McCormick & Schmicks Seafood Restaurants Inc. - 10-K Annual Report

Overview

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

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

Our restaurants are designed to capture the distinctive characteristics of each local market, positioning us to compete successfully in a sector comprised primarily of locally owned and operated seafood restaurants. We seek to create an inviting atmosphere 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 to upper-middle income brackets. We believe the combination of our restaurant atmosphere and our extensive menu offering and broad range of price points appeals to a diverse customer base from casual diners, families and tourists to business travelers and special occasion diners.

Restaurant Industry Overview

General

According to the National Restaurant Association (“NRA”) the restaurant industry represents approximately 4.0% of the U.S. gross domestic product. The NRA forecasts restaurant industry sales in the United States will continue to rise in 2005, reaching $476 billion. The NRA estimates that the U.S. restaurant industry today encompasses approximately 900,000 full-service restaurants, a number which is expected to grow to over 1,000,000 by 2010.

The NRA also estimates:

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

· sales in the full-service segment of the U.S. restaurant industry grew approximately 5.4% between 2003 and 2004, reaching over $157 billion in 2004; and

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

Technomic, Inc., a national consulting and research firm, forecasts sales at U.S. full-service restaurants 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 varied menu category within the full-service restaurant segment of the U.S. restaurant industry, which includes McCormick & Schmick’s, is projected to grow at an 8.5% compounded annual growth rate from 2002 through 2007, the highest projected compounded annual growth rate over that period for all menu categories. In addition, Technomic anticipates that the seafood marketplace will benefit on a continuing long-term basis as consumers show a greater interest in better health and specialized diets.

The Seafood Restaurant Segment

Americans consumed 4.7 billion pounds of seafood in 2003, 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 the next ten years.

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

Our Strengths

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

· developing and maintaining consistent, reliable sources of high quality, fresh seafood is difficult;

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

· the preparation and handling of seafood are more complicated than for other types of cuisine; and

· consumer tastes in seafood products vary from region to region.

We believe we have successfully addressed these operational barriers and differentiated ourselves from our competitors by focusing on the following core strengths of our business model.

Fresh Seafood

Our primary business focus for more than 33 years has been to consistently offer a broad selection of fresh seafood, which we believe commands strong loyalty from our customers. Our daily-printed menu typically contains between 85 and 100 made-to-order dishes, including an extensive selection of nationally available species such as Atlantic lobster, Dungeness crab and Alaskan halibut, as well as seasonal products such as wild King salmon, Columbia River sturgeon, Sashimi grade tuna, exotic Hawaiian catch and an extensive variety of cold water oysters. The executive chef and general manager at each of our restaurants tailor the menu, at least once daily, based on the availability of different species of fresh seafood, price and customer preferences.

We believe we successfully differentiate our concept from both independent local seafood restaurants and national and regional seafood restaurant chains by including in our daily-printed menu our signature “Fresh List” of typically 30 to 40 fresh seafood items, sourced from throughout the United States and from select international locations. We are able to offer a wide variety of consistently fresh, high quality seafood through our close relationships with reputable local and national seafood vendors. We encourage our vendors to adopt preferred and sustainable fishing practices to guarantee the current and future quality and supply of our seafood. During our daily “fresh talk,” the executive chef at each of our restaurants educates our restaurant staff on the menu items of the day so we can effectively communicate the sourcing, freshness, quality and method of preparation of our products to our customers.

Attraction of Our Full-Service Bar

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

commitment to traditionalism and quality. We attract patrons to our bar as a final destination, where they can enjoy a broad selection of liquors, wines and beers in a traditional yet lively environment. Our cocktail drinks are created using traditional methods and are hand-shaken, hand-poured and made with freshly squeezed juices, underlining our focus on product quality. We also offer value-priced items from our full restaurant menu at our bars, which tends to attract younger customers whom we aim to develop into regular restaurant customers.

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

Broad Appeal of Our Concept

We believe we appeal to a broad range of customers by providing an attractive price-value proposition, with prices that are generally more affordable than those of our upscale competitors. Additionally, we believe we offer superior service to that of most casual dining operators. The price of a 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 our customers a more affordable dining option by including a selection of lower priced items on our menu. For example, we offer a variety of lunch specials starting at $5.95. We believe even the price sensitive diner values our superior service, and we have received recognition from our customers and industry awards for our service quality.

The combination of our high quality seafood, pricing strategy and customer service enables us to attract a broad customer demographic. Most of our customers are 30 to 60 years old, primarily college-educated, in the middle to upper-middle income brackets and split relatively evenly between male and female customers, with a significant number of our customers comprising the post-war baby boomer generation. These baby boomers, who are the largest segment of the U.S. population (approximately 26% of the total) and a primary driver in the restaurant industry, generally have the greatest level of disposable income and tend to be more focused on better health and specialized diets than other age groups. As our core customers, we believe baby boomers typically prefer restaurants that offer higher quality food items, stronger flavor profiles and wider menu diversity. In addition to this core customer base, our bar operations allow us to also capture the 25 to 35 year old professionals, positioning us to attract a younger clientele as dedicated restaurant customers.

Our broad appeal is supported by our catering and banquet services which we offer both in our restaurants and at other locations as customers request. Our presence in and near hotels enables us to expand the reach of our banquet offerings. In 2004, banquets accounted for approximately 10% of our revenues.

Entrepreneurial Culture with Corporate Control

A key component of our success for over 33 years and under successive owners has been our commitment to promoting and sustaining an entrepreneurial culture throughout our restaurants while maintaining strong corporate oversight and financial controls. Within this strong corporate infrastructure, each restaurant has profit and loss responsibility and a high degree of operating autonomy. The executive chef and general manager at each restaurant have the flexibility, within clearly defined corporate guidelines, to structure menus to cater to customer preferences in that restaurant’s market and respond to changes in product availability and market conditions. We offer quarterly and annual cash performance incentives to exempt employees at the restaurant level based on the unit’s revenues, profitability and costs,

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

We believe our entrepreneurial culture helps us to attract and retain highly qualified and motivated individuals. We have historically retained substantially all of our regional chefs and regional managers and our retention rate for our unit general managers and executive chefs is approximately 80%. We believe our decentralized, employee-oriented, entrepreneurial culture creates a sense of pride in our company and allows us to ensure quality service execution at the restaurant level. We believe the stability of our management team and operating personnel, coupled with our disciplined but entrepreneurial culture, position us for the continued success and growth of our concept.

Portability of Our Brand

We have expanded the McCormick & Schmick’s seafood restaurant concept throughout the United States and have competed successfully with both national and regional restaurant chains and independent local operators, due in part to the flexibility of our real estate model and our nationwide infrastructure. We operate 52 restaurants in 22 states across the United States and plan to open 20 to 25 additional restaurants over the next three years.

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

We compete on a unit-by-unit basis with independent local restaurant operators while leveraging the operating strengths of our national infrastructure. We have successfully executed our concept at the local level while maintaining quality and consistency on a national basis in a manner that is not formulaic and that enables us to celebrate the uniqueness of each of our markets. We believe the breadth and scale of our restaurant operations and our 33 year experience in 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 contributes to our brand’s reputation for quality and service in the affordable upscale dining sector, which we believe commands strong loyalty from our customers.

Our Growth Strategy

We believe our flexible business model, combined with our fresh menu offerings, professional customer service and inviting restaurant environment, provide us with significant opportunities to further grow our business. Key elements of our growth strategy include the following:

Expansion in Existing Markets

We remain focused on the disciplined growth of our McCormick & Schmick’s brand in our existing markets. We believe we have established the necessary market analysis and site selection procedures for identifying new unit opportunities in these markets. In particular, we will continue to evaluate opportunities in affluent suburban areas near existing units in downtown areas to better diversify our presence in existing markets. This strategy enables us to achieve a higher degree of market penetration and brand awareness, resulting in increased repeat business from our broad and diverse customer base. Additionally, we will further leverage the economies of scale of our operations to enhance our competitive

advantage against independent local competitors, principally in the areas of advertising, purchasing and distribution infrastructure. We intend to open three additional restaurants in existing markets in 2005.

Entry into New Markets

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

Capture of Ancillary Business Opportunities

We will continue to pursue secondary opportunities that are complementary to our primary concept and further our growth objectives. We operate three restaurants under the name M&S Grill and one under the name Jake’s Grill, each of which offers an alternative menu to that of our seafood restaurants. These restaurants are located near our existing seafood restaurants to take advantage of management and operating efficiencies. We will also continue to consider catering opportunities and management agreements with hotels. We believe entering into management agreements with hotels gives our brand additional exposure to business and leisure travelers, requires minimal initial investment and is therefore low-risk, and is profitable. We currently operate two restaurants under management agreements with hotels.

Unit Level Economics

Our average investment per restaurant opened since 1997 has been approximately $2.9 million, including leasehold improvements, furniture, fixtures and equipment, and net of landlord incentive allowances. As a result of the reduction in the size of our restaurant prototype, to facilitate our entry into a greater variety of markets and provide us with increased flexibility with site selection, we anticipate that our average investment per restaurant will be approximately $2.4 million going forward, consistent with the average investment incurred for the restaurants we opened in 2004. We believe our focus on a traditional décor has allowed us to benefit from lower restaurant-level maintenance or upgrade costs than those incurred by our competitors.

