,931 | ** ** |   |   | 17,776 | ** ** |   |   | 17,776 | ** ** |   |   | 18,880 |   |   |
| Labor                                                                                                            |       |                                     | 17,810     | ** ** |   |   | 17,810 | ** ** |   |   | 18,732 | ** ** |   |   | 18,732 | ** ** |   |   | 19,013 | ** ** |   |   | 19,013 | ** ** |   |   | 19,526 |   |   |
| Operating                                                                                                        |       |                                     | 7,874      | ** ** |   |   | 7,874 | ** ** |   |   | 8,744 | ** ** |   |   | 8,744 | ** ** |   |   | 8,947 | ** ** |   |   | 8,947 | ** ** |   |   | 9,639 |   |   |
| Occupancy                                                                                                        |       |                                     | 4,513      | ** ** |   |   | 4,848 | ** ** |   |   | 5,129 | ** ** |   |   | 5,397 | ** ** |   |   | 5,137 | ** ** |   |   | 5,434 | ** ** |   |   | 5,722 |   |   |
| Total restaurant operating costs                                                                                 |       |                                     | 46,483     | ** ** |   |   | 46,818 | ** ** |   |   | 50,536 | ** ** |   |   | 50,804 | ** ** |   |   | 50,873 | ** ** |   |   | 51,170 | ** ** |   |   | 53,767 |   |   |
| General and administrative  expenses                                                                             |       |                                     | 2,549      | ** ** |   |   | 2,549 | ** ** |   |   | 2,616 | ** ** |   |   | 2,616 | ** ** |   |   | 3,340 | ** ** |   |   | 3,340 | ** ** |   |   | 3,557 |   |   |
| Restaurant pre-opening costs                                                                                     |       |                                     | 936        | ** ** |   |   | 994 | ** ** |   |   | 1,052 | ** ** |   |   | 1,120 | ** ** |   |   | 95 | ** ** |   |   | 112 | ** ** |   |   | 167 |   |   |
| Depreciation and amortization                                                                                    |       |                                     | 2,626      | ** ** |   |   | 2,683 | ** ** |   |   | 2,836 | ** ** |   |   | 2,902 | ** ** |   |   | 2,605 | ** ** |   |   | 2,690 | ** ** |   |   | 2,448 |   |   |
| Management fees and covenants not to compete                                                      |       |                                     | 638        | ** ** |   |   | 638 | ** ** |   |   | 3,603 | ** ** |   |   | 3,603 | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — |   |   |
| Total costs and expenses                                                                                         |       |                                     | 53,232     | ** ** |   |   | 53,682 | ** ** |   |   | 60,643 | ** ** |   |   | 61,045 | ** ** |   |   | 56,913 | ** ** |   |   | 57,312 | ** ** |   |   | 59,939 |   |   |
| Operating income (loss)                                                                                          |       |                                     | 1,281      | ** ** |   |   | 831 | ** ** |   |   | (920 | ) |   |   | (1,322 | ) |   |   | 2,684 | ** ** |   |   | 2,285 | ** ** |   |   | 4,985 |   |   |
| Interest expense                                                                                                 |       |                                     | 857        | ** ** |   |   | 857 | ** ** |   |   | 939 | ** ** |   |   | 939 | ** ** |   |   | 569 | ** ** |   |   | 570 | ** ** |   |   | 314 |   |   |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock                                       |       |                                     | 1,012      | ** ** |   |   | 1,012 | ** ** |   |   | 1,054 | ** ** |   |   | 1,054 | ** ** |   |   | 3,693 | ** ** |   |   | 3,693 | ** ** |   |   | — |   |   |
| Write off of deferred loan costs on early  extinguishment of debt                                                |       |                                     | —     | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | 1,288 | ** ** |   |   | 1,288 | ** ** |   |   | — |   |   |
| Income (loss) before income taxes and accrued  dividends and accretion on mandatorily redeemable preferred stock |       |                                     | (588       | ) |   |   | (1,038 | ) |   |   | (2,913 | ) |   |   | (3,315 | ) |   |   | (2,866 | ) |   |   | (3,266 | ) |   |   | 4,671 |   |   |
| Income tax expense (benefit)                                                                                     |       |                                     | 161        | ** ** |   |   | (15 | ) |   |   | (577 | ) |   |   | (734 | ) |   |   | 228 | ** ** |   |   | 71 | ** ** |   |   | (2,973 | ) |   |
| Net income (loss)                                                                                                |       |                                     | $          | (749 | ) |   |   | $ | (1,023 | ) |   |   | $ | (2,336 | ) |   |   | $ | (2,581 | ) |   |   | $ | (3,094 | ) |   |   | $ | (3,337 | ) |   |   | $ | 7,644 |   |   |
| Net income (loss) per share (Note 3)                                                                             |       |                                     |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   |   |   |
| Basic and diluted                                                                                                |       |                                     | $          | (0.10 | ) |   |   | $ | (0.13 | ) |   |   | $ | (0.30 | ) |   |   | $ | (0.33 | ) |   |   | $ | (0.25 | ) |   |   | $ | (0.27 | ) |   |   | $ | 0.55 |   |   |
| Shares used in computing net income (loss) per  share (Note 3)                                         |       |                                     |       | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   | ** ** |   |   |   |   |   |
| Basic                                                                                                            |       |                                     | 7,782      | ** ** |   |   | 7,782 | ** ** |   |   | 7,782 | ** ** |   |   | 7,782 | ** ** |   |   | 12,299 | ** ** |   |   | 12,299 | ** ** |   |   | 13,782 |   |   |
| Diluted                                                                                                          |       |                                     | 7,782      | ** ** |   |   | 7,782 | ** ** |   |   | 7,782 | ** ** |   |   | 7,782 | ** ** |   |   | 12,299 | ** ** |   |   | 12,299 | ** ** |   |   | 13,896 |   |   |
|                                                                                                                  |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

64

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**McCormick & Schmick’s SeafoodRestaurants, Inc. and SubsidiariesConsolidated Statements of Cash Flows—Unaudited(In thousands)**
| ** **                                                                               | ** ** | **Quarter Ended**       | ** ** |                        |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|
| ** **                                                                               | ** ** | **March 27, 2004** | ** ** | **June 26, 2004** | ** ** | **September 25, 2004** | ** ** | **December 25, 2004** | ** ** |
| ** **                                                                               | ** ** | **As  previously  reported** | ** ** | **Restated**                | ** ** | **As  previously  reported** | ** ** | **Restated** | ** ** | **As  previously  reported** | ** ** | **Restated** | ** ** | ** ** | ** ** |
| **Operating activities**                                                                 |       |                         |       |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                        |       |                         | $          | (749                        | ) |   | $ | (1,023 | ) |   | $ | (2,336 | ) |   | $ | (2,581 | ) |   | $ | (3,094 | ) |   | $ | (3,337 | ) |   | $ | 7,644 |   |   |
| Adjustments to reconcile  net income (loss) to net cash provided by operating activities |       |                         |       |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                           |       |                         | 2,626      |                        |   | 2,683 |   |   | 2,836 |   |   | 2,902 |   |   | 2,605 |   |   | 2,690 |   |   | 2,448 |   |   |
| Amortization of  unearned compensation                                                   |       |                         | 3          |                        |   | 3 |   |   | 2 |   |   | 2 |   |   | 37 |   |   | 37 |   |   | — |   |   |
| Deferred income  taxes                                                                   |       |                         | 161        |                        |   | (15 | ) |   | (576 | ) |   | (734 | ) |   | 227 |   |   | 71 |   |   | (3,127 | ) |   |
| Write off of  deferred loan costs on early extinguishment of debt                        |       |                         | —     |                        |   | — |   |   | — |   |   | — |   |   | 1,288 |   |   | 1,288 |   |   | — |   |   |
| Accrued dividends and  accretion on mandatorily redeemable preferred stock               |       |                         | 1,012      |                        |   | 1,012 |   |   | 1,054 |   |   | 1,054 |   |   | 3,693 |   |   | 3,693 |   |   | — |   |   |
| Changes in  operating assets and liabilities                                             |       |                         |       |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade accounts  receivable                                                               |       |                         | (1,916     | )                           |   | (1,916 | ) |   | 613 |   |   | 614 |   |   | 181 |   |   | 182 |   |   | (179 | ) |   |
| Inventories                                                                              |       |                         | (234       | )                           |   | (234 | ) |   | (269 | ) |   | (269 | ) |   | (12 | ) |   | (12 | ) |   | (165 | ) |   |
| Prepaid expenses  and other current   assets                                             |       |                         | (700       | )                           |   | (700 | ) |   | (606 | ) |   | (606 | ) |   | 782 |   |   | 782 |   |   | 45 |   |   |
| Accounts payable                                                                         |       |                         | (846       | )                           |   | (846 | ) |   | 4,092 |   |   | 4,092 |   |   | (3,623 | ) |   | (3,623 | ) |   | 2,036 |   |   |
| Accrued expenses                                                                         |       |                         | 1,628      |                        |   | 1,628 |   |   | 184 |   |   | 184 |   |   | 796 |   |   | 796 |   |   | (109 | ) |   |
| Other long-term  liabilities                                                             |       |                         | 88         |                        |   | 1,315 |   |   | 164 |   |   | 2,465 |   |   | 234 |   |   | 808 |   |   | 454 |   |   |
| Net cash provided  by operating   activities                                             |       |                         | 1,073      |                        |   | 1,907 |   |   | 5,158 |   |   | 7,123 |   |   | 3,114 |   |   | 3,375 |   |   | 9,047 |   |   |
| **Investing  activities**                                                                |       |                         |       |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition of  equipment and leasehold improvements                                     |       |                         | (10,648    | )                           |   | (11,482 | ) |   | (7,199 | ) |   | (9,164 | ) |   | (2,174 | ) |   | (2,435 | ) |   | (3,936 | ) |   |
| Other assets                                                                             |       |                         | (53        | )                           |   | (53 | ) |   | (67 | ) |   | (67 | ) |   | 4 |   |   | 4 |   |   | (151 | ) |   |
| Net cash used in  investing activities                                                   |       |                         | (10,701    | )                           |   | (11,535 | ) |   | (7,266 | ) |   | (9,231 | ) |   | (2,170 | ) |   | (2,431 | ) |   | (4,087 | ) |   |
| **Financing  activities**                                                                |       |                         |       |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Increase  (decrease) in book overdraft                                              |       |                         | (2,319     | )                           |   | (2,319 | ) |   | 414 |   |   | 414 |   |   | (551 | ) |   | (551 | ) |   | (2,167 | ) |   |
| Loan costs                                                                               |       |                         | —     |                        |   | — |   |   | — |   |   | — |   |   | (775 | ) |   | (775 | ) |   | (30 | ) |   |
| Borrowings made on  revolving credit facility                                            |       |                         | 25,500     |                        |   | 25,500 |   |   | 14,500 |   |   | 14,500 |   |   | 22,500 |   |   | 22,500 |   |   | 3,000 |   |   |
| Payments made on  revolving credit facility                                              |       |                         | (13,500    | )                           |   | (13,500 | ) |   | (14,000 | ) |   | (14,000 | ) |   | (56,500 | ) |   | (56,500 | ) |   | (8,000 | ) |   |
| Proceeds from  issuance of common stock                                                  |       |                         | —     |                        |   | — |   |   | — |   |   | — |   |   | 64,854 |   |   | 64,854 |   |   | 222 |   |   |
| Redemption of  senior preferred stock                                               |       |                         | —     |                        |   | — |   |   | — |   |   | — |   |   | (28,896 | ) |   | (28,896 | ) |   | — |   |   |
| Payments on  capital lease obligations                                              |       |                         | (102       | )                           |   | (102 | ) |   | (103 | ) |   | (103 | ) |   | (104 | ) |   | (104 | ) |   | (107 | ) |   |
| Purchase of  Class B units                                                          |       |                         | —     |                        |   | — |   |   | (6 | ) |   | (6 | ) |   | — |   |   | — |   |   | — |   |   |
| Net cash provided  by (used in) financing activities                                     |       |                         | 9,579      |                        |   | 9,579 |   |   | 805 |   |   | 805 |   |   | 528 |   |   | 528 |   |   | (7,082 | ) |   |
| Net increase  (decrease) in cash and cash equivalents                                    |       |                         | (49        | )                           |   | (49 | ) |   | (1,303 | ) |   | (1,303 | ) |   | 1,472 |   |   | 1,472 |   |   | (2,122 | ) |   |
| Cash and cash  equivalents, beginning of period                                          |       |                         | 2,453      |                        |   | 2,453 |   |   | 2,404 |   |   | 2,404 |   |   | 1,101 |   |   | 1,101 |   |   | 2,573 |   |   |
| Cash and cash  equivalents, end of period                                                |       |                         | $          | 2,404                       |   |   | $ | 2,404 |   |   | $ | 1,101 |   |   | $ | 1,101 |   |   | $ | 2,573 |   |   | $ | 2,573 |   |   | $ | 451 |   |   |

