**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 
| **ý**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                                                                                 |
|------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                       | ** **                                                                                                                                                                                                                                                                                         |
| ** **                                                       | **For the  quarterly period ended June 26, 2004**                                                                                                                                                                                                                                             |
| ** **                                                       | ** **                                                                                                                                                                                                                                                                                         |
| **OR**                                                           |
| ** **                                                       |
| **o**                                                            | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934**                                                                                                                                                                                                            |
| ** **                                                       | ** **                                                                                                                                                                                                                                                                                         |
| ** **                                                       | **For the  transition period  from                     to                     ** |
|                                                             |                                                                                                                                                                                                                                                                                               |
| **McCormick & Schmick’s Seafood Restaurants, Inc.**     |
| (Exact  name of registrant as specified in its charter)          |
|                                                             |                                                                                                                                                                                                                                                                                               |   |   |   |
| **Delaware**                                                     | ** **                                                                                                                                                                                                                                                                                         | **000-50845** | ** ** | **20-1193199** |
| (State  or other jurisdiction of  incorporation or organization) |                                                                                                                                                                                                                                                                                               | (Commission  File  Number) |   | (IRS  Employer  Identification Number) |
|                                                             |                                                                                                                                                                                                                                                                                               |   |   |   |
| **720 SW Washington Street, Suite 550 Portland, Oregon 97205**   |
| (Address  of principal executive offices) (Zip Code)             |
|                                                             |                                                                                                                                                                                                                                                                                               |   |   |   |
| **(503) 226-3440**                                               |
| (Registrant’s  telephone number, including area code)       |
|                                                                  |                                                                                                                                                                                                                                                                                                    |  |  |  |  |

 

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

 

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

 

The number of shares ofCommon Stock outstanding on August 26, 2004 was 13,179,358.

 

 

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**Explanatory Note**

 

McCormick & Schmick’sSeafood Restaurants, Inc., the registrant whose name appears on the cover ofthis report, is the survivor of a merger with McCormick & Schmick HoldingsLLC that occurred on July 20, 2004, after the period covered by thisreport and prior to our initial public offering.  The financial statements for the periodcovered by this report are those of McCormick & Schmick Holdings LLC.  Because McCormick & Schmick Holdings LLCwas a holding company, giving retroactive effect to the merger would not affectthe financial statements contained in this report, except with respect toinformation regarding the membership units in McCormick & Schmick HoldingsLLC.  See Note 2 to the financialstatements “Corporate Reorganization and Initial Public Offering.”

 

2

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

QuarterEnded June 26, 2004

 

INDEXTO FORM 10-Q

 

 
| **PART I.  FINANCIAL INFORMATION**                                                                            | **4**  |
|--------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                               |   |
| Item 1 –  Financial Statements – McCormick &  Schmick Holdings LLC and Subsidiaries (Unaudited) | 4      |
|                                                                                                               |   |
| Consolidated Balance Sheets                                                                                        | 4      |
|                                                                                                               |   |
| Consolidated Statements  of Operations                                                                             | 5      |
|                                                                                                               |   |
| Consolidated  Statements of Cash Flows                                                                             | 6      |
|                                                                                                               |   |
| Notes  to Unaudited Consolidated Financial Statements                                                              | 7      |
|                                                                                                               |   |
| Item  2 –  Management’s Discussion and Analysis  of Financial Condition and Results of Operations   | 12     |
|                                                                                                               |   |
| Item  3 – Quantitative and Qualitative Disclosures About Market Risk                                          | 26     |
|                                                                                                               |   |
| Item 4 – Controls and  Procedures                                                                             | 26     |
|                                                                                                               |   |
| **PART II.  OTHER INFORMATION**                                                                               | **27** |
|                                                                                                               |   |
| Item 1 – Legal Proceedings                                                                                    | 27     |
|                                                                                                               |   |
| Item 2 – Changes in  Securities and Use of Proceeds                                                           | 27     |
|                                                                                                               |   |
| Item 3 –  Defaults Upon Senior Securities                                                                     | 27     |
|                                                                                                               |   |
| Item  4 – Submissions of Matters to a Vote of Security Holders                                                | 27     |
|                                                                                                               |   |
| Item 5 – Other Information                                                                                    | 27     |
|                                                                                                               |   |
| Item 6 –  Exhibits and Reports on Form 8-K                                                                    | 27     |
|                                                                                                               |   |
| Signatures                                                                                                         | 28     |

 

3

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS.**

 

**McCormick & Schmick Holdings LLC andSubsidiaries**

**ConsolidatedBalance Sheets**

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

 
| ** **                                                                                            | ** ** | **June 26, 2004** | ** ** | **December 27, 2003** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                                                            | ** ** | **(Unaudited)**        | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                            |       |                   |       |                       |       |
| Current assets:                                                                                       |       |                   |       |                       |       |
| Cash and cash equivalents                                                                             |       | $                      | 1,101      |                       | $          | 2,453 |   |
| Trade accounts receivable, net                                                                        |       | 7,049                  |       | 3,689                      |       |
| Inventories                                                                                           |       | 3,207                  |       | 2,704                      |       |
| Prepaid expenses and other current assets                                                             |       | 3,673                  |       | 2,367                      |       |
| Deferred income taxes                                                                                 |       | 96                     |       | 96                         |       |
| Total current assets                                                                                  |       | 15,126                 |       | 11,309                     |       |
| Equipment and leasehold improvements, net                                                             |       | 85,441                 |       | 74,829                     |       |
| Other assets                                                                                          |       | 54,306                 |       | 54,470                     |       |
| Goodwill                                                                                              |       | 21,209                 |       | 21,209                     |       |
| Total assets                                                                                          |       | $                      | 176,082    |                       | $          | 161,817 |   |
|                                                                                                  |       |                   |       |                       |       |
| **LIABILITIES AND  MEMBERS’ EQUITY**                                                             |       |                   |       |                       |       |
| Current liabilities:                                                                                  |       |                   |       |                       |       |
| Book overdraft                                                                                        |       | $                      | 3,147      |                       | $          | 5,052 |   |
| Accounts payable                                                                                      |       | 14,462                 |       | 11,216                     |       |
| Accrued expenses                                                                                      |       | 14,510                 |       | 12,698                     |       |
| Capital lease obligations, current portion                                                            |       | 428                    |       | 415                        |       |
| Derivative instrument-interest rate swap                                                              |       | 363                    |       | 805                        |       |
| Total current liabilities                                                                             |       | 32,910                 |       | 30,186                     |       |
|                                                                                                  |       |                   |       |                       |       |
| Revolving credit facility                                                                             |       | 51,000                 |       | 38,500                     |       |
| Mandatorily redeemable preferred stock  (liquidation preference of $28,775 and $27,002)               |       | 25,203                 |       | 23,137                     |       |
| Other long-term liabilities                                                                           |       | 4,887                  |       | 4,635                      |       |
| Capital lease obligations, non-current  portion                                                       |       | 923                    |       | 1,141                      |       |
| Deferred income taxes                                                                                 |       | 4,045                  |       | 4,312                      |       |
| Total liabilities                                                                                     |       | 118,968                |       | 101,911                    |       |
| Members’ equity                                                                                  |       |                   |       |                       |       |
| Preferred units, 57,000 units issued and  outstanding (liquidation preference of $82,569 and $77,385) |       | 57,000                 |       | 57,000                     |       |
| Warrant to acquire 4,956.52 Preferred  units, entitled to liquidation preference of $7,171 and $6,772 |       | 4,951                  |       | 4,951                      |       |
| Class A units, 1,000,000 units issued and  outstanding                                                |       | 756                    |       | 756                        |       |
| Warrant to acquire 103,896.1 Class A-2  units                                                         |       | 103                    |       | 103                        |       |
| Class B units, 171,428.57 units issued and  outstanding                                               |       | 31                     |       | 37                         |       |
| Class C units, 13.20 units issued and  outstanding                                                    |       | 14                     |       | 14                         |       |
| Unearned compensation                                                                                 |       | (37                    | )          | (42                        | )          |
| Accumulated deficit                                                                                   |       | (5,510                 | )          | (2,425                     | )          |
| Accumulated other comprehensive loss,  interest rate swap                                             |       | (194                   | )          | (488                       | )          |
| Total members’ equity                                                                            |       | 57,114                 |       | 59,906                     |       |
| Total liabilities and members’ equity                                                            |       | $                      | 176,082    |                       | $          | 161,817 |   |

 

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

 

4

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**McCormick & Schmick Holdings LLC andSubsidiaries**

**ConsolidatedStatements of Operations**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                                                             | ** ** | **Thirteen week period ended** | ** ** | **Twenty-six week  period ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                             | ** ** | **June 26,  2004**        | ** ** | **June 28, 2003**                 | ** ** | **June 26, 2004** | ** ** | **June 28,  2003** | ** ** |
|                                                                                                                   |       |                           |       |                                   |       |   |   |   |   |
| Revenues                                                                                                               |       | $                              | 59,723     |                                   | $          | 48,642 |   | $ | 114,237 |   | $ | 93,691 |   |
| Restaurant operating costs                                                                                             |       |                           |       |                                   |       |   |   |   |   |
| Food and beverage                                                                                                      |       | 17,931                         |       | 14,163                                 |       | 34,217 |   | 27,560 |   |
| Labor                                                                                                                  |       | 18,732                         |       | 15,109                                 |       | 36,542 |   | 29,573 |   |
| Operating costs                                                                                                        |       | 8,744                          |       | 7,082                                  |       | 16,611 |   | 13,893 |   |
| Occupancy                                                                                                              |       | 5,129                          |       | 3,901                                  |       | 9,643 |   | 7,575 |   |
| Total restaurant operating costs                                                                                       |       | 50,536                         |       | 40,255                                 |       | 97,013 |   | 78,601 |   |
| General and administrative expenses                                                                                    |       | 2,616                          |       | 2,016                                  |       | 5,171 |   | 3,957 |   |
| Restaurant pre-opening costs                                                                                           |       | 1,052                          |       | 104                                    |       | 1,989 |   | 111 |   |
| Depreciation and amortization                                                                                          |       | 2,836                          |       | 2,331                                  |       | 5,462 |   | 4,672 |   |
| Management fees and covenants not to compete                                                                           |       | 3,603                          |       | 637                                    |       | 4,240 |   | 1,274 |   |
| Total costs and expenses                                                                                               |       | 60,643                         |       | 45,343                                 |       | 113,875 |   | 88,615 |   |
| Operating income (loss)                                                                                                |       | (920                           | )          | 3,299                                  |       | 362 |   | 5,076 |   |
| Interest expense                                                                                                       |       | 939                            |       | 768                                    |       | 1,796 |   | 1,600 |   |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock                                             |       | 1,054                          |       | —                                 |       | 2,066 |   | — |   |
| Income (loss) before income tax expense and  accrued dividends and accretion on mandatorily redeemable preferred stock |       | (2,913                         | )          | 2,531                                  |       | (3,500 | ) | 3,476 |   |
| Income tax expense (benefit)                                                                                           |       | (577                           | )          | 1,757                                  |       | (415 | ) | 2,411 |   |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock                                             |       | —                         |       | 916                                    |       | — |   | 1,832 |   |
| Net loss                                                                                                               |       | $                              | (2,336     | )                                      | $          | (142 | ) | $ | (3,085 | ) | $ | (767 | ) |
|                                                                                                                   |       |                           |       |                                   |       |   |   |   |   |
| Proforma net loss per common share                                                                                     |       |                           |       |                                   |       |   |   |   |   |
| Basic and diluted                                                                                                      |       | $                              | (0.30      | )                                      | $          | (0.02 | ) | $ | (0.40 | ) | $ | (0.10 | ) |
| Shares used in computing proforma net loss per  share                                                                  |       |                           |       |                                   |       |   |   |   |   |
| Basic and diluted                                                                                                      |       | 7,782                          |       | 7,782                                  |       | 7,782 |   | 7,782 |   |
|                                                                                                                   |       |                           |       |                                   |       |   |   |   |   |
| Supplemental proforma net loss per common  share                                                                       |       | $                              | (0.22      | )                                      | $          | — |   | $ | (0.29 | ) | $ | — |   |
| Shares used in computing supplemental proforma  net loss per share                                                     |       | 10,690                         |       | —                                 |       | 10,690 |   | — |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