Average unit volume for restaurants opened from 1997 through 2001 was approximately $5.5 million by the third year of operations. These restaurants were, on average, approximately 10,800 square feet each. Since the beginning of 2002, we have opened 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, Food Preparation, Quality Control and Purchasing

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

We maintain strict quality standards at all of our restaurants. We expect each of our employees to adhere to these standards, and it is the responsibility of the general manager and the executive chef at each restaurant to ensure these standards are upheld. We are committed to providing our guests with high quality, fresh products and superior service. We regularly hold senior management meetings designed to

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

At the restaurant level, purchasing is primarily directed by the executive chef, who is trained in our purchasing practices and philosophy and is supervised by an experienced regional chef. To provide the freshest ingredients and products and to improve operating efficiencies between purchase and use, each executive chef determines the daily requirements for food ingredients, products and supplies. The executive chef orders accordingly from local suppliers and regional and national distributors. Fresh seafood is sourced through multiple vendors in varying geographic regions and delivered daily to each restaurant.

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

Restaurant Design and Atmosphere

Our restaurant designs and décor are intended to capture distinctive attributes of each local market, varying from traditional New England-style fish houses to contemporary dinner houses with waterfront views. Some of our restaurants are located in historic buildings, which reinforces our commitment to local design elements and further promotes the appeal and ambience of our restaurants. Our flexible approach to our restaurant designs contributes to the uniqueness of each restaurant and allows us to successfully compete in a sector comprised primarily of independent, locally-owned and operated seafood restaurants.

Our restaurants are generally modeled after two styles:

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

· classic art deco style.

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

Our wait staff and bartenders are typically uniformed in traditional white jackets and black ties and are committed to providing our guests with service to further enhance their dining experience.

Our Full Service Bar

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

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

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

Layout and Use of Space

Our restaurant model offers us the flexibility to open restaurants in prime downtown or suburban areas. We have a proven track record of opening restaurants in sizes typically ranging from 6,000 to 14,000 square feet and in a range of real estate formats, including both freestanding and in-line locations. We believe the flexibility of our real estate model is a competitive advantage, allowing us to cost-effectively and opportunistically open restaurants in attractive markets without being constrained by a standard prototype or other limiting real estate factors. Space in an 8,000 square foot restaurant, which represents a typical size for our current, smaller restaurant prototype, generally would be allocated in the following manner:

· 2,900 square feet dining room;

· 1,000 square feet bar area;

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

· 950 square feet of storage and office space;

· 300 square feet customer entry/hostess area;

· 500 square feet of restrooms; and

· 900 square feet of circulation space.

Restaurant Locations, Lease Arrangements and Management Fee Arrangements

We operate 52 restaurants in 22 states. We lease all of our restaurant sites except for the two we operate under management agreements. Terms vary by restaurant, but we generally lease space for 10 to 20 years and negotiate one 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

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

*We operate these restaurants under management agreements.

Site Selection

We believe our site selection strategy is critical to our growth strategy. We carefully consider potential markets and we devote substantial time and effort to evaluating each potential restaurant site. We identify new restaurant development opportunities through an established real estate broker network and developer relationships. Our site specifications are flexible and we believe we consider a broader range of possible locations than most of our regional and national competitors. The criteria we consider in developing our expansion plans and in siting new restaurants include:

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

· competitive conditions and price points;

· estimates of the return on investment;

· available square footage and lease economics;

· the proximity of hotels and office space and the density of pedestrian and vehicle traffic;

· the suitability of the site for an affordable, upscale restaurant with a traditional ambience;

· capacity expansion possibilities; and

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

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

Of our 52 restaurants, including the two we operate under management agreements, seventeen were opened within the last three years and twenty-six were opened within the last five years. Although our expansion has increased in the last five years, we believe it has been steady, controlled and prudent. We opened ten restaurants in 2004 and our plan for 2005 includes the opening of seven restaurants. We anticipate opening 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 a restaurant at that location is approximately twelve to fifteen months.

Marketing and Advertising

The goals of our marketing efforts are to:

· increase comparable restaurant sales by attracting new guests;

· increase the frequency of visits by our current guests;

· support new restaurant openings to achieve sales and profit goals; and

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

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

Local Marketing

Approximately 60 days before a scheduled restaurant opening, our local public relations firms collaborate with the local media to publicize our restaurant opening and to generate awareness of our brand. For example, we typically host several social events in the local community to generate publicity before the official opening of a restaurant. Post-opening, we maintain a strong relationship with our public relations firms and remain focused on our commitment to promoting our brand in the local market through various programs, such as cooking demonstrations by our chefs or discussions on seafood and related offerings on local news broadcasts. We also advertise with local business journals in most urban markets, in addition to using local daily publications in almost all our markets.

We expect each of our restaurants to actively promote our special holiday programs and sponsor community events, such as donations, charitable organizations, non-profit organizations and visual and performing cultural arts activities. We believe that, in addition to benefiting our local communities, these activities generate positive media attention and publicity for our brand and enhance our local public image.

National Marketing

In 2004, we incurred approximately 20.0% of our advertising expenditures at the national level. Our national campaign focuses on national periodicals such as United Airlines’, Southwest Airlines’ and Alaska Airlines’ in-flight magazines and WHERE Magazine. Additionally, we advertise across the national network of The Business Journal publication.

To reinforce our broad differentiation, we highlight the breadth and freshness of our seafood, in both local and national advertising. We periodically offer promotional discount certificates and maintain contact with organizations in the travel and convention industries, such as hotels, travel agents, convention centers and local shops, to further enhance both brand and restaurant location awareness and to target specific guest groups.

Operations

Restaurant Management

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

Eleven regional managers, of whom five are operational managers and six are regional chefs, are each responsible for five to eleven restaurants and report to a vice president of operations. Both operational managers and regional chefs are responsible for overall restaurant operations, but have an increased focus on their respective areas of expertise. For example, regional chefs focus more heavily on negotiating food costs, ensuring high food quality, developing and nurturing executive and sous chefs and being responsive to overall kitchen staff needs. Regional managers focus primarily on revenues, profitability, front-of-house management and marketing issues.

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

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

All management levels in operations, from vice presidents to assistant managers, participate in incentive bonus programs. These incentive programs are designed to establish specific goals and objectives and to ensure accountability and reward performance.

Restaurant Operations

Our restaurants are generally open 365 days each year, serve lunch and dinner and are generally open from 11:00 a.m. to 11:00 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 our revenues, while lunch comprised approximately 25% of revenues, and our restaurants served an average of 1,100 guests per week during lunch and 1,750 guests

per week during dinner. To accommodate guests who have limited time available during lunch, we offer a 45-minute lunch guarantee.

Additionally, we offer catering and banquet services both in our restaurants and at other locations as customers request. Our presence in and near hotels enables us to expand the reach of our banquet offerings. In 2004, banquets accounted for approximately 10% of our revenues.

Training

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

· service positions, including bartender and waiter;

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

· kitchen management.

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

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

Recruiting, Retention and Advancement

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

Our restaurants operate on a decentralized basis with each restaurant having profit and loss responsibility and a high degree of operating autonomy within clearly defined corporate guidelines. This philosophy allows the general manager and executive chef at each of our restaurants the flexibility to operate the restaurant with significant independence and, we believe, helps us to attract managers and chefs who are creative and entrepreneurial and who have a desire to operate their own restaurants.

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

We aim to motivate and retain our employees by providing them with opportunities for increased responsibilities and advancement. It is our policy to promote from within our organization whenever possible based on employee performance and contribution to our business. We also provide performance-

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

We support our employees by offering competitive wages and benefits, including a 401(k) plan and medical insurance. In addition, we provide equity incentives to our senior managers 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 hourly personnel. None of our employees are represented by unions and we consider our relationship with our employees to be good. Our employees are summarized by major 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

Management Information Systems

All of our information processing is managed from our headquarters in Portland, Oregon. Point-of-sale terminals at each unit allow us to generate the daily reports needed to manage our restaurants and our business. These reports include, among other things, daily and weekly revenues, guest counts, meal period sales breakouts and food and liquor consumption. The data from the point of sale system is electronically transferred each night to a third party intranet provider, with the data then accessible by us through the Internet. Financial operating results are reviewed at the corporate office and studied by unit level and regional management. Variances from expectations are analyzed and addressed at frequent financial meetings.

Industry and Competition

Industry

We operate in a highly competitive industry that is affected by changes in consumer eating habits and dietary preferences, population trends and traffic patterns, and local and national economic conditions. Key competitive factors in the industry include the taste, quality and price of the food products offered, quality and speed of guest service, brand name identification, attractiveness of facilities, restaurant location, and overall dining experience. We believe we compete favorably with respect to each of these factors and have successfully overcome the following barriers faced by seafood restaurants:

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

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

· the preparation and handling of seafood are more complicated than for other types of cuisine; and

· consumer tastes in seafood products vary from region to region.

