Mccormick & Schmicks Seafood Restaurants (MSSR) 10-Q 2009 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2009

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission File Number 000-50845

McCormick & Schmick’s Seafood Restaurants, Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-1193199
(State or other jurisdiction of incorporation or organization)	(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 mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    Yes  ¨    No  x

There were 14,832,695 shares of common stock outstanding as of July 30, 2009.

Table of Contents

INDEX

PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements - (Unaudited)	3
Condensed Consolidated Balance Sheets as of December 27, 2008 and June 27, 2009	3
Condensed Consolidated Statements of Income for the thirteen and twenty-six week periods ended June  28, 2008 and June 27, 2009	4
Condensed Consolidated Statements of Cash Flows for the twenty-six week period ended June 28, 2008 and June  27, 2009	5
Notes to Condensed Consolidated Financial Statements	6
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3 - Quantitative and Qualitative Disclosures About Market Risk	16
Item 4 - Controls and Procedures	16
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings	16
Item 1A - Risk Factors	16
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3 - Defaults Upon Senior Securities	20
Item 4 - Submissions of Matters to a Vote of Security Holders	20
Item 5 - Other Information	21
Item 6 - Exhibits	22
Signatures	23

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

	December 27, 2008			June 27, 2009
				(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	4,428		$	6,457
Trade accounts receivable, net		9,283			7,275
Tenant improvement allowance receivables		2,344			283
Income tax receivable		3,789			409
Inventories		6,028			5,760
Prepaid expenses and other current assets		2,690			2,440
Deferred income taxes		97			107
Total current assets		28,659			22,731
Property and equipment, net		185,171			181,398
Other assets		3,689			3,760
Total assets	$	217,519		$	207,889
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	18,919		$	16,849
Accrued expenses		31,361			23,775
Total current liabilities		50,280			40,624
Revolving credit facility		24,000			21,000
Deferred rent and other long-term liabilities		33,158			35,145
Capital lease obligations		2,526			2,718
Deferred income taxes		1,760			1,884
Total liabilities		111,724			101,371
Commitments and contingencies (Note 10)
Stockholders’ equity
Common stock, $0.001 par value, 120,000 shares authorized, 14,721 and 14,785 shares issued and outstanding		15			15
Additional paid in capital		148,030			148,224
Accumulated other comprehensive loss		(1,675	)		(1,190	)
Accumulated deficit		(40,575	)		(40,531	)
Total stockholders’ equity		105,795			106,518
Total liabilities and stockholders’ equity	$	217,519		$	207,889

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

3

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

Condensed Consolidated Statements of Income-Unaudited

(in thousands, except per share data)

	Thirteen week period ended						Twenty-six week period ended
	June 28, 2008			June 27, 2009			June 28, 2008			June 27, 2009
Revenues	$	99,699		$	92,742		$	192,039		$	184,636
Restaurant operating costs
Food and beverage		30,038			27,517			58,109			55,214
Labor		32,095			30,269			62,492			60,757
Operating		15,384			14,158			29,885			28,498
Occupancy		9,297			9,501			18,095			18,990
Total restaurant operating costs		86,814			81,445			168,581			163,459
General and administrative expenses		5,138			4,947			10,709			10,793
Restaurant pre-opening costs		692			80			1,876			641
Depreciation and amortization		3,652			4,293			7,047			8,373
Impairment, restructuring and other charges (Note 11)		452			371			452			552
Total costs and expenses		96,748			91,136			188,665			183,818
Operating income		2,951			1,606			3,374			818
Interest expense, net		87			469			416			847
Other expense (income), net		(184	)		13			(258	)		27
Income (loss) before income taxes		3,048			1,124			3,216			(56	)
Income tax expense (benefit)		691			(64	)		741			(100	)
Net income	$	2,357		$	1,188		$	2,475		$	44
Net income per share
Basic	$	0.16		$	0.08		$	0.17		$	—
Diluted	$	0.16		$	0.08		$	0.17		$	—
Shares used in computing net income per share
Basic		14,699			14,773			14,692			14,750
Diluted		14,699			14,807			14,692			14,763

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

4

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

Condensed Consolidated Statements of Cash Flows-Unaudited

(in thousands)

	Twenty-six week period ended
	June 28, 2008			June 27, 2009
Operating activities
Net income	$	2,475		$	44
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		7,047			8,373
Deferred income taxes		676			(134	)
Share based compensation		523			448
Impairment, restructuring and other charges		—			277
Changes in operating assets and liabilities
Trade accounts receivable, net		1,843			2,025
Tenant improvement allowance receivables		4,697			2,061
Income tax receivable		1,527			3,263
Inventories		(168	)		273
Prepaid expenses and other current assets		(783	)		244
Accounts payable		(3,525	)		(2,092	)
Accrued expenses		(3,211	)		(7,792	)
Accrued legal settlement		(2,200	)		—
Other long-term liabilities		1,403			1,575
Net cash provided by operating activities		10,304			8,565
Investing activities
Purchase of property and equipment		(29,077	)		(3,975	)
Additions to other assets		(293	)		(231	)
Net cash used in investing activities		(29,370	)		(4,206	)
Financing activities
Borrowings made on revolving credit facility		70,000			71,500
Payments made on revolving credit facility		(59,500	)		(74,500	)
Payments made on capital lease obligations		(18	)		(20	)
Deemed landlord financing proceeds (in the form of tenant improvement allowances)		4,530			672
Deemed landlord financing payments		(209	)		(116	)
Issuance of restricted stock		—			21
Net cash provided by (used in) financing activities		14,803			(2,443	)
Effect of exchange rate changes on cash and cash equivalents		(70	)		113
Net increase (decrease) in cash and cash equivalents		(4,333	)		2,029
Cash and cash equivalents, beginning of period		7,343			4,428
Cash and cash equivalents, end of period	$	3,010		$	6,457
Supplemental disclosure of cash flow information
Cash paid during the period
Interest	$	431		$	752
Income taxes, net of refunds	$	622		$	(3,069	)

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

5

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

Notes to Condensed Consolidated Financial Statements-Unaudited

1. The Business and Organization

McCormick and Schmick’s Seafood Restaurants, Inc. is a leading national seafood restaurant operator in the affordable upscale dining segment and, as of June 27, 2009, operated 93 restaurants including 87 restaurants in 25 states throughout the United States, including one pursuant to a management agreement, and six restaurants under The Boathouse name in the greater Vancouver, British Columbia area. The Company has aggregated its operations into one reportable segment.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial statements have been included. Operating results for the thirteen week period ended June 27, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending December 26, 2009.

The condensed consolidated balance sheet at December 27, 2008 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2008.

3. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the assets, liabilities and results of operations of McCormick & Schmick’s Seafood Restaurants, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

Management Estimates

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

Revenue Recognition

Revenues are recognized at the point of delivery of products and services. The Company recognizes income from gift cards when the gift card is redeemed by the customer; or the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and the Company determines there is no legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The Company determines the gift card breakage rate based upon historical redemption patterns. Gift card income is included in revenues in the consolidated statements of operations. Revenues are presented net of sales tax and the related tax obligation is recorded as a liability until the taxes are remitted to the appropriate taxing authorities.

Share-Based Compensation

The Company determines the fair value of stock option awards on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model is affected by the Company’s stock price as well as the Company’s assumptions regarding a number of complex and subjective variables, including but not limited to the Company’s expected stock price volatility over the term of the awards, life of the option, expected term of the option, the estimated forfeiture rate, the risk-free interest rate and the expected dividend yield.

Basic and Diluted Net Income per Share

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of employee stock options and restricted stock.

SFAS No. 128, “Earnings per Share,” requires that employee equity share options, non-vested shares and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include the dilutive effect of in-the-money options and is calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, assumed proceeds include the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits, if any, that would be credited to additional paid-in capital upon the exercise of the options or vesting of the restricted stock.

Operating Leases

The Company generally operates its restaurants in leased premises. The Company records the minimum base rents for its operating leases using the straight-line method over the life of the lease term, including option periods which are reasonably assured of renewal due to the presence of certain economic penalties. For purposes of calculating straight-line rents, the lease term commences on the date the lessee obtains control of the property, which is normally when the property is ready for normal tenant improvements (build-out-period). For certain leases the Company only has the right to exercise its option for renewal if certain sales targets are achieved at or near the renewal date. These renewal option periods have been included in the lease term when the Company determines at lease inception or at the acquisition date of the restaurant, if later, that the sales targets are non-substantive and achievement of such sales targets is virtually certain. The difference between rent expense calculated using the straight-line method and rent paid is recorded as deferred rent liability.