5

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**McCormick & Schmick Holdings LLC andSubsidiaries**

**ConsolidatedStatements of Cash Flows**

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

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Twenty-six week period ended** |
|------------------------------------------------------------------------------------|------------|----------------------------------|
| ** **                                                                         | ** ** | **June 26,  2004**          | ** ** | **June 28,  2003** | ** ** |
| **Operating activities**                                                           | * *   | * *                         | * * | * * | * * |
| Net loss                                                                           |       | $                                | (3,085 | ) | $ | (767 | ) |
| Adjustments to reconcile net loss to cash flows  provided by operating activities: |       |                             |   |   |   |
| Depreciation and amortization                                                      |       | 5,462                            |   | 4,672 |   |
| Amortization of unearned compensation                                              |       | 5                                |   | 2 |   |
| Deferred income taxes                                                              |       | (415                             | ) | 2,416 |   |
| Accrued dividends and accretion on mandatorily  redeemable preferred stock         |       | 2,066                            |   | 1,832 |   |
| Changes in operating assets and liabilities                                        |       |                             |   |   |   |
| Trade accounts receivable                                                          |       | (1,303                           | ) | (340 | ) |
| Inventories                                                                        |       | (503                             | ) | (113 | ) |
| Prepaid expenses and other current assets                                          |       | (1,306                           | ) | (461 | ) |
| Accounts payable                                                                   |       | 3,246                            |   | (95 | ) |
| Accrued expenses                                                                   |       | 1,812                            |   | 220 |   |
| Other long-term liabilities                                                        |       | 252                              |   | 266 |   |
| Cash provided by operating activities                                              |       | 6,231                            |   | 7,632 |   |
| **Investing activities**                                                           |       |                             |   |   |   |
| Acquisition of equipment and leasehold  improvements                               |       | (15,790                          | ) | (6,167 | ) |
| Charge in accounts receivable for tenant improvement  allowances (1)               |       | (2,057                           | ) | 259 |   |
| Other assets                                                                       |       | (120                             | ) | 1 |   |
| Net cash used in investing activities                                              |       | (17,967                          | ) | (5,907 | ) |
| **Financing activities**                                                           |       |                             |   |   |   |
| Book overdraft                                                                     |       | (1,905                           | ) | 205 |   |
| Payments on long-term debt                                                         |       | —                           |   | (3,358 | ) |
| Borrowings made on revolving credit facility                                       |       | 40,000                           |   | 27,500 |   |
| Payments made on revolving credit facility                                         |       | (27,500                          | ) | (27,500 | ) |
| Payments on capital lease agreements                                               |       | (205                             | ) | (208 | ) |
| Purchase of Class B units                                                          |       | (6                               | ) | — |   |
| Net cash provided by (used in) financing  activities                               |       | 10,384                           |   | (3,361 | ) |
| Decrease in cash                                                                   |       | (1,352                           | ) | (1,636 | ) |
| Cash and cash equivalents, beginning of period                                     |       | 2,453                            |   | 2,945 |   |
| Cash and cash equivalents, end of period                                           |       | $                                | 1,101 |   | $ | 1,309 |   |

 

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(1) Thebalance sheets as of June 26, 2004 and as of December 27, 2003 include in tradeaccount receivable amounts due from landlords for tenant improvement allowancestotaling $2.8 million and $0.8 million respectively.

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

6

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**McCormick & Schmick Holdings LLC andSubsidiaries**

**Notesto Unaudited Consolidated Financial Statements**

**June 26, 2004**

 

**(1)**                                 **BASIS OF PRESENTATION**

 

The accompanying unauditedconsolidated financial statements of McCormick & Schmick Holdings LLC andits wholly owned subsidiaries (the “Company”) for the thirteen week periodsended June 26, 2004 and June 28, 2003 and the twenty-six week periodsended June 26, 2004 and June 28, 2003 have been prepared by the managementof the Company and include all adjustments (consisting of a normal andrecurring nature) that are, in the opinion of management, necessary for a fairpresentation of the financial condition, results of operations, and cash flowsfor such periods.  The financial statementshave been prepared in accordance with generally accepted accounting principles,except that certain information and footnotes have been condensed or omittedpursuant to rules and regulations of the Securities and Exchange Commission.  Operating results for the thirteen week andtwenty-six week periods ended June 26, 2004 are not necessarily indicativeof the results that may be expected for the year ending December 25, 2004.

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesas of the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.

 

Pro formabasic and diluted net loss per share have been computed by dividing net lossfor each period by 7,782,349 shares of common stock issued upon the corporatereorganization, which shares include a total of 602,992 shares issuable uponexercise of certain warrants because warrants have a nominal exerciseprice.  Such shares were assumed to beoutstanding for all periods presented. There were no potential dilutive securities.  Supplemental pro forma net loss per shareincludes 2,649,632 shares issued in the offering representing the sharesattributable to the amount of net proceeds that were used to redeem the mandatorilyredeemable preferred stock and 257,827 shares issued in the offeringrepresenting the shares attributable to the amount of net proceeds that wereused for payments made in connection with the termination of the management andcovenant not to compete agreements.

 

Management believes that thedisclosures included in the accompanying interim financial statements complywith the requirements of Secton 13(a) of the Securities Exchange Act of 1934for a Quarterly Report on Form 10-Q and are adequate to make the information presented not misleading.  The financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in Amendment No. 5 to the registration statement on Form S-1 filed bythe Company under the Securities Act of 1933 dated July 20, 2004.

 

**(2)**                                 **CORPORATE REORGANIZATION ANDINITIAL PUBLIC OFFERING**

 

On July 20, 2004, theCompany merged into a newly created, wholly owned Delaware subsidiary,McCormick & Schmick’s Seafood Restaurants, Inc. (“MSSR”).  MSSR succeeded the Company as the registrantin connection with the initial public offering (“IPO”) of the Company onJuly 20, 2004.  Except with respectto information regarding the membership units in McCormick & SchmickHoldings LLC and the common stock issued upon the reorganization, there is noimpact to the financial statements as a result of converting from a limitedliability company to a corporation because the operations of the Company werepreviously conducted in McCormick and Schmick Acquisition Corp. and itssubsidiaries, which are corporations. Accordingly, the historical financial statements of the Company haveincluded a provision for income taxes and related deferred income taxes.

 

Also, on June 2, 2004,the Company approved agreements to terminate effective on June 25, 2004management agreements with Bruckmann, Rosser, Sherrill & Co., L.L.C.(“BRS”) and Castle Harlan, Inc. (“Castle Harlan”) and covenant not to competeagreements with the Company’s co-founders, William P. McCormick and Douglas L.Schmick.  BRS and Castle Harlan are eachaffiliates of our controlling stockholders.

 

                                                In connection with the reorganization andIPO, the Company:

 

•Issued 7,179,357 shares of MSSR’s commonstock in the merger to the holders of the Company’s units, not including602,992 shares issuable upon exercise of warrants at a nominal price to TheBell Atlantic Master Trust.  See Note 8,“Members’ Equity.”

 

•Issued 6,000,000 new shares to new investorsat $12.00 per share, raising approximately $65.2 million after underwritingdiscounts and transaction costs.

 

•Repaid $51.5 million of indebtedness on itsthen existing credit facility with the proceeds raised in the IPO and from$18.0 million in loans under a new $40.0 million credit facility.  See Note 3, “Debt.”

 

7

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•Paid $28.9 million to The Bell AtlanticMaster Trust to redeem all of the 13% senior exchangeable preferred stock of aCompany subsidiary.  See Note 7,“Mandatorily Redeemable Preferred Stock.”

 

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

 

The followingcondensed proforma balance sheet as of June 26, 2004 presents the impact of thereorganization and IPO on the Company’s balance sheet as if the transaction hadhappened on June 26, 2004:

 
| ** **                                 | ** ** | **As Reported**   | ** ** | **IPO Related Transactions** | ** ** | **Pro Forma**             | ** ** |
|--------------------------------------------|------------|-------------------|------------|------------------------------|------------|---------------------------|------------|
| ** **                                 | ** ** | **June 26, 2004** | ** ** | **(A)**                      | ** ** | **(B)**                   | ** ** | **(C)** | ** ** | **(D)** | ** ** | **June 26, 2004** | ** ** |
| ** **                                 | ** ** | **(Unaudited)**   | ** ** | ** **                   | ** ** | **($ in thousands)** | ** ** | ** ** | ** ** | **(Unaudited)** | ** ** |
| ** **                                 | ** ** | ** **        | ** ** |
| **ASSETS**                                 | ** ** | ** **        | ** ** | ** **                   | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                  |       | $                 | 1,101      |                         | $          | 62,500                    |       | $ | (33,100 | ) | $ | — |   | $ | (28,775 | ) | $ | 1,726 |   |
| Other assets                               |       | 174,981           |       | —                       |       | (882                      | )          | (2,800 | ) | — |   | 171,299 |   |
| Total assets                               |       | $                 | 176,082    |                         | $          | 62,500                    |       | $ | (33,982 | ) | $ | (2,800 | ) | $ | (28,775 | ) | $ | 173,025 |   |
|                                       |       |              |       |                         |       |                      |       |   |   |   |   |   |   |
| **LIABILITIES AND MEMBERS’ EQUITY**   |       |              |       |                         |       |                      |       |   |   |   |   |   |   |
| Revolving credit facility                  |       | $                 | 51,000     |                         | $          | —                    |       | $ | (33,100 | ) | $ | — |   | $ | — |   | $ | 17,900 |   |
| Mandatory redeemable preferred stock       |       | 25,203            |       | —                       |       | —                    |       | — |   | (25,203 | ) | — |   |
| Other liabilities                          |       | 42,765            |       | —                       |       | —                    |       | (2,800 | ) | — |   | 39,965 |   |
| Total liabilities                          |       | 118,968           |       | —                       |       | (33,100                   | )          | (2,800 | ) | (25,203 | ) | 57,865 |   |
| **Members’ equity**                   |       |              |       |                         |       |                      |       |   |   |   |   |   |   |
| Common stock                               |       | —            |       | 14                           |       | —                    |       | — |   | — |   | 14 |   |
| Additional paid in capital                 |       | —            |       | 125,341                      |       | —                    |       | — |   | — |   | 125,341 |   |
| Member units/warrants                      |       | 62,818            |       | (62,818                      | )          | —                    |       | — |   | — |   | — |   |
| Accumulated deficit                        |       | (5,510            | )          | (37                          | )          | (882                      | )          | — |   | (3,572 | ) | (10,001 | ) |
| Accumulated other comprehensive loss       |       | (194              | )          | —                       |       | —                    |       | — |   | — |   | (194 | ) |
| Total members’ equity                 |       | 57,114            |       | 62,500                       |       | (882                      | )          | — |   | (3,572 | ) | 115,160 |   |
| Total liabilities and members’ equity |       | $                 | 176,082    |                         | $          | 62,500                    |       | $ | (33,982 | ) | $ | (2,800 | ) | $ | (28,775 | ) | $ | 173,025 |   |