Competition

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

· independent, local seafood houses;

· regional seafood restaurant concepts, such as California Beach Restaurants, King’s Seafood, 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 Seafood Restaurants. These restaurants, generally operated by small local companies or families, typically offer a narrow selection of widely available seafood items and, in some cases, a selection of local seafood species. The appeal of these restaurants is the operators’ knowledge of the local community, their local restaurant design and their “family-style” customer service. We successfully compete with such independent, local seafood houses by maintaining a decentralized management structure which allows the executive chef at each of our restaurants to tailor the menu to local tastes. We also localize the design of our restaurants, which affords us the appeal of a local seafood operator, rather than a more formulaic national chain. Additionally, given our national scale and sophisticated sourcing capabilities, we are able to offer a more extensive selection of seafood on our menu at lower prices.

Regional Seafood Restaurants. These larger regional restaurant chains typically offer a broader selection of seafood items than the local independent restaurants, and strive to offer a fresher quality product at price points that may be comparable to ours. We successfully compete with such larger, regional chains by leveraging our long track record in the business, as well as our national infrastructure and purchasing power, which enables us to offer a broader selection of high quality, fresh seafood at affordable price points.

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

Available Information

We make available free of charge 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 or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we file these materials with the Securities and Exchange Commission. These materials are also available on the Security and Exchange Commission’s website at www.sec.gov.

ITEM 2. PROPERTIES

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

ITEM 3. LEGAL PROCEEDINGS

Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including claims resulting from “slip and fall” accidents, employment related claims and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns. None of these types of litigation, most of which are covered by insurance, has had a material effect on our business, results of operations, financial position or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report.

ITEM 4A. EXECUTIVE OFFICER AND OTHER KEY EMPLOYEES

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

Douglas L. Schmick (age 57) co-founded McCormick & Schmick’s in 1972 and has been our president since March 1997. From 1997 through 1999, he was also chief executive officer and served as secretary, treasurer, and chief executive officer from 1974 through 1997. Mr. Schmick has served on the board of directors since August 22, 2001. Mr. Schmick received his Bachelor of Science degree from the University of Idaho.

Saed Mohseni (age 42) has been our chief executive officer since January 2000 and became a director in June 2004. Mr. Mohseni joined McCormick & Schmick’s in 1986 as a general manager. He has also held the positions of senior manager (1988-1993), vice president of operations-California (1993-1997), and senior vice president of operations (1997-1999).

Emanuel (Manny) N. Hilario (age 37) joined McCormick & Schmick’s in April 2004 as chief financial officer. For the four years before joining us, Mr. Hilario was with Angelo and Maxie’s, Inc. (formerly Chart House Enterprises, Inc.) most recently as vice president of finance and chief financial officer. From December 1997 until April 2000, Mr. Hilario was with ACCO North America, a wholly owned subsidiary of Fortune Brands, where he held various positions, most recently Group Director of Finance and Cost Management. Previously, he spent nine years with McDonald’s Corporation serving in various capacities. Mr. Hilario received his Bachelor of Science and Commerce degree in accounting from Santa Clara University and is a certified public accountant.

Jerry R. Kelso (age 51) has been the chief internal audit and compliance officer of the Company since April 2004. Mr. Kelso joined us in 1984 as our controller and was vice president of finance and chief financial officer from 1988 to April 2004. He previously worked for nearly seven years with two regional and local certified public accounting firms. Mr. Kelso received his Bachelor of Arts degree from Central Washington State College and became a certified 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 a vice president at West Group Partners. Mr. Skeele graduated from the University 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 of Island Restaurants (1992-1996), the

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

Michael B. Liedberg (age 42) joined McCormick & Schmick’s in January 2004 as a vice president of operations. Mr. Liedberg has over 20 years of management experience in the restaurant industry including service as the president and chief 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 a certificate from the Management Program at Georgia Institute of Technology and a Human Resources Certificate from the University of Georgia.

Raymond E. Bean, Jr. (age 47) has held the position of controller since joining McCormick & Schmick’s in 1991. Mr. Bean also became our chief accounting officer in 1997. Before joining us, Mr. Bean worked in the audit department of a regional certified public accounting firm for eleven years. Mr. Bean received his Bachelor of Science degree from Central Washington University and became a certified public accountant in 1980.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is listed on The Nasdaq Stock Market’s National Market under the symbol MSSR. The table below sets forth the high and low closing price per share sales prices for our common stock within the third and fourth quarters of fiscal 2004 as reported by The Nasdaq Stock Market’s National Market System. Our initial public offering occurred in July 2004. There was no established public 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, 2005 there were approximately 64 holders of record of our common stock.

Dividend Policy

We expect to retain all of our earnings to finance the expansion and development of our business and, except as described below, we have not paid and have no plans to pay cash dividends to our stockholders after this offering for the foreseeable future. The payment of dividends is within the 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—Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

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

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information about compensation plans (including individual compensation arrangements) under which our equity securities are authorized for issuance to employees or non-employees (such as directors and consultants), 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

Issuer Purchases of Equity Securities

We did not repurchase any of our equity securities during 2004.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

We have determined that we have incorrectly accounted for certain operating lease transactions under GAAP. Consequently, we have restated 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 for the fiscal period from August 23, 2001 to December 29, 2001, and the selected financial information of our Predecessor for the fiscal period from December 31, 2000 to August 22, 2001 and the fiscal year ended December 30, 2000. The restatement adjustments are non-cash and had no impact on revenues or cash and cash equivalents.

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

The selected consolidated financial and operating data below are derived from the following sources:

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

· Our unaudited consolidated financial statements for the period from August 23, 2001 to December 29, 2001 and our consolidated financial statements for the fiscal years 2002, 2003 and 2004, which have been audited by an independent registered public accounting firm.

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

The selected consolidated financial and operating data below represent portions of our financial statements which should be read together with Part II—Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included in Part II—Item 8. Historical results are not necessarily indicative 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) The errors identified in 2000 and 2001 are of the same nature as those described in Note 2 “Restatement of Financial Information” in the Consolidated Financial Statements included in Part II—Item 8. The impact of the adjustments for the fiscal year ended December 30, 2000, the

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, respectively and 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 public offering, we have given retroactive effect to the completion of our corporate reorganization in calculating common shares outstanding. See Part II—Item 8, Note 3, “Summary of Significant Accounting Policies”.

(2) EBITDA represents earnings before interest, taxes, depreciation and amortization, write off of deferred loan costs on early extinguishment of debt and accrued dividends and accretion on mandatorily redeemable preferred stock. We are presenting EBITDA because it provides an additional measure to view our operations which, when considered with both our GAAP results and the reconciliation to net income (loss), we believe provides a more complete understanding of our business than could be obtained absent this disclosure. EBITDA is presented because we believe it is a useful measure for investors to assess our ability to incur indebtedness, and to compare the operating performance of our business against the operating performance of our competitors. EBITDA is not a measurement determined in accordance with GAAP and should not be considered in isolation or as an alternative to net income (loss), net cash provided by operating, investing or financing activities or other financial statement data presented as indicators of financial performance or liquidity. EBITDA as presented may not be comparable to other similarly titled measures of other companies. A reconciliation of EBITDA to net income (loss) is provided below.

	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

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

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

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Restatement of Financial Information

Like many other restaurant companies and retailers, we have conducted a review of our accounting policies 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 and Exchange Commission (“SEC”) to the American Institute of Certified Public Accountants regarding proper accounting for certain operating lease matters under generally accepted accounting principles (“GAAP”). Based on our review, we have determined that we have incorrectly accounted for certain operating lease transactions under GAAP. Consequently, we have restated 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 selected financial information for the fiscal period from August 23, 2001 to December 29, 2001 and the selected financial information of our Predecessor for the fiscal period from December 31, 2000 to August 22, 2001 and the fiscal year ended December 30, 2000. The restatement adjustments are non-cash and had no impact on revenues or cash and cash equivalents.

Lease term

Historically, we have amortized our leasehold improvements on leased properties over the shorter of the combined initial term and all option periods of the lease (generally ranging 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 date of the restaurant through the initial term of the lease. We have concluded that our calculation of straight line rent expense should be based on the lease term as defined in Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for Leases, as amended, which in most cases exceeds the initial term of the lease. As a result, we have restated our financial statements to recognize rent expense on the straight-line basis over the lease term, including option periods which are reasonably assured of renewal due to the presence of certain economic penalties. For purposes of calculating straight line rents, the lease term commences on the date the lessee obtains control over the property, which is generally when the lessor’s property is substantially complete and ready for tenant improvements. In addition, we will amortize leasehold improvements over the shorter of the lease term or the useful life of the assets. As a result of these changes, deferred rent credit liability included in other long-term liabilities, pre-opening costs and rent expense in the accompanying financial statements have increased on a restated basis.

Tenant improvement allowances

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

These restatement adjustments reduced net income by $1,182,000 and $750,000 and diluted earnings per share by ($0.15) and ($0.10) for the years 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,” for additional information on the restatement adjustments.

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

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

Overview

Our company was founded in 1972 with William P. McCormick’s acquisition of Jake’s Famous Crawfish in Portland, Oregon. We grew our family of restaurants slowly through the next two decades and in 1994, when we owned 14 restaurants, a majority interest in our company was purchased by Castle Harlan Partners II, L.P., a private investment firm. Avado Brands purchased us in 1997. We operated as a division of Avado Brands and added 18 new restaurants in just under four and a half years. In August 2001, Avado Brands sold our company to Castle Harlan Partners III, L.P. (“Castle Harlan”) and Bruckmann, Rosser, Sherrill & Co., II, L.P. (“BRS”), private equity investment firms that actively invest in restaurant companies. We have expanded our restaurant base to 52 restaurants, including two restaurants operated under management contracts.