6

The Company receives certain tenant improvement allowances which are considered lease incentives and are amortized over the life of the lease term as a reduction of rent expense over the lease term. Accordingly, the Company has recorded a deferred rent liability including tenant improvement allowances for the straight lining of rents and lease incentives, which is included in deferred rent and other long-term liabilities of $23.7 million and $25.0 million as of December 27, 2008 and June 27, 2009, respectively. Certain other landlord tenant improvement allowances received, depending on the specifics of the leased space, the lease agreement and in accordance with Emerging Issues Task Force (“EITF”) 97-10, “The Effect of Lessee Involvement in Asset Construction,” for the amounts paid for structural components during the construction period are recorded as construction in progress and the landlord tenant improvement allowances received are recorded as a landlord financing liability. Upon completion of construction for those leases that meet the criteria of EITF 97-10, and for those leases that do not qualify for sale leaseback treatment in accordance with SFAS No. 98, the landlord financing liability is amortized under the effective interest rate method over the lease term based on the rent payments designated in the lease agreement.

Foreign Currency

The Canadian dollar is the functional currency of the Company’s subsidiary in Canada. Monetary assets and liabilities related to the Company’s operations in Canada are translated into U.S. dollars at the rate of exchange at the end of the applicable fiscal reporting period. Non-monetary assets and liabilities are translated into U.S. dollars at historical exchange rates. Revenues and expenses are translated at the average rate of exchange for the applicable fiscal reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included in accumulated other comprehensive income or loss. Gains and losses resulting from foreign currency transactions are included in the Company’s results of operations.

4. Recent Accounting Pronouncements

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, to establish general standards of accounting for disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This standard is effective for interim or annual financial periods ending after June 15, 2009. The Company adopted SFAS 165 effective with this interim report for the period ending June 27, 2009. The Company has performed an evaluation of subsequent events through August 5, 2009, which is the date the financial statements were issued. No recognized or non-recognized subsequent events were noted.

5. Long-Term Debt

As of June 27, 2009, the outstanding balance on the Company’s revolving credit facility was $21.0 million. On January 29, 2009 the existing revolving credit facility was amended. In conjunction with the amendment, the availability under the facility was reduced from $150.0 million to $90.0 million, with an additional $50.0 million available at the Company’s request if specified conditions are met. The amended facility also makes certain financial covenants less restrictive, including the minimum fixed charge ratio and the maximum adjusted leverage ratio covenants. The interest rate on U.S. borrowings is based on the financial institution’s base rate plus a margin between 0.25% and 1.50% or the Eurodollar rate plus a margin of 1.25% to 2.50%, with margins determined by certain financial ratios. The terms of the facility also allow the Company to borrow up to $10.0 million in Canadian dollars, which reduces the limit available for borrowings under the credit facility by an equal amount, with an interest rate based on the Canadian Eurodollar Rate plus a margin of 1.35% to 2.60%, with margins determined by certain financial ratios.

Under the revolving credit facility, the Company is required to comply with certain financial covenants, including a maximum adjusted leverage ratio and a minimum fixed charge ratio. The Company was in compliance with these covenants as of June 27, 2009. As of June 27, 2009, the Company’s effective interest rate on its borrowings was 2.8%, which was calculated using the financial institution’s calculated base rate of 0.3%.

Under the Company’s revolving credit facility agreement, loans are collateralized by the stock of the subsidiaries of the Company and mature on December 28, 2012. The revolving credit facility agreement also provides for bank guarantees under standby letter of credit arrangements in the normal course of business operations. The Company’s commercial bank issues standby letters of credit to secure its obligations to pay or perform when required to do so pursuant to the requirements of an underlying agreement or the provision of goods and services. The standby letters of credit are cancelable only at the option of the beneficiary who is authorized to draw drafts on the issuing bank up to the face amount of the standby letter of credit in accordance with its terms. As of June 27, 2009, the maximum exposure under these standby letters of credit was $3.0 million. As of June 27, 2009, the Company had $66.0 million available, subject to the conditions of the agreement, under its $90.0 million revolving credit facility.

6. Share-Based Compensation

Share-based compensation expense recognized under SFAS 123R for the thirteen week periods ended June 28, 2008 and June 27, 2009 was $0.3 million and $0.1 million, respectively.

The fair value of the Company’s stock options was estimated using the following assumptions:

	Thirteen and Twenty- six week periods ended
	June 28, 2008		June 27, 2009
Expected volatility	24.8	%	51.1	%
Option life	10 years		10 years
Expected term	5.5 years		5.5 years
Estimated forfeiture rate	14	%	0	%
Risk-free interest rate	3.9	%	1.12	%
Dividend yield	0	%	0	%

As of June 27, 2009, options to acquire a total of 1,154,600 shares of the Company’s common stock had been granted under the Company’s 2004 Stock Incentive Plan (the “Plan”) at an average grant price of $10.53. In conjunction with the hiring of the Company’s Chief Executive Officer on January 12, 2009, the Company issued 250,000 options to him at a price equal to $3.92, the fair market value of the stock on the date of grant. One-third of the grant vests on each of the three anniversary dates following the grant date if the grantee is then employed by the Company. As of June 27, 2009, there were 553,778 shares subject to options outstanding, of which 248,779 were exercisable.

The Company has issued 232,725 shares of restricted stock at an average price of $18.42 to employees, directors and executive officers. Grants are issued at fair market value on the date of the grant. Typically, one-third of the restricted stock grants vest on each of the three anniversary dates following the grant date if the grantee is then employed by the Company. In April 2008, the Company issued 15,765 shares of restricted stock to the independent members of the Board of Directors at a price equal to $11.10, the fair market value of the stock on the date of grant. The restricted stock granted vests one year from the date of grant, if the Director is still serving the Company as of the anniversary date. As of June 27, 2009, there were 38,011 shares of restricted stock outstanding still subject to vesting.

7

Additional awards granted under the Plan may be in the form of nonqualified stock options, incentive stock options, stock appreciation rights (“SARs”), restricted stock, stock bonuses and performance-based awards. Vesting of awards under the Plan may vary. Each award granted under the Plan may, at the discretion of the board of directors of the Company, become fully exercisable or payable, as applicable, upon a change of control of the Company.

Each award expires on the date determined at the date of grant; however, the maximum term of options, SARs and other rights to acquire common stock under the Plan is ten years after the initial date of the award, subject to provisions for further deferred payment in certain circumstances. These and other awards may also be issued solely or in part for services. Any shares subject to awards that are not paid or exercised before they expire or are terminated become available for other award grants under the Plan. If not sooner terminated by the Company’s board of directors, the Plan will terminate on June 16, 2014. As of June 27, 2009, there were 285,776 shares of common stock available for grant under the Plan.

The following table summarizes the status of the Company’s share-based compensation plans, including stock options and restricted stock grants, as of June 27, 2009.

	Stock Options	Weighted Average Exercise Price		Restricted Stock	Stock Compensation (1)	Total Shares	Aggregate Intrinsic Value
Outstanding at December 27, 2008	319,311	$	12.62	115,388	—	434,699
Awards granted	250,000		3.92	—	5,105	255,105	$	884,818
Awards exercised	—		—	66,090	5,105	71,195		359,184
Awards forfeited	15,533		20.18	11,287	—	26,820		82,508
Outstanding at June 27, 2009	553,778	$	8.48	38,011	—	591,789	$	1,125,360
Exercisable at June 27, 2009	248,779	$	12.19	—	—	248,779	$	—

(1) Directors may elect to receive their cash compensation for service as a director in the form of company stock, with the number of shares to be received determined by the closing price of the Company stock at the end of each fiscal quarter related to that quarter’s Board fee payments. A total of 5,105 shares were issued during the quarter ended March 28, 2009 at a price of $4.16, related to payments made to board members.