 

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**IPOTransactions**

(A) - IPO /Reorganization

(B) - Repayment of amended and restated revolving credit facility andwrite off of related unamortized deferred loan costs which were terminated June25, 2004

(C) - Paymentin connection with the termination of management and covenant not to competeagreements

(D) -Redemption of 13% senior exchangeable preferred stock

 

 

**(3)**                                 **DEBT**

 

On July 23, 2004, theCompany repaid the outstanding balance on its amended and restated revolving creditfacility in the amount of $51.5 million with net proceeds from the IPO and$18.0 million in loans pursuant to a new revolving credit facility agreement,which provides among other things for $40.0 million in revolving credit loans.  Loans under this agreement are collateralizedby a first-priority security interest in all of the assets of MSSR and matureon July 22, 2009.  The interest rateon the credit facility is based on the financial institution’s prime rate plusa margin of .25% to .75% or the Eurodollar rates plus a margin of 1.75% to2.25%, with margins determined by certain financial ratios.  According to the terms of the new revolvingcredit facility, MSSR is subject to certain financial and non-financialcovenants, including an adjusted leverage ratio, a consolidated cash flow ratioand growth capital expenditures limitations. The first compliance reporting will be completed for the quarter endingSeptember 25, 2004.  In the thirdquarter of 2004, the Company expects to recognize $0.9 million expense net oftax related to the write-off of unamortized deferred loan costs related to itsprior amended and restated revolving credit facility.

 

As of June 26, 2004,the outstanding balance on the Company’s amended and restated revolving creditfacility was $51.0 million.  The Companyentered into this revolving credit facility agreement with a syndicate offinancial institutions on October 28, 2003, which provided for a $70.0million revolving credit loan. Loans under this agreement were collateralizedby a first-priority security interest in all of the assets of the Company.Loans pursuant to this revolving credit facility were scheduled to matureApril 2007 and bore interest based on the financial institution’s primerate plus a margin of 1.75% to 2.25% or the Eurodollar rate plus a margin of3.25% to 3.75%, margins determined by certain financial ratios.  The Company expensed $0.9 million and $1.8million in interest for the thirteen week periods ended June 26, 2004 andthe twenty-six week periods ended June 26, 2004, respectively, pursuant tothe revolving loan, capital lease and interest rate swap agreements.  The Company expensed $0.8 million and $1.6million in interest for the thirteen week period ended June 28, 2003 andthe twenty-six week period ended June 28, 2003, respectively, pursuant tothe revolving loan, capital lease and interest rate swap agreements.

 

8

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The Company had entered intoan interest rate swap with a notional amount totaling $29.3 million to reducethe impact of changes in interest rates on a portion of the revolving creditloan. The interest rate swap was designated as a cash flow hedge for purposesof Statement of Financial Accounting Standards (“SFAS”) No. 133 and allowed theCompany to receive floating rate receipts based on the financial institution’sprime rate plus a margin of 1.75% to 2.25% or the Eurodollar rates plus amargin 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% to4.5%, depending on certain financial ratios. This effectively changed theCompany’s interest rate exposure on the revolving credit loan from a floatingrate to a fixed rate on $29.3 million of the total balance outstanding on therevolving credit loan. The balance of the revolving credit loan remained at afloating rate of interest based on the prime rate or Eurodollar rate plus theaforementioned applicable margins. The fair value of the interest rate swap asof June 26, 2004 was an unrealized loss of $0.4 million, and is recordedas a liability (derivative instrument-interest rate swap) on the balance sheet.

 

**(4)**                                 **RELATED-PARTY TRANSACTIONS**

 

Prior to the IPO, theCompany paid annual management fees of $1.1 million to each of BRS and CastleHarlan.  Affiliates of each of BRS andCastle Harlan had controlling ownership interests in the Company at the time ofthe agreement terminations.  For thethirteen week periods ended June 26, 2004 and June 28, 2003, managementfees recognized as expense totaled $2.8 million, including $1.1 million paid toeach of BRS and Castle Harlan for the termination of the management agreementsas of June 25, 2004, and $0.6 million, respectively.  For the twenty-six week periods ended June 26, 2004 and June 28, 2003,management fees recognized as expense totaled $3.3 million and $1.1 million,respectively.

 

Pursuant to covenants not tocompete of certain stockholders, the Company expensed $0.8 million and $0.1million for the thirteen week periods ended June 26, 2004 andJune 28, 2003, respectively, and $0.9 million and $0.2 million for thetwenty-six week periods ended June 26, 2004 and June 28, 2003,respectively.

 

The Company leasesproperties from landlords controlled by certain stockholders of the Company.Total rent paid to these landlords was $112,000 in each of the thirteen weekperiods ended June 26, 2004 and June 28, 2003, and $221,000 and$210,000 for the twenty-six week periods ended June 26, 2004 and June 28,2003, respectively.

 

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**(5)**                                 **EQUITY-BASED COMPENSATION**

 

Prior to the IPO, theCompany had an equity-based compensation plan under which it could grant theright to purchase a fixed number of the Company’s equity units.  The Company accounted for its equity-basedcompensation plan using the intrinsic-value method prescribed by AccountingPrinciples Board (“APB”) Opinion No. 25. Accordingly, the Company computedcompensation cost for employee equity units granted as the amount by which theestimated fair value of the Company’s equity units on the date of grant exceedsthe amount the employee would have had to pay to acquire the related equityunits. The amount of compensation cost is charged to income over the vestingperiod.

 

Under SFAS No. 123, asamended by SFAS No. 148, companies that choose to account for equity-basedcompensation plans using the intrinsic-value method are required to determinethe fair value of employee equity grants using the fair-value method and to disclosethe impact of fair-value accounting in a note to the financial statements.There is no difference between the accounting for the equity-based compensationplan described in Note 11 under APB Opinion No. 25 and SFAS No. 123.Accordingly, there is no difference between reported net income and pro formanet income determined under SFAS No. 123.

 

In connectionwith the initial public offering, all of the outstanding Class B units owned byemployees of the Company vested at July 20, 2004.  The Company accounted for the acceleration ofthe vesting of the units in accordance with Financial Accounting StandardsBoard Interpretation (“FIN”) No. 44, *Accounting for CertainTransactions Involving Stock Compensation*.  This resulted in a new measurement date at thetime of the acceleration and a new measurement of compensation as if the awardwere newly granted.  However, based onthe valuation formula the Class B units had no value and, accordingly therewere no shares of common stock issued for the Class B units.  Shares of common stock with an aggregatevalue of $3.0 million were allocated among the holders of C units which hadalready vested as of June 26, 2004.

 

**(6)**                                 **COMMITMENTS ANDCONTINGENCIES**

 

During 2003, the Company wasa defendant in a labor code class-action lawsuit filed in the Superior Court ofCalifornia, Orange County. In January 2004, the Company resolved thismatter in principal by agreeing to pay $1.2 million, which was accrued as ofDecember 27, 2003 and is included in current accrued expenses.

 

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

 

**(7)**                                 **MANDATORILY REDEEMABLEPREFERRED STOCK**

 

McCormick & SchmickAcquisition Corp II (“Acquisition Corp II”) is a subsidiary of the Company.Acquisition Corp II’s mandatorily redeemable 13% senior exchangeable preferredstock is reflected as mandatorily redeemable preferred stock in theconsolidated financial statements.  Inconnection with the reorganization and IPO, on July 23, 2004 the Company paid$28.9 million to redeem all of the outstanding mandatorily redeemable 13%senior exchangeable preferred stock.  SeeNote 2, “Corporate Reorganization And Initial Public Offering.”

 

**(8)**                                 **MEMBERS’ EQUITY**

 

Prior to the IPO, theCompany had outstanding the following equity units:  preferred units, Class A-1 units, Class A-2units, Class B units and Class C units. All of the units were converted intocommon stock as the result of the IPO. The holders of the Class A-1 units hadvoting rights; the Class A-2 units, Class B units, Class C units and preferredunits did not have voting rights.

 

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In connection with theissuance of the senior exchangeable preferred stock of Acquisition Corp IIdiscussed in Note 7, the Company also sold for $102,857 a warrant to purchase103,896.10 Class A-2 units and sold for $4,951,563 a warrant to purchase4,956.52 preferred units. In connection with the corporate reorganization, thewarrants became exercisable for 602,992 shares of common stock for an aggregateconsideration of $5,995.  See Note 2,“Corporate Reorganization And Initial Public Offering.”

 

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

 

The underwriters of theCompany’s IPO did not exercise their over-allotment option to purchase anadditional 900,000 shares of the Company’s common stock at $12.00 per share.

 

MSSR adopted a 2004 StockIncentive Plan on June 16, 2004 under which 1,500,000 shares are reservedfor issuance.  On July 20, 2004,MSSR issued to officers and employees options to purchase an aggregate ofapproximately 900,000 shares of common stock at $12.00 per share.  The options are intended to qualify asincentive stock options under Section 422 of the Internal Revenue Code.

 

**(10)**                          **NEW ACCOUNTINGPRONOUNCEMENTS**

 

In January 2003, theFASB issued FIN No. 46, *Consolidation ofVariable Interest Entities*. FIN No. 46 clarifies the application ofAccounting Research Bulletin No. 51, *ConsolidatedFinancial Statements*, to certain entities in which equity investorsdo not have the characteristics of a controlling financial interest or do nothave sufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. Application ofthis interpretation is required in financial statements for periods endingafter March 15, 2004. We have not identified any variable interestentities for which the Company is the primary beneficiary or has significantinvolvement.