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

We measure performance using key operating indicators such as comparable restaurant sales, food and beverage costs, and restaurant operating expenses, with a focus on labor as a percentage of revenues and total occupancy costs. We also track trends in average weekly revenues at both the restaurant level and on a consolidated basis as an indicator of our performance. The key operating measure used by management in evaluating our operating results is operating income. Operating income is calculated by deducting restaurant operating costs, general and administrative expenses, restaurant pre-opening costs, depreciation and amortization and other corporate costs from revenues. We monitor general and administrative expenses as a percentage of revenues, which we target to be approximately 5% of revenues. Restaurant pre-opening costs are analyzed based on the number and timing of restaurant openings and by comparison to budgeted amounts, with an overall target of approximately $0.3 to $0.4 million per restaurant opening, which may include up to $0.1 million in non-cash rent expense during the construction period.

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

General and administrative expenses are controlled in absolute amounts and monitored as a percentage of revenues. As we have continued our growth, we have incurred substantial training costs and made significant investments in infrastructure, including our information systems. As we continue to grow

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

Identification of appropriate new restaurant sites is essential to our growth strategy. We evaluate and invest in new restaurants based on site-specific projected returns on investment. We believe our store model and flexible real estate strategy provide us with continued opportunities to find attractive real estate locations on favorable terms.

Strategic Focus and Operating Outlook

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

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

Results of Operations

We have restated our financial statements for the first three quarters of fiscal 2004 (unaudited) and for the fiscal years 2002 and 2003. We have also restated the selected financial information for the fiscal period from August 23, 2001 to December 29, 2001 and the selected financial information of our Predecessor for the fiscal period from December 31, 2000 to August 22, 2001 and the fiscal year ended December 30, 2000. The restatement adjustments are non-cash and had no impact on revenues or cash and cash 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.

Our operating results for the fiscal years 2002, 2003 and 2004 are expressed as a percentage 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 of Terms

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

Restaurant operating costs consist of:

· food and beverage costs;

· labor costs, consisting of restaurant management salaries, hourly staff payroll and other payroll-related items including taxes and fringe benefits;

· operating costs, consisting of advertising, maintenance, utilities, insurance, bank and credit card charges, and any other restaurant level expenses; and

· occupancy costs, consisting of both fixed and variable portions of rent, common area maintenance charges, property insurance premiums, and real property taxes.

General and administrative expenses consist of expenses associated with corporate administrative functions that support development and restaurant operations and provide an infrastructure to support future growth, including management and staff salaries, employee benefits, 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 a new restaurant and are comprised principally of manager salaries and relocation, employee payroll and related training costs for new employees, including practice and rehearsal of service activities. Restaurant pre-opening costs also include non-cash rent expense during the construction period.

Depreciation and amortization consists of depreciation of equipment and amortization of leasehold improvements and capitalized loan costs.

Financial Performance Overview

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

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

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

· We reported net income of $0.7 million in 2004 primarily due to the following;

· Operating income was $6.8 million, an increase of $0.7 million compared to 2003 primarily due to the higher revenues, partially offset by a decrease in the operating margin as a percentage of revenues;

· Redemption costs for the 13% senior exchangeable preferred stock of our wholly owned subsidiary, including $5.8 million in accretion and dividends, all of which was redeemed in 2004 in connection with our initial public offering;

· $4.2 million related to management fees and non-compete payments, which were terminated in 2004 in connection with our initial public offering;

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

· General and 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 administrative expenses as a percentage of revenues remained relatively flat in 2004 compared to 2003, the 2004 expenses reflect increases in salary and related expenses associated with the oversight and administrative support of additional restaurants coupled with costs of being a publicly traded company, partially offset by a decrease due to a $1.2 million expense in 2003 to settle a California labor dispute; and

· A tax benefit of $3.7 million primarily related to the recognition of certain deferred tax assets.

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

Revenues. Revenues increased 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 in 2003, and a $6.4 million increase from restaurants opened prior to 2003. Comparable restaurant sales were positive 3.8% in 2004, primarily as the result of higher pricing.

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

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

Operating Costs. Operating costs 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 nine company-owned restaurants opened in 2004. We also experienced higher energy costs 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 this cost category are either fixed or semi-variable. As a result, operating costs as a percentage of revenues decreased due to the 3.8% comparable restaurant sales increase in 2004.

Occupancy Costs. Occupancy costs increased by $4.5 million, or 26.7%, to $21.4 million in 2004 from $16.9 million in 2003 primarily due to the occupancy costs of the restaurants opened in 2004. Occupancy costs as a percentage of revenues increased to 9.0% in 2004 from 8.6% in 2003 primarily due to occupancy costs as a percentage of revenues for the restaurants opened in 2004 being higher than occupancy costs as a percentage 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 and 2003, respectively.

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

Restaurant Pre-Opening Costs. There were 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 the increased number of restaurants opened in 2004 compared to 2003.

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

Management Fees and Covenants Not to Compete. Prior to our initial public offering, we paid annual management fees of $1.1 million to each of BRS and Castle Harlan. Affiliates of each of BRS and Castle Harlan had significant ownership interests in the Company at the time of the agreement terminations. Management fees recognized as 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 of the management agreements as of June 25, 2004. Pursuant to covenant not to compete agreements with certain stockholders, we expensed $0.9 million and $0.35 million for 2004 and 2003, respectively. The management fee agreements and all but one of the covenants not to compete agreements were terminated in connection with our initial public offering.

Interest Expense. Interest expense 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 decrease in the average outstanding debt balance as a result of the payoff of our prior credit facility in connection with our initial public offering.

Accrued Dividends and Accretion on Mandatorily Redeemable Preferred Stock. Dividends and accretive rights of a subsidiary’s redeemable preferred stock are reflected as accrued dividends and accretion on mandatorily redeemable preferred stock in the consolidated financial statements. Proceeds from our initial public offering were used to redeem all of the preferred stock. See “Liquidity and Capital Resources.”

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

Income Tax (Benefit) Expense. In 2004, the Company recognized an income tax benefit of $3.7 million primarily related to a reduction in the deferred tax asset valuation allowance of $1.2 million and FICA Tip Credits of $3.7 million (net of reduction in net operating loss carry forward), offset by the income tax expense of $1.1 million on current earnings before the “accrued dividends and accretion on mandatorily redeemable 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 the change in the valuation allowance, the accrued dividends and accretion on mandatorily redeemable preferred stock which is not deductible for income tax purposes, and in 2004 by the FICA Tip Credits. We expect our effective income tax rate to be approximately 31% in 2005.

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

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

Revenues. Revenues increased 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 in 2002, and a $2.3 million increase for restaurants opened prior to 2002. Comparable restaurant sales were positive 1.1% in 2003. Approximately 0.3% of the comparable restaurant sales increase was attributable to an increased customer count and the remainder was attributable to increased per meal spending.

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

Labor Costs. Labor costs increased by $5.5 million, or 9.8%, to $61.6 million in 2003 from $56.1 million in 2002. This increase was primarily due to the three restaurants opened in 2003. Labor costs as a percentage of revenues increased slightly to 31.3% in 2003 from 31.2% in 2002, primarily due to increased worker’s compensation insurance rates.

Operating Costs. Operating costs increased by $2.8 million, or 10.7%, to $29.2 million in 2003 from $26.4 million in 2002. This increase was primarily due to the three restaurants opened in 2003. The increase in operating costs as a percentage of revenues reflected increased marketing expenses, coupled with the impact of higher utility rates. We increased restaurant-level marketing to support local community activities in an effort to offset decreases in customer traffic caused by the weak economic environment. Operating costs as a percentage of revenues increased slightly from 14.7% in 2002 to 14.9% in 2003.

Occupancy Costs. Occupancy costs increased by $1.6 million, or 10.0%, to $16.9 million in 2003 from $15.3 million in 2002 primarily due to the occupancy costs of the restaurants opened in 2003. Occupancy costs as a percentage of revenues increased to 8.6% in 2003 from 8.5% in 2002 primarily due to occupancy costs as a percentage of revenues for the restaurants opened in 2003 being higher than occupancy costs as a percentage 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 and 2002, respectively.

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

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

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

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

Impairment of Assets. We review property and equipment (which includes leasehold improvements) for impairment when events or circumstances indicate these assets might be impaired. We test impairment using historical cash flow and other relevant facts and circumstances as the primary basis for our estimates of future cash flows. During 2003, 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 fixtures and equipment and leasehold improvements at one restaurant. This restaurant has experienced a decline in cash flows due to the location of the restaurant.

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

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

Income Tax Expense. Income tax expense decreased by $1.2 million, or 48.5%, to $1.3 million in 2003 from $2.6 million in 2002 due to a decrease in income before income taxes and accrued dividends and accretion on mandatorily redeemable preferred stock as well as the recognition of a $1.2 million valuation allowance against deferred tax assets.

Net Income (Loss). Net loss was ($4.4) million in 2003 compared to a net loss of ($0.5) million in 2002. The decrease was due primarily 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.