 

65

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**McCormick &Schmick’s Seafood Restaurants, Inc. and SubsidiariesConsolidated Balance Sheets**—Unaudited(In thousands)
| ** **                                                         | ** ** | **Quarter Ended**                | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **March 29, 2003**     | ** ** | **June 28, 2003** | ** ** | **September 27, 2003** | ** ** | **December 27, 2003** | ** ** |
| ** **                                                         | ** ** | **As previously  reported** | ** ** | **Restated** | ** ** | **As previously  reported** | ** ** | **Restated** | ** ** | **As previously  reported** | ** ** | **Restated** | ** ** | **As previously  reported** | ** ** | **Restated** | ** ** |
| **Assets**                                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets                                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                         |       |                             | $          | 2,991 |   |   | $ | 2,991 |   |   | $ | 1,309 |   |   | $ | 1,309 |   |   | $ | 2,423 |   |   | $ | 2,423 |   |   | $ | 2,453 |   |   | $ | 2,453 |   |
| Trade accounts  receivable,  net                                   |       |                             | 3,363      |   |   | 3,363 |   |   | 3,372 |   |   | 3,372 |   |   | 4,916 |   |   | 4,916 |   |   | 3,689 |   |   | 3,689 |   |
| Inventories                                                        |       |                             | 2,330      |   |   | 2,330 |   |   | 2,430 |   |   | 2,430 |   |   | 2,566 |   |   | 2,566 |   |   | 2,704 |   |   | 2,704 |   |
| Prepaid expenses  and other current assets                         |       |                             | 2,120      |   |   | 2,120 |   |   | 2,333 |   |   | 2,333 |   |   | 2,261 |   |   | 2,261 |   |   | 2,367 |   |   | 2,367 |   |
| Deferred income  taxes                                             |       |                             | —     |   |   | — |   |   | — |   |   | — |   |   | — |   |   | — |   |   | 96 |   |   | 96 |   |
| Total current  assets                                              |       |                             | 10,804     |   |   | 10,804 |   |   | 9,444 |   |   | 9,444 |   |   | 12,166 |   |   | 12,166 |   |   | 11,309 |   |   | 11,309 |   |
| Equipment and  leasehold improvements, net                         |       |                             | 70,090     |   |   | 71,139 |   |   | 72,608 |   |   | 73,613 |   |   | 73,639 |   |   | 74,684 |   |   | 74,829 |   |   | 76,017 |   |
| Other assets                                                       |       |                             | 55,231     |   |   | 55,231 |   |   | 55,323 |   |   | 55,323 |   |   | 55,539 |   |   | 55,539 |   |   | 54,470 |   |   | 54,470 |   |
| Goodwill                                                           |       |                             | 21,209     |   |   | 19,996 |   |   | 21,209 |   |   | 19,996 |   |   | 21,209 |   |   | 19,996 |   |   | 21,209 |   |   | 19,996 |   |
| Total assets                                                       |       |                             | $          | 157,334 |   |   | $157,170 |   |   | $ | 158,584 |   |   | $ | 158,376 |   |   | $ | 162,553 |   |   | $ | 162,385 |   |   | $ | 161,817 |   |   | $ | 161,792 |   |
| **Liabilities and Members’  Equity**                          |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                                                |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Book overdraft                                                     |       |                             | $          | 3,231 |   |   | $ | 3,231 |   |   | $ | 3,127 |   |   | $ | 3,127 |   |   | $ | 4,040 |   |   | $ | 4,040 |   |   | $ | 5,052 |   |   | $ | 5,052 |   |
| Accounts payable                                                   |       |                             | 6,288      |   |   | 6,288 |   |   | 8,143 |   |   | 8,143 |   |   | 8,417 |   |   | 8,417 |   |   | 11,216 |   |   | 11,216 |   |
| Accrued expenses                                                   |       |                             | 9,976      |   |   | 9,976 |   |   | 10,613 |   |   | 10,613 |   |   | 11,478 |   |   | 11,478 |   |   | 12,698 |   |   | 12,698 |   |
| Current maturities  of long-term debt                              |       |                             | 6,858      |   |   | 6,858 |   |   | 6,929 |   |   | 6,929 |   |   | 7,000 |   |   | 7,000 |   |   | — |   |   | — |   |
| Capital lease  obligations, current portion                        |       |                             | 367        |   |   | 367 |   |   | 384 |   |   | 384 |   |   | 409 |   |   | 409 |   |   | 415 |   |   | 415 |   |
| Derivative  instrument,  current                                   |       |                             | 800        |   |   | 800 |   |   | 800 |   |   | 800 |   |   | 800 |   |   | 800 |   |   | 805 |   |   | 805 |   |
| Deferred income  tax                                               |       |                             | 374        |   |   | 374 |   |   | 374 |   |   | 374 |   |   | 374 |   |   | 374 |   |   | — |   |   | — |   |
| Total current  liabilities                                         |       |                             | 27,894     |   |   | 27,894 |   |   | 30,370 |   |   | 30,370 |   |   | 32,518 |   |   | 32,518 |   |   | 30,186 |   |   | 30,186 |   |
| Revolving credit  facility                                         |       |                             | 2,000      |   |   | 2,000 |   |   | — |   |   | — |   |   | 2,000 |   |   | 2,000 |   |   | 38,500 |   |   | 38,500 |   |
| Long-term debt                                                     |       |                             | 36,500     |   |   | 36,500 |   |   | 34,750 |   |   | 34,750 |   |   | 33,000 |   |   | 33,000 |   |   | — |   |   | — |   |
| Mandatorily  redeemable preferred stock                            |       |                             | 20,320     |   |   | 20,320 |   |   | 21,236 |   |   | 21,236 |   |   | 22,186 |   |   | 22,186 |   |   | 23,137 |   |   | 23,137 |   |
| Other long-term  liabilities                                       |       |                             | 3,670      |   |   | 4,587 |   |   | 3,791 |   |   | 4,973 |   |   | 4,301 |   |   | 5,920 |   |   | 4,635 |   |   | 6,749 |   |
| Capital lease  obligations, non-current portion                    |       |                             | 1,484      |   |   | 1,484 |   |   | 1,354 |   |   | 1,354 |   |   | 1,246 |   |   | 1,246 |   |   | 1,141 |   |   | 1,141 |   |
| Deferred income  taxes                                             |       |                             | 2,817      |   |   | 2,901 |   |   | 4,601 |   |   | 4,473 |   |   | 5,490 |   |   | 5,262 |   |   | 4,312 |   |   | 4,312 |   |
| Derivative  instrument, non-current                                |       |                             | 500        |   |   | 500 |   |   | 425 |   |   | 425 |   |   | 215 |   |   | 215 |   |   | — |   |   | — |   |
| Total liabilities                                                  |       |                             | 95,185     |   |   | 96,186 |   |   | 96,527 |   |   | 97,581 |   |   | 100,956 |   |   | 102,347 |   |   | 101,911 |   |   | 104,025 |   |
| Members’ equity                                               |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Members’ equity in  McCormick & Schmick Holdings LLC |       |                             | 62,812     |   |   | 62,812 |   |   | 62,814 |   |   | 62,814 |   |   | 62,817 |   |   | 62,817 |   |   | 62,819 |   |   | 62,819 |   |
| Retained earnings  (accumulated deficit)                           |       |                             | 130        |   |   | (1,035 | ) |   | (12 | ) |   | (1,274 | ) |   | (605 | ) |   | (2,164 | ) |   | (2,425 | ) |   | (4,564 | ) |
| Accumulated other  comprehensive loss                              |       |                             | (793       | ) |   | (793 | ) |   | (745 | ) |   | (745 | ) |   | (615 | ) |   | (615 | ) |   | (488 | ) |   | (488 | ) |
| Total members’  equity                                        |       |                             | 62,149     |   |   | 60,984 |   |   | 62,057 |   |   | 60,795 |   |   | 61,597 |   |   | 60,038 |   |   | 59,906 |   |   | 57,767 |   |
| Total liabilities and  members’ equity                        |       |                             | $          | 157,334 |   |   | $ | 157,170 |   |   | $ | 158,584 |   |   | $ | 158,376 |   |   | $ | 162,553 |   |   | $ | 162,385 |   |   | $ | 161,817 |   |   | $ | 161,792 |   |

 