 

In April 2003, the FASBissued SFAS No. 150, *Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity*.SFAS No. 150 changes the accounting for certain financial instruments that,under previous guidance, could be classified as equity or “mezzanine” equity,by requiring those instruments to be classified as liabilities (or assets insome circumstances) in the statement of financial position. SFAS No. 150requires disclosure regarding the terms of those instruments and settlementalternatives. This statement was effective for all financial instrumentsentered into or modified after May 31, 2003, and was otherwise effective at thebeginning of the first interim period beginning after June 15, 2003. Therestatement of financial statements for earlier years presented is notpermitted. We adopted SFAS No. 150 effective June 29, 2003 (the beginningof our 2003 third quarter). Effective with the adoption of SFAS No. 150, wereported the mandatorily redeemable preferred stock on the balance sheet as aliability and the accrued dividends and accretion on mandatorily redeemablepreferred stock prior to income (loss) before income taxes on the statement ofoperations. Prior to the adoption of SFAS No. 150, in accordance with previousguidance, we reported the mandatorily redeemable preferred stock on the balancesheet as mezzanine equity and the accrued dividends and accretion onmandatorily redeemable preferred stock below income taxes on the statement ofoperations.

 

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

 

**FORWARD-LOOKINGSTATEMENTS**

 

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

 

Important factors that couldcause actual results to differ materially from our expectations include thosediscussed below under “Factors That May Affect Our Business and the Price ofOur Common Stock.”  We do not undertakeany duty to update forward-looking statements after the date they are made orto conform them to actual results or to changes in circumstances orexpectations.

 

**OVERVIEW**

 

Since our first restaurantopened in 1972, we have focused on prudent growth without sacrificing thequality or appeal of our restaurants or our seafood.  We have grown our business by offering ourcustomers a daily-printed menu with a broad selection of affordable freshseafood in an upscale, comfortable setting. Our revenues are generated by sales at our restaurants, includingbanquets. In the quarter ended June 27, 2004, banquets accounted for approximately8% of our revenues. Food and nonalcoholic beverage sales account forapproximately 70% of revenues, and the remaining 30% of revenues are from thesale of alcoholic beverages.

 

We opened five restaurantsin the first quarter of 2004 and we opened three restaurants and beganoperating an additional restaurant under a management contract in the secondquarter of 2004.  We anticipate openingone additional restaurant in 2004, six restaurants in 2005 and eightrestaurants in 2006.  We believe there issubstantial opportunity for our continued growth and we remain committed topursuing our strategy of leveraging our infrastructure in existing markets, inparticular by siting additional restaurants in suburban areas near our downtownrestaurants, selectively entering into new markets, and pursuing opportunitiesthat complement our seafood restaurant operations such as catering, managementagreements with hotels, and expansion of our M&S Grill concept.

 

The following are highlightsof our financial performance for the thirteen week period ended June 26,2004 (“2004 Q2”) compared to the thirteen week period ended June 28, 2003(“2003 Q2”).

 

•                  Net lossincreased $2.2 million to ($2.3) million in 2004 Q2 from ($0.1) million in 2003Q2. The increase was primarily due to the $2.8 million non-recurring expensefor the termination of the management and covenants not to compete agreementscoupled with a $0.9 million increase in pre-opening costs associated with threenew company-owned restaurants in 2004 Q2 and $0.6 million in incrementalgeneral and administrative expenses incurred to support restaurant openingssubsequent to 2003 Q2, partially offset by the benefit of higher revenues andlower income taxes.

 

•                  Comparable restaurant sales in 2004 Q2increased 2.9%, an improvement over the 2.2% decrease in 2003 Q2.

 

•                  Revenues increased 22.8% in 2004 Q2 primarilydue to the revenues generated by the 11 company-owned restaurants opened since2003 Q2 coupled with our 2.9% positive comparable restaurant sales.

 

•                  General and administrative expenses as apercentage of revenues increased to 4.4% in 2004 Q2 from 4.1% in 2003 Q2 due toincremental expenses consisting primarily of additional salary expensesassociated with the oversight and administrative support of 11 additionalcompany-owned restaurants opened since 2003 Q2.

 

The following are highlightsof our financial performance for the six-month period ended June 26, 2004(“YTD Q2 2004”) compared to the six-month period ended June 28, 2003 (“YTDQ2 2003”).

 

•      Net loss increased $2.3 million to ($3.1)million in YTD Q2 2004 from ($0.8) million in YTD Q2 2003. The increase wasprimarily due to the $2.8 million non-recurringexpense for the termination of the management and covenants not to competeagreements coupled with an increase of $1.9 million in pre-opening costsassociated with eight new company-owned restaurants in YTD Q2 2004 and $1.2million in incremental general and administrative expenses incurred to supportrestaurant openings subsequent to 2003 Q2, partially offset by the benefit ofhigher revenues and lower income taxes.

 

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•                  Comparable restaurant sales YTD Q2 2004increased 4.4%, an improvement over the 1.3% decrease YTD Q2 2003.

 

•                  Revenues increased 21.9% YTD Q2 2004primarily due to the revenues generated by the 11 company-owned additionalrestaurants opened since YTD Q2 2003 coupled with our 4.4% positive comparablerestaurant sales.

 

•                  General and administrative expenses as apercentage of revenues increased to 4.5% in YTD Q2 2004 from 4.2% in YTD Q22003 due to incremental expenses consisting primarily of additional salaryexpenses associated with the oversight and administrative support of 11additional company-owned restaurants opened since 2003 Q2.

 

**CorporateReorganization and Initial Public Offering**

 

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

 

•Issued 7,179,357 shares of common stock tothe former holders of units of McCormick & Schmick Holdings LLC, notincluding 602,992 shares issuable upon exercise of warrants at a nominal priceto The Bell Atlantic Master Trust.

 

•Issued 6,000,000 new shares to new investorsat $12.00 per share, raising approximately $65.2 million after underwritingdiscounts and transaction costs.

 

•Repaid $51.5 million of indebtedness on ourthen existing credit facility with the proceeds raised in the public offeringand from $18.0 million in loans under our new $40.0 million credit facility.

 

•Paid $28.9 million to The Bell AtlanticMaster Trust to redeem all of the 13% senior exchangeable preferred stock ofour subsidiary.

 

•Paid $2.8 million in connection with thetermination of management agreements with BRS and Castle Harlan and covenantnot to compete agreements with our founders, William P. McCormick and DouglasL. Schmick.

 

We incurred the expensesrelating to termination of the management agreements and covenant not tocompete agreements in 2004 Q2.  In ourfiscal quarter ending September 25, 2004, we will incur charges of $4.6 million, of which $3.7 million isassociated with the redemption of the 13% senior exchangeable preferred stockof our subsidiary and $0.9 million net of tax is associated with the expensingof previously capitalized costs from our extinguished credit facility.

 

 

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**RESULTS OFOPERATIONS**

 

The following table presentsthe results of operations, in dollars and as a percentage of revenues, for eachof the thirteen week and twenty-six week periods ended June 26, 2004 andJune 28, 2003.

 
| ** **                                                                                                             | ** ** | **Thirteen week periods ended** | ** ** | **Twenty six week periods ended** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------|
| ** **                                                                                                             | ** ** | **June 26, 2004**          | ** ** | **June 28, 2003**            | ** ** | **June 26, 2004** | ** ** | **June 28, 2003** | ** ** |
| **(Unaudited,  dollars in thousands)**                                                                                 | ** ** | **Amount**                      | ** ** | **%**                             | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** | **Amount** | ** ** | **%** | ** ** |
|                                                                                                                   |       |                            |       |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                                                                                                               |       | $                               | 59,723     |                              | 100.0 |   | $ | 48,642 |   | 100.0 |   | $ | 114,237 |   | 100.0 |   | $ | 93,691 |   | 100.0 |   |
| Restaurant operating costs                                                                                             |       |                            |       |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Food and beverage                                                                                                      |       | 17,931                          |       | 30.0                              |   | 14,163 |   | 29.1 |   | 34,217 |   | 30.0 |   | 27,560 |   | 29.4 |   |
| Labor                                                                                                                  |       | 18,732                          |       | 31.4                              |   | 15,109 |   | 31.1 |   | 36,542 |   | 32.0 |   | 29,573 |   | 31.6 |   |
| Operating costs                                                                                                        |       | 8,744                           |       | 14.6                              |   | 7,082 |   | 14.6 |   | 16,611 |   | 14.5 |   | 13,893 |   | 14.8 |   |
| Occupancy                                                                                                              |       | 5,129                           |       | 8.6                               |   | 3,901 |   | 8.0 |   | 9,643 |   | 8.4 |   | 7,575 |   | 8.1 |   |
| Total restaurant operating costs                                                                                       |       | 50,536                          |       | 84.6                              |   | 40,255 |   | 82.8 |   | 97,013 |   | 84.9 |   | 78,601 |   | 83.9 |   |
| General and administrative expenses                                                                                    |       | 2,616                           |       | 4.4                               |   | 2,016 |   | 4.1 |   | 5,171 |   | 4.5 |   | 3,957 |   | 4.2 |   |
| Restaurant pre-opening costs                                                                                           |       | 1,052                           |       | 1.8                               |   | 104 |   | 0.2 |   | 1,989 |   | 1.7 |   | 111 |   | 0.1 |   |
| Depreciation and amortization                                                                                          |       | 2,836                           |       | 4.7                               |   | 2,331 |   | 4.8 |   | 5,462 |   | 4.8 |   | 4,672 |   | 5.0 |   |
| Management fees and covenants not to  compete                                                                          |       | 3,603                           |       | 6.0                               |   | 637 |   | 1.3 |   | 4,240 |   | 3.7 |   | 1,274 |   | 1.4 |   |
| Total costs and expenses                                                                                               |       | 60,643                          |       | 101.5                             |   | 45,343 |   | 93.2 |   | 113,875 |   | 99.7 |   | 88,615 |   | 94.6 |   |
| Operating income                                                                                                       |       | (920                            | )          | (1.5                              | ) | 3,299 |   | 6.8 |   | 362 |   | 0.3 |   | 5,076 |   | 5.4 |   |
| Interest expense                                                                                                       |       | 939                             |       | 1.6                               |   | 768 |   | 1.6 |   | 1,796 |   | 1.6 |   | 1,600 |   | 1.7 |   |
| Accrued dividends and accretion on  mandatorily redeemable preferred stock                                             |       | 1,054                           |       | 1.8                               |   | — |   | — |   | 2,066 |   | 1.8 |   | — |   | — |   |
| Income (loss) before income tax expense and  accrued dividends and accretion on mandatorily redeemable preferred stock |       | (2,913                          | )          | (4.9                              | ) | 2,531 |   | 5.2 |   | (3,500 | ) | (3.1 | ) | 3,476 |   | 3.7 |   |
| Income tax expense (benefit)                                                                                           |       | (577                            | )          | (1.0                              | ) | 1,757 |   | 3.6 |   | (415 | ) | (0.4 | ) | 2,411 |   | 2.6 |   |
| Accrued dividends and accretion on  mandatorily redeemable preferred stock                                             |       | —                          |       | —                            |   | 916 |   | 1.9 |   | — |   | — |   | 1,832 |   | 2.0 |   |
| Net loss                                                                                                               |       | $                               | (2,336     | )                                 | (3.9 | ) | $ | (142 | ) | (0.3 | ) | $ | (3,085 | ) | (2.7 | ) | $ | (767 | ) | (0.8 | ) |
|                                                                                                                        |            |                                 |            |                                   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Descriptionof Terms**

 

*Revenues* consist of revenues from comparablerestaurants, new restaurants and management agreements. For purposes ofcomparable restaurant sales, a restaurant is included in the comparablerestaurant base in the first full quarter following the 18th month ofoperations. New restaurant revenues include revenues from restaurants we openedduring the period under discussion.