The aggregate intrinsic value of stock options represents the difference between the Company’s closing stock price of $7.31 as of June 27, 2009 and the exercise price multiplied by the number of shares subject to options outstanding as of that date. In the case of the restricted stock, the aggregate intrinsic value is calculated using the closing price of the stock at June 27, 2009 multiplied by the number of shares outstanding as of that date still subject to vesting.

The following table summarizes additional information about stock options outstanding at June 27, 2009.

Outstanding					Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Years of Contractual Life	Weighted Average Exercise price		Number of Options	Weighted Average Exercise price
$3.92 – $26.81	553,778	7.1	$	8.48	248,779	$	12.19

As of June 27, 2009, unamortized compensation expense related to stock options and restricted stock under the Plan was $1.1 million.

The following table summarizes share-based compensation expense related to employee stock options and restricted stock awards under SFAS 123R for the thirteen and twenty-six week periods ended June 28, 2008 and June 27, 2009 (in thousands).

	Thirteen week period ended				Twenty-six week period ended
	June 28, 2008		June 27, 2009		June 28, 2008		June 27, 2009
Labor	$	2	$	—	$	5	$	—
General and administrative expenses		270		83		525		448
Share-based compensation expense included in total costs and expenses		272		83		530		448
Income tax benefit related to share-based compensation		105		25		202		174
Share-based compensation expense related to employee stock options, net of tax	$	167	$	58	$	328	$	274

7. Income Taxes

As of June 27, 2009, there had been no material changes to the Company’s uncertain tax position disclosure as provided in the 2008 Annual Report on Form 10-K. The Company does not anticipate any significant changes to the balance of unrecognized tax benefits in the next twelve months. It is the Company’s policy to recognize interest and penalties related to uncertain tax positions in income tax expense.

8. Comprehensive Income

The components of comprehensive income for the thirteen and twenty-six week periods ended June 28, 2008 and June 27, 2009 are as follows (in thousands):

	Thirteen week period ended				Twenty-six week period ended
	June 28, 2008		June 27, 2009		June 28, 2008			June 27, 2009
Net income	$	2,357	$	1,188	$	2,475		$	44
Other comprehensive income (loss):
Foreign currency translation		105		581		(642	)		485
Total comprehensive income	$	2,462	$	1,769	$	1,833		$	529

9. Related Party Transactions

The Company leases certain properties from landlords deemed to be related parties of the Company. Total rent paid to these landlords was $0.2 million for both the thirteen week period ended June 28, 2008 and the thirteen week period ended June 27, 2009.

8

10. Commitments and Contingencies

The Company is subject to various claims, possible legal actions, and other matters arising in the normal course of business. While it is difficult to accurately predict the outcome of these issues, the Company believes that adequate provision for potential losses has been made in the accompanying condensed consolidated financial statements and that the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

In 2006, the Company was named in a class action complaint regarding employment practices filed in the U.S. District Court for the Northern District of California. The Company contested the claims and negotiated with the plaintiffs to reach a settlement. The settlement was approved by the court, and the settlement amount was paid, in April 2008.

The Company’s primary insurer has informed the Company it believes the Company has exhausted its insurance coverage with respect to claims arising in the Company’s 2004 coverage year. The Company disagrees with this interpretation of the coverage, but has taken this interpretation into account in connection with the charge taken related to the settlement of class action claims. The Company has initiated litigation to contest the insurer’s conclusion. If the Company is unsuccessful, and if the Company’s insurer determines that other existing employment claims arose in 2004 and are therefore not covered, the resolution of those claims could be more expensive.

11. Impairment, Restructuring and Other Charges

During the second quarter of fiscal year 2009, the Company incurred a net charge of $371,000 related to impairment, restructuring and other charges. Of the charges incurred, $395,000 related to severance costs and other termination benefits paid to employees. The Company also incurred net impairment charges as defined in SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” for exit costs of $132,000 associated with the closing of the Oak St. location in Portland, OR, and recorded a net credit of $156,000 attributable to the subleasing and sale of leasehold improvements of Restaurant K in Washington D.C. All of the leasehold improvements related to Restaurant K were written off as of the end of fiscal year 2007.

12. Net Income Per Share

Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed based on the weighted average number of shares of common stock and potentially dilutive securities, which includes options and restricted stock outstanding under the Company’s 2004 Stock Incentive Plan.

There were no dilutive shares for the thirteen and twenty-six week periods ended June 28, 2008. There were 33,673 and 12,938 dilutive shares for the thirteen and twenty-six week periods ended June 27, 2009, respectively. For the thirteen and twenty-six week period ended June 28, 2008 and June 27, 2009, 448,831 and 303,778, respectively, of the Company’s shares were excluded from the calculation due to their anti-dilutive effect.

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

FORWARD-LOOKING STATEMENTS

This information should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of Part I of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 27, 2008 contained in our 2008 Annual Report on Form 10-K.

The following section contains forward-looking statements which are subject to risks and uncertainties. These forward-looking statements include those regarding anticipated restaurant openings, anticipated costs and sizes of future restaurants, anticipated costs savings and the adequacy of anticipated sources of cash to fund our future capital requirements. Our actual results may differ materially from those discussed in the forward-looking statements. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Important factors that could cause actual results to differ materially from our expectations include those discussed below under “Risk Factors.” We do not undertake any duty to update forward-looking statements after the date they are made or to conform them to actual results or to changes in circumstances or expectations.

Overview

As of June 27, 2009, we operated 93 restaurants, including 87 restaurants in the United States, of which one was operated pursuant to a management agreement, and six restaurants operated in Canada under The Boathouse name.

McCormick & Schmick’s has successfully grown over the past 37 years by offering our customers menus that, at most restaurants, are printed twice daily with a broad selection of affordable, quality, and fresh seafood in an upscale environment, serviced by knowledgeable and professional management and staff. McCormick & Schmick’s inviting atmosphere and high quality, diverse menu offering and compelling price-value proposition appeals to a diverse base of casual diners, families, travelers and the business community. Our revenues are primarily generated by sales at our restaurants, including banquets.

We utilize a broad-based marketing approach to drive guest traffic which includes in-house marketing campaigns, including our preferred guest program and e-marketing programs. We have successfully grown our preferred guest program to nearly 85,000 members since its inception in 2006 and our online marketing e-mail club database to nearly 180,000 members.

We measure performance using key operating indicators such as comparable restaurant sales, food and beverage costs, labor costs, restaurant operating expenses, and occupancy costs, with a focus on these costs and expenses as a percentage of revenues. For purposes of comparable restaurant sales, a restaurant is included in the comparable restaurant base in the first full quarter following the eighteenth month of operations. Comparable sales exclude the impact of currency translation. We also track trends in average weekly revenues at both the restaurant level and on a condensed consolidated basis as an indicator of our performance. The key operating measure used by management in evaluating our operating results is operating income. Operating income is calculated by deducting total restaurant operating costs, general and administrative expenses, restaurant pre-opening costs, depreciation and amortization and other corporate costs from revenues. Restaurant pre-opening costs are analyzed based on the number and timing of restaurant openings and by comparison to budgeted amounts, with an overall target of approximately $0.3 million to $0.4 million per restaurant opening, which may include non-cash rent expense during the construction period.

9

The most significant restaurant operating costs are food and beverage costs, labor costs and employee benefit costs. We believe our national and regional presence allows us to achieve better quality and pricing on key products than most of our competitors. We closely monitor food and beverage costs and regularly review our selection of preferred vendors on the basis of several key metrics, including pricing. In addition, because we print our menu twice daily in most of our restaurants, we are able to adapt the seafood items we offer to changes in vendor pricing to optimize our revenue mix and mitigate the impact of cost increases in any particular seafood item by substituting a lower-cost alternative on our menu or by adjusting the price. With respect to labor costs, we are actively managing our fixed and variable labor costs to closely align our costs with our projected sales volumes on a week to week basis. We are leveraging the experience and expertise of our vice presidents of operations and regional managers to help our restaurant managers diligently manage our restaurant payroll expenses. Our employee benefits include health insurance, the cost of which continues to increase faster than the general rate of inflation. We continually monitor this cost and review and implement strategies to effectively control increases.

General and administrative expenses are controlled in absolute amounts and monitored as a percentage of revenues. As we have grown, we have incurred substantial training costs and made significant investments in infrastructure, including our information systems. We expect these expenses to level off as a percentage of revenues over time as we leverage the benefits of our investments.