Potential Fluctuations in Quarterly Results and Seasonality

Our quarterly operating results may fluctuate significantly as a result of a variety of factors. See “Factors That May Affect Our 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 the spring months and winter holiday season. For the reasons and factors discussed above our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly quarterly. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. If this occurs, the price of our common stock would likely decrease.

The unaudited data for the first, second and third quarters of 2004 and for each of the quarters in 2003 and 2002 has been restated to correct our historical accounting for certain lease transactions. Additional details regarding the restatement are included in Part II—Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Restatement of Financial Information,” and Note 2 to Financial Statements included in Part II—Item 8.

The following table sets forth quarterly unaudited operating results in each of the 2002 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, we give retroactive effect to the completion of our corporate reorganization in calculating common shares outstanding.

Liquidity and Capital Resources

Our primary cash needs have been for new restaurant construction, working capital and general corporate purposes, including payments under credit facilities. Our main sources of cash have been issuance of common stock, net cash provided by operating activities and borrowings under credit facilities.

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

· Issued 7,179,357 shares of common stock in the merger to the holders of McCormick & Schmick Holdings LLC’s units, not including 602,992 shares issuable upon the exercise of warrants at a nominal price to The Bell Atlantic Master Trust. See Note 14, “Members’ Equity,” to our Financial Statements.

· Sold 6,000,000 shares at $12.00 per share, raising approximately $65.1 million after underwriting discounts and transaction costs.

· Repaid $51.5 million of indebtedness on our then existing credit facility with the proceeds raised in the initial public offering and from $18.1 million in loans under a new revolving credit facility, which provides, among other 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 in connection with the termination of the management agreements and covenant not to 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 $21.5 million in 2004, compared to $20.7 million in 2003 and $14.6 million in 2002. The increase in net cash provided by operating activities in 2004 compared to 2003 was primarily due to an increase in cash received from landlords for lease incentives. The increase in 2003 consisted primarily of improvements in working capital due to better management of payables as well as incremental revenues from the addition of new restaurants.

Net cash used in investing activities was $27.3 million in 2004, $15.0 million in 2003 and $8.8 million in 2002. We use cash for tenant improvements and equipment to open new restaurants, and to upgrade and add capacity to existing restaurants. Net cash used in investing activities varied in the periods presented based on the number of new restaurants opened and/or existing restaurant capacity expanded during the period. Purchases of property and equipment also include purchases of information technology systems and expenditures relating to our corporate headquarters.

Net cash provided by financing activities was $3.8 million in 2004. Net cash used by financing activities was $6.2 million in 2003 and $4.9 million in 2002. Net cash provided by financing activities in 2004 consisted primarily of net proceeds from issuance of common stock in connection with our initial public offering of $65.1 million, offset by payments on redemption of senior preferred stock of $28.9 million and

net proceeds and payments on our revolving credit facilities of $26.5 million. The net cash used by financing activities during 2003 and 2002 was primarily related to financing the property and equipment purchases for restaurant openings.

On July 23, 2004, we repaid the outstanding balance 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 credit loans. Loans under the facility are collateralized by a first priority security interest in all of our assets and mature on July 23, 2009. For the year ended December 25, 2004, we recognized a $1.3 million expense related to the write-off of unamortized deferred loan costs related to the prior revolving credit facility.

As of December 25, 2004, the outstanding balance on our revolving credit facility was $12.0 million. The interest rate on the credit facility is based on the financial institution’s prime rate plus a margin of 0.25% to 0.75% or the Eurodollar rate plus a margin of 1.75% to 2.25%, with margins determined by certain financial ratios. Under our revolving credit facility, we are subject to certain financial and non-financial covenants, including an adjusted leverage ratio, a consolidated cash flow ratio and growth capital expenditures limitations. We were in compliance with these covenants 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 this facility were collateralized by a first priority security interest in all of the assets of the Company, were scheduled to mature April 2007 and bore interest 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 margins determined 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 2006 and June 2008. The interest rates on these term loans were based on the financial institution’s prime rate plus a margin of 1.5% to 3.0% or the Eurodollar rate plus a margin of 3.0% to 4.25% determined by certain financial ratios.

We believe the net cash provided by operating activities and funds available from our revolving credit facility will be sufficient to satisfy our working capital and capital expenditure requirements, including restaurant construction, pre-opening costs and potential initial operating losses related to new restaurant openings for at least the next 12 months. We believe the cash flows from our operating activities and the proceeds from our initial public offering will be sufficient to fund our operations and meet our obligations for the foreseeable future.

Off-Balance Sheet Arrangements

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

Contractual Obligations

Our contractual obligations consist of long-term debt, operating leases (primarily restaurant leases) and capital leases. We lease all of our restaurants and our corporate offices under non-cancelable operating leases. Most of our restaurants have an initial operating lease term of 10 to 20 years and options to renew for between 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

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

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

Critical Accounting Policies and Use of Estimates

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

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Equipment consists primarily of restaurant equipment, furniture, fixtures and small wares. Depreciation is generally calculated using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term as defined in SFAS No. 13, Accounting for Leases, as amended or the estimated useful life of the asset. As discussed in SFAS No. 13, the lease term includes any period covered by a renewal option where the renewal is reasonably assured because failure to renew the lease would impose an economic penalty to the lessee. Repairs and maintenance 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 30 years. Judgments and estimates made by us related to the expected useful lives of these assets are affected by factors such as changes in economic conditions and changes in operating performance. If these assumptions change in the future, we may be required to record impairment charges for these assets.

Impairment of Long-Lived Assets

We review property and equipment (which includes leasehold improvements) for impairment when events or circumstances indicate these assets might be impaired. We test impairment using historical cash flow and other relevant facts and circumstances as the primary basis for our estimates of future cash flows.

The analysis is performed at the restaurant level for indicators of permanent impairment. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset-carrying amount exceeds its fair value. The determination of asset fair value is also subject to significant judgment. This process requires the use of estimates and assumptions, which are subject to a high degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets. In our most recent impairment evaluation for long-lived assets, no additional impairment charge would have resulted even if there were a permanent 5% reduction in revenues in our restaurants.

During 2003, 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 fixtures and equipment and leasehold improvements at one restaurant. This restaurant has experienced a decline in cash flows due to the location of the restaurant. There were no impairments during 2002 or 2004.

Goodwill and Other Indefinite Lived Assets

Goodwill and other indefinite lived assets resulted from our acquisition in 2001. Goodwill and other intangible assets with indefinite lives are not subject to amortization. However, such assets must be tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and at least 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 goodwill and other indefinite lived assets. There were no impairments of goodwill or assets with indefinite lives in 2002 or 2003. In assessing the recoverability of goodwill and other indefinite lived assets, market values and projections regarding estimated future cash flows and other factors are used to determine the fair value of the respective assets. The estimated future cash flows were projected using significant assumptions, including future revenues and expenses. If these estimates or related projections change in the future, we may be required to record impairment charges for these assets. In our most recent impairment evaluation for goodwill and other indefinite lived assets, no impairment charge would have resulted even if a permanent 5% reduction in revenues were to occur.

Insurance Liability

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

Income Taxes

We have accounted for, and currently account for, income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This Statement establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. It requires an asset and liability approach for financial accounting and reporting of income taxes. We recognize deferred tax liabilities and assets for the future consequences of events that have been recognized in our consolidated financial statements or tax returns. In the event the future consequences of differences between financial reporting bases and 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 future benefits

indicated by such asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all deferred tax asset will not be realized. The realization of such net deferred tax will generally depend on whether we will have sufficient taxable income of an appropriate character within the carry forward period permitted by the tax law. Without sufficient taxable income to offset the deductible amounts and carry forwards, the related tax benefits will expire unused. We have evaluated both positive and negative evidence in making a determination as to whether it is more likely than not that all or some portion of the deferred tax asset will not be realized. Measurement of deferred items is based on enacted tax laws. No deferred tax asset valuation allowance has been recorded as of December 25, 2004.

Operating Leases

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

Recent Accounting Pronouncements

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

In December 2004, FASB issued SFAS No. 123(R), ‘‘Share-Based Payment’’, which is a revision of SFAS No. 123 and supersedes 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 the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of share-based payments effect to the statement of operations is no longer an alternative, and SFAS No. 123(R) is effective for all stock-based awards granted on or after July 1, 2005. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. We are currently evaluating the effect that the adoption of SFAS No. 123(R) will have on our financial position and results of operations. The adoption of SFAS No. 123(R) is expected to increase compensation expense in the future.

Effect of Inflation

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

Factors That May Affect Our Business and the Price of Our Stock

Our ability to expand our restaurant base is influenced by factors beyond our control and therefore we may not be able to achieve our planned growth.

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

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

· locating and securing a sufficient number of suitable new restaurant sites in new and existing markets on acceptable lease terms;

· managing the amount of time and construction and development costs associated with the opening of new restaurants;

· obtaining adequate financing for the construction of new restaurants;

· securing governmental approvals and permits required to open new restaurants in a timely manner, if at all;

· successfully promoting our new restaurants and competing in the markets in which our new restaurants are located; and

· general economic conditions.

Some of these factors are beyond our control. We may not be able to achieve our expansion goals and our new restaurants may not be able to achieve operating results similar to those of our existing restaurants.