 

*Restaurantoperating costs*consist of:

 

•                  food and beverage costs;

 

•                  labor costs, consisting of restaurantmanagement salaries, hourly staff payroll and other payroll-related itemsincluding taxes and fringe benefits;

 

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

 

•                  occupancy costs, consisting of both fixed andvariable portions of rent, common area maintenance charges, property insurancepremiums, and real property taxes.

 

*Generaland administrative expenses* consist of expenses associated with corporate administrative functionsthat support development and restaurant operations and provide aninfrastructure to support future growth, including management and staffsalaries, employee benefits, travel, legal and professional fees, technologyand market research.

 

*Restaurantpre-opening costs*,which are expensed as incurred, consist of costs incurred prior to opening anew restaurant and are comprised principally of manager salaries andrelocation, employee payroll and related training costs for new employees,including practice and rehearsal of service activities.

 

*Depreciationand amortization*consist of depreciation of fixed assets and the amortization of capitalizedloan costs.

 

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**2004 Q2Compared to 2003 Q2**

 

*Revenues.*   Revenues increased by $11.1 million, or 22.8%, to $59.7 million in 2004Q2 from $48.6 million in 2003 Q2. This increase was attributable to revenues of$6.0 million generated by the eight restaurants opened in 2004, $3.6 millionin  revenues from the three restaurantsopened in 2003, and $1.5 million in incremental revenues from restaurantsopened before 2003. Comparable restaurant sales were positive 2.9% in 2004 Q2.We estimate approximately 0.9% of the comparable restaurant sales increase wasattributable to an increased customer count and the remainder was attributableto increased per meal spending. Improvements in the overall economicenvironment as evidenced by higher travel supported our comparable restaurantsales growth in 2004 Q2.

 

*Food andBeverage Costs.*    Food and beverage costs increased by $3.8million, or 26.6%, to $17.9 million in 2004 Q2 from $14.2 million in 2003 Q2.This increase was primarily related to the 11 company-owned restaurants openedsince 2003 Q2. Food and beverage costs as a percentage of revenues increasedslightly to 30.0% in 2004 Q2 from 29.1% in 2003 Q2. The increase was primarilyrelated to product handling inefficiency at the eight company-owned restaurantsopened in 2004. Typically, new restaurants experience lower raw product yieldsduring the first year of operations as the new employees learn our operatingmodel. Due to the higher number of restaurant openings in 2004 compared to2003, we expect this trend in food and beverage cost to continue for theremainder of 2004.

 

*LaborCosts.*    Labor costs increased by $3.6 million, or24.0%, to $18.7 million in 2004 Q2 from $15.1 million in 2003 Q2. This increasewas primarily related to the 11 company-owned restaurants opened since 2003 Q2.Labor costs as a percentage of revenues increased to 31.4% in 2004 Q2 from31.1% in 2003 Q2. The increase was primarily related to labor inefficienciesexperienced by the eight company-owned restaurants opened in 2004. Typically,new restaurants experience lower productivity and higher training costs duringthe first year of operations as the new employees learn our operating model.

 

*OperatingCosts.*    Operating costs increased by $1.7 million,or 23.5%, to $8.7 million in 2004 Q2 from $7.1 million in 2003 Q2. Thisincrease was primarily related to the 11 company-owned restaurants opened since2003 Q2. Operating costs as a percentage of revenues was the same for both 2004Q2 and 2003 Q2 at 14.6%.

 

*OccupancyCosts.*    Occupancy costs increased by $1.2 million,or 31.5%, to $5.1 million in 2004 Q2 from $3.9 million in 2003 Q2. Thisincrease was primarily related to the 11 company-owned restaurants opened since2003 Q2. Occupancy costs as a percentage of revenues increased to 8.6% in 2004Q2 from 8.0% in 2003 Q2. Occupancy costs for the 11 company-owned restaurantsopened after 2003 Q2 are running higher as a percentage of revenues. Due totheir early stage of maturity, these restaurants are experiencing lighter salesresulting in a higher rent expense as a percentage of revenues. We expectoccupancy costs as a percentage of revenue to decrease as the new restaurantsmature and their revenues increase.

 

*Generaland Administrative Expenses.*    General and administrativeexpenses increased by $0.6 million, or 29.8%, to $2.6 million in 2004 Q2 from$2.0 million in 2003 Q2. This increase was primarily due to the addition ofcorporate, administrative and senior operations personnel to accommodate ourgrowth in 2003 and 2004. In addition, general and administrative costs wereimpacted by higher training costs to prepare new management for the 11 new company-ownedrestaurant openings.  General andadministrative expenses as a percentage of revenues increased to 4.4% in 2004Q2 from 4.1% in 2003 Q3. We expect that general and administrative expenses asa percentage of revenues will increase due to both new and higher than currentcorporate expenses such as director and officers insurance premiums, investorsupport services, and regulatory and exchange fees as a result of completion ofour public offering.

 

*RestaurantPre-Opening Costs.*    2004 Q2 pre-opening costs relating to thethree company-owned restaurants opened in 2004 Q2 were $1.1 million. We plan toopen an additional  company-ownedrestaurant in 2004. Our target is to keep total pre-opening costs per restaurantat approximately $350,000 per opening. There were no restaurant openings in2003 Q2 and the $0.1 million in expenses relate to the restaurants opened inthe third quarter of 2003.

 

*Depreciationand Amortization.*    Depreciation and amortization increased by$0.5 million, or 21.7%, to $2.8 million in 2004 Q2 from $2.3 million in 2003Q2. This increase was primarily related to the 11 company-owned restaurantsopened since 2003 Q2.

 

*ManagementFees and Covenants Not to Compete.*    In 2004 Q2, we recognized asexpense an aggregate of $2.8 million in management fees paid to BRS and CastleHarlan, Inc. and an aggregate of $0.8 million paid to William P. McCormick andDouglas L. Schmick pursuant to management and covenants not to competeagreements. These agreements were terminated effective June 25, 2004 inconnection with our public offering for an aggregate payment of $2.8 millionand expensed in 2004 Q2. In 2003 Q2, we expensed $0.5 million in managementfees to BRS and Castle Harlan, and an aggregate of $0.1 million to William P.McCormick and Douglas L. Schmick pursuant to these agreements.  We do not expect to incur any future expensesrelated to these agreements.

 

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*Income TaxExpense.*    We recorded a tax benefit of $0.6 millionin 2004 Q4 which is approximately 31% of our loss for the quarterly period.

 

*AccruedDividends and Accretion on Mandatorily Redeemable Preferred Stock.*   Dividends and accretive rights of a subsidiary’s redeemable preferredstock are reflected as accrued dividends and accretion on mandatorilyredeemable preferred stock in the consolidated financial statements. Proceedsfrom our public offering were used to redeem the preferred stock. See“Liquidity and Capital Resources.”  Werecognized expenses of $1.1 million and $0.9 million in 2004 Q2 and 2003 Q2,respectively, relating to the dividends and accretive rights.

 

*Net Loss.*    Netloss increased $2.2 million to ($2.3) million in 2004 Q2 from ($0.1) million in2003 Q2. The increase was primarily due to the $2.8 million non-recurringexpense for the termination of the management and covenants not to competeagreements coupled with a $0.9 million increase in pre-opening costs associatedwith three new company-owned restaurants in 2004 Q2 and $0.6 million inincremental general and administrative expenses incurred to support restaurantopenings after 2003 Q2, partially offset by the benefit of higher revenues andlower income taxes.

 

**YTD Q2 2004Compared to YTD Q2 2003**

 

*Revenues.*  Revenues increased by $20.5 million, or 21.9%, to $114.2 million in YTDQ2 2004 from $93.7 million in YTD Q2 2003. This increase was attributable torevenues of $9.6 million generated by the eight restaurants opened in 2004,$7.1 million in incremental revenues from the three restaurants opened in 2003,and $3.8 million in incremental revenues from restaurants opened before 2003.Comparable restaurant sales were positive 4.4% in YTD Q2 2004.  We estimate approximately 1.3% of thecomparable restaurant sales increase was attributable to an increased customercount and the remainder was attributable to increased per meal spending.Improvements in the overall economic environment as evidenced by higher travelsupported our comparable restaurant sales growth in YTD Q2 2004.

 

*Food andBeverage Costs.*    Food and beverage costs increased by $6.7million, or 24.2%, to $34.2 million in YTD Q2 2004 from $27.6 million in YTD Q22003. This increase was primarily related to the 11 company-owned restaurantsopened since Q2 2003. Food and beverage costs as a percentage of revenuesincreased slightly to 30.0% in YTD Q2 2004 from 29.4% in YTD Q2 2003. Theincrease was primarily related to product handling inefficiency at the eightcompany-owned restaurants opened in 2004. Typically, new restaurants experiencelower raw product yields during the first year of operations as the newemployees learn our operating model. Due to the higher number of restaurantopenings in 2004 compared to 2003, we expect this trend in food and beveragecost to continue for the remainder of 2004.

 

*LaborCosts.*    Labor costs increased by $7.0 million, or23.6%, to $36.5 million in YTD Q2 2004 from $29.6 million in YTD Q2 2003. Thisincrease was primarily related to the 11 company-owned restaurants opened since2003 Q2. Labor costs as a percentage of revenues increased to 32.0% in YTD Q22004 Q2 from 31.6% in YTD Q2 2003. The increase was primarily related to laborinefficiencies experienced by the eight company-owned restaurants opened in2004. Typically, new restaurants experience lower productivity and highertraining costs during the first year of operations as the new employees learnour operating model.

 

*OperatingCosts.*    Operating costs increased by $2.7 million,or 19.6%, to $16.6 million in YTD Q2 2004 from $13.9 million in YTD Q2 2003.This increase was primarily related to the 11 company-owned restaurants openedsince 2003 Q2. Operating costs as a percentage of revenues decreased to 14.5%in YTD Q2 2004 from 14.8% in YTD Q2 2003. Several of the operating costs included in this cost category are eitherfixed or semi-variable. As a result, operating costs as a percentage ofrevenues decreased due to the 4.4% increase in comparable restaurant sales inYTD Q2 2004. The lower percentage for YTD Q2 2004 also reflects our lower costas a percentage of revenues for marketing and utilities compared to YTD Q22003. In the first quarter of 2003 we increased both restaurant-level marketingand support to local community activities in an effort to offset decreases incustomer traffic caused by the weak economic environment. We believe ourspending rate for marketing for the rest of 2004 will be in line with ourspending rate in YTD Q2 2004. The decrease in utility costs as a percentage ofrevenues was primarily driven by the slight improvement in utility rates duringthe first quarter of 2004, which we do not expect to continue for the remainderof 2004.