66

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**McCormick &Schmick’s Seafood Restaurants, Inc. and Subsidiaries Consolidated Statements of Operations—Unaudited(In thousands, except per share data)**
| ** **                                                                                                        | ** ** | **Quarter Ended**       | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                                        | ** ** | **March 29, 2003** | ** ** | **June 28, 2003** | ** ** | **September 27, 2003** | ** ** | **December 27, 2003** | ** ** |
| ** **                                                                                                        | ** ** | **As  previously  reported** | ** ** | ** Restated ** | ** ** | **As  previously  reported** | ** ** | ** Restated ** | ** ** | **As  previously  reported** | ** ** | ** Restated ** | ** ** | **As  previously  reported** | ** ** | ** Restated ** | ** ** |
| Revenues                                                                                                          |       |                         | $          | 45,049 |   |   |   | $ | 45,049 |   |   |   | $ | 48,642 |   |   |   | $ | 48,642 |   |   |   | $ | 48,895 |   |   |   | $ | 48,895 |   |   |   | $ | 54,131 |   |   |   | $ | 54,131 |   |   |
| Restaurant operating costs                                                                                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Food and beverage                                                                                                 |       |                         | 13,397     |   |   |   | 13,397 |   |   |   | 14,163 |   |   |   | 14,163 |   |   |   | 14,522 |   |   |   | 14,522 |   |   |   | 15,877 |   |   |   | 15,877 |   |   |
| Labor                                                                                                             |       |                         | 14,464     |   |   |   | 14,464 |   |   |   | 15,109 |   |   |   | 15,109 |   |   |   | 15,488 |   |   |   | 15,488 |   |   |   | 16,583 |   |   |   | 16,583 |   |   |
| Operating                                                                                                         |       |                         | 6,811      |   |   |   | 6,811 |   |   |   | 7,082 |   |   |   | 7,082 |   |   |   | 7,274 |   |   |   | 7,274 |   |   |   | 8,077 |   |   |   | 8,077 |   |   |
| Occupancy                                                                                                         |       |                         | 3,674      |   |   |   | 3,923 |   |   |   | 3,901 |   |   |   | 4,170 |   |   |   | 3,938 |   |   |   | 4,213 |   |   |   | 4,316 |   |   |   | 4,584 |   |   |
| Total restaurant  operating costs                                                                                 |       |                         | 38,346     |   |   |   | 38,595 |   |   |   | 40,255 |   |   |   | 40,524 |   |   |   | 41,222 |   |   |   | 41,497 |   |   |   | 44,853 |   |   |   | 45,121 |   |   |
| General and  administrative expenses                                                                              |       |                         | 1,941      |   |   |   | 1,941 |   |   |   | 2,016 |   |   |   | 2,016 |   |   |   | 2,126 |   |   |   | 2,126 |   |   |   | 3,686 |   |   |   | 3,686 |   |   |
| Restaurant  pre-opening costs                                                                                     |       |                         | 7          |   |   |   | 4 |   |   |   | 104 |   |   |   | 101 |   |   |   | 635 |   |   |   | 712 |   |   |   | 364 |   |   |   | 402 |   |   |
| Depreciation and amortization                                                                                     |       |                         | 2,341      |   |   |   | 2,385 |   |   |   | 2,331 |   |   |   | 2,375 |   |   |   | 2,406 |   |   |   | 2,450 |   |   |   | 2,597 |   |   |   | 2,643 |   |   |
| Management fees  and covenants not to compete                                                                     |       |                         | 637        |   |   |   | 637 |   |   |   | 637 |   |   |   | 637 |   |   |   | 637 |   |   |   | 637 |   |   |   | 639 |   |   |   | 639 |   |   |
| Impairment of  assets                                                                                             |       |                         | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,513 |   |   |   | 1,513 |   |   |
| Total costs and expenses                                                                                          |       |                         | 43,272     |   |   |   | 43,562 |   |   |   | 45,343 |   |   |   | 45,653 |   |   |   | 47,026 |   |   |   | 47,422 |   |   |   | 53,652 |   |   |   | 54,004 |   |   |
| Operating income                                                                                                  |       |                         | 1,777      |   |   |   | 1,487 |   |   |   | 3,299 |   |   |   | 2,989 |   |   |   | 1,869 |   |   |   | 1,473 |   |   |   | 479 |   |   |   | 127 |   |   |
| Interest expense                                                                                                  |       |                         | 832        |   |   |   | 832 |   |   |   | 768 |   |   |   | 768 |   |   |   | 703 |   |   |   | 703 |   |   |   | 766 |   |   |   | 766 |   |   |
| Accrued dividends  and accretion  on mandatorily redeemable preferred stock                                       |       |                         | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 950 |   |   |   | 950 |   |   |   | 951 |   |   |   | 951 |   |   |
| Write off of  deferred loan costs on early extinguishment of debt                                                 |       |                         | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,313 |   |   |   | 2,313 |   |   |
| Income (loss)  before income taxes and accrued dividends and accretion on mandatorily  redeemable preferred stock |       |                         | 945        |   |   |   | 655 |   |   |   | 2,531 |   |   |   | 2,221 |   |   |   | 216 |   |   |   | (180 | ) |   |   | (3,551 | ) |   |   | (3,903 | ) |   |
| Income tax expense  (benefit)                                                                                     |       |                         | 654        |   |   |   | 572 |   |   |   | 1,757 |   |   |   | 1,545 |   |   |   | 809 |   |   |   | 709 |   |   |   | (1,731 | ) |   |   | (1,503 | ) |   |
| Accrued dividends  and accretion  on mandatorily redeemable preferred stock                                       |       |                         | 916        |   |   |   | 916 |   |   |   | 916 |   |   |   | 916 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net loss                                                                                                          |       |                         | $          | (625 | ) |   |   | $ | (833 | ) |   |   | $ | (142 | ) |   |   | $ | (240 | ) |   |   | $ | (593 | ) |   |   | $ | (889 | ) |   |   | $ | (1,820 | ) |   |   | $ | (2,400 | ) |   |
| Net loss per share (Note  3)                                                                                      |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                                                                                 |       |                         | $          | (0.08 | ) |   |   | $ | (0.11 | ) |   |   | $ | (0.02 | ) |   |   | $ | (0.03 | ) |   |   | $ | (0.08 | ) |   |   | $ | (0.11 | ) |   |   | $ | (0.23 | ) |   |   | $ | (0.31 | ) |   |
| Shares used in computing  net loss per share (Note 3)                                                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted                                                                                                 |       |                         | 7,782      |   |   |   | 7,782 |   |   |   | 7,782 |   |   |   | 7,782 |   |   |   | 7,782 |   |   |   | 7,782 |   |   |   | 7,782 |   |   |   | 7,782 |   |   |

 

67

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**McCormick &Schmick’s Seafood Restaurants, Inc. and SubsidiariesConsolidated Statements of Cash Flows—Unaudited(In thousands)**
| ** **                                                                      | ** ** | **Quarter Ended**            | ** ** |
|---------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                      | ** ** | **March 29, 2003** | ** ** | **June 28, 2003** | ** ** | **September 27, 2003** | ** ** | **December 27, 2003** | ** ** |
| ** **                                                                      | ** ** | **As  previously  reported** | ** ** | **Restated** | ** ** | **As  previously  reported** | ** ** | **Restated** | ** ** | **As  previously  reported** | ** ** | ** Restated ** | ** ** | **As  previously  reported** | ** ** | **Restated** | ** ** |
| **Operating  Activities**                                                       |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                        |       |                         | $          | (625 | ) |   | $ | (833 | ) |   | $ | (142 | ) |   | $ | (240 | ) |   | $ | (593 | ) |   |   | $ | (889 | ) |   |   | $ | (1,820 | ) |   | $ | (2,400 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                  |       |                         | 2,341      |   |   | 2,385 |   |   | 2,331 |   |   | 2,375 |   |   | 2,406 |   |   |   | 2,450 |   |   |   | 2,597 |   |   | 2,643 |   |
| Amortization of  unearned compensation                                          |       |                         | —     |   |   | — |   |   | — |   |   | — |   |   | 3 |   |   |   | 3 |   |   |   | 6 |   |   | 6 |   |
| Provision for  doubtful accounts                                                |       |                         | —     |   |   | — |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | 48 |   |   | 48 |   |
| Deferred income  taxes                                                          |       |                         | 654        |   |   | 572 |   |   | 1,757 |   |   | 1,545 |   |   | 809 |   |   |   | 709 |   |   |   | (1,731 | ) |   | (1,503 | ) |
| Write off of  deferred loan costs on early extinguishment of debt               |       |                         | —     |   |   | — |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | 2,313 |   |   | 2,313 |   |
| Impairment of  assets                                                           |       |                         | —     |   |   | — |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | 1,513 |   |   | 1,513 |   |
| Accrued dividends  and accretion on mandatorily redeemable preferred  stock     |       |                         | 916        |   |   | 916 |   |   | 916 |   |   | 916 |   |   | 950 |   |   |   | 950 |   |   |   | 951 |   |   | 951 |   |
| Changes in  operating assets and liabilities                                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade accounts  receivable                                                      |       |                         | 154        |   |   | 154 |   |   | (493 | ) |   | (493 | ) |   | 13 |   |   |   | 13 |   |   |   | (120 | ) |   | (120 | ) |
| Inventories                                                                     |       |                         | (15        | ) |   | (15 | ) |   | (100 | ) |   | (100 | ) |   | (136 | ) |   |   | (136 | ) |   |   | (136 | ) |   | (136 | ) |
| Prepaid expenses  and other current  assets                                     |       |                         | (248       | ) |   | (248 | ) |   | (213 | ) |   | (213 | ) |   | 72 |   |   |   | 72 |   |   |   | (106 | ) |   | (106 | ) |
| Accounts payable                                                                |       |                         | (1,950     | ) |   | (1,950 | ) |   | 1,855 |   |   | 1,855 |   |   | 274 |   |   |   | 274 |   |   |   | 2,799 |   |   | 2,799 |   |
| Accrued expenses                                                                |       |                         | (410       | ) |   | (410 | ) |   | 645 |   |   | 645 |   |   | 865 |   |   |   | 865 |   |   |   | 1,210 |   |   | 1,210 |   |
| Other long-term  liabilities                                                    |       |                         | 141        |   |   | 387 |   |   | 121 |   |   | 387 |   |   | 510 |   |   |   | 946 |   |   |   | 47 |   |   | 542 |   |
| Net cash provided  by operating activities                                      |       |                         | 958        |   |   | 958 |   |   | 6,677 |   |   | 6,677 |   |   | 5,173 |   |   |   | 5,257 |   |   |   | 7,571 |   |   | 7,760 |   |
| **Investing activities**                                                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition of  equipment and leasehold improvements                            |       |                         | (1,448     | ) |   | (1,448 | ) |   | (4,463 | ) |   | (4,463 | ) |   | (5,210 | ) |   |   | (5,294 | ) |   |   | (3,495 | ) |   | (3,684 | ) |
| Other assets                                                                    |       |                         | —     |   |   | — |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | (67 | ) |   | (67 | ) |
| Net cash used in  investing activities                                          |       |                         | (1,448     | ) |   | (1,448 | ) |   | (4,463 | ) |   | (4,463 | ) |   | (5,210 | ) |   |   | (5,294 | ) |   |   | (3,562 | ) |   | (3,751 | ) |
| **Financing activities**                                                        |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Increase  (decrease) in book overdraft                                          |       |                         | 310        |   |   | 310 |   |   | (104 | ) |   | (104 | ) |   | 913 |   |   |   | 913 |   |   |   | 1,011 |   |   | 1,011 |   |
| Loan costs                                                                      |       |                         | —     |   |   | — |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | (1,398 | ) |   | (1,398 | ) |
| Payments on  long-term debt                                                     |       |                         | (1,679     | ) |   | (1,679 | ) |   | (1,679 | ) |   | (1,679 | ) |   | (1,679 | ) |   |   | (1,679 | ) |   |   | (40,019 | ) |   | (40,019 | ) |
| Borrowings made on  revolving credit facility                                   |       |                         | 15,000     |   |   | 15,000 |   |   | 12,500 |   |   | 12,500 |   |   | 11,000 |   |   |   | 11,000 |   |   |   | 64,500 |   |   | 64,500 |   |
| Payments made on  revolving credit facility                                     |       |                         | (13,000    | ) |   | (13,000 | ) |   | (14,500 | ) |   | (14,500 | ) |   | (9,000 | ) |   |   | (9,000 | ) |   |   | (28,000 | ) |   | (28,000 | ) |
| Proceeds from notes  receivable                                                 |       |                         | —     |   |   | — |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |   | 26 |   |   | 26 |   |
| Payments on  capital lease obligations                                          |       |                         | (95        | ) |   | (95 | ) |   | (113 | ) |   | (113 | ) |   | (83 | ) |   |   | (83 | ) |   |   | (99 | ) |   | (99 | ) |
| Net cash provided  by (used in) financing activities                            |       |                         | 536        |   |   | 536 |   |   | (3,896 | ) |   | (3,896 | ) |   | 1,151 |   |   |   | 1,151 |   |   |   | (3,979 | ) |   | (3,979 | ) |
| Net increase  (decrease) in cash and cash equivalents                           |       |                         | 46         |   |   | 46 |   |   | (1,682 | ) |   | (1,682 | ) |   | 1,114 |   |   |   | 1,114 |   |   |   | 30 |   |   | 30 |   |
| Cash and cash  equivalents, beginning of period                                 |       |                         | 2,945      |   |   | 2,945 |   |   | 2,991 |   |   | 2,991 |   |   | 1,309 |   |   |   | 1,309 |   |   |   | 2,423 |   |   | 2,423 |   |
| Cash and cash  equivalents, end of period                                       |       |                         | $          | 2,991 |   |   | $ | 2,991 |   |   | $ | 1,309 |   |   | $ | 1,309 |   |   | $ | 2,423 |   |   |   | $ | 2,423 |   |   |   | $ | 2,453 |   |   | $ | 2,453 |   |

 

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**3.   Summary ofSignificant Accounting Policies**

**Principles ofConsolidation**

The consolidated financialstatements include the assets, liabilities and results of operations ofMcCormick & Schmick’s Seafood Restaurants, Inc. and itssubsidiaries: McCormick & Schmick Acquisition Corp II, McCormick &Schmick Acquisition Corp., McCormick & Schmick Restaurant Corp.,McCormick & Schmick Maryland Liquor, Inc., McCormick &Schmick Acquisition I Texas, Inc., McCormick & SchmickAcquisition II Texas, Inc., McCormick & Schmick Acquisition IIITexas, Inc., McCormick & Schmick Acquisition Texas, LP, McCormick &Schmick’s Atlanta II, LLC, McCormick & Schmick’s Hackensack, LLC,McCormick & Schmick Orlando, LLC, McCormick & Schmick DallasLP, McCormick & Schmick Dallas Liquor, Inc., McCormick &Schmick Austin LP, and McCormick & Schmick Austin Liquor, Inc. Allintercompany balances and transactions have been eliminated upon consolidation.