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

Strategic Focus and Operating Outlook

Our primary business focus for over 37 years has been to consistently offer a broad selection of high quality, fresh seafood, which we believe commands strong loyalty from our guests. During the fourth quarter of 2007 we initiated a new steak program to complement our seafood offerings. Under the program, we increased the range of beef offerings on our menu, upgraded the quality of beef served, and implemented new seasoning techniques. As a result of the program, our beef entrée sales have increased to approximately 18% of our dinner entrée sales in the second quarter of 2009. We have also been highlighting our offerings of wild fish, which give the most affluent customers the opportunity to trade up in product mix. We have continued our focus of offering the best seasonal species, such as the variety of lobster dishes we offered in the second quarter of 2009. We are also focusing on our everyday value messaging including our most recent offering of 10 lunch entrées under $10.

We have successfully expanded our McCormick & Schmick’s Seafood Restaurant concept throughout the United States and have competed effectively with national and regional restaurant chains and with local restaurant operators. We have continued to utilize our size and experience to maximize our purchasing power, closely monitor our costs, and take advantage of areas where we feel we can trim costs without affecting the guest experience.

Our objective is to continue to prudently grow McCormick & Schmick’s Seafood Restaurants and The Boathouse restaurants in existing and new markets. We also consider acquisitions of additional restaurants or restaurant groups when opportunities arise. Our stated long term growth target is to grow restaurant units at a prudent pace with economic conditions factored into our growth decisions. Because of the current economic environment, particularly uncertainty regarding consumer spending, and in line with our disciplined capital utilization, we are being more cautious when selecting new restaurant locations and in 2009 have opened both of our planned new restaurants.

Financial Performance Overview

The following are results of our financial performance for the thirteen week period ended June 27, 2009 compared to the thirteen week period ended June 28, 2008:

• Revenues decreased 7.0% to $92.7 million from $99.7 million

• Comparable restaurant sales decreased 17.3%

• Restaurant pre-opening costs decreased to $0.1 million from $0.7 million

• Operating income decreased to $1.6 million from $3.0 million

• Net income decreased to $1.2 million from $2.4 million

• Diluted earnings per share decreased to $0.08 from $0.16

Thirteen Week Period Ended June 28, 2008 Compared to Thirteen Week Period Ended June 27, 2009

The following table sets forth our operating results from our unaudited condensed consolidated statements of operations.

	Thirteen week period ended
	June 28, 2008					June 27, 2009
	(in thousands)
Revenues	$	99,699		100.0	%	$	92,742		100.0	%
Restaurant operating costs
Food and beverage		30,038		30.1	%		27,517		29.7	%
Labor		32,095		32.2	%		30,269		32.6	%
Operating		15,384		15.4	%		14,158		15.3	%
Occupancy		9,297		9.3	%		9,501		10.2	%
Total restaurant operating costs		86,814		87.1	%		81,445		87.8	%
General and administrative expenses		5,138		5.2	%		4,947		5.3	%
Restaurant pre-opening costs		692		0.7	%		80		0.1	%
Depreciation and amortization		3,652		3.7	%		4,293		4.6	%
Impairment, restructuring and other charges		452		0.5	%		371		0.4	%
Total costs and expenses		96,748		97.0	%		91,136		98.3	%
Operating income		2,951		3.0	%		1,606		1.7	%
Interest expense, net		87		0.1	%		469		0.5	%
Other expense (income), net		(184	)	(0.2	)%		13		—
Income before income taxes		3,048		3.1	%		1,124		1.2	%
Income tax expense (benefit)		691		0.7	%		(64	)	(0.1	)%
Net income	$	2,357		2.4	%	$	1,188		1.3	%

10

Revenues and Restaurant Operating Costs

The following table sets forth revenues and restaurant operating costs, including food and beverage, labor, operating and occupancy costs from our unaudited condensed consolidated statements of operations.

	Thirteen week period ended				Change
	June 28, 2008		June 27, 2009		$			%
	(in thousands)
Revenues	$	99,699	$	92,742	$	(6,957	)	(7.0	)%
Restaurant operating costs
Food and beverage	$	30,038	$	27,517	$	(2,521	)	(8.4	)%
Labor		32,095		30,269		(1,826	)	(5.7	)%
Operating		15,384		14,158		(1,226	)	(8.0	)%
Occupancy		9,297		9,501		204		2.2	%
Total restaurant operating costs	$	86,814	$	81,445	$	(5,369	)	(6.2	)%

Revenues. Revenues decreased $7.0 million, or 7.0%, to $92.7 million in the thirteen week period ended June 27, 2009 from $99.7 million in the thirteen week period ended June 28, 2008. The decrease was primarily due to the 17.3% decrease in comparable restaurants sales, which was partially offset by increased sales by restaurants not included in the comparable base. We had a total of 1,209 store operating weeks for the quarter ended June 27, 2009 compared to a total of 1,093 for the quarter ended June 28, 2008. The decrease in comparable restaurant sales of 17.3% was a result of a 16.7% decrease in traffic, which was coupled with a net decrease in pricing and product mix of 0.6%.

Food and Beverage Costs. Food and beverage costs decreased $2.5 million, or 8.4%, to $27.5 million in the thirteen week period ended June 27, 2009 from $30.0 million in the thirteen week period ended June 28, 2008. This decrease was primarily due to lower restaurant sales. Food and beverage costs as a percentage of revenues decreased to 29.7% in the thirteen week period ended June 27, 2009 from 30.1% in the thirteen week period ended June 28, 2008, primarily due to increased cost efficiencies from restaurants not included in the comparable base coupled with better commodity prices.

Labor Costs. Labor costs decreased $1.8 million, or 5.7%, to $30.3 million in the thirteen week period ended June 27, 2009 from $32.1 million in thirteen week period ended June 28, 2008. Labor costs as a percentage of revenues increased to 32.6% in the thirteen week period ended June 27, 2009 from 32.2% in the thirteen week period ended June 28, 2008, primarily due to deleveraging of fixed labor costs at the comparable restaurants. Deleveraging occurs when sales decline and fixed costs have a relatively larger impact as a percentage of revenues.

Operating Costs. Operating costs decreased $1.2 million, or 8.0%, to $14.2 million in the thirteen week period ended June 27, 2009 from $15.4 million in the thirteen week period ended June 28, 2008. This decrease was primarily due to lower advertising, janitorial and utilities costs as a result of our cost saving initiatives implemented in the first and second quarters of 2009. Operating costs as a percentage of revenues decreased to 15.3% in the thirteen week period ended June 27, 2009 from 15.4% in the thirteen week period ended June 28, 2008.

Occupancy Costs. Occupancy costs increased $0.2 million, or 2.2%, to $9.5 million in the thirteen week period ended June 27, 2009 from $9.3 million in the thirteen week period ended June 28, 2008, primarily due to the nine restaurants opened since June 28, 2008, partially offset by lower percentage rent due to lower sales volumes. Occupancy costs as a percentage of revenues increased to 10.2% in the thirteen week period ended June 27, 2009 from 9.3% in the thirteen week period ended June 28, 2008, primarily due to deleveraging of fixed occupancy costs.

General and Administrative Expenses, Restaurant Pre-Opening Costs, Depreciation and Amortization and Impairment, Restructuring and Other Charges

The following table sets forth general and administrative expenses, restaurant pre-opening costs, depreciation and amortization, and impairment, restructuring and other charges from our unaudited condensed consolidated statements of operations.

	Thirteen week period ended				Change
	June 28, 2008		June 27, 2009		$			%
			(in thousands)
General and administrative expenses	$	5,138	$	4,947	$	(191	)	(3.7	)%
Restaurant pre-opening costs		692		80		(612	)	(88.4	)%
Depreciation and amortization		3,652		4,293		641		17.6	%
Impairment, restructuring and other charges		452		371		(81	)	(17.9	)%

General and Administrative Expenses. General and administrative expenses decreased $0.2 million, or 3.7%, to $4.9 million in the thirteen week period ended June 27, 2009 from $5.1 million in the thirteen week period ended June 28, 2008, primarily due to decreases in variable compensation, share based compensation and travel costs, partially offset by higher legal fees and consulting costs. A significant portion of the higher legal fees were related to certain litigation which was resolved in our favor at the end of July 2009. General and administrative expenses as a percentage of revenues increased to 5.3% in the thirteen week period ended June 27, 2009 from 5.2% in the thirteen week period ended June 28, 2008, primarily due to the deleveraging of revenues, coupled with an increase in legal fees, partially offset by lower variable compensation and share-based compensation, as a percentage of revenues.