 

*OccupancyCosts.*    Occupancy costs increased by $2.1 million,or 27.3%, to $9.6 million in YTD Q2 2004 from $7.6 million in YTD Q2 2003. Thisincrease was primarily related to the 11 company-owned restaurants opened since2003 Q2. Occupancy costs as a percentage of revenues increased to 8.4% in YTDQ2 2004 from 8.1% in YTD Q2 2003. Occupancy costs for the 11 new company-owned

 

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restaurants opened after2003 Q2 are running higher as a percentage of revenues. Due to their earlystage of maturity, these restaurants are experiencing lighter sales resultingin a higher rent expense as a percentage of revenue. We expect occupancy costsas a percentage of revenue to decrease as the new restaurants mature and theirrevenues increase.

 

*Generaland Administrative Expenses.*    General and administrativeexpenses increased by $1.2 million, or 30.7%, to $5.2 million in YTD Q2 2004from $4.0 million in YTD Q2 2003. This increase was primarily due to theaddition of corporate, administrative and senior operations personnel toaccommodate our growth in 2003 and 2004. In addition, general andadministrative costs were impacted by higher training costs to prepare newmanagement for the 11 new company-owned restaurant openings.  General and administrative expenses as apercentage of revenues increased to 4.5% in YTD Q2 2004 Q2 from 4.2% in YTD Q22003. We expect that general and administrative expenses as a percentage ofrevenues will increase due to both new and higher than current corporateexpenses such as director and officers insurance premiums, investor supportservices, and regulatory and exchange fees upon completion of our publicoffering.

 

*RestaurantPre-Opening Costs.*    YTD Q2 2004 pre-opening costs relating tothe eight company-owned restaurants opened in the period were $2.0 million. Weplan to open an additional company-owned restaurant in 2004. Our target is to keeptotal pre-opening costs per restaurant at approximately $350,000 per opening.There were no restaurant openings in YTD Q2 2003 and the $0.1 million inexpenses relate to the restaurants opened in the third quarter of 2003.

 

*Depreciationand Amortization.*    Depreciation and amortization increased by$0.8 million, or 16.9%, to $5.5 million in YTD Q2 2004 from $4.7 million in YTDQ2 2003. This increase was primarily related to the 11 company-ownedrestaurants opened since 2003 Q2.

 

*ManagementFees and Covenants Not to Compete.*    In YTD Q2 2004, we expensedan aggregate of $3.3 million in management fees to BRS and Castle Harlan, Inc.and an aggregate of $0.9 million to William P. McCormick and Douglas L. Schmickpursuant to management and covenants not to compete agreements. Theseagreements were terminated effective June 25, 2004 in connection with ourpublic offering for an aggregate payment of $2.8 million and expensed in 2004Q2. In YTD Q2 2003, we expensed $1.1 million in management fees to BRS and CastleHarlan, and an aggregate of $0.2 million to William P. McCormick and Douglas L.Schmick pursuant to these agreements.  Wedo not expect to incur any future expenses related to these agreements.

 

*Income TaxExpense.*    We recorded a tax benefit of $0.4 millionin YTD Q2 2004 which is approximately 29% of our estimated tax loss for theperiod, primarily driven by the $2.8 million non-recurring expense for thetermination of the management and covenants not to compete agreements.  We recorded a tax expense of $2.4 million inYTD Q2 2003.

 

*AccruedDividends and Accretion on Mandatorily Redeemable Preferred Stock.*   Dividends and accretive rights of a subsidiary’s redeemable preferredstock are reflected as accrued dividends and accretion on mandatorily redeemablepreferred stock in the consolidated financial statements. Proceeds from ourpublic offering were used to redeem the preferred stock. See “Liquidity andCapital Resources.”  We recorded $2.1million and $1.8 million expenses in YTD Q2 2004 and YTD Q2 2003, respectively.

 

*Net Loss.*    Netloss increased $2.3 million to ($3.1) million in YTD Q2 2004 from ($0.8)million in YTD Q2 2003. The increase was primarily due to the $2.8 millionnon-recurring expense for the termination of the management and covenants notto compete agreements coupled with an increase of $1.9 million in pre-openingcosts associated with eight new company-owned restaurants in YTD Q2 2004 and$1.2 million in incremental general and administrative expenses incurred tosupport restaurant openings after 2003 Q2, partially offset by the benefit ofhigher revenues and lower income taxes.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our primary liquidity andcapital requirements have been for new restaurant construction, working capitaland general corporate needs. Historically, our main sources of liquidity andcapital have been net cash provided by operating activities and borrowingsunder credit facilities.  OnJuly 23, 2004 we completed our initial public offering in which we sold6,000,000 shares to new investors at $12.00 per share, raising approximately$65.2 million after underwriting discounts and transaction costs.  With the proceeds and an $18.0 million loanfrom a new revolving credit facility, we retired our then existing revolvingfacility of $51.5 million, redeemed all of the outstanding 13% seniorexchangeable preferred stock of our subsidiary for $28.9 million, and paid $2.8million to terminate, as of June 25, 2004, management and covenant not tocompete agreements with affiliated parties.

 

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The table below summarizesour sources and uses of cash for the twenty-six weeks ended June 26, 2004and June 28, 2003, respectively.

 

 
| ** **                                           | ** ** | **Twenty-six week period ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|
| **(Unaudited,  dollars in thousands)**               | ** ** | **June 26, 2004**           | ** ** | **June 28, 2003** | ** ** |
|                                                 |       |                             |       |   |   |
| Net cash provided by operating activities            |       | $                                | 6,231      |   | $ | 7,632 |   |
| Net cash used in investing activities                |       | (17,967                          | )          | (5,907 | ) |
| Net cash provided by (used in) financing  activities |       | 10,384                           |       | (3,361 | ) |
|                                                 |       |                             |       |   |   |
| Net decrease in cash                                 |       | $                                | (1,352     | ) | $ | (1,636 | ) |

 

Net cash provided byoperating activities was $6.2 million for YTD Q2 2004 compared to $7.6 millionfor YTD Q2 2003. The decrease in net cash provided by operating activities wasprimarily due to a $4.7 million decrease in operating income resulting from$3.0 million in higher management fees and covenants not to compete coupledwith $1.9 million pre-opening expenses in the YTD Q2 2004 period.

 

Net cash used in investingactivities was $18.0 million for YTD Q2 2004 compared to $5.9 million for YTDQ2 2003. The increase in net cash used in investing activities in YTD Q2 2004resulted mainly from the acquisition of equipment and leasehold improvementsfor eight new company-owned restaurants opened in the period. We opened no newrestaurants in YTD Q2 2003. We use cash for tenant improvements and equipmentto open new restaurants and to upgrade and add capacity to existingrestaurants. Net cash used in investing activities varied in the periodspresented based on the number of new restaurants opened and/or existingrestaurant capacity expanded during the period. Purchases of property andequipment also include purchases of information technology systems andexpenditures relating to our corporate headquarters.

 

Net cash provided byfinancing activities was $10.4 million in YTD Q2 2004 compared to $3.4 millionnet cash used for financing activities in YTD Q2 2003. There was $12.5 millionof net borrowings under our revolving credit facility in YTD Q2 2004 comparedto no net borrowings in YTD Q2 2003. In Q2 YTD 2004, we used $1.9 million toreduce book overdrafts. In YTD Q2 2003, we used $3.4 million to reducelong-term debt.

 

Like many restaurantcompanies that have financing terms with suppliers, we operate with a workingcapital deficit. The deficit primarily results from the difference between thefrequency of our inventory turns (every few days) and the negotiated settlementcycle of our accounts payable (typically, between 21 and 36 days). We do notbelieve our working capital deficit has a negative impact on our liquidity.

 

In October 2003, weentered into an amended and restated revolving credit facility with FleetNational Bank (“Fleet”) and several other lenders. We initially borrowed $45.3million under this facility to refinance approximately $38.3 million inoutstanding term loans and approximately $7.0 million in outstanding loansunder our prior revolving credit facility. Loans under this revolving creditfacility bear interest at either a “base rate,” which is the higher of Fleet’sannounced annual variable interest “prime rate” or 0.5% plus the weightedaverage rate on overnight federal funds transactions with members of theFederal Reserve System, or a rate based on the Eurodollar rate.  The loans pursuant to this credit facilitywere scheduled to mature on April 27, 2007.

 

In connection with ourpublic offering, on July 23, 2004 we secured a new facility under whichthe maximum amount we may borrow is $40.0 million. In connection with thetermination of our prior revolving credit facility, we expect to recognize asexpense the remaining deferred financing costs of approximately $1.3 million inthe third quarter 2004. We borrowed approximately $18.5 million under the newcredit facility at the closing of our public offering.  Loans under this revolving credit facilitybear interest at either a “base rate,” which is the higher of Fleet’s announcedannual variable interest “prime rate” or 0.25% plus the weighted average rateon overnight federal funds transactions with members of the Federal ReserveSystem, or a rate based on the Eurodollar rate. At our option, we may convertloans from one type of rate to the other. Loans are scheduled to mature onJuly 23, 2009.

 

In August 2001, TheBell Atlantic Master Trust made a $20.0 million investment in our company. Inconnection with the investment, we issued to The Bell Atlantic Master Trust20,000 shares of the 13% senior exchangeable preferred stock of our subsidiary,McCormick & Schmick Acquisition Corp. II, and warrants to purchase ClassA-2 units of McCormick & Schmick Holdings LLC. We used $28.9 million fromthe proceeds received by us from our initial public offering to redeem alloutstanding shares of the preferred stock held by The Bell Atlantic MasterTrust.

 

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We expect to open oneadditional restaurant in 2004, for a total in 2004 of 10 (including one webegan operating under a management agreement), at least six in 2005 and atleast eight in 2006.  We estimate thatthe pre-opening costs associated with each of these new restaurants will beapproximately $350,000 and that they generally ramp up to anticipated operatinglevel at the end of their third year of operations.  We believe the net cash provided by operatingactivities and funds available from our new revolving credit facility will besufficient to satisfy our working capital and capital expenditure requirements,including restaurant construction, pre-opening costs and potential initialoperating losses related to new restaurant openings for the next 24 months.