**Fiscal Year**

The Company utilizes a 52 or53 week accounting period that ends on the Saturday closest to December 31.The fiscal years ended December 28, 2002, December 27, 2003 and December 25,2004 were each comprised of 52 weeks. Approximately every six years a 53-week fiscalyear occurs.

**ManagementEstimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period. The Company bases its estimates on historical experience andon various assumptions that are believed to be reasonable under thecircumstances at the time. Actual results could differ from those estimatesunder different assumptions or conditions.

**Cash and CashEquivalents**

The Company considers allhighly liquid investment instruments purchased with an initial maturity ofthree months or less to be cash equivalents. Cash consists of deposits held atmajor banks that may at times exceed FDIC-insured limits, and cash on hand inrestaurant locations.

**Trade AccountsReceivable**

Tradeaccounts receivable is comprised of balances receivable from credit cardcompanies and other third parties. Allowance for doubtful accounts is theCompany’s best estimate of the amount of probable losses in its existingaccounts receivable. We review our allowances by assessing individual accountsreceivable over a specific aging and amount. The Company has established anallowance for doubtful accounts as follows:
| ** **                             | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|------------------------------------------|------------|
| ** **                             | ** ** | **(in thousands)**                        | ** ** |
| 52-weeks ended  December 28, 2002 |       |                                           | $          | —                                        |       |           |       | $                                        | 165        |   |   |   | $ | 48 |   |   |   | $ | 117 |   |   |
| 52-weeks ended  December 27, 2003 |       |                                           | 117        |                                          |       |           | 48         |                                     |       |   | 40 |   |   |   | 125 |   |   |
| 52-weeks ended  December 25, 2004 |       |                                           | 125        |                                          |       |           | 31         |                                     |       |   | 49 |   |   |   | 107 |   |   |

 

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**Inventories**

Inventories, which consistprincipally of restaurant food, beverages and supplies, are stated at the lowerof first-in, first-out cost method or market.

**Equipment andLeasehold Improvements**

Equipment and leaseholdimprovements are stated at cost less accumulated depreciation and amortization.Equipment consists primarily of restaurant equipment, furniture, fixtures andsmallwares. Depreciation is calculated using the straight-line method over theestimated useful lives of the related assets. Leasehold improvements areamortized using the straight-line method over the shorter of the lease term,including option periods which are reasonably assured of renewal or theestimated useful life of the asset. Repairs and maintenance are expensed asincurred; renewals and betterments are capitalized. Upon disposal of equipmentand leasehold improvements, the accounts are relieved of the costs and relatedaccumulated depreciation or amortization, and resulting gains or losses are reflectedin operations.

**Estimated useful lives are generally as follows:**
| Equipment               |   | 3-10 years |   |
|-------------------------|--------|-----------------|--------|
| Furniture and  fixtures |   | 5-10 years |   |
| Leasehold improvements  |   | 7-30 years      |   |

 

**Other Assets and Goodwill**

Other assets include trademarks, loan costs and liquorlicenses, which are stated at cost, less amortization, if any. The tradenamesand trademarks are used in the advertising and marketing of the restaurants andare widely recognized and accepted by consumers in each respective market as anindication of and recognition of service, value and quality. Goodwillrepresents the excess of purchase price over the fair value of the net assetsof the business acquired. The Company has adopted SFAS, No. 142 *Goodwill and Other Intangible Assets*,which provides that goodwill and certain other intangible assets withindefinite lives are no longer subject to amortization.

The Company has not recorded any amortization ontrademarks, which represent the cost of acquiring the McCormick &Schmick tradename and trademarks, or on goodwill acquired in connection withthe acquisition of the McCormick & Schmick division of Avado Brands, Inc.,as management believes these assets have indefinite lives, are not impaired,and only nominal costs must be incurred to maintain them.

Loan costs are stated atcost and amortized using the effective interest method over the life of theloan. Transferable liquor licenses, which have a market value, are stated atcost.

**Impairment of Long-LivedAssets**

In accordance with SFAS No. 144,*Accounting for the Impairment or Disposal of Long-Lived Assets*,long-lived assets, such as equipment and leasehold improvements, and purchasedintangibles subject to amortization, are reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. The Company’s assessment of recoverability ofproperty and equipment is performed on a restaurant-by-restaurant basis. Recoverabilityof assets to be held and used is measured by a comparison of the carryingamount of an asset to estimated undiscounted future cash flows expected to begenerated by the asset. If the carrying amount of an asset exceeds itsestimated future cash flows, an impairment charge is recognized by the amountby which the carrying amount of the asset exceeds the fair value of the asset. Assetsto be disposed of would be separately presented in the consolidated balancesheet and reported at the lower of the carrying amount or fair value less coststo sell, and are no longer depreciated. The assets and liabilities of adisposed group classified as 

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held for sale would bepresented separately in the appropriate asset and liability sections of theconsolidated balance sheet.

During 2003, the Company recorded a loss on impairmentof long-lived assets in the amount of $1,513,000. The charge was related topartial impairment of fixtures and equipment and leasehold improvements at onerestaurant. This restaurant is located on a site that was hidden from view fromthe street by a building constructed subsequent to the opening of thisrestaurant and in an area where several competing restaurants have been built. Thesefactors, along with the seasonality of business experienced at this location,led to a decline in the cash flows from this restaurant location. Because thisrestaurant has reduced its costs and because several nearby restaurants haveclosed or relocated, the cash flow from this location has stabilized atapproximately a break-even level, which is projected to continue for theforeseeable future. There are no plans to sell or abandon this restaurantlocation and no reserves have been established for future lease payments orother costs. Management measured the impairment charge with the assistance of athird-party appraisal of the related assets. There were no impairments ofequipment and leasehold improvements in 2004 or 2002.

Goodwill and intangibleassets not subject to amortization are tested annually for impairment, and aretested for impairment more frequently if events and circumstances indicate thatthe asset might be impaired. An impairment loss is recognized to the extentthat the carrying amount exceeds the asset’s fair value. The Company tested thetradename, trademarks and goodwill for impairment in accordance with SFAS No. 142.Based on its evaluation, there were no impairments in 2004, 2003, and 2002 fortradenames, trademarks, or goodwill.

**Fair Value ofFinancial Instruments**

The followingmethods and assumptions were used to estimate the fair value of each class offinancial instruments for which it is practicable to estimate that value:

1)              Cashand cash equivalents, receivables, prepaid and other current assets, bookoverdraft, accounts payable, accrued compensation and benefits and othercurrent and long-term liabilities

·        Thecarrying amounts of these items are a reasonable estimate of their fair valuesdue primarily to their short-term nature.

2)              Long-termdebt

·        Borrowings under therevolving credit facility arrangement as of December 25, 2004 and December 27,2003 have variable interest rates that reflect currently available terms andconditions for similar debt. The carrying amount of this debt is a reasonableestimate of its fair value.

**Book Overdraft**

Book overdraft representsthe amount of checks outstanding in excess of cash in banks and deposits intransit at December 27, 2003 and December 25, 2004. The Companymaintains a controlled disbursement arrangement whereby checks presented to onebank are funded by transfers from another bank.

**Income Taxes**

Income taxes are providedfor the tax effects of transactions reported in the financial statements andconsist of taxes currently due plus deferred taxes. Deferred taxes arerecognized for differences between the basis of assets and liabilities forfinancial statement and income tax purposes. The deferred tax assets andliabilities represent the future tax return consequences of these differences,which will either be taxable or deductible when the assets and liabilities arerecovered or settled. Recognition of deferred tax 

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assetsis limited to amounts considered to be more likely than not of realization infuture periods. A valuation allowance is established if the realization of thedeferred tax assets is uncertain.

**Revenue Recognition**

Revenues are recognized atthe point of delivery of products and services. A deferred liability isrecognized for gift certificates that have been sold but not yet redeemed attheir anticipated redemption value. The anticipated redemption value includesthe cash value of gift certificates outstanding for approximately eighteenmonths from the date of sale. The anticipated redemption value is adjustedthereafter based on the Company’s historical redemption rates. The Company recognizesrevenue and reduces the related deferred liability when the gift certificatesare redeemed.

**Equity-BasedCompensation Plan**

The Company accounts for its equity-based compensationplan using the intrinsic-value method prescribed by Accounting Principles Board(“APB”) Opinion No. 25. Accordingly, the Company computed compensationcost for employee equity units granted as the amount by which the estimatedfair value of the Company’s equity units on the date of grant exceeds theamount the employee must pay to acquire the related equity units. The amount ofcompensation cost is charged to income over the vesting period.

Under SFAS No. 123, as amended by SFAS No. 148,companies who choose to account for equity-based compensation plans using theintrinsic-value method are required to determine the fair value of employeeequity grants using the fair value method and to disclose the impact of fairvalue accounting in a note to the financial statements. Prior to the initialpublic offering, there was no difference between the accounting for theequity-based compensation plan described in Note 11 under APB Opinion No. 25and SFAS No. 123. Accordingly, prior to the initial public offering, therewas no difference between reported net income and pro forma net incomedetermined under SFAS No. 123.

In December 2004, the Financial AccountingStandards Board (‘‘FASB’’) issued SFAS No. 123(R), ‘‘Share-Based Payment’’,which is a revision of SFAS No. 123 and supercedes APB Opinion No. 25.SFAS No. 123(R) requires all share-based payments to employees,including grants of employee stock options, to be valued at fair value on thedate of grant, and to be expensed over the applicable vesting period. Pro formadisclosure of share-based payments effect to the statement of operations is nolonger an alternative, and SFAS No. 123(R) is effective for allstock-based awards granted on or after July 1, 2005. In addition,companies must also recognize compensation expense related to any awards thatare not fully vested as of the effective date. Compensation expense for theunvested awards will be measured based on the fair value of the awardspreviously calculated in developing the pro forma disclosures in accordancewith the provisions of SFAS No. 123. The Company is currently evaluatingthe effect that the adoption of SFAS 123(R) will have on our financialposition and results of operations. The adoption of SFAS No. 123(R) isexpected to increase compensation expense in the future.

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Thetable below shows the effects on net income and net income per share hadcompensation cost been measured with the fair value method pursuant to SFAS No. 123:
| ** **                                            | ** ** | ** Year ended  December 25, 2004** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                            | ** ** | **(in thousands, except**                         | ** ** |
| ** **                                            | ** ** | **per share data)**                                    | ** ** |
| Net income, as  reported                              |       |                                                   | $          | 703 |   |   |
| Compensation  expense included in net income          |       |                                                   | 42         |   |   |
| Compensation cost  based on the fair value method     |       |                                                   | (318       | ) |   |
| Pro forma net  income                                 |       |                                                   | $          | 427 |   |   |
| Basic and fully diluted net income per share          |       |                                                   |       |   |   |
| As reported                                           |       |                                                   | $          | 0.07 |   |   |
| Pro forma                                             |       |                                                   | $          | 0.04 |   |   |
| Shares used in  computing net income per common share |       |                                                   |       |   |   |
| Basic and fully diluted                               |       |                                                   | 10,387     |   |   |

 

The preceding proformaresults were calculated with the use of the Black Scholes option pricing model.The following assumptions were used:

(1)   risk-freeinterest rate of 3.9%;

(2)   dividendyield of 0%;

(3)   expectedlife of 5.5 years; and volatility of 24.3%. Results may vary depending on theassumptions applied within the model.