Restaurant Pre-Opening Costs. Restaurant pre-opening costs decreased $0.6 million, to $0.1 million in the thirteen week period ended June 27, 2009 from $0.7 million in the thirteen week period ended June 28, 2008, primarily due to the timing of restaurant openings and the number of restaurants under construction.

11

Depreciation and Amortization. Depreciation and amortization increased $0.6 million, or 17.6%, to $4.3 million in the thirteen week period ended June 27, 2009 from $3.7 million in the thirteen week period ended June 28, 2008. The increase was primarily due to the nine restaurants opened since June 28, 2008. Depreciation and amortization as a percentage of revenues increased to 4.6% in the thirteen week period ended June 27, 2009 from 3.7% in the thirteen week period ended June 28, 2008, primarily due to the deleveraging of sales and the nine restaurants opened since June 28, 2008.

Impairment, restructuring and other charges. During the second quarter of fiscal year 2009 we incurred a net total of $371,000 related to impairment, restructuring and other charges. Of the charges incurred, $395,000 related to severance costs and other termination benefits paid to employees. We also incurred net impairment charges as defined in SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” for exit costs of $132,000 associated with the closing of our Oak St. location in Portland, OR, and recorded a net credit of $156,000 attributable to the subleasing and sale of leasehold improvements of our Restaurant K in Washington D.C. All of the leasehold improvements related to Restaurant K were written off as of the end of fiscal year 2007.

Interest Expense, Net, Other Expense (Income), Net, Income Tax Expense (Benefit) and Net Income

The following table sets forth interest expense, net, other expense (income), net, income tax expense (benefit) and net income from our unaudited condensed consolidated statements of operations.

	Thirteen week period ended						Change
	June 28, 2008			June 27, 2009			$			%
				(in thousands)
Interest expense, net	$	87		$	469		$	382		*
Other expense (income), net		(184	)		13			197		(107.1	)%
Income before income taxes	$	3,048		$	1,124		$	(1,924	)	(63.1	)%
Income tax expense (benefit)		691			(64	)		(755	)	(109.3	)%
Net income	$	2,357		$	1,188		$	(1,169	)	(49.6	)%

* Not meaningful

Interest Expense, Net. Interest expense, net, was $0.5 million for the thirteen week period ended June 27, 2009, compared to $0.1 million in the thirteen week period ended June 28, 2008. The change was primarily due to a decrease in the amount of interest capitalized related to construction costs and an increase in the interest related to deemed landlord financing.

Other Expense (Income), Net. Other expense (income), net for the thirteen week periods ended June 28, 2008 and June 27, 2009 represents business interruption insurance proceeds net of expenses.

Income Tax Expense (Benefit). Income tax expense (benefit) was a benefit of $64,000 in the thirteen week period ended June 27, 2009 compared to an income tax expense of $0.7 million in the thirteen week period ended June 28, 2008, primarily related to an income tax benefit related to our Canadian subsidiary. Our estimated annual effective tax rate for the thirteen week period ended June 27, 2009 is 10.0% compared to 22.7% in the thirteen week period ended June 28, 2008. We maintain a valuation allowance related to deferred tax assets since we believe realization is uncertain. Any change in our deferred tax asset position is offset by a similar change in the valuation allowance. Due to our projection of modest taxable income for the year in certain taxing jurisdictions, and due to the expected decrease in our deferred tax assets and corresponding change in the valuation allowance, our effective tax rate is expected to be between 5% and 10%.

Net Income. Net income decreased $1.2 million, or 49.6%, to $1.2 million in the thirteen week period ended June 27, 2009 from $2.4 million in the thirteen week period ended June 28, 2008, primarily due to a decrease in comparable restaurant sales of 17.3%.

Twenty-Six Week Period Ended June 28, 2008 Compared to Twenty-Six Week Period Ended June 27, 2009

The following are results of our financial performance for the twenty-six week period ended June 27, 2009 compared to the twenty-six week period ended June 28, 2008:

• Revenues decreased 3.9% to $184.6 million from $192.0 million

• Comparable restaurant sales decreased 15.7%

• Restaurant pre-opening costs decreased to $0.6 million from $1.9 million

• Operating income decreased to $0.8 million from $3.4 million

• Net income decreased to $44,000 from $2.5 million

• Diluted earnings per share decreased to $0.00 from $0.17

The following table sets forth our operating results from our unaudited consolidated statements of income.

	Twenty-six week period ended
	June 28, 2008					June 27, 2009
	(in thousands)
Revenues	$	192,039		100.0	%	$	184,636		100.0	%
Restaurant operating costs
Food and beverage		58,109		30.3	%		55,214		29.9	%
Labor		62,492		32.5	%		60,757		32.9	%
Operating		29,885		15.6	%		28,498		15.4	%
Occupancy		18,095		9.4	%		18,990		10.3	%
Total restaurant operating costs		168,581		87.8	%		163,459		88.5	%
General and administrative expenses		10,709		5.6	%		10,793		5.8	%
Restaurant pre-opening costs		1,876		1.0	%		641		0.3	%
Depreciation and amortization		7,047		3.7	%		8,373		4.5	%
Impairment, restructuring and other charges		452		0.2	%		552		0.3	%
Total costs and expenses		188,665		98.2	%		183,818		99.6	%
Operating income		3,374		1.8	%		818		0.4	%
Interest expense (income), net		416		0.2	%		847		0.5	%
Other expense (income), net		(258	)	(0.1	)%		27		—
Income (loss) before income taxes		3,216		1.7	%		(56	)	—
Income tax expense (benefit)		741		0.4	%		(100	)	(0.1	)%
Net income	$	2,475		1.3	%	$	44		—

12

Revenues and Restaurant Operating Costs

The following table sets forth revenues and restaurant operating costs, including food and beverage, labor, operating and occupancy costs from our unaudited consolidated statements of income.

	Twenty-six week period ended				Change
	June 28, 2008		June 27, 2009		$			%
			(in thousands)
Revenues	$	192,039	$	184,636	$	(7,403	)	(3.9	)%
Restaurant operating costs
Food and beverage	$	58,109	$	55,214	$	(2,895	)	(5.0	)%
Labor		62,492		60,757		(1,735	)	(2.8	)%
Operating		29,885		28,498		(1,387	)	(4.6	)%
Occupancy		18,095		18,990		895		4.9	%
Total restaurant operating costs	$	168,581	$	163,459	$	(5,122	)	(3.0	)%

Revenues. Revenues decreased $7.4 million, or 3.9%, to $184.6 million in the twenty-six week period ended June 27, 2009 from $192.0 million in the twenty-six week period ended June 28, 2008. This decrease was primarily due to the decrease in comparable restaurant sales of 15.7%, partially offset by the sales generated by the nine restaurants opened since June 28, 2008. We had a total of 2,404 store operating weeks for the twenty-six week period ended June 27, 2009 compared to a total of 2,154 for the twenty-six week ended June 28, 2008. The comparable restaurant sales decrease of 15.7% was comprised of a 16.4% decrease in traffic, which was partially offset by a net increase in pricing and product mix of 0.7%.

Food and Beverage Costs. Food and beverage costs decreased $2.9 million, or 5.0%, to $55.2 million in the twenty-six week period ended June 27, 2009 from $58.1 million in the twenty-six week period ended June 28, 2008. This decrease was primarily attributable to the decrease in sales. Food and beverage costs as a percentage of revenues decreased to 29.9% in the twenty-six week period ended June 27, 2009 from 30.3% in the twenty-six week period ended June 28, 2008, primarily due to increased cost efficiencies from restaurants not included in the comparable base coupled with better commodity prices.

Labor Costs. Labor costs decreased $1.7 million, or 2.8%, to $60.8 million in the twenty-six week period ended June 27, 2009 from $62.5 million in twenty-six week period ended June 28, 2008. This decrease was primarily attributable to lower revenues. Labor costs as a percentage of revenues increased to 32.9 % in the twenty-six week period ended June 27, 2009 from 32.5% in the twenty-six week period ended June 28, 2008, primarily due to the deleveraging of sales at the comparable restaurants.