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

Our growth strategy includes opening restaurants in markets where we have little or no meaningful operating experience and in which potential customers may not be familiar with our restaurants. The success of these new restaurants may be affected by different competitive conditions, consumer tastes and discretionary spending patterns, and our ability to generate market awareness and acceptance of the McCormick & Schmick’s brand. As a result, we may incur costs related to the opening, operation and promotion of these new restaurants that are greater than those incurred in other areas. Even though we may incur substantial additional costs with these new restaurants, they may attract fewer customers than our more established restaurants in existing markets. Sales at restaurants that we open in new markets may take longer to reach our average annual sales, if at all. As a result, the results of operations at our new restaurants may be inferior to those of our existing restaurants. We may not be successful in profitably opening restaurants in new markets.

Our growth may strain our infrastructure and resources, which could slow our development of new restaurants and adversely affect our ability to manage our existing restaurants.

We opened nine company-owned restaurants and began operating an additional restaurant under a management contract in 2004. We plan to open seven company-owned restaurants in 2005. Our 2004 expansion and our future growth may strain our restaurant management systems and resources, financial controls and information systems. Those demands on our infrastructure and resources may also adversely

affect our ability to manage our existing restaurants. If we fail to continue to improve our infrastructure or to manage other factors necessary for us to meet our expansion objectives, our operating results could be materially and adversely affected.

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

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

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

Our profitability depends significantly on our ability to anticipate and react to changes in seafood costs. We rely on local, regional and national suppliers to provide our seafood. Increases in distribution costs or sale prices or failure to perform by these suppliers could cause our food costs to increase. We could also experience significant short-term disruptions in our supply if a significant supplier failed to meet its obligations. The supply 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, each of which may affect our food costs or cause a disruption in our supply. Changes in the price or availability of certain types of seafood could affect our ability to offer a broad menu and price offering to customers and could materially adversely affect our profitability.

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

Our operating results may fluctuate significantly because of several factors, including:

· our ability to achieve and manage our planned expansion;

· our ability to achieve market acceptance, particularly in new markets;

· our ability to raise capital in the future;

· changes in the availability and costs of food;

· the loss of key management personnel;

· the concentration of our restaurants in specific geographic areas;

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

· changes in consumer preferences or discretionary spending;

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

· health concerns about seafood or other food products;

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

· increases in labor costs;

· the impact of federal, state or local government regulations relating to our employees or the sale or preparation of food and the sale of alcoholic beverages;

· the impact of litigation;

· the effect of competition in the restaurant industry; and

· economic trends generally.

Our business also is subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the second and fourth quarter of each year. As a result, our quarterly and annual operating results and restaurant sales may fluctuate significantly as a result of seasonality and the factors discussed above. Accordingly, results for any one fiscal quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease. Our operating results may also fall below the expectations of securities analysts and investors. In that event, the price of our common stock would likely decrease.

A decline in visitors or business travelers to downtown areas where our restaurants are located could negatively affect our restaurant sales.

Many of our restaurants are located in downtown areas. We depend on both local residents and business travelers to frequent these locations. We experienced a decline in revenues in our downtown locations in 2001 and 2002, caused in part by decreases in business travel and the general decline in economic conditions. We may experience a similar decline in our revenues in the future. If the number of visitors to downtown areas declines due to economic or other conditions, changes in consumer preferences, changes in discretionary consumer spending or for other reasons, our revenues could decline significantly and our results of operations could be adversely affected.

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

We depend on the services of our key management personnel, including Saed Mohseni, our chief executive officer, and Douglas L. Schmick, our president. In addition, we have increasingly relied on personal appearances and interviews by our founders, William P. McCormick and Douglas L. Schmick, in our marketing and advertising efforts. If we lose the services of any members of our senior management, key personnel or founders for any reason, we may be unable to replace them with qualified personnel, which could have a material adverse effect on our business and growth. We do not carry key person life insurance on any of our executive officers.

Many of our restaurants are concentrated in local or regional areas and, as a result, we are sensitive to economic and other trends and developments in these areas.

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

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

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

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

We do not maintain confidentiality and non-competition agreements with all of our executives, key personnel or suppliers. If competitors independently develop or otherwise obtain access to our know-how, concepts, recipes or trade secrets, the appeal of our restaurants could be reduced and our business could be harmed.

Our current insurance policies may not provide adequate levels of coverage against all claims.

We believe we maintain insurance 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 that we believe are not commercially reasonable to insure. These losses, if they occur, could have a material and adverse effect on our business and results of operations.

Expanding our restaurant base by opening new restaurants in existing markets could reduce the business of our existing restaurants.

Our growth strategy includes opening restaurants in markets in which we already have existing restaurants. We may be unable to attract enough customers to the new restaurants for them to operate at a profit. Even if we are able to attract enough customers to the new restaurants to operate them at a profit, those customers may be former customers of one of our existing restaurants in that market and the opening of new restaurants in the existing market could reduce the revenue of our existing restaurants in that market.

We may not be able to successfully integrate into our business the operations of restaurants that we acquire, which may adversely affect our business, financial condition and results of operations.

We may seek to selectively acquire existing restaurants and integrate them into our business operations. Achieving the expected benefits of any restaurants that we acquire will depend in large part on our ability to successfully integrate the operations of the acquired restaurants and personnel in a timely and efficient manner. The risks involved in such restaurant acquisitions and integration include:

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

· possible disruption to our business as a result of the diversion of management’s attention from its normal operational responsibilities and duties; and

· the consolidation of the corporate, information technology, accounting and administrative infrastructure and resources of the acquired restaurants into our business.

Future acquisitions of existing restaurants, which may be accomplished through a cash purchase transaction or the issuance of our equity securities, or a combination of both, could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which could harm our business and financial condition.

We may be unable to successfully integrate the operations, or realize the anticipated benefits, of any restaurant that we acquire. If we cannot overcome the challenges and risks that we face in integrating the operations of newly acquired restaurants, our business, financial condition and results of operations could be adversely affected.

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

We are sometimes the subject of complaints or litigation from customers alleging illness, injury or other food quality, health or operational concerns. Litigation or adverse publicity resulting from these allegations may materially and adversely affect us or our restaurants, regardless of whether the allegations are valid or whether we are liable. Further, these claims may divert our financial and management resources from revenue-generating activities and business operations.

Health concerns relating to the consumption of seafood or other food products could affect consumer preferences and could negatively impact our results of operations.

We may lose customers based on health concerns about the consumption of seafood or negative publicity concerning food quality, illness and injury generally, such as negative publicity concerning the accumulation of mercury or other carcinogens in seafood, e-coli, “mad cow” or “foot-and-mouth” disease, publication of government or industry findings about food products served by us or other health concerns or operating issues stemming from one of our restaurants. In addition, we cannot guarantee that our operational controls and training will be fully effective in preventing all food-borne illnesses. Some food-borne illness incidents could be caused by food suppliers and transporters and would be outside of our control. Any negative publicity, health concerns or specific outbreaks 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 traffic to our restaurants and could have a material adverse effect on our business.

Changes in consumer preferences or discretionary consumer spending could negatively impact our results of operations.

The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes and purchasing habits. Our continued success depends in part upon the popularity of seafood and the style of dining we offer. Shifts in consumer preferences away from this cuisine or dining style could materially and adversely affect our profitability and operating results. Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and purchasing habits, as well as other factors affecting the restaurant industry, including new market entrants and demographic changes. If we change our concept and menu to respond to changes in consumer tastes or dining patterns, we may lose customers who do not prefer the new concept or menu, and may not be able to attract a sufficient new customer base to produce the revenue needed to make the restaurant profitable. Our success also depends to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes in these factors could reduce guest traffic or impose practical limits on pricing, either of which could harm our results of operations.

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

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including regional operational managers and regional chefs, restaurant general managers and executive chefs, necessary to continue our operations and keep pace with our growth. Qualified individuals whom we need to fill these positions are in short supply and competition for these employees is intense. If we are unable to recruit and retain sufficient qualified individuals, our business and our growth could be adversely affected. Additionally, competition for qualified employees could require us to pay higher wages, 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 government regulation.

Our restaurants are subject to various federal, state and local government regulations, including those relating to employees, the preparation and sale of food and the sale of alcoholic beverages. These regulations impact our current restaurant operations and our ability to open new restaurants.

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

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

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

Various federal and state labor laws govern our relationship with our employees and affect operating costs. These laws include minimum wage requirements, overtime pay, unemployment tax rates, workers’ compensation rates, and citizenship requirements. Additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, increased tax reporting and tax payment requirements for employees who receive gratuities, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements could harm our operating results.

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

Restaurant companies have been the target of class-actions and other lawsuits alleging, among other things, violation of federal and state law.

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

defendants. Similar lawsuits have been instituted against us from time to time. Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment significantly in excess of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations, and adverse publicity resulting from these allegations may materially adversely affect our business. We offer no assurance that we will not incur substantial damages and expenses resulting from lawsuits, which could have a material adverse effect on our business.

Our operations and profitability are highly susceptible to the effects of violence, war and economic trends.

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

Terrorist attacks could also directly impact our physical facilities or those of our suppliers, and attacks or armed conflicts may make travel and the transportation of our supplies and products more difficult and more expensive and ultimately affect our revenues.