There is no differencebetween reported net loss and net loss per share and proforma net loss and netloss per share determined under SFAS No. 123 for the years ended December 28,2002 and December 27, 2003.

**RestaurantPre-Opening Costs**

Restaurant pre-openingcosts, consisting primarily of wages and salaries, hourly employee recruiting,license fees, meals, lodging and travel, and non-cash rent expenses during theconstruction period are expensed as incurred and totaled $1,006,000, $1,219,000and $2,393,000 for the years ended December 28, 2002, December 27,2003 and December 25, 2004, respectively.

**Advertising Costs**

Advertising costs areexpensed as incurred and were $1,737,000, $2,035,000 and $2,553,000 for the yearsended December 28, 2002, December 27, 2003 and December 25, 2004,respectively.

**Insurance Liability**

The Company maintainsvarious policies for workers’ compensation, employee health, general liability,and property damage. Pursuant to those policies, the Company is responsible forlosses up to certain limits. The Company records a liability for the estimatedexposure for aggregate losses below those limits. This liability is based onestimates of the ultimate costs to be incurred to settle known claims andclaims not reported as of the balance sheet date. The estimated liability isnot discounted and is based on a number of assumptions and factors, includinghistorical trends, actuarial assumptions, and economic conditions.

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**ComprehensiveIncome (Loss)**

The Company accounts forcomprehensive income (loss) under SFAS No. 130, *Reporting Comprehensive Income*. SFAS No. 130establishes standards for the reporting and display of elements ofcomprehensive income (loss), including unrealized gains and losses on certaininvestments in debt and equity securities and deferred gains and losses onunrealized derivative hedge transactions.

**Basic and DilutedNet Income (Loss) per Share**

Basic income (loss) per share is computed based on theweighted-average number of common shares outstanding during the period sincethe initial public offering. For periods prior to the initial public offeringthe 7,179,357 shares of common stock of the Company issued to the former unitholders of McCormick & Schmick Holdings LLC and the 602,292 sharesissuable upon the exercise of certain warrants (because the warrants have anominal exercise price) are assumed to be outstanding for all periods presented.Diluted earnings per share are computed using the weighted average number ofshares of common stock and potentially dilutive securities assumed to beoutstanding during the year. Potentially dilutive shares from stock options andother common stock equivalents are excluded from the computation when theireffect is antidilutive.

Options to purchase870,500 shares of common stock were outstanding at December 25, 2004. Thediluted weighted-average shares for the year ended December 25, 2004include 29,020 shares subject to stock options. There were no stock optionsprior to the initial public offering.

**Operating Leases**

The Company has enteredinto operating leases (See Note 16), which have accelerating minimum base rentterms and contingent rent terms if individual restaurant sales exceed certainlevels. The Company records the minimum base rents on a straight-line basis overthe life of the lease term, including option periods which are reasonablyassured of renewal due to the presence of certain economic penalties. Forpurposes of calculating straight line rents, the lease term commences on thedate the lessee obtains control of the property, which is normally when theproperty is ready for normal tenant improvements (build-out-period), when norent payments are typically due under the terms of the lease. For certain leasesthe Company only has the right to exercise its option for renewal if certain salestargets are achieved at or near the renewal date. These renewal option periodshave been included in the lease term when the Company determines at leaseinception or at the acquisition date of the restaurant, if later, that thesales targets are nonsubstantive and achievement of such sales targets isvirtually certain. The difference between rent expense calculated on a straightline basis and rent paid is recorded as deferred rent liability. The Companyreceives certain tenant improvement allowances which are considered leaseincentives and are amortized as reduction of rent expense over the lease term. Accordingly,the Company has recorded a deferred rent liability for the straightlining of rentsand lease incentives, which is included in other long-term liabilities of $5,707,000and $10,792,000 as of December 27, 2003 and December 25, 2004,respectively.

**DerivativeInstruments and Hedging Activities**

The Company accounts for all derivative instruments onthe balance sheet at fair value. Changes in the fair value (i.e., gains orlosses) of the derivatives are recorded each period in the consolidatedstatement of operations or accumulated other comprehensive income (loss). For aderivative designated as a cash flow hedge, the gain or loss on the derivativeis initially reported as a component of other comprehensive income (loss) andsubsequently reclassified into the statement of operations when the hedgedtransaction affects earnings. For derivatives recognized as a fair value hedge,the gain or loss on the derivative in the period of change and the offsettingloss or gain of the hedged item attributed to the 

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hedged risk are recognizedin the consolidated statement of operations. For derivatives not recognized ashedges, the gain or loss on the derivative in the period of change isrecognized as other income.

If the Company were toterminate an interest rate swap, any gain or loss realized upon terminationwould be deferred and amortized to interest expense over the remaining term ofthe underlying debt instrument it was intended to modify or would be recognizedimmediately if the underlying debt instrument were settled prior to maturity.

**4.   Equipmentand Leasehold Improvements**

Equipmentand leasehold improvements consist of the following: 
| ** **                                       | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **Restated**                | ** ** | ** **                  | ** ** |
| ** **                                       | ** ** | **(in thousands)**     | ** ** |
| Fixtures and  equipment                          |       |                        | $          | 28,406                      |       |   |   | $ | 36,808 |   |   |
| Leasehold  improvements                          |       |                        | 59,938     |                        |       |   | 77,331 |   |   |
| Construction in  progress                        |       |                        | 4,978      |                        |       |   | 5,699 |   |   |
| Equipment under  capital leases                  |       |                        | 1,992      |                        |       |   | 1,992 |   |   |
|                                             |       |                        | 95,314     |                        |       |   | 121,830 |   |   |
| Less: Accumulated  depreciation and amortization |       |                        | (19,297    | )                           |       |   | (29,086 | ) |   |
| Equipment and leasehold  improvements, net       |       |                        | $          | 76,017                      |       |   |   | $ | 92,744 |   |   |

 

For the years ended December 27,2003 and December 25, 2004, the Company capitalized interest in the amountof $159,000 and $88,000, respectively. Depreciation and amortization expenserelated to equipment and leasehold improvements for the years ended December28, 2002, December 27, 2003 and December 25, 2004 was $8,226,000, $9,285,000and $10,290,000, respectively.

**5.   OtherAssets**

Otherassets consist of the following:
| ** **                                                                                                                                                               | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                               | ** ** | **(in thousands)**     | ** ** |
| Tradename and  trademarks                                                                                                                                                |       |                        | $          | 50,600                      |       |   |   | $ | 50,600 |   |   |
| Loan costs                                                                                                                                                               |       |                        | 1,632      |                        |       |   | 805 |   |   |
| Liquor licenses                                                                                                                                                          |       |                        | 1,015      |                        |       |   | 1,103 |   |   |
| Notes receivable                                                                                                                                                         |       |                        | 585        |                        |       |   | 716 |   |   |
| Other                                                                                                                                                                    |       |                        | 989        |                        |       |   | 1,036 |   |   |
|                                                                                                                                                                     |       |                        | 54,821     |                        |       |   | 54,260 |   |   |
| Less accumulated  amortization of loan costs ($77,000 and $68,000) and other ($274,000 and  $371,000) at December 27, 2003 and December 25, 2004, respectively |       |                        | (351       | )                           |       |   | (439 | ) |   |
|                                                                                                                                                                     |       |                        | $          | 54,470                      |       |   |   | $ | 53,821 |   |   |

 

Amortization expense related to other assets (loancosts, prepaid management contract and a covenant not to compete agreement) was $582,000, $568,000 and $433,000 for the yearsended December 28, 2002, December 27, 2003 and December 25, 2004,respectively.

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Estimatedaggregate amortization expense related to the loan costs, prepaid managementcontract and a covenant not to compete for the 52-week periods ended during thenext five years from December 25, 2004 and thereafter is as follows: 
| 2005       |   | $   | 238    |   |
|------------|--------|-----|--------|--------|
| 2006       |   | 185 |   |
| 2007       |   | 185 |   |
| 2008       |   | 185 |   |
| 2009       |   | 122 |   |
| Thereafter |   | 65  |   |
|       |   | $   | 980    |   |

 

**6.   AccruedExpenses**

Accruedexpenses consist of the following: 
| ** **                               | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **(in thousands)**     | ** ** |
| Accrued  compensation and benefits       |       |                        | $          | 5,951                       |       |   |   | $ | 7,814 |   |   |
| Deferred  revenue—gift certificates |       |                        | 1,904      |                        |       |   | 3,089 |   |   |
| Accrued legal and  related costs         |       |                        | 1,400      |                        |       |   | 331 |   |   |
| Accrued sales tax                        |       |                        | 1,139      |                        |       |   | 1,392 |   |   |
| Accrued rent                             |       |                        | 526        |                        |       |   | 636 |   |   |
| Accrued interest                         |       |                        | 459        |                        |       |   | 156 |   |   |
| Other                                    |       |                        | 1,319      |                        |       |   | 1,779 |   |   |
|                                     |       |                        | $          | 12,698                      |       |   |   | $ | 15,197 |   |   |

 

**7.   Long-TermDebt**

On July 23, 2004, the Company repaid theoutstanding balance on its amended and restated revolving credit facility inthe amount of $51.5 million with net proceeds from the initial public offeringand $18.1 million in loans pursuant to a new revolving credit facilityagreement, which provides among other things for $50.0 million inrevolving credit loans. Loans under the facility are collateralized by a firstpriority security interest in all of the assets of the Company and mature on July 22,2009. For the year ended December 25, 2004, the Company recognized a$1.3 million expense related to the write off of unamortized deferred loancosts related to the prior revolving credit facility. As of December 25,2004, the outstanding balance on the Company’s revolving credit facility was $12.0 million.The interest rate on the credit facility is based on the financial institution’sprime rate plus a margin of 0.25% to 0.75% or the Eurodollar rate plus a marginof 1.75% to 2.25%, with margins determined by certain financial ratios. Underits revolving credit facility, the Company is subject to certain financial andnon-financial covenants, including an adjusted leverage ratio, a consolidatedcash flow ratio and growth capital expenditures limitations. The Company was incompliance with these covenants as of December 25, 2004.

The Company’s prior revolving credit facility, enteredinto on October 28, 2003, provided for a $70.0 million revolvingcredit loan. Loans under this facility were collateralized by a first prioritysecurity interest in all of the assets of the Company, were scheduled to matureApril 2007 and bore interest based on the financial institution’s primerate plus a margin of 1.75% to 2.25% or the Eurodollar rate plus a margin of3.25% to 3.75%, with margins determined by certain financial ratios.

Before October 28, 2003, the Company had termloans and a $15.0 million revolving credit facility payable to financialinstitutions. The term loans had quarterly principal payments due in amountsranging 

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from $0.3 million to $2.1 millionand were scheduled to mature between June 2006 and June 2008. Theinterest rates on these term loans was based on the financial institution’sprime rate plus a margin of 1.5% to 3.0% or the Eurodollar rate plus a marginof 3.0% to 4.25% determined by certain financial ratios. As of September 27,2003 the balance of the term loans was $38.5 million. The interest rateson the revolving credit facility were based on the financial institution’sprime rate plus a margin of 1.7% to 2.2% or the Eurodollar rate plus a marginof 3.2% to 3.7% determined by certain financial ratios.