Operating Costs. Operating costs decreased $1.4 million, or 4.6%, to $28.5 million in the twenty-six week period ended June 27, 2009 from $29.9 million in the twenty-six week period ended June 28, 2008. This decrease was primarily attributable to the decrease in revenues, coupled with lower advertising and janitorial costs as a result of our cost saving initiatives implemented in the first and second quarters of 2009. Operating costs as a percentage of revenues decreased to 15.4% in the twenty-six week period ended June 27, 2009 from 15.6% in the twenty-six week period ended June 28, 2008, primarily due to decreases in advertising and janitorial expenses as a percentage of revenues.

Occupancy Costs. Occupancy costs increased $0.9 million, or 4.9%, to $19.0 million in the twenty-six week period ended June 27, 2009 from $18.1 million in the twenty-six week period ended June 28, 2008, primarily due to the nine restaurants opened since June 28, 2008, partially offset by lower percentage rent due to lower revenues. Occupancy costs as a percentage of revenues increased to 10.3% in the twenty-six week period ended June 27, 2009 from 9.4% in the twenty-six week period ended June 28, 2008, primarily due to deleveraging of fixed occupancy costs at the comparable restaurants.

General and Administrative Expenses, Restaurant Pre-Opening Costs, Depreciation and Amortization and Impairment, Restructuring and Other Charges

The following table sets forth general and administrative expenses, restaurant pre-opening costs, depreciation and amortization, and impairment, restructuring and other charges from our unaudited consolidated statements of income.

	Twenty-six week period ended				Change
	June 28, 2008		June 27, 2009		$			%
			(in thousands)
General and administrative expenses	$	10,709	$	10,793	$	84		0.8	%
Restaurant pre-opening costs		1,876		641		(1,235	)	(65.8	)%
Depreciation and amortization		7,047		8,373		1,326		18.8	%
Impairment, restructuring and other charges		452		552		100		22.1	%

General and Administrative Expenses. General and administrative expenses increased $0.1 million, or 0.8%, to $10.8 million in the twenty-six week period ended June 27, 2009 from $10.7 million in the twenty-six week period ended June 28, 2008, primarily due to the increase in legal fees and consulting costs, partially offset by decreased variable compensation and travel costs. The higher legal fees were primarily related to certain litigation which was resolved in our favor at the end of July 2009. General and administrative expenses as a percentage of revenues increased to 5.8% in the twenty-six week period ended June 27, 2009 from 5.6% in the twenty-six week period ended June 28, 2008, primarily due to deleveraging of revenues.

Restaurant Pre-Opening Costs. Restaurant pre-opening costs decreased $1.2 million, or 65.8%, to $0.6 million in the twenty-six week period ended June 27, 2009 from $1.9 million in the twenty-six week period ended June 28, 2008, primarily due to the timing of restaurant openings and restaurants under construction.

13

Depreciation and Amortization. Depreciation and amortization increased $1.3 million, or 18.8%, to $8.4 million in the twenty-six week period ended June 27, 2009 from $7.0 million in the twenty-six week period ended June 28, 2008. The increase was primarily due to the addition of nine restaurants since June 28, 2008. Depreciation and amortization as a percentage of revenues increased to 4.5% in the twenty-six week period ended June 27, 2009 from 3.7% in the twenty-six week period ended June 28, 2008, primarily due to the deleveraging of sales and the nine restaurants opened since June 28, 2008.

Impairment, Restructuring and Other Charges. For the twenty-six week period ended June 27, 2009 we have incurred a total of $552,000 related to impairment, restructuring and other charges. Of the charges incurred, $576,000 related to severance costs and other termination benefits paid to employees. We also incurred net impairment charges as defined in SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” for exit costs of $132,000 associated with the closing of our Oak St. location in Portland, OR, and recorded a net credit of $156,000 attributable to the subleasing and sale of leasehold improvements of our Restaurant K in Washington D.C. All of the leasehold improvements related to Restaurant K were written off as of the end of fiscal year 2007.

Interest Expense (Income), Net, Other Expense (Income), Net, Income Tax Expense (Benefit) and Net Income

The following table sets forth interest expense (income), net, other expense (income), net, income tax expense (benefit) and net income from our unaudited consolidated statements of income.

	Twenty-six week period ended						Change
	June 28, 2008			June 27, 2009			$			%
				(in thousands)
Interest expense (income), net	$	416		$	847		$	431		103.6	%
Other expense (income), net		(258	)		27			285		(110.5	)%
Income (loss) before income taxes	$	3,216		$	(56	)	$	(3,272	)	(101.7	)%
Income tax expense (benefit)		741			(100	)		(841	)	(113.5	)%
Net income	$	2,475		$	44		$	(2,431	)	(98.2	)%

* Percentage is non-meaningful

Interest Expense (Income), Net. Interest expense (income), net was a net interest expense of $0.8 million in the twenty-six week period ended June 27, 2009 compared to $0.4 million in the twenty-six week period ended June 28, 2008. The change was primarily due to a decrease in the amount of interest capitalized related to construction costs and an increase in the interest related to deemed landlord financing.

Other Expense (Income), Net. Other expense (income), net for the twenty-six week periods ended June 28, 2008 and June 27, 2009 represents business interruption insurance proceeds net of expenses.

Income Tax Expense (Benefit). Income tax expense (benefit) was a benefit of $0.1 million in the twenty-six week period ended June 27, 2009, primarily related to an income tax benefit related to our Canadian subsidiary. Our estimated effective annualized tax rate was 10.0% for the twenty-six week period ended June 27, 2009. In the twenty-six week period ended June 28, 2008, income tax expense was $0.7 million, which reflects an estimated effective annualized tax rate of 23.0%. We maintain a valuation allowance related to deferred tax assets since we believe realization is uncertain. Any change in our deferred tax asset position is offset by a similar change in the valuation allowance. Due to our projection of modest taxable income for the year in certain taxing jurisdictions, and due to the expected decrease in our deferred tax assets and corresponding change in the valuation allowance, our effective tax rate is expected to be between 5% and 10%.

Net Income. Net income decreased $2.4 million, to $44,000 in the twenty-six week period ended June 27, 2009, compared to $2.5 million in the twenty-six week period ended June 28, 2008, primarily due to a decrease in comparable restaurant sales.

Liquidity and Capital Resources

Our primary cash needs have been for new restaurant construction, restaurant acquisition, working capital and general corporate purposes, including payments under our credit facility. Our main sources of cash have been borrowings under our credit facility, net cash provided by operating activities, cash from tenant improvement allowances, and issuance of common stock. The following table summarizes our sources and uses of cash and cash equivalents from our unaudited condensed consolidated statements of cash flows:

	Twenty-six week period ended
	June 28, 2008			June 27, 2009
	(in thousands)
Net cash provided by operating activities	$	10,304		$	8,565
Net cash used in investing activities		(29,370	)		(4,206	)
Net cash provided by (used in) financing activities		14,803			(2,443	)
Effect of exchange rate changes on cash and cash equivalents		(70	)		113
Net increase (decrease) in cash and cash equivalents	$	(4,333	)	$	2,029

The reduction in net cash provided by operating activities of $1.7 million, to $8.6 million in the twenty-six week period ended June 27, 2009 compared to net cash used in operating activities of $10.3 million in the twenty-six week period ended June 28, 2008 was primarily due to the reduction in net income between periods of $2.4 million.

Net cash used in investing activities was $4.2 million in the twenty-six week period ended June 27, 2009 compared to $29.4 million in the twenty-six week period ended June 28, 2008. We use cash primarily for equipment purchases and construction costs related to new restaurant openings, to purchase restaurants, and to upgrade and add capacity to existing restaurants. During the twenty-six week periods ended June 27, 2009 and June 28, 2008, we opened two and four restaurants, respectively.

Net cash used in financing activities was $2.4 million in the twenty-six week period ended June 27, 2009 compared to a net cash provided by financing activities of $14.8 million in the twenty-six week period ended June 28, 2008. Net cash provided by or used in financing activities is primarily related to the borrowings and payments on our revolving credit facility. We utilize our revolving credit facility to fund our construction of new restaurants, remodeling of existing restaurants, as well as fund our ongoing operations.