 

**CRITICALACCOUNTING POLICIES**

 

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

 

***Equipment and Leasehold Improvements***

 

Equipment and leaseholdimprovements are stated at cost less accumulated depreciation and amortization.Equipment consists primarily of restaurant equipment, furniture, fixtures andsmallwares. Depreciation is generally calculated using the straight-line methodover the estimated useful lives of the related assets. Leasehold improvementsare amortized using the straight-line method over the shorter of the leaseterm, including renewal periods, or the estimated useful life of the asset.Repairs and maintenance are expensed as incurred; renewals and betterments arecapitalized. Estimated useful lives are generally as follows: equipment - threeto 10 years; furniture and fixtures - five to seven years. Judgments andestimates made by us related to the expected useful lives of these assets areaffected by factors such as changes in economic conditions and changes inoperating performance. If these assumptions change in the future, we may berequired to record impairment charges for these assets.

 

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

 

We review property andequipment (which includes leasehold improvements) for impairment when events orcircumstances indicate these assets might be impaired. We test impairment usinghistorical cash flow and other relevant facts and circumstances as the primarybasis for our estimates of future cash flows. The analysis is performed at therestaurant level for indicators of permanent impairment. In determining futurecash flows, significant estimates are made by us with respect to futureoperating results of each restaurant over its remaining lease term. If assetsare determined to be impaired, the impairment charge is measured by calculatingthe amount by which the asset carrying amount exceeds its fair value. Thedetermination of asset fair value is also subject to significant judgment. Thisprocess requires the use of estimates and assumptions, which are subject to ahigh degree of judgment. If these assumptions change in the future, we may berequired to record impairment charges for these assets. In our most recentimpairment evaluation for long-lived assets, no additional impairment chargewould have resulted even if there were a permanent 5% reduction in revenues inour restaurants.

 

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

 

Goodwill and otherindefinite lived assets resulted from our acquisition in 2001. Goodwill andother intangible assets with indefinite lives are not subject to amortization.However, such assets must be tested for impairment whenever events or changesin circumstances indicate that the carrying amount may not be recoverable andat least annually. We completed our most recent impairment test inDecember 2003, and determined that there were no impairment losses relatedto goodwill and other indefinite lived assets. In assessing the recoverabilityof goodwill and other indefinite lived assets, market values and projectionsregarding estimated future cash flows and other factors are used to determinethe fair value of the respective assets. The estimated future cash flows wereprojected using significant assumptions, including future revenues andexpenses. If these estimates or related projections change in the future, wemay be required to record impairment charges for these assets. In our mostrecent impairment evaluation for goodwill and other indefinite lived assets, noimpairment charge would have resulted even if a permanent 5% reduction inrevenues were to occur.

 

***Insurance Liability***

 

We maintain various insurancepolicies for workers’ compensation, employee health, general liability, andproperty damage. Pursuant to those policies, we are responsible for losses upto certain limits and are required to estimate a liability that represents ourultimate exposure for aggregate losses below those limits. This liability isbased on management’s estimates of the ultimate costs to be incurred to settleknown claims and claims not reported as of the balance sheet date. Ourestimated liability is not discounted and is

 

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based on a number ofassumptions and factors, including historical trends, actuarial assumptions,and economic conditions. If actual trends differ from our estimates, ourfinancial results could be impacted.

 

***Income Taxes***

 

We have accounted for, andcurrently account for, income taxes in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 109, *Accountingfor Income Taxes*. This statement establishes financial accountingand reporting standards for the effects of income taxes that result from anenterprise’s activities during the current and preceding years. It requires anasset and liability approach for financial accounting and reporting of incometaxes. We recognize deferred tax liabilities and assets for the futureconsequences of events that have been recognized in our consolidated financialstatements or tax returns. In the event the future consequences of differencesbetween financial reporting bases and tax bases of our assets and liabilitiesresult in a net deferred tax asset, an evaluation is made of the probability ofbeing able to realize the future benefits indicated by such asset. A valuationallowance related to a deferred tax asset is recorded when it is more likely thannot that some portion or all of a deferred tax asset will not be realized. Therealization of such net deferred tax will generally depend on whether we willhave sufficient taxable income of an appropriate character within thecarry-forward period permitted by the tax law. Without sufficient taxableincome to offset the deductible amounts and carry-forwards, the related taxbenefits will expire unused. We have evaluated both positive and negativeevidence in making a determination as to whether it is more likely than notthat all or some portion of the deferred tax asset will not be realized.Measurement of deferred items is based on enacted tax laws.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

In January 2003 theFASB issued Financial Accounting Standards Board Interpretation (“FIN”) No. 46,*Consolidation of Variable Interest Entities*.FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, tocertain entities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. Application of this interpretation is required infinancial statements for periods ending after March 15, 2004. We have notidentified any variable interest entities for which we are the primarybeneficiary or have significant involvement.

 

In April 2003 the FASBissued SFAS No. 150, *Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity*.SFAS No. 150 changes the accounting for certain financial instruments that,under previous guidance, could be classified as equity or “mezzanine” equity,by requiring those instruments to be classified as liabilities (or assets insome circumstances) in the statement of financial position. SFAS No. 150requires disclosure regarding the terms of those instruments and settlementalternatives. This statement was effective for all financial instrumentsentered into or modified after May 31, 2003, and was otherwise effective at thebeginning of the first interim period beginning after June 15, 2003. Therestatement of financial statements for earlier years presented is notpermitted. We adopted SFAS No. 150 effective June 29, 2003 (the beginningof our 2003 third quarter). Effective with the adoption of SFAS No. 150, wereported the mandatorily redeemable preferred stock on the balance sheet as aliability and the accrued dividends and accretion on mandatorily redeemablepreferred stock prior to income before income taxes on the statement ofoperations. Prior to the adoption of SFAS No. 150, in accordance with previousguidance, we reported the mandatorily redeemable preferred stock on the balancesheet as mezzanine equity and the accrued dividends and accretion onmandatorily redeemable preferred stock below income taxes on the statement ofoperations.

 

**FactorsThat May Affect Our Business and the Price of Our Stock**

 

***Our ability to expand our restaurant base is influenced by factorsbeyond our control and therefore we may not be able to achieve our plannedgrowth***

 

Our growth strategy dependsin large part on our ability to open new restaurants and to operate theserestaurants profitably. Delays or failures in opening new restaurants couldimpair our ability to meet our growth objectives. We have in the pastexperienced delays in restaurant openings and may experience similar delays inthe future. Our ability to expand our business successfully will depend uponnumerous factors, including:

 

•                  hiring, training and retaining skilledmanagement, chefs and other qualified personnel to open, manage and operate newrestaurants;

 

•                  locating and securing a sufficient number ofsuitable new restaurant sites in new and existing markets on acceptable leaseterms;

 

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•                  managing the amount of time and constructionand development costs associated with the opening of new restaurants;

 

•                  obtaining adequate financing for theconstruction of new restaurants;

 

•                  securing governmental approvals and permitsrequired to open new restaurants in a timely manner, if at all;

 

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

 

•                  general economic conditions.

 

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

 

***Unexpected expenses and low market acceptance could adversely affectthe profitability of restaurants that we open in new markets***

 

Our growth strategy includesopening restaurants in markets where we have little or no meaningful operatingexperience and in which potential customers may not be familiar with ourrestaurants. The success of these new restaurants may be affected by differentcompetitive 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 thoseincurred in other areas. Even though we may incur substantial additional costswith these new restaurants, they may attract fewer customers than our moreestablished restaurants in existing markets. Sales at restaurants that we openin new markets may take longer to reach our average annual sales, if at all. Asa result, the results of operations at our new restaurants may be inferior tothose of our existing restaurants. We may not be successful in profitablyopening restaurants in new markets.

 

***Our growth may strain our infrastructure and resources, which couldslow our development of new restaurants and adversely affect our ability tomanage our existing restaurants***

 

We have opened eightrestaurants and began operating an additional restaurant under a managementcontract in the first two quarters of 2004 and expect to open one additionalrestaurant in the remainder of 2004. This will be the most single-yearrestaurant openings we have had in our history. Our 2004 expansion and ourfuture growth may strain our restaurant management systems and resources,financial controls and information systems. These demands on our infrastructureand resources may also adversely affect our ability to manage our existingrestaurants. If we fail to continue to improve our infrastructure or to manageother factors necessary for us to meet our expansion objectives, our operatingresults could be materially and adversely affected.

 

***Our ability to raise capital in the future may be limited, which couldadversely impact our growth***

 

Changes in our operatingplans, acceleration of our expansion plans, lower than anticipated sales,increased expenses or other events described in this Risk Factorssection may require us to seek additional debt or equity financing.Financing may not be available on acceptable terms, or at all, and our failureto raise capital when needed could negatively impact our growth and ourfinancial condition and results of operations. Additional equity financing maybe dilutive to the holders of our common stock, and debt financing, ifavailable, may involve significant cash payment obligations and covenants thatrestrict our ability to operate our business. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations-Liquidity and CapitalResources.”

 

***Our operations are susceptible to changes in food availability andcosts, which could adversely affect our operating results***

 

Our profitability dependssignificantly on our ability to anticipate and react to changes in seafoodcosts. We rely on local, regional and national suppliers to provide our seafood.Increases in distribution costs or sale prices or failure to perform by thesesuppliers could cause our food costs to increase. We could also experiencesignificant short-term disruptions in our supply if a significant supplierfailed to meet its obligations. The supply of seafood is more volatile thanother types of food. The type, variety, quality and price of seafood is subjectto factors beyond our control, including weather, governmental regulation,availability and seasonality, each of which may affect our food costs or causea disruption in our supply. Changes in the price or availability of certaintypes of seafood could affect our ability to offer a broad menu and priceoffering to customers and could materially adversely affect our profitability.

 

***Our operating results may fluctuate significantly and could fall belowthe expectations of securities analysts and investors due to seasonality andother factors, resulting in a decline in our stock price***

 

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Our operating results mayfluctuate significantly because of several factors, including:

 

•                  our ability to achieve and manage our plannedexpansion;

 

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

 

•                  our ability to raise capital in the future;

 

•                  changes in the availability and costs offood;

 

•                  the loss of key management personnel;

 

•                  the concentration of our restaurants inspecific geographic areas;

 

•                  our ability to protect our name and logo andother proprietary information;

 

•                  changes in consumer preferences ordiscretionary spending;

 

•                  fluctuations in the number of visitors orbusiness travelers to downtown locations;

 

•                  health concerns about seafood or other foodproducts;

 

•                  our ability to attract, motivate and retainqualified employees;

 

•                  increases in labor costs;

 

•                  the impact of federal, state or localgovernment regulations relating to our employees or the sale or preparation offood and the sale of alcoholic beverages;

 

•                  the impact of litigation;

 

•                  the effect of competition in the restaurantindustry; and

 

•                  economic trends generally.

 

Our business also is subjectto seasonal fluctuations. Historically, sales in most of our restaurants havebeen higher during the second and fourth quarter of each year. As a result, ourquarterly and annual operating results and restaurant sales may fluctuatesignificantly as a result of seasonality and the factors discussed above.Accordingly, results for any one fiscal quarter are not necessarily indicativeof results to be expected for any other quarter or for any year and comparablerestaurant sales for any particular future period may decrease. Our operatingresults may also fall below the expectations of securities analysts andinvestors. In that event, the price of our common stock would likely decrease.