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

The restaurant industry is intensely competitive with respect to price, service, location, food quality, ambiance and the overall dining experience. Our competitors include a large and diverse group of restaurant chains and individual restaurants that range from independent local operators to well-capitalized national restaurant companies. Some of our competitors have been in existence for a substantially longer period than we have and may be better established in the markets where our restaurants are or may be located. Some of our competitors may have substantially greater financial, marketing and other resources than we do. If our restaurants are unable to compete successfully with other restaurants in new and existing markets, our results of operations will be adversely affected. We also compete with other restaurants for experienced management personnel and hourly employees, and with other restaurants and retail establishments for quality restaurant sites.

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

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

· quarterly variations in our operating results;

· changes in financial estimates by securities analysts;

· additions or departures of our key personnel; and

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

Fluctuations or decreases in the trading price of our common stock may adversely affect your ability to trade your shares. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert management’s attention and resources that would otherwise be used to benefit the future performance of our operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk exposures are related to our cash and cash equivalents. We invest any excess cash in highly liquid short-term investments with maturities of less than one year. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations.

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

McCormick & Schmick’s Seafood Restaurants, Inc. and Subsidiaries
Consolidated 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 consolidated financial statements.

McCormick & Schmick’s Seafood Restaurants, Inc. and Subsidiaries
Consolidated 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 $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 investing and financing activities

In 2003, accounts receivable totaling $226 were converted to a note receivable, which is included in other assets. A liquor license was purchased for $306 using a note payable. In 2002 equipment totaling $357 was acquired under capital leases.

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

Unaudited Selected Quarterly Financial Data

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

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

McCormick & Schmick’s Seafood Restaurants, 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

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

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

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

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

3. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the assets, liabilities and results of operations of McCormick & Schmick’s Seafood Restaurants, Inc. and its subsidiaries: 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 & Schmick Acquisition II Texas, Inc., McCormick & Schmick Acquisition III Texas, Inc., McCormick & Schmick Acquisition Texas, LP, McCormick & Schmick’s Atlanta II, LLC, McCormick & Schmick’s Hackensack, LLC, McCormick & Schmick Orlando, LLC, McCormick & Schmick Dallas LP, McCormick & Schmick Dallas Liquor, Inc., McCormick & Schmick Austin LP, and McCormick & Schmick Austin Liquor, Inc. All intercompany balances and transactions have been eliminated upon consolidation.

Fiscal Year

The Company utilizes a 52 or 53 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 fiscal year occurs.

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual results could differ from those estimates under different assumptions or conditions.

Cash and Cash Equivalents

The Company considers all highly liquid investment instruments purchased with an initial maturity of three months or less to be cash equivalents. Cash consists of deposits held at major banks that may at times exceed FDIC-insured limits, and cash on hand in restaurant locations.

Trade Accounts Receivable

Trade accounts receivable is comprised of balances receivable from credit card companies and other third parties. Allowance for doubtful accounts is the Company’s best estimate of the amount of probable losses in its existing accounts receivable. We review our allowances by assessing individual accounts receivable over a specific aging and amount. The Company has established an allowance 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

Inventories

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

Equipment and Leasehold Improvements

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 liquor licenses, which are stated at cost, less amortization, if any. The tradenames and trademarks are used in the advertising and marketing of the restaurants and are widely recognized and accepted by consumers in each respective market as an indication of and recognition of service, value and quality. Goodwill represents the excess of purchase price over the fair value of the net assets of the business acquired. The Company has adopted SFAS, No. 142 Goodwill and Other Intangible Assets, which provides that goodwill and certain other intangible assets with indefinite lives are no longer subject to amortization.

The Company has not recorded any amortization on trademarks, which represent the cost of acquiring the McCormick & Schmick tradename and trademarks, or on goodwill acquired in connection with the 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 at cost and amortized using the effective interest method over the life of the loan. Transferable liquor licenses, which have a market value, are stated at cost.

Impairment of Long-Lived Assets

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 purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s assessment of recoverability of property and equipment is performed on a restaurant-by-restaurant basis. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as

held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.

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

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

Fair Value of Financial Instruments

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

1) Cash and cash equivalents, receivables, prepaid and other current assets, book overdraft, accounts payable, accrued compensation and benefits and other current and long-term liabilities

· The carrying amounts of these items are a reasonable estimate of their fair values due primarily to their short-term nature.

2) Long-term debt

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

Book Overdraft

Book overdraft represents the amount of checks outstanding in excess of cash in banks and deposits in transit at December 27, 2003 and December 25, 2004. The Company maintains a controlled disbursement arrangement whereby checks presented to one bank are funded by transfers from another bank.

Income Taxes

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

assets is limited to amounts considered to be more likely than not of realization in future periods. A valuation allowance is established if the realization of the deferred tax assets is uncertain.

Revenue Recognition

Revenues are recognized at the point of delivery of products and services. A deferred liability is recognized for gift certificates that have been sold but not yet redeemed at their anticipated redemption value. The anticipated redemption value includes the cash value of gift certificates outstanding for approximately eighteen months from the date of sale. The anticipated redemption value is adjusted thereafter based on the Company’s historical redemption rates. The Company recognizes revenue and reduces the related deferred liability when the gift certificates are redeemed.

Equity-Based Compensation Plan

The Company accounts for its equity-based compensation plan using the intrinsic-value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25. Accordingly, the Company computed compensation cost for employee equity units granted as the amount by which the estimated fair value of the Company’s equity units on the date of grant exceeds the amount the employee must pay to acquire the related equity units. The amount of compensation 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 the intrinsic-value method are required to determine the fair value of employee equity grants using the fair value method and to disclose the impact of fair value accounting in a note to the financial statements. Prior to the initial public offering, there was no difference between the accounting for the equity-based compensation plan described in Note 11 under APB Opinion No. 25 and SFAS No. 123. Accordingly, prior to the initial public offering, there was no difference between reported net income and pro forma net income determined under SFAS No. 123.

In December 2004, the Financial Accounting Standards 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 the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of share-based payments effect to the statement of operations is no longer an alternative, and SFAS No. 123(R) is effective for all stock-based awards granted on or after July 1, 2005. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. The Company is currently evaluating the effect that the adoption of SFAS 123(R) will have on our financial position and results of operations. The adoption of SFAS No. 123(R) is expected to increase compensation expense in the future.

The table below shows the effects on net income and net income per share had compensation 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 proforma results were calculated with the use of the Black Scholes option pricing model. The following assumptions were used:

(1) risk-free interest rate of 3.9%;

(2) dividend yield of 0%;

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

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

Restaurant Pre-Opening Costs

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

Advertising Costs

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

Insurance Liability

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

Comprehensive Income (Loss)

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

Basic and Diluted Net Income (Loss) per Share

Basic income (loss) per share is computed based on the weighted-average number of common shares outstanding during the period since the initial public offering. For periods prior to the initial public offering the 7,179,357 shares of common stock of the Company issued to the former unit holders of McCormick & Schmick Holdings LLC and the 602,292 shares issuable upon the exercise of certain warrants (because the warrants have a nominal exercise price) are assumed to be outstanding for all periods presented. Diluted earnings per share are computed using the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the year. Potentially dilutive shares from stock options and other common stock equivalents are excluded from the computation when their effect is antidilutive.

Options to purchase 870,500 shares of common stock were outstanding at December 25, 2004. The diluted weighted-average shares for the year ended December 25, 2004 include 29,020 shares subject to stock options. There were no stock options prior to the initial public offering.

Operating Leases

The Company has entered into operating leases (See Note 16), which have accelerating minimum base rent terms and contingent rent terms if individual restaurant sales exceed certain levels. The Company records the minimum base rents on a straight-line basis over the life of the lease term, including option periods which are reasonably assured of renewal due to the presence of certain economic penalties. For purposes of calculating straight line rents, the lease term commences on the date the lessee obtains control of the property, which is normally when the property is ready for normal tenant improvements (build-out-period), when no rent payments are typically due under the terms of the lease. For certain leases the Company only has the right to exercise its option for renewal if certain sales targets are achieved at or near the renewal date. These renewal option periods have been included in the lease term when the Company determines at lease inception or at the acquisition date of the restaurant, if later, that the sales targets are nonsubstantive and achievement of such sales targets is virtually certain. The difference between rent expense calculated on a straight line basis and rent paid is recorded as deferred rent liability. The Company receives certain tenant improvement allowances which are considered lease incentives 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 rents and lease incentives, which is included in other long-term liabilities of $5,707,000 and $10,792,000 as of December 27, 2003 and December 25, 2004, respectively.

Derivative Instruments and Hedging Activities

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

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

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

4. Equipment and Leasehold Improvements

Equipment and 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 amount of $159,000 and $88,000, respectively. Depreciation and amortization expense related to equipment and leasehold improvements for the years ended December 28, 2002, December 27, 2003 and December 25, 2004 was $8,226,000, $9,285,000 and $10,290,000, respectively.

5. Other Assets

Other assets 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 (loan costs, prepaid management contract and a covenant not to compete agreement) was $582,000, $568,000 and $433,000 for the years ended December 28, 2002, December 27, 2003 and December 25, 2004, respectively.