14

As of June 27, 2009, the outstanding balance on our revolving credit facility was $21.0 million. On January 29, 2009, we amended our revolving credit facility. In conjunction with the amendment, the maximum availably under the facility was reduced from $150.0 million to $90.0 million, with an additional $50.0 million available at our request if specified conditions are met. Among other things, the amendment also affected our covenants and interest rates on borrowings under the facility. The interest rate on U.S. borrowings is based on the financial institution’s base rate plus a margin between 0.25% and 1.50% or the Eurodollar rate plus a margin of 1.25% to 2.50%, with margins determined by certain financial ratios. The terms of the facility also allow us to borrow up to $10.0 million in Canadian dollars, which reduces the limit available for borrowings under the credit facility by an equal amount, with an interest rate based on the Canadian Eurodollar Rate plus a margin of 1.35% to 2.60%, with margins determined by certain financial ratios. As of June 27, 2009, our effective interest rate on our borrowings was 2.8%. Under our revolving credit facility agreement, we are subject to certain financial covenants, including a maximum adjusted leverage ratio and a minimum fixed charge ratio. We were in compliance with these covenants as of June 27, 2009.

Under our revolving credit facility agreement, loans are collateralized by the stock of our subsidiaries and are scheduled to mature on December 28, 2012. The revolving credit facility agreement also provides for bank guarantees under standby letter of credit arrangements in the normal course of business operations. Our commercial bank issues standby letters of credit to secure our obligations to pay or perform when required to do so, pursuant to the requirements of an underlying agreement or the provision of goods and services. The standby letters of credit are cancelable only at the option of the beneficiary who is authorized to draw drafts on the issuing bank up to the face amount of the standby letter of credit in accordance with its terms. As of June 27, 2009, the maximum exposure under these standby letters of credit was $3.0 million. At June 27, 2009 we had $66.0 million available, subject to the conditions of the agreement, under our revolving credit facility.

On July 30, 2008, our Board of Directors authorized the repurchase of up to $20.0 million of our common stock. Such repurchases may be made from time to time in open market transactions or through privately negotiated transactions. As of June 27, 2009 we had not repurchased any shares.

We believe the net cash provided by operating activities and funds available from our revolving credit facility will be sufficient to satisfy our working capital and capital expenditure requirements, including restaurant construction and pre-opening costs and potential initial operating losses related to new restaurant openings, for at least the next twelve months.

Critical Accounting Policies and Use of Estimates

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

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Our assessment of recoverability of property and equipment is performed on a restaurant-by-restaurant basis. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of such asset to its estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of such asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Insurance Liability

We maintain various insurance policies including workers’ compensation, employee health, and general liability. Pursuant to those policies, we are responsible for losses up to certain limits and are required to estimate a liability that represents our ultimate exposure for aggregate losses below those limits. This liability is based on management’s estimates of the ultimate costs to be incurred to settle known claims and claims not reported as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions, and economic conditions. If actual trends differ from our estimates, our financial results could be impacted. In addition, we may exceed our insurance coverage for specified matters. Our primary insurer has informed us it believes we have exhausted our insurance coverage with respect to employment claims arising in our 2004 coverage year, which it believes includes litigation in California and possibly similar future claims. Furthermore, the insurer has also taken the position that several claims arising in the 2005 through 2008 coverage years are related to certain 2004 claims, and therefore not eligible for coverage. We disagree with this interpretation of our coverage, but we have taken this interpretation into account in connection with our accounting for claims under the policy. See PART II. OTHER INFORMATION—ITEM 1. LEGAL PROCEEDINGS.

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event we were to determine that we would not be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would increase the provision for income taxes.

Operating Leases

We generally operate our restaurants in leased premises. We record the minimum base rents for our operating leases on a straight-line basis over the life of the lease term, including option periods which are reasonably assured of renewal due to the presence of certain economic penalties. For purposes of calculating straight-line rents, the lease term commences on the date the lessee obtains control of the property, which is normally when the property is ready for normal tenant improvements (build-out-period). For certain leases we only have the right to exercise our option for renewal if certain sales targets are achieved at or near the renewal date. These renewal option periods have been included in the lease term when we determine at lease inception or at the acquisition date of the restaurant, if later, that the sales targets are non-substantive and achievement of such sales targets is virtually certain. The difference between rent expense calculated on the straight-line method and rent paid is recorded as deferred rent liability.

We receive certain tenant improvement allowances which are considered lease incentives and are amortized over the life of the lease term, as a reduction of rent expense over the lease term. Accordingly, we have recorded a deferred rent liability including tenant improvement allowances for the straight lining of rents and lease incentives, which is included in deferred rent and other long-term liabilities. Certain other landlord tenant improvement allowances received, depending on the specifics of the leased space, the lease agreement and in accordance with Emerging Issues Task Force (“EITF”) 97-10, “The Effect of Lessee Involvement in Asset Construction,” for the amounts paid for structural components during the construction period are recorded as construction in progress and the landlord tenant improvement allowances received are recorded as a landlord financing liability. Upon completion of construction for those leases that meet the criteria of EITF 97-10, and for those leases that do not qualify for sale leaseback treatment in accordance with SFAS No. 98, the landlord financing liability is amortized under the effective interest rate method over the lease term based on the rent payments designated in the lease agreement.

15

Share-Based Compensation

We account for share-based compensation in accordance with the fair value recognition provisions of SFAS No. 123, “Share Based Payment (revised 2004)” (“SFAS 123R”). Under SFAS 123R, we determine the fair value of share-based payment awards on the date of grant using the Black-Scholes option-pricing model. The model is affected by our stock price as well as our assumptions regarding a number of complex and subjective variables, including but not limited to our expected stock price volatility over the term of the awards, life of the option, expected term of the option, the estimated forfeiture rate, the risk-free interest rate and the expected dividend yield.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, including changes in interest rates and foreign currency exchange rates. Our foreign exchange rate risk relates to our operations in Canada.

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

We are exposed to market risk from changes in interest rates on borrowings, which under the terms of our revolving credit facility at June 27, 2009, bear interest at the financial institution’s prime rate plus a margin of 0.25% and 1.50% or the Eurodollar rate plus a margin of 1.25% to 2.50%, with margins determined by certain financial ratios. At our option, we may convert loans under our revolving credit facility from one type of rate to the other. The terms of the facility also allow us to borrow up to $10.0 million in Canadian dollars, with an interest rate based on the Canadian Eurodollar Rate plus a margin of 1.35% to 2.60%, with margins determined by certain financial ratios. As of June 27, 2009, there was an outstanding balance of $21.0 million under our revolving credit facility. A hypothetical 30 basis point change in our effective borrowing rate would not have a material effect on our results of operations.

A portion of our revenue is generated in Canada. As a result, we conduct some transactions in Canadian currency, which increases our exposure to fluctuations in foreign currency exchange rates relative to the U.S. dollar. For the thirteen week period ended June 27, 2009 we have incurred a $0.6 million currency translation gain, which is included in other comprehensive income. A hypothetical 10% decline in the foreign exchange rate of the Canadian dollar to the U.S. dollar, based on year to date, through the second quarter of 2009, results of operations would have a material affect on our financial statements.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our management has evaluated, under the supervision and with the participation of our chief executive officer who is also our interim chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our chief executive officer has concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our chief executive officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including claims resulting from “slip and fall” accidents, employment related claims and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns. These may include claims brought against us by private party plaintiffs and various government agencies, including federal, state and local taxing agencies, various state and local health departments, and the Equal Employment Opportunity Commission and other employment related agencies, among others. In certain instances we may settle claims if management concludes that future costs to defend the suits outweigh the costs to settle the claims. The Company is currently a defendant in several disputes that may be litigated in court.

In 2006, we were named in a class action complaint regarding employment practices filed in the U.S. District Court for the Northern District of California. We contested the claims and have negotiated with the plaintiffs to reach a settlement. The settlement was approved by the court, and the settlement amount was paid, in April 2008. In July 2009, we prevailed in a lawsuit brought against us regarding employment practices, which was litigated in the Superior Court of California.

