| ITEM 1A RISK FACTORS 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 may incur substantial damages and expenses resulting from lawsuits, which could have a material adverse effect on our business |
| 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 |
| 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 |
| 12 ______________________________________________________________________ [41]Table of Contents 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 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 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 able to profitably open 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 opened seven company-owned restaurants in 2005 and we plan to open eight in 2006 |
| Our 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 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 |
| 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; 13 ______________________________________________________________________ [42]Table of Contents • 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 foods; • 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 |
| 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 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 |
| If we lose the services of any members of our senior management or key personnel 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 five restaurants in the Seattle, Washington area, seven in the Portland, Oregon area and 10 in California; our East Coast restaurants are concentrated in and around Washington, DC 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 13prca, of our then existing restaurants |
| 14 ______________________________________________________________________ [43]Table of Contents 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 15 ______________________________________________________________________ [44]Table of Contents • 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 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 foods 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, our operational controls and training may not 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 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 operating results |
| Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and purchasing habits, and to 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 like 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 |
| 16 ______________________________________________________________________ [45]Table of Contents 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 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 affect our restaurant operations and our ability to open new restaurants |
| Each of our restaurants must obtain licenses from regulatory authorities to sell liquor, beer and wine, and each restaurant must obtain a food service license from local health authorities |
| Each 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 operating results and 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 and financial condition |
| 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 |
| Our operations and profitability are susceptible to the effects of violence, war and economic trends |
| Terrorist attacks and other acts of violence or war and US military reactions to such attacks may negatively affect our operations and an investment in our shares of common stock |
| The terrorist attacks in New York and Washington, DC 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 17 ______________________________________________________________________ [46]Table of Contents 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 |