Estimated aggregate amortization expense related to the loan costs, prepaid management contract and a covenant not to compete for the 52-week periods ended during the next 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. Accrued Expenses

Accrued expenses 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-Term Debt

On July 23, 2004, the Company repaid the outstanding balance on its amended and restated revolving credit facility in the amount of $51.5 million with net proceeds from the initial public offering and $18.1 million in loans pursuant to a new revolving credit facility agreement, which provides among other things for $50.0 million in revolving credit loans. Loans under the facility are collateralized by a first priority 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 loan costs 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’s prime rate plus a margin of 0.25% to 0.75% or the Eurodollar rate plus a margin of 1.75% to 2.25%, with margins determined by certain financial ratios. Under its revolving credit facility, the Company is subject to certain financial and non-financial covenants, including an adjusted leverage ratio, a consolidated cash flow ratio and growth capital expenditures limitations. The Company was in compliance with these covenants as of December 25, 2004.

The Company’s prior revolving credit facility, entered into on October 28, 2003, provided for a $70.0 million revolving credit loan. Loans under this facility were collateralized by a first priority security interest in all of the assets of the Company, were scheduled to mature April 2007 and bore interest 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 margins determined by certain financial ratios.

Before October 28, 2003, the Company 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 2006 and June 2008. The interest rates on these term loans was based on the financial institution’s prime rate plus a margin of 1.5% to 3.0% or the Eurodollar rate plus a margin of 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 rates on the revolving credit facility were based on the financial institution’s prime rate plus a margin of 1.7% to 2.2% or the Eurodollar rate plus a margin of 3.2% to 3.7% determined by certain financial ratios.

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

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

8. Capital Leases

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

The gross amount of equipment and related accumulated amortization recorded under capital 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

Minimum future lease payments under capital leases as of December 25, 2004 are as follows (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

9. Income Taxes

The provision (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		)

The effective 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 Instruments with Characteristics of Both Liabilities and Equity, effective June 29, 2003. Effective with the adoption of SFAS No. 150, accrued dividends and accretion of mandatorily redeemable preferred stock is included in the computation of income before income taxes and, accordingly, impacts the effective income tax rates. Prior to the adoption of SFAS No. 150 in July 2003, such amounts were reported after income taxes and did not impact the effective income tax rates. In accordance with SFAS No. 150, the restatement of financial statements for earlier years is not permitted.

The tax effects of temporary differences that give rise to deferred tax assets and liabilities 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 be realized, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary difference becomes deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment.

In accordance with accounting principles generally accepted in the United States of America, deferred tax credits resulting from amortization of indefinite lived assets for income tax purposes generally cannot 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 and other temporary differences (other than those relating to amortization of indefinite lived assets) for which utilization was uncertain due to projected future taxable income at that date. Accordingly, a valuation allowance was established as of December 27, 2003.

As discussed in Note 1, during 2004 the Company completed an initial public offering, a portion of the proceeds of which was used to repay indebtedness. In connection with the initial public offering the Company redeemed the mandatorily redeemable preferred stock and terminated certain agreements. As a result of these changes and improved operating results, management believes that as of December 25, 2004 it is more likely than not that the Company will realize the benefits of the deferred tax assets based on projections for future taxable income. Accordingly no deferred tax asset valuation allowance has been recorded as of December 25, 2004.

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

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

As a result of increased projected taxable income, the Company has determined in 2004 that it is advantageous to make the election to take as an income tax credit the amounts related to FICA taxes on reported tips. The Company is in the process of amending its federal income tax returns to claim the FICA Tip Credits. As a result the Company’s deferred tax asset relating to the net operating loss has decreased by $2,010,000 and the deferred tax credit has increased by $5,746,000 as of December 25, 2004. There was no effect on the net deferred tax liability at December 27, 2003 as a result of the Company’s determination to claim the FICA Tip Credits because the increase in net deferred tax assets would have been offset by a valuation allowance at that date.

10. Related Party Transactions

Prior to the initial public offering, the Company paid annual management fees of $1.1 million to each of BRS and Castle Harlan. Affiliates of each of BRS and Castle Harlan had significant ownership interests in the LLC at the time of the agreement terminations. Management fees recognized as expenses totaled $2.2 million, $2.2 million and $3.3 million for the 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 the termination of the management agreements as of June 25, 2004.

Pursuant to covenant not to compete agreements with certain 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. The management fee agreements and all but one of the covenants not to compete agreements were terminated in connection with our initial public offering.

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

Castle Harlan and BRS each own approximately 20% of the Company’s outstanding common stock. As a result, these stockholders, acting individually or together, could exert significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of the Company and make some transactions more difficult or impossible without the support of these stockholders.

11. Equity Based Compensation

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

exceeded the amount the employee would have had to pay to acquire the related equity units. The amount of 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 the intrinsic-value method are required to determine the fair value of employee equity grants using the fair value method and to disclose the impact of fair value accounting in a note to the financial statements. There was no difference between the accounting for the equity-based compensation plan described above under APB Opinion No. 25 and SFAS No. 123. Accordingly, there was no difference between reported net income and pro forma net income determined under SFAS No. 123 for the years ended December 28, 2002 and December 27, 2003.

In connection with the initial public offering, all of the 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 in accordance with Financial Accounting Standards Board Interpretation (“FIN”) No. 44, Accounting for Certain Transactions Involving Stock Compensation. This resulted in a new measurement date at the time of the acceleration and a new measurement of compensation as if the award were newly granted. However, based on the formula used to calculate the conversion ratios of various classes of LLC units into common stock when the LLC merged into McCormick & Schmick’s Seafood Restaurants, Inc., the Class B units had no value and accordingly no shares of common stock were issued for the 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 had already vested.

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

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

Each award shall expire on such date as shall be determined at the date of grant, however, the maximum term of options, SARs and other rights to acquire common stock under the Plan is 10 years after the initial date of the award, subject to provisions for further deferred payment in certain circumstances. These and other awards may also be issued solely or in part for services. Any shares subject to awards that are not paid or exercised before they expire or are terminated will become available for other award grants under the Plan. If not sooner terminated by the 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 of the 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).

The table below summarizes the status of the Company’s stock based compensation plans 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

The table 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. Commitments and Contingencies

During 2003, the Company was a defendant in a labor code class action lawsuit filed in the Superior Court of California, Orange County. In January 2004, the Company resolved this matter in principal by agreeing 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 period requirements.

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

13. Mandatorily Redeemable Preferred Stock

McCormick & Schmick Acquisition Corp II (“Acquisition Corp II”) is a subsidiary of the Company. Acquisition Corp II’s mandatorily redeemable 13% senior exchangeable preferred stock is reflected as mandatorily redeemable preferred stock in the December 27, 2003 balance sheet. In connection with the reorganization and initial public offering, on July 23, 2004 the Company paid $28.9 million to redeem all of the outstanding mandatorily redeemable 13% senior exchangeable preferred stock. See Note 1, “The Business and Organization.” Following is the summary of mandatorily 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		—		$	—			$	—		$	—

14. Members’ Equity

Prior to the initial public offering, the Company had outstanding the following equity units: preferred units, Class A-1 units, Class A-2 units, Class B units and Class C units. All of the units were converted into common stock as the result of the initial public offering. The holders of the Class A-1 units had voting rights; the Class A-2 units, Class B units, Class C units and preferred units did not have voting rights. At December 27, 2003 members’ equity consisted of the following (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 the issuance of the senior exchangeable preferred stock of McCormick & Schmick Acquisition Corp II discussed in Note 13, “Mandatorily Redeemable Preferred Stock, the Company also sold for $102,857 a warrant to purchase 103,896.10 Class A-2 units and sold for $4,951,563 a warrant to purchase 4,956.52 preferred units. In connection with the corporate reorganization, the warrants became exercisable for 602,992 shares of common stock for an aggregate exercise price of $5,995. On October 20, 2004, The Bell Atlantic Master Trust exercised its warrants to purchase 602,992 shares of common stock for $5,995.

15. Employee Benefit Plans

The Company has a 401(k) contributory benefit plan for eligible employees, which currently matches up to a maximum of 3% of the participant’s eligible compensation. For the years ended December 28, 2002, December 27, 2003 and December 25, 2004, Company matching contributions totaled approximately $231,000, $234,000 and $245,000, respectively.

16. Operating Leases

The Company generally operates its restaurants in leased premises. The typical restaurant premises lease is for an initial term between 15 and 25 years with renewal options ranging from 5 to 10 years. The leases generally provide for the payment of property taxes, utilities, and various other use and occupancy costs by the Company.

Minimum payments under lease commitments as of December 25, 2004 are summarized below 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

Rent expense 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. Recent Accounting Pronouncements

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

In December 2004, the FASB issued SFAS No. 123(R), ‘‘Share-Based Payment’’, which is a revision of SFAS No. 123 and supersedes 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 the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of share-based payments effect to the statement of operations is no longer an alternative, and SFAS No. 123(R) is effective for all stock-based awards granted on or after July 1, 2005. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. The Company is currently evaluating the effect that the adoption of SFAS No. 123(R) will have on our financial position and results of operations. The adoption of SFAS No. 123(R) is expected to increase compensation expense in the future. Subsequent to the initial public offering the Company issued options to employees as further discussed in Note 11, “Equity Based Compensation.”

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)

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

			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

	McCORMICK & SCHMICK’S SEAFOOD RESTAURANT, INC.
	By:	/s/ EMANUEL N. HILARIO
		Emanuel N. Hilario
		*Chief Financial Officer*

		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

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.