The Company had entered into an interest rate swapwith a notional amount totaling $29.3 million to reduce the impact ofchanges in interest rates on a portion of the revolving credit loan. Thisagreement expired in November 2004. The interest rate swap was designatedas a cash flow hedge for purposes of SFAS No. 133 and allowed the Companyto receive floating rate receipts based on the financial institution’s primerate plus a margin of 1.75% to 2.25% or the Eurodollar rate plus a margin of3.25% to 3.75%, with margins determined by certain financial ratios, inexchange for making fixed rate payments of 4.1%, plus a margin of 3.0% to 4.5%,depending on certain financial ratios. This effectively changed the Company’sinterest rate exposure on the revolving credit loan from a floating rate to afixed rate on $29.3 million of the total balance outstanding on therevolving credit loan. The balance of the revolving credit loan above$29.3 million, if any, would remain at a floating rate of interest basedon the prime rate or Eurodollar rate plus the aforementioned applicable margins.As of December 25, 2004, the Company did not hold a position in anyinterest rate swap. The gain on the interest rate swap was $0.8 million in2004.

The Company expensed$3.7 million, $3.1 million and $2.7 million in interest for the yearsended December 28, 2002, December 27, 2003 and December 25,2004, respectively.

**8.   CapitalLeases**

The Company is the lessee of equipment under capitalleases expiring in years through 2007. The assets and related liabilities undercapital leases are recorded at the fair value of the assets at the inception ofthe lease. The assets are depreciated over their estimated useful lives. Depreciationof assets under capital leases is included in depreciation expense.

Thegross amount of equipment and related accumulated amortization recorded undercapital leases are as follows (in thousands):
| ** **                      | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
|---------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Equipment                       |       |                        | $          | 1,992                       |       |   |   | $ | 1,992 |   |   |
| Less: Accumulated  amortization |       |                        | (336       | )                           |       |   | (616 | ) |   |
|                            |       |                        | $          | 1,656                       |       |   |   | $ | 1,376 |   |   |

 

Minimumfuture lease payments under capital leases as of December 25, 2004 are asfollows (in thousands): 
| 2005                                        |   | $     | 491    |   |
|---------------------------------------------|--------|-------|--------|--------|
| 2006                                        |   | 402   |   |
| 2007                                        |   | 348   |   |
| Total minimum lease payments                |   | 1,241 |   |
| Less: Amount  representing interest         |   | (101  | )      |
| Present value of net minimum lease payments |   | 1,140 |   |
| Less: Current  portion                      |   | (433  | )      |
| Long-term portion                           |   | $     | 707    |   |

 

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**9.   IncomeTaxes**

Theprovision (benefit) for income taxes consists of:
| ** **                | ** ** | **Year Ended**                    | ** ** |
|---------------------------|------------|-----------------------------------|------------|
| ** **                | ** ** | **December 28,  2002 ** | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
| ** **                | ** ** | **Restated**                      | ** ** | **Restated** | ** ** | ** ** | ** ** |
| ** **                | ** ** | **(in thousands)**           | ** ** |
| **Current  tax expense**  |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Federal                   | ** ** | ** **                        | **$**      | **—** |   | ** ** | ** ** | **$** | **—** |   | ** ** | ** ** | **$** | **—** |   |   |
| State and local           | ** ** | ** **                        | **—** |   | ** ** | ** ** | **—** |   |   |   | 154 |   |   |
|                      |       |                              | **—** |   |   |   | **—** |   |   |   | 154 |   |   |
| **Deferred  tax expense** |       |                              |       |   |   |   |   |   |   |   |   |   |   |
| Federal                   |       |                              | 2,252      |   |   |   | 1,268 |   |   |   | (3,797 | ) |   |
| State and local           |       |                              | 318        |   |   |   | 55 |   |   |   | (8 | ) |   |
|                      |       |                              | 2,570      |   |   |   | 1,323 |   |   |   | (3,805 | ) |   |
|                      |       |                              | $2,570     |   |   |   | $ | 1,323 |   |   |   | $(3,651 | ) |   |
|                           |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theeffective income tax rate differs from the federal statutory rate as follows:
| ** **                                                                                                                           | ** ** | **Year Ended**              | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                           | ** ** | **December 28,  2002** | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
| ** **                                                                                                                           | ** ** | **Restated**                | ** ** | **Restated** | ** ** | ** ** | ** ** |
| Federal statutory  rate                                                                                                              |       |                        | 35.0       | % |   |   | (35.0 | )% |   |   | (35.0 | )% |   |
| State taxes                                                                                                                          |       |                        | 5.9        | % |   |   | (4.8 | )% |   |   | (4.4 | )% |   |
| Valuation  allowance                                                                                                                 |       |                        | —     |   |   |   | 98.0 | % |   |   | (40.1 | )% |   |
| Nondeductible  expenses and other-primarily nondeductible accrued dividends and accretion of  mandatorily redeemable preferred stock |       |                        | 6.9        | % |   |   | 51.4 | % |   |   | 82.4 | % |   |
| FICA Tip Credits                                                                                                                     |       |                        | —     |   |   |   | — |   |   |   | (126.7 | )% |   |
|                                                                                                                                 |       |                        | 47.8       | % |   |   | 109.6 | % |   |   | (123.8 | )% |   |

 

The Company adopted the provisions of SFAS No. 150,*Accounting for Certain Financial Instrumentswith Characteristics of Both Liabilities and Equity*, effective June 29,2003. Effective with the adoption of SFAS No. 150, accrued dividends andaccretion of mandatorily redeemable preferred stock is included in the computationof income before income taxes and, accordingly, impacts the effective incometax rates. Prior to the adoption of SFAS No. 150 in July 2003, suchamounts were reported after income taxes and did not impact the effectiveincome tax rates. In accordance with SFAS No. 150, the restatement offinancial statements for earlier years is not permitted.

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Thetax effects of temporary differences that give rise to deferred tax assets andliabilities are:
| ** **                                               | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | **Restated**                | ** ** | ** **                  | ** ** |
| ** **                                               | ** ** | **(in thousands)**     | ** ** |
| **Deferred tax (liabilities)  assets—current**      |       |                        |       |                        |       |   |   |   |   |
| Lessor  reimbursement                                    |       |                        | $          | 245                         |       |   |   | $ | 240 |   |   |
| Liability  insurance                                     |       |                        | (327       | )                           |       |   | (332 | ) |   |
| Accrued vacation  pay                                    |       |                        | 215        |                        |       |   | 693 |   |   |
| Other                                                    |       |                        | (37        | )                           |       |   | 229 |   |   |
| Current deferred tax asset                               |       |                        | 96         |                        |       |   | 830 |   |   |
| **Deferred tax (liabilities)  assets—noncurrent**   |       |                        |       |                        |       |   |   |   |   |
| Depreciation and  amortization on property and equipment |       |                        | (4,344     | )                           |       |   | (9,546 | ) |   |
| Amortization of  intangible assets                       |       |                        | (4,533     | )                           |       |   | (6,247 | ) |   |
| Deferred rent                                            |       |                        | 1,599      |                        |       |   | 2,475 |   |   |
| Smallwares and  supplies                                 |       |                        | (622       | )                           |       |   | (869 | ) |   |
| FICA Tip Credits                                         |       |                        | —     |                        |       |   | 5,746 |   |   |
| Net operating  loss carryforwards                        |       |                        | 4,267      |                        |       |   | 6,866 |   |   |
| Derivative  interest—interest rate swap             |       |                        | 317        |                        |       |   | — |   |   |
| Other                                                    |       |                        | 187        |                        |       |   | 17 |   |   |
|                                                     |       |                        | (3,129     | )                           |       |   | (1,558 | ) |   |
| Less valuation  allowance                                |       |                        | (1,183     | )                           |       |   | — |   |   |
| Noncurrent deferred tax liability                        |       |                        | (4,312     | )                           |       |   | (1,558 | ) |   |
| Net deferred tax  liability                              |       |                        | $          | (4,216                      | )          |   |   | $ | (728 | ) |   |

 

In assessing whether deferred tax assets can berealized, management considers whether it is more likely than not that someportion or all of the deferred tax assets will be realized. The ultimaterealization of deferred tax assets is dependent upon the generation of futuretaxable income during the periods in which the temporary difference becomesdeductible. Management considers the scheduled reversal of deferred taxliabilities and projected future taxable income in making this assessment.

In accordance with accounting principles generallyaccepted in the United States of America, deferred tax credits resulting fromamortization of indefinite lived assets for income tax purposes generallycannot be used to support the recoverability of deferred tax assets. As of December 27,2003, there was a net deferred tax asset arising from net operating losses andother temporary differences (other than those relating to amortization ofindefinite lived assets) for which utilization was uncertain due to projectedfuture taxable income at that date. Accordingly, a valuation allowance wasestablished as of December 27, 2003.

As discussed in Note 1, during 2004 the Companycompleted an initial public offering, a portion of the proceeds of which was usedto repay indebtedness. In connection with the initial public offering theCompany redeemed the mandatorily redeemable preferred stock and terminatedcertain agreements. As a result of these changes and improved operatingresults, management believes that as of December 25, 2004 it is morelikely than not that the Company will realize the benefits of the deferred taxassets based on projections for future taxable income. Accordingly no deferredtax asset valuation allowance has been recorded as of December 25, 2004.

The Company can make an election to take as an incometax credit amounts related to reported tips (“FICA Tip Credits”) rather thantreating them as a deduction in the determination of taxable income (loss). Asof December 27, 2003, the Company had not elected to take the FICA TipCredits on its federal income tax returns although it could do so by amendingpreviously filed federal income tax returns. If the 

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Company were to make thiselection, the deferred tax asset relating to the net operating loss woulddecrease by approximately $1,250,000 and the Company would have approximately$3,675,000 of FICA Tip Credits available to offset future income taxliabilities.

As a result of increasedprojected taxable income, the Company has determined in 2004 that it isadvantageous to make the election to take as an income tax credit the amountsrelated to FICA taxes on reported tips. The Company is in the process ofamending its federal income tax returns to claim the FICA Tip Credits. As aresult the Company’s deferred tax asset relating to the net operating loss hasdecreased by $2,010,000 and the deferred tax credit has increased by $5,746,000as of December 25, 2004. There was no effect on the net deferred taxliability at December 27, 2003 as a result of the Company’s determinationto claim the FICA Tip Credits because the increase in net deferred tax assetswould have been offset by a valuation allowance at that date.

**10.   RelatedParty Transactions**

Prior to the initial public offering, the Company paidannual management fees of $1.1 million to each of BRS and Castle Harlan. Affiliatesof each of BRS and Castle Harlan had significant ownership interests in the LLCat the time of the agreement terminations. Management fees recognized asexpenses totaled $2.2 million, $2.2 million and $3.3 million forthe years ended December 28, 2002, December 27, 2003 and December 25,2004, respectively. The amount of $3.3 million paid for the year ended December 25,2004 includes $1.1 million paid to each of BRS and Castle Harlan for thetermination of the management agreements as of June 25, 2004.

Pursuant to covenant not to compete agreements withcertain stockholders, the Company expensed $0.35 million,$0.35 million and $0.9 million for the years ended December 28,2002, December 27, 2003 and December 25, 2004, respectively. Themanagement fee agreements and all but one of the covenants not to competeagreements were terminated in connection with our initial public offering.

The Company leases properties from landlordscontrolled by certain stockholders of the Company. Total rent paid to theselandlords was $0.5 million, $0.5 million and $0.8 million forthe years ended December 28, 2002, December 27, 2003 and December 25,2004, respectively.

Castle Harlan and BRS eachown approximately 20% of the Company’s outstanding common stock. As a result,these stockholders, acting individually or together, could exert significantinfluence over all matters requiring stockholder approval, including theelection of directors and approval of significant corporate transactions. Inaddition, this concentration of ownership may delay or prevent a change incontrol of the Company and make some transactions more difficult or impossiblewithout the support of these stockholders.