 

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

 

Our restaurants areprimarily located in downtown areas. We depend on both local residents andbusiness travelers to frequent these locations. We experienced a decline inrevenues in our downtown locations in 2001 and 2002, caused in part bydecreases in business travel and the general decline in economic conditions. Wemay experience a similar decline in our revenues in the future. If the numberof visitors to downtown areas declines due to economic or other conditions,changes in consumer preferences, changes in discretionary consumer spending orfor other reasons, our revenues could decline significantly and our results ofoperations could be adversely affected.

 

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

 

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

 

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

 

We operate four restaurantsin 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 aresult, adverse economic conditions, weather and labor markets in

 

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any of these areas couldhave a material adverse effect on our overall results of operations. Forexample, ice storms in northwestern Oregon in January 2004 affected salesat six, or 12%, of our restaurants.

 

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

 

***Our success depends on our ability to protect our proprietaryinformation. Failure to protect our trademarks, service marks or trade secretscould adversely affect our business***

 

Our business prospectsdepend in part on our ability to develop favorable consumer recognition of theMcCormick & Schmick’s name. Although McCormick & Schmick’s, M&SGrill and other of our service marks are federally registered trademarks withthe United States Patent and Trademark Office, our trademarks could be imitatedin ways that we cannot prevent. In addition, we rely on trade secrets,proprietary know-how, concepts and recipes. Our methods of protecting thisinformation may not be adequate, however, and others could independentlydevelop similar know-how or obtain access to our trade secrets, know-how,concepts and recipes. Moreover, we may face claims of misappropriation orinfringement of third parties’ rights that could interfere with our use of ourproprietary know-how, concepts, recipes or trade secrets. Defending theseclaims may be costly and, if unsuccessful, may prevent us from continuing touse this proprietary information in the future, and may result in a judgment ormonetary damages. We do not maintain confidentiality and non-competitionagreements with all of our executives, key personnel or suppliers. Ifcompetitors independently develop or otherwise obtain access to our know-how,concepts, recipes or trade secrets, the appeal of our restaurants could bereduced and our business could be harmed.

 

***Our current insurance policies may not provide adequate levels ofcoverage against all claims***

 

We believe we maintaininsurance coverage that is customary for businesses of our size and type.However, there are types of losses we may incur that cannot be insured againstor that we believe are not commercially reasonable to insure. These losses, ifthey occur, could have a material and adverse effect on our business and resultsof operations.

 

***Expanding our restaurant base by opening new restaurants in existingmarkets could reduce the business of our existing restaurants***

 

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

 

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

 

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

 

•                  challenges and costs associated with theacquisition and integration of restaurant operations located in markets wherewe have limited or no experience;

 

•                  possible disruption to our business as aresult of the diversion of management’s attention from its normal operationalresponsibilities and duties; and

 

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

 

Future acquisitions of existingrestaurants, which may be accomplished through a cash purchase transaction orthe issuance of our equity securities, or a combination of both, could resultin potentially dilutive issuances of our equity securities, the incurrence ofdebt and contingent liabilities and impairment charges related to goodwill andother intangible assets, any of which could harm our business and financialcondition.

 

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

 

***Negative publicity concerning food quality, health and other issues andcosts or liabilities resulting from litigation may have a material adverseeffect on our results of operations***

 

We are sometimes the subjectof complaints or litigation from customers alleging illness, injury or otherfood quality, health or operational concerns. Litigation or adverse publicityresulting from these allegations may materially and adversely affect us or ourrestaurants, regardless of whether the allegations are valid or whether we areliable. Further, these claims may divert our financial and management resourcesfrom revenue-generating activities and business operations.

 

***Health concerns relating to the consumption of seafood or other foodproducts could affect consumer preferences and could negatively impact ourresults of operations***

 

We may lose customers basedon health concerns about the consumption of seafood or negative publicityconcerning food quality, illness and injury generally, such as negativepublicity concerning the accumulation of mercury or other carcinogens inseafood, E. coli, “mad cow” or “foot-and-mouth” disease, publication ofgovernment or industry findings about food products served by us or otherhealth concerns or operating issues stemming from one of our restaurants. Inaddition, we cannot guarantee that our operational controls and training willbe fully effective in preventing all food-borne illnesses. Some food-borneillness incidents could be caused by food suppliers and transporters and wouldbe outside of our control. Any negative publicity, health concerns or specificoutbreaks of food-borne illnesses attributed to one or more of our restaurants,or the perception of an outbreak, could result in a decrease in guest trafficto our restaurants and could have a material adverse effect on our business.

 

***Changes in consumer preferences or discretionary consumer spendingcould negatively impact our results of operations***

 

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

 

***Labor shortages or increases in labor costs could slow our growth orharm our business***

 

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

 

***We may incur costs or liabilities and lose revenue, and our growthstrategy may be adversely impacted, as a result of government regulation***

 

Our restaurants are subjectto various federal, state and local government regulations, including thoserelating to employees, the preparation and sale of food and the sale ofalcoholic beverages. These regulations impact our current restaurant operationsand our ability to open new restaurants.

 

Each of our restaurants mustobtain licenses from regulatory authorities allowing it to sell liquor, beerand wine, and each restaurant must obtain a food service license from localhealth authorities. Each restaurant’s liquor license must be renewed annuallyand may be revoked at any time for cause, including violation by us or ouremployees of any laws and regulations relating to the

 

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minimum drinking age,advertising, wholesale purchasing and inventory control. In California, wherewe operate 10 restaurants, the number of alcoholic beverage licenses availableis limited and licenses are traded at market prices.

 

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

 

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

 

Various federal and statelabor laws govern our relationship with our employees and affect operatingcosts. These laws include minimum wage requirements, overtime pay, unemploymenttax rates, workers’ compensation rates, and citizenship requirements.Additional government-imposed increases in minimum wages, overtime pay, paidleaves of absence and mandated health benefits, increased tax reporting and taxpayment requirements for employees who receive gratuities, or a reduction inthe number of states that allow tips to be credited toward minimum wagerequirements could harm our operating results.

 

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

 

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

 

We are subject to a varietyof claims arising in the ordinary course of our business brought by or onbehalf of our customers or employees, including personal-injury claims,contract claims, and employment-related claims. In recent years, a number ofrestaurant companies have been subject to lawsuits, including class-actionlawsuits, alleging violations of federal and state law regarding workplace,employment and similar matters. A number of these lawsuits have resulted in thepayment of substantial damages by the defendants. Similar lawsuits have beeninstituted against us from time to time. Regardless of whether any claimsagainst 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 ouroperations and hurt our performance. A judgment significantly in excess of ourinsurance coverage for any claims could materially adversely affect ourfinancial condition or results of operations, and adverse publicity resultingfrom these allegations may materially adversely affect our business. We offerno assurance that we will not incur substantial damages and expenses resultingfrom lawsuits, which could have a material adverse effect on our business.

 

***Our operations and profitability are highly susceptible to the effectsof violence, war and economic trends***

 

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

 

Terrorist attacks could alsodirectly impact our physical facilities or those of our suppliers, and attacksor armed conflicts may make travel and the transportation of our supplies andproducts 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 isintensely competitive with respect to price, service, location, food quality,ambiance and the overall dining experience. Our competitors include a large anddiverse group of restaurant chains and individual restaurants that range fromindependent local operators to well-capitalized national restaurant companies.Some of our competitors have been in existence for a substantially longerperiod than we have and may be better established in the markets where ourrestaurants are or may be located. Some of our competitors may havesubstantially greater financial, marketing and other resources than we do. Ifour restaurants are

 

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unable to competesuccessfully with other restaurants in new and existing markets, our results ofoperations will be adversely affected. We also compete with other restaurantsfor experienced management personnel and hourly employees, and with otherrestaurants and retail establishments for quality restaurant sites.

 

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

 

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

 

•                  quarterly variations in our operatingresults;

 

•                  changes in financial estimates by securitiesanalysts;

 

•                  additions or departures of our key personnel;and

 

•                  sales of shares of our common stock in thepublic markets.

 

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

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**

 

At June 26, 2004, thedate of the interim balance sheet, there was no material change in the marketrisk disclosed in Amendment No. 5 to the Registration Statement on Form S-1dated July 20, 2004.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

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

 

There has been no change inour internal control over financial reporting that occurred during our fiscalquarter ended June 26, 2004 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II -OTHER INFORMATION**

 

**ITEM 1.  LEGALPROCEEDINGS.**

 

At June 26, 2004, therewas no material change in the litigation matters disclosed in our RegistrationStatement on Form S-1 and no new material litigation.

 

Occasionally, we are adefendant in litigation arising in the ordinary course of our business,including claims resulting from “slip and fall” accidents, employment-related claimsand claims from guests or employees alleging illness, injury or other foodquality, health or operational concerns.

 

**ITEM 2.  CHANGES INSECURITIES****AND USE OF PROCEEDS**

 

We used the proceeds of ourinitial public offering, which was completed July 23, 2004, as follows:

 

•                  $33.5 million to pay indebtedness outstandingunder revolving credit facilities;

 

•                  $2.8 million to pay the termination fees ofthe management agreements of Bruckmann, Rosser, Sherrill & Co., L.L.C. andCastle Harlan, Inc. and the covenants not to complete of our founders, WilliamP. McCormick and Douglas L. Schmick; and

 

•                  $28.9 million to redeem all outstandingshares of the 13% senior exchangeable preferred stock of our subsidiary held byThe Bell Atlantic Master Trust.

 

**ITEM 3.  DEFAULTSUPON SENIOR SECURITIES.**

 

None.

 

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

 

None.

 

**ITEM 5.  OTHERINFORMATION.**

 

None.

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.**

 

(a)                                  Exhibits:

 

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

4.2                                 Bylaws of the Company, as amended.  Incorporated by reference to Exhibits 3.2 and3.2a to the Company’s Registration Statement on Form S-1, File No. 333-114977.

31.1                           Certification of the Chief Executive Officerpursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2                           Certification of the Chief Financial Officerpursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1                           Certification of the Chief Executive Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

32.2                           Certification of the Chief Financial Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                                 Reports on Form 8-K.

 

None.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                             | McCORMICK AND SCHMICK’S  SEAFOOD RESTAURANTS, INC. |
|----------------------------------|---------------------------------------------------------|
|                             |                                                    |
|                             |                                                    |
| Date:  August 26, 2004 | By:                                                     | /s/ SAED MOHSENI |   |
|                             |                                                    | Saed  Mohseni |
|                             |                                                    | Chief  Executive Officer |
|                             |                                                    | (principal executive  officer) |
|                             |                                                    |
|                             |                                                    |
| Date:  August 26, 2004 | By:                                                     | /s/ EMANUEL N. HILARIO |   |
|                             |                                                    | Emanuel  N. Hilario |
|                             |                                                    | Chief  Financial Officer and Vice President of Finance |
|                             |                                                    | (principal financial and  accounting  officer) |
|                                  |                                                         |  |  |  |

 

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