**11.   EquityBased Compensation**

In December 2004, the FASB issued SFAS No. 123(R),‘‘Share-Based Payment’’, which is a revision of SFAS No. 123 andsupersedes APB Opinion No. 25. SFAS No. 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be valued at fair value on the date of grant, and to be expensed over theapplicable vesting period. See Note 17, “Recent Accounting Pronouncements.”

Prior to the initial public offering, the Company hadan equity-based compensation plan under which it could grant the right topurchase a fixed number of its equity units. The Company accounted for itsequity-based compensation plan using the intrinsic-value method prescribed byAccounting Principles Board (“APB”) Opinion No. 25. Accordingly, theCompany computed compensation cost for employee equity units granted at theamount by which the estimated fair value of its equity units on the date ofgrant 

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exceeded the amount theemployee would have had to pay to acquire the related equity units. The amountof compensation cost was charged to income over the vesting period.

Under SFAS No. 123, as amended by SFAS No. 148,companies that choose to account for equity-based compensation plans using theintrinsic-value method are required to determine the fair value of employeeequity grants using the fair value method and to disclose the impact of fairvalue accounting in a note to the financial statements. There was no differencebetween the accounting for the equity-based compensation plan described aboveunder APB Opinion No. 25 and SFAS No. 123. Accordingly, there was nodifference between reported net income and pro forma net income determinedunder SFAS No. 123 for the years ended December 28, 2002 and December 27,2003.

In connection with the initial public offering, all ofthe outstanding Class B units owned by employees of the Company vested at July 20,2004. The Company 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 resulted in a new measurement date at the time ofthe acceleration and a new measurement of compensation as if the award werenewly granted. However, based on the formula used to calculate the conversionratios of various classes of LLC units into common stock when the LLC mergedinto McCormick & Schmick’s Seafood Restaurants, Inc., the Class Bunits had no value and accordingly no shares of common stock were issued forthe Class B units. Shares of common stock with an aggregate value of$3.0 million were allocated among the holders of Class C units, which hadalready vested.

On June 16, 2004, the Company adopted a 2004Stock Incentive Plan (the “Plan”) under which 1,500,000 shares are reserved forissuance. Under the Plan, the Company may grant stock options and other awardsto employees, directors, consultants and to any parent or subsidiary of theCompany. On July 20, 2004, the Company issued to officers and employeesoptions to purchase an aggregate of 879,600 shares of common stock at $12.00per share. These options become exercisable over a three-year period and areintended to qualify as incentive stock options under Section 422 of theInternal Revenue Code. Additional awards granted under the Plan may be in theform of nonqualified stock options, incentive stock options, stock appreciationrights (“SARs”), restricted stock, stock bonuses and performance-based awards.

Incentive stock options must have an exercise pricethat is at least equal to the fair market value of the common stock, or 110% offair market value of the common stock for any greater than 10% owner of theCompany’s common stock, on the date of grant. Vesting of awards under the Planmay vary. Each award granted under the Plan may, at the discretion of the boardof directors of the Company, become fully exercisable or payable, asapplicable, upon a change of control of the Company.

Each award shall expire onsuch date as shall be determined at the date of grant, however, the maximumterm of options, SARs and other rights to acquire common stock under the Plan is10 years after the initial date of the award, subject to provisions forfurther deferred payment in certain circumstances. These and other awards mayalso be issued solely or in part for services. Any shares subject to awardsthat are not paid or exercised before they expire or are terminated will becomeavailable for other award grants under the Plan. If not sooner terminated bythe Company’s board of directors, the Plan will terminate on June 16, 2014.As of December 25, 2004, options to acquire a total of 879,600 shares ofthe Company’s common stock have been granted under the Plan at a price equal to$12.00, the fair market value on the date of grant (July 20, 2004).

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Thetable below summarizes the status of the Company’s stock based compensationplans as of December 25, 2004:
| ** **                             | ** ** | **As of December 25, 2004** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                             | ** ** | **Shares**                                      | ** ** | **Weighted Average  Exercise Price** | ** ** |
| Outstanding at  July 20, 2004     |       | —                                          |       |   | $ | — |   |   |
| Awards granted                         |       | 879,600                                         |       |   | 12.00 |   |   |
| Awards forfeited                       |       | 9,100                                           |       |   | 12.00 |   |   |
| Outstanding at  December 25, 2004 |       | 870,500                                         |       |   | 12.00 |   |   |

 

Thetable below summarizes information about stock options outstanding at December 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                              |       | 870,500                     |       |   | 9.6 |   |   |   | $ | 12.00 |   |   |   | — |   |   |   | $ | — |   |   |
|                                     |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**12.   Commitmentsand Contingencies**

During 2003, the Company was a defendant in a laborcode class action lawsuit filed in the Superior Court of California, OrangeCounty. In January 2004, the Company resolved this matter in principal byagreeing to pay $1.2 million, which was accrued as of December 27,2003 and paid in November 2004. We believe our restaurants in California,and in states with similar laws, are now complying with meal and rest periodrequirements.

The Company is subject tovarious other claims, possible legal actions, and other matters arising out ofthe normal course of business. Management does not expect disposition of theseother matters to have a material adverse effect on the Company’s results ofoperations, financial position or cash flows.

**13.   MandatorilyRedeemable Preferred Stock**

McCormick &Schmick Acquisition Corp II (“Acquisition Corp II”) is a subsidiary of theCompany. Acquisition Corp II’s mandatorily redeemable 13% senior exchangeablepreferred stock is reflected as mandatorily redeemable preferred stock in the December 27,2003 balance sheet. In connection with the reorganization and initial publicoffering, on July 23, 2004 the Company paid $28.9 million to redeemall of the outstanding mandatorily redeemable 13% senior exchangeable preferredstock. See Note 1, “The Business and Organization.” Following is the summary ofmandatorily redeemable preferred stock:
| ** **                                                           | ** ** | **Number of  Shares** | ** ** | **Mandatory  Redemption  Value** | ** ** | **Unamortized  Issuance  Discount** | ** ** | **Net Book  Value** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------|------------|-------------------------------------|------------|--------------------------|------------|
| ** **                                                           | ** ** | **(in thousands)**    | ** ** |
| **Balances  at December 28, 2002**                              |       |                       | 20,000     |                             |       |                                | $          | 23,774                   |       |   |   | $ | (4,370 | ) |   | $ | 19,404 |   |
| Accrual of  dividends and accretion of issuance discount        |       |                       | —     |                             |       |                                | 3,228      |                     |       |   | 505 |   |   | 3,733 |   |
| **Balances  at December 27, 2003**                              |       |                       | 20,000     |                             |       |                                | 27,002     |                     |       |   | (3,865 | ) |   | 23,137 |   |
| Accrual of  dividends and accretion of issuance discount (unaudited) |       |                       |       |                             |       |                                | 5,467      |                     |       |   | 292 |   |   | 5,759 |   |
| Redemption of  senior exchangeable preferred stock                   |       |                       |       |                             |       |                                | (32,469    | )                        |       |   | 3,573 |   |   | (28,896 | ) |
| **Balances at December 25,  2004**                              |       |                       | —     |                             |       |                                | $          | —                   |       |   |   | $ | — |   |   | $ | — |   |

 

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**14.   Members’Equity**

Priorto the initial public offering, the Company had outstanding the followingequity units: preferred units, Class A-1 units, Class A-2units, Class B units and Class C units. All of the units wereconverted into common stock as the result of the initial public offering. Theholders of the Class A-1 units had voting rights; the Class A-2units, Class B units, Class C units and preferred units did not havevoting rights. At December 27, 2003 members’ equity consisted of thefollowing (dollars in thousands):
| 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 connection with theissuance of the senior exchangeable preferred stock of McCormick &Schmick Acquisition Corp II discussed in Note 13, “MandatorilyRedeemable Preferred Stock, the Company also sold for $102,857 a warrant topurchase 103,896.10 Class A-2 units and sold for $4,951,563 awarrant to purchase 4,956.52 preferred units. In connection with the corporatereorganization, the warrants became exercisable for 602,992 shares of commonstock for an aggregate exercise price of $5,995. On October 20, 2004, TheBell Atlantic Master Trust exercised its warrants to purchase 602,992 shares ofcommon stock for $5,995.

**15.   EmployeeBenefit Plans**

The Company has a 401(k) contributorybenefit plan for eligible employees, which currently matches up to a maximum of3% of the participant’s eligible compensation. For the years ended December 28,2002, December 27, 2003 and December 25, 2004, Company matchingcontributions totaled approximately $231,000, $234,000 and $245,000,respectively.

**16.   OperatingLeases**

The Company generally operates its restaurants inleased premises. The typical restaurant premises lease is for an initial term between15 and 25 years with renewal options ranging from 5 to 10 years. Theleases generally provide for the payment of property taxes, utilities, andvarious other use and occupancy costs by the Company.

Minimumpayments under lease commitments as of December 25, 2004 are summarizedbelow for operating leases. 
| ** ** | ** ** | **($ in thousands)** | ** ** |
|------------|------------|--------------------------------|------------|
| 2005       |       |                           | $          | 16,167 |   |   |
| 2006       |       |                           | 17,291     |   |   |
| 2007       |       |                           | 16,695     |   |   |
| 2008       |       |                           | 15,921     |   |   |
| 2009       |       |                           | 15,691     |   |   |
| Thereafter |       |                           | 102,003    |   |   |
|       |       |                           | $          | 183,768 |   |   |

 

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Rentexpense charged to operations under all operating leases is as follows:
| ** **                          | ** ** | **December 28,  2002** | ** ** | **December 27,  2003** | ** ** | **December 25,  2004** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **(Restated)**              | ** ** | **(Restated)**              | ** ** | ** **                  | ** ** |
| Fixed rent                          |       |                        | $          | 10,241                      |       |                        |       | $ | 11,032 |   |   |   | $ | 14,252 |   |   |
| Contingent rent,  based on revenues |       |                        | 2,028      |                        |       |                        | 2,114      |   |   |   | 2,184 |   |   |
| Non-cash rent                       |       |                        | 1,755      |                        |       |                        | 1,687      |   |   |   | 1,865 |   |   |
|                                |       |                        | $          | 14,024                      |       |                        |       | $14,833 |   |   |   | $18,301 |   |   |

 

**17.   RecentAccounting Pronouncements**

In December 2003, the FASB issued FASBInterpretation No. 46 Revised, “Consolidation of Variable InterestEntities—an Interpretation of ARB No. 51” (“FIN 46R”), which provided, amongother things, immediate deferral of the application of FIN 46 for entities thatdid not originally qualify as special purpose entities and additional scopeexceptions for joint ventures with business operations and franchises. TheCompany’s adoption of FIN 46R did not have an impact on its consolidatedfinancial statements.

In December 2004, the FASB issued SFAS No. 123(R),‘‘Share-Based Payment’’, which is a revision of SFAS No. 123 andsupersedes APB Opinion No. 25. SFAS No. 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be valued at fair value on the date of grant, and to be expensed over theapplicable vesting period. Pro forma disclosure of share-based payments effectto the statement of operations is no longer an alternative, and SFAS No. 123(R) iseffective for all stock-based awards granted on or after July 1, 2005. Inaddition, companies must also recognize compensation expense related to any awardsthat are not fully vested as of the effective date. Compensation expense forthe unvested awards will be measured based on the fair value of the awardspreviously calculated in developing the pro forma disclosures in accordancewith the provisions of SFAS No. 123. The Company is currently evaluatingthe effect that the adoption of SFAS No. 123(R) will have on ourfinancial position and results of operations. The adoption of SFAS No. 123(R) isexpected to increase compensation expense in the future. Subsequent to theinitial public offering the Company issued options to employees as furtherdiscussed in Note 11, “Equity Based Compensation.”

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**ITEM 9**.                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A**.        CONTROLSAND PROCEDURES

***Disclosure Controlsand Procedures***

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in the reports we file or submit under the Securities ExchangeAct of 1934 (the “Exchange Act”) is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.

As of the end of theperiod covered by this report, we evaluated, under the supervision and with theparticipation of our Disclosure Committee and management, including our ChiefExecutive Officer and Chief Financial Officer, the effectiveness of the designand operation of our disclosure controls and procedures pursuant to ExchangeAct Rule 13a-15. In the evaluation, we considered the restatement ofour financial statements to correct our historical accounting for our operatingleases. We have determined that the deficiencies that led to incorrectoperating lease accounting practices constitute a material weakness in ourinternal control over financial reporting. A detailed discussion of the changesto our lease accounting policies and the impact of the restatement is in Note 2to the Consolidated Financial Statements in Part II–Item 8. Because we did notearlier identify and correct our lease accounting, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures were not effective as of December 25, 2004.

***Description ofMaterial Weakness***

A material weakness is acontrol deficiency, or combination of control deficiencies, that results inmore than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. Our controls over the selection and application of accounting policiesrelated to lease terms and tenant allowances were ineffective to ensure thatthese policies complied with accounting principles generally accepted in theUnited States of America. Specifically, the deficiency in our controls over theselection and application of our lease accounting policies failed to identifymaterial misstatements in leasehold improvements, deferred rent liability, rentexpense, restaurant pre-opening costs, and amortization expense, which resultedin restatements of our consolidated financial statements for the fiscal yearsended 2003 and 2002, the four quarters of fiscal 2003 (unaudited), and thefirst three quarters of fiscal 2004 (unaudited), as well as adjustments to ourfourth quarter 2004 (unaudited) consolidated financial statements. Accordingly,we concluded that this control deficiency constituted a material weakness inour internal control over financial reporting as of December 25, 2004. 

***Remediation ofMaterial Weakness***

During the first quarterof 2005, to remedy the material weakness in our internal control over financialreporting with respect to lease accounting, we performed additional analysisand other post-closing procedures to ensure our consolidated financialstatements were prepared in accordance with generally accepted accountingprinciples.

***Changes in InternalControl Over Financial Reporting***

There were no changes inour internal control over financial reporting during the most recentlycompleted fiscal quarter that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting. We havealso changed our accounting policies regarding the 

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review,analysis and recording of new and current leases, including the selection andmonitoring of appropriate assumptions and guidelines to be applied during thereview and analysis of all the leases.

**9B**.                                            OTHERINFORMATION

On February 1, 2005the Compensation Committee of the board of directors determined thecompensation to be paid to independent directors for 2005. The CompensationCommittee of the board of directors has determined the 2005 compensation forthe Chief Executive Officer and for other “named executive officers,” asdefined in SEC Regulation S-K, Item 402. A summary of the compensation for thedirectors and specified executive officers is filed as Exhibit 10.9 tothis Annual Report on Form 10-K.

**PART III**

**ITEM 10**.         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

Information about ourdirectors is incorporated by reference to our definitive proxy statement, underthe caption “Proposal 1: Election of Directors,” for our 2005 annual meeting ofstockholders (the “2005 Proxy Statement”) to be filed pursuant to Regulation14A under the Securities Exchange Act of 1934, which proxy statement we expectto file no later than 120 days after the end of our fiscal year ended December 25,2004. Information with respect to our executive officers is included under Item4A of Part I of this report.

Information regarding ouraudit committee and our audit committee financial expert, under the captions “CorporateGovernance—Board Committees” and “Report of the Audit Committee,” isincorporated by reference to the 2005 Proxy Statement.

Information regardingdisclosure of compliance with Section 16(a) of the SecuritiesExchange Act of 1934 is incorporated by reference to the 2005 Proxy Statement.

We have adopted a Businessand Ethics Code of Conduct for the guidance of our directors, officers, andemployees, including our principal executive, financial and accounting officersand our controller. Our code of conduct, along with other corporate governancedocuments, is posted on our website at *www.msmg.com*,Investors, Corporate Governance.

**ITEM 11**.         EXECUTIVECOMPENSATION

Information regardingexecutive compensation is hereby incorporated by reference to the 2005 ProxyStatement.

**ITEM 12**.         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

Information setting forththe security ownership of certain beneficial owners and management is herebyincorporated by reference to our 2005 Proxy Statement.

Information regarding ourequity compensation plan is included in Item 5 of this Annual Report on Form 10-K.

**ITEM 13**.         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

Information regardingcertain relationships and related transactions is hereby incorporated byreference to our 2005 Proxy Statement.

**ITEM 14**.         PRINCIPALACCOUNTANT FEES AND SERVICES

Information regardingprincipal accountant fees and services, appearing under the caption “Report ofthe Audit Committee—Fees Paid to Independent Registered Public Accounting Firm,”is hereby incorporated by reference to our 2005 Proxy Statement.

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**PART IV**

**ITEM 15**.         EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES

(a)(1) and (a)(2) Financial Statements.   TheFinancial Statements of the Company are filed in Part II—Item 8 of thisAnnual Report on Form 10-K. The Financial Statement schedules havebeen omitted because they are not required or because the information requiredto be set forth therein is included in the Consolidated Financial Statements orNotes thereto.

(a)(3) Exhibits.   See Exhibit Indexbeginning on page 89 for a description of the documents that are filed asExhibits to this Annual Report on Form 10-K or incorporatedherein by reference.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, as of April 8, 2005.
|         | McCORMICK &  SCHMICK’S SEAFOOD RESTAURANT, INC. |
|--------------|--------------------------------------------------------------------|
|         | By:                                                                | /s/    EMANUEL N. HILARIO |
| ** **   | ** **                                                         | **Emanuel N. Hilario** |
| *** *** | *** ***                                                       | ***Chief Financial Officer*** |

 

**POWER OF ATTORNEY**

KNOW ALL THESE PERSONS BY THESE PRESENTS, that eachperson whose signature appears below constitutes and appoints, jointly andseverally, Saed Mohseni and Emanuel N. Hilario, and each of them,attorneys-in-fact for the undersigned, each with the power of substitution, forthe undersigned in any and all capacities to sign any and all amendments tothis Annual Report on Form 10-K for the year ended December 25, 2004,and to file the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying andconfirming all that each of said attorneys-in-fact, or his substitute orsubstitutes, may do or cause to be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the registrant and in thecapacities indicated as of April 8, 2005.
|        | **Signatures**                    | ** ** | ** **                                   | ** ** | **Title** | ** ** |
|--------|-----------------------------------|------------|----------------------------------------------|------------|-----------|------------|
| /s/    | SAED MOHSENI                      |       | Chief Executive Officer  and Director        |
|   | **Saed Mohseni**                  |       | (Principal Executive Officer)                |
| /s/    | EMANUEL N. HILARIO                |       | Vice President and Chief Financial Officer   |
|   | **Emanuel N. Hilario**            |       | (Principal Financial and Accounting Officer) |
| /s/    | DOUGLAS L. SCHMICK                |       | President and Director                       |
|   | **Douglas L. Schmick**            |       |                                         |
| /s/    | *LEE M. COHN                      |       | Director                                     |
|   | **Lee M. Cohn**                   |       |                                         |
| /s/    | *ELLIOT H. JURGENSEN, JR.         |       | Director                                     |
|   | **Elliot H. Jurgensen, Jr.** |       |                                         |
| /s/    | *J. RICE EDMONDS                  |       | Director                                     |
|   | **J. Rice Edmonds**               |       |                                         |
| /s/    | *DAVID B. PITTAWAY                |       | Director                                     |
|   | **David B. Pittaway**             |       |                                         |
| /s/    | *HAROLD O. ROSSER                 |       | Director                                     |
|   | **Harold O. Rosser**              |       |                                         |
| /s/    | *FORTUNATO N. VALENTI             |       | Director                                     |
|   | **Fortunato N. Valenti**          |       |                                         |
| /s/    | *JUSTIN B. WENDER                 |       | Director                                     |
|   | **Justin B. Wender**              |       |                                         |
|        |                                   |            |                                              |            |           |            |  |

 

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**EXHIBITS.**

**Itemsidentified with an asterisk (*) are management contracts or compensatory plansor arrangements.**
| 3.1   |   | Certificate of Incorporation of the Company, as  amended. Incorporated by reference to Exhibit 3.1 to the Company’s  Registration Statement on Form S-1, File No. 333-114977.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2   |   | Bylaws of the Company, as amended (incorporated by  reference to Exhibits 3.2 and 3.2a to our Registration Statement on  Form S-1, File No. 333-114977)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1   |   | Registration Rights Agreement, dated as of  August 22, 2001, by and among McCormick & Schmick Holdings LLC,  Bruckmann, Rosser, Sherrill & Co. II, L.P., Castle Harlan Partners  III, L.P. and certain other parties thereto (incorporated by reference to  Exhibit 4.2 to our registration statement on Form S-1, file  No. 333-114977)                                                                                                                                                                                                                                                                                        |
| 10.1  |   | Revolving Credit 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, and specified other  lenders; Amendment to Post-Closing Delivery Requirements dated  October 12, 2004 by and among McCormick & Schmick Acquisition  Corp. and certain of its subsidiaries and Fleet National Bank as  Administrative Agent and Lender (incorporated by reference to  Exhibit 10.1 to our quarterly report on Form 10-Q for the  period ended September 25, 2004) |
| 10.2  |   | Lease, dated as of October 13, 1994, between  Boin Properties, LLC, as successor in interest to William P. McCormick, and  McCormick & Schmick Restaurant Corp., as successor in interest to  Jake’s Restaurant,  Inc. (incorporated by reference to Exhibit 10.9  to our registration statement on Form S-1, file No. 333-114977)                                                                                                                                                                                                                                                                                             |
| 10.3  |   | Retail Lease Agreement, dated as of  February 14, 1985, between Harborside Partners, LLC, as successor in  interest to Cornerstone Development Company, and McCormick & Schmick  Restaurant Corp., as successor in interest to the Cornerstone-McCormick Joint  Venture dba Harborside Restaurant, and Amendments 4 and 5 thereto  (incorporated by reference to Exhibit 10.10 to our registration  statement on Form S-1, file No. 333-114977)                                                                                                                                                                                          |
| 10.4  |   | Lease, dated June 18, 2004, between DLS  Investments, LLC and McCormick & Schmick Restaurant Corp.  (incorporated by reference to Exhibit 10.11 to our registration  statement on Form S-1, file No. 333-114977)                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.5* |   | Form of Executive Severance Agreement entered  into by William P. McCormick, Douglas L. Schmick and Saed Mohseni and  McCormick & Schmick’s Seafood Restaurants, Inc. (incorporated by  reference to Exhibit 10.12 to our registration statement on Form S-1,  file No. 333-114977)                                                                                                                                                                                                                                                                                                                                            |
| 10.7* |   | McCormick & Schmick’s Seafood  Restaurants, Inc. 2004 Stock Incentive Plan (incorporated by reference  to Exhibit 10.16 to our registration statement on Form S-1,  file No. 333-114977)                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.8* |   | Form of McCormick & Schmick’s Seafood  Restaurants, Inc. Incentive Stock Option Agreement; form of  McCormick & Schmick’s Seafood Restaurants, Inc. Non-Statutory  Stock Option Agreement (incorporated by reference to Exhibit 10.17 to  our registration statement on Form S-1, file No. 333-114977)                                                                                                                                                                                                                                                                                                      |
| 10.9* |   | Summary of Director and Executive Officer  Compensation for Fiscal 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 21.1  |   | Subsidiaries of McCormick & Schmick’s  Seafood Restaurants, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 24.1  |   | Power of Attorney (included on signature page)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.1  |   | Certification of the Chief Executive Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act of  1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.2  |   | Certification of the Chief Financial Officer  pursuant to Rule 13a-14(a) of the Securities Exchange Act of  1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 32.1  |   | Certification of the Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 32.2  |   | Certification of the Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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