Our primary insurer has informed us it believes we have exhausted our insurance coverage with respect to employment claims arising in our 2004 coverage year, which it believes includes the litigation in California and possibly similar future claims. Furthermore, the insurer has also taken the position that several claims arising in the 2005 through 2008 coverage years are related to certain 2004 claims, and therefore not eligible for coverage. We disagree with this interpretation of the coverage, but have taken this interpretation into account in connection with the accounting for employment claims. In fiscal year 2008, we initiated litigation to contest the insurer’s conclusion.

ITEM 1A. RISK FACTORS

Continued or worsening economic conditions and disruptions in the financial markets may adversely impact our business and results of operations, and could increase our cost of borrowing.

The restaurant industry is being affected by economic factors, including changes in national, regional, and local economic conditions, employment levels and consumer spending patterns. The recent increased concerns about the economy and financial markets have reduced consumer confidence and decreased restaurant traffic, particularly at upscale restaurants, which is harmful to our business and results of operations. If these conditions continue or worsen, deteriorating financial performance could affect the financial ratios and covenants under our credit agreement, which, in turn, could affect our ability to borrow, increase our cost of borrowing or result in accelerated payment of outstanding loans.

16

In addition, adverse general economic conditions may affect:

• Our vendors and suppliers, some of which are local or regional and may be less able to survive in a difficult economic environment than national suppliers;

• Our customers, who may have less disposable income or who may decrease discretionary spending; and

• Real estate developers and landlords, who may be unable to meet commitments to fill space in developments where our restaurants are located.

If our vendors, customers or other service providers are adversely affected, our business and results of operations may also be adversely affected.

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

We are subject to a variety of claims arising in the ordinary course of our business brought by or on behalf of our customers or employees, including personal injury claims, contract claims, and employment-related claims. In recent years, a number of restaurant companies have been subject to lawsuits, including class-action lawsuits, alleging violations of federal and state law regarding workplace, employment and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted against us from time to time. Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment significantly in excess of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations, and adverse publicity resulting from these allegations may materially adversely affect our business. We may incur substantial damages and expenses resulting from lawsuits, which could have a material adverse effect on our business.

Failure of our existing or new restaurants to achieve predicted results could have a negative impact on our revenues and performance results.

The results achieved by our restaurants may not be indicative of longer term performance or the potential market acceptance of restaurants in other locations. New restaurants we open may not have operating results similar to those of previously opened restaurants. The failure of restaurants to perform as predicted could result in an impairment charge, which could negatively impact our results of operations.

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

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

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

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

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

• obtaining adequate financing for the construction of new restaurants;

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

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

• general economic conditions.

Some of these factors are beyond our control. We may not be able to achieve our expansion goals and our new restaurants may not be able to achieve operating results similar to those of our existing restaurants. Due to the economic outlook, we have opened both of our planned new restaurants in 2009, which is fewer than in the last several years.

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

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

• our ability to achieve and manage our planned expansion;

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

• our ability to raise capital;

• changes in the availability and costs of food;

• the loss of key management personnel;

• the concentration of our restaurants in specific geographic areas;

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

• changes in consumer preferences or discretionary spending;

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

• health concerns about seafood or other foods;

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

• increases in labor costs;

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

• the impact of litigation;

• the effect of competition in the restaurant industry; and

• economic trends generally.

17

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

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

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

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

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

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

We opened twelve company-owned restaurants and acquired five The Boathouse restaurants in 2007, and in 2008 we opened eleven company-owned restaurants. We have opened two company-owned restaurants in 2009, and we do not anticipate opening additional restaurants in 2009. Our expansion and our future growth may strain our restaurant management systems and resources, financial controls and information systems. Those demands on our infrastructure and resources may also adversely affect our ability to manage our existing restaurants. If we fail to continue to improve our infrastructure or to manage other factors necessary for us to meet our expansion objectives, our operating results could be materially and adversely affected.

Any acquisition of new restaurants could strain our financial resources or result in dilution to our existing stockholders.

Future acquisitions of existing restaurants, which may be accomplished with cash or through the issuance of our equity securities, or a combination of both, could result in dilutive issuances of our equity securities and/or the incurrence of debt and contingent liabilities, either of which could harm our business, financial condition or results of operations.

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

Many of our restaurants are located in downtown areas. We depend on both local residents and business travelers to frequent these locations. If the number of visitors to downtown areas declines due to economic or other conditions, changes in consumer preferences, changes in discretionary consumer spending or for other reasons, our revenues could decline significantly and our results of operations could be adversely affected.

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

We depend on the services of our key senior management personnel. If we lose the services of any members of our senior management or key personnel for any reason, we may be unable to replace them with qualified personnel, which could have a material adverse effect on our business and growth. We do not carry key person life insurance on any of our executive officers. Effective May 21, 2009, our chief financial officer ceased to be employed by us. We have commenced a search for a candidate to fill the position of chief financial officer, and the position is being filled on an interim basis by our chief executive officer, William T. Freeman.

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

As of June 27, 2009, we operated five restaurants in the Seattle, Washington area, six in the Portland, Oregon area, fourteen in California, and six in the greater Vancouver, British Columbia area; our East Coast restaurants are concentrated in and around Washington, D.C. As a result, adverse economic conditions, weather and labor markets in any of these areas could have a material adverse effect on our overall results of operations.

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

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

Our business prospects depend in part on our ability to develop favorable consumer recognition of the McCormick & Schmick’s name. Although McCormick & Schmick’s, M&S Grill, The Boathouse Restaurants, and other of our service marks are registered trademarks, our trademarks could be imitated in ways that we cannot prevent. In addition, we rely on trade secrets, proprietary know-how, concepts and recipes. Our methods of protecting this information may not be adequate, however, and others could independently develop similar know-how or obtain access to our trade secrets, know-how, concepts and recipes.

18

Moreover, we may face claims of misappropriation or infringement of third parties’ rights that could interfere with our use of our proprietary know-how, concepts, recipes or trade secrets. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future, and may result in a judgment or monetary damages.

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

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

We believe we maintain insurance coverage that is customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not commercially reasonable to insure. These losses, if they occur, could have a material and adverse effect on our business and results of operations. Our primary insurer has informed us it believes we have exhausted our insurance coverage with respect to employment claims arising in our 2004 coverage year and that several claims arising in 2005 through 2008 coverage years are related to the 2004 coverage year. We disagree with this interpretation of our coverage, but we have taken this interpretation into account in connection with the charge we have taken related to our settlement of class action claims in California. See Item 3, “Legal Proceedings.” We may not succeed in our planned contest of our insurer’s conclusion. If we are unsuccessful, and if our insurer determines that other existing employment claims arose in 2004 and are therefore not covered, our resolution of those claims would be more expensive.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

19

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

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

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

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

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

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

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

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

Terrorist attacks and other acts of violence or war and U.S. military reactions to such attacks may negatively affect our operations and an investment in our shares of common stock. The terrorist attacks in New York and Washington, D.C. on September 11, 2001 led to a temporary interruption in deliveries from some of our suppliers and, we believe, contributed to the decline in average annual comparable restaurant sales in 2001 and 2002.

Future acts of violence or war could cause a decrease in travel and in consumer confidence, decrease consumer spending, result in increased volatility in the United States and worldwide financial markets and economy, or result in an economic recession in the United States or abroad. They could also impact consumer leisure habits, for example, by increasing time spent watching television news programs at home, and may reduce the number of times consumers dine out, which could adversely impact our revenue. Any of these occurrences could harm our business, financial condition or results of operations, and may result in the volatility of the market price for our securities and on the future price of our securities.

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

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

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

Our Annual Meeting of Stockholders was held on May 21, 2009 in Portland, Oregon. A total of 14,022,187 shares were present or represented by proxy at the meeting, representing approximately 94% of the shares outstanding as of the April 7, 2009 record date. The only matters submitted for a vote was the election of eight nominees to serve as directors and the ratification of PricewaterhouseCoopers LLP as our independent public accounting firm for 2009. The eight nominees were elected as follows:

	For	Against	Abstain
J. Rice Edmonds	11,667,066	2,353,833	977
William T. Freeman	11,668,418	2,352,481	977
Emanuel N. Hilario *	11,244,433	2,776,466	977
Elliott H. Jurgensen, Jr.	9,921,730	4,090,677	9,469
Jeffrey D. Klein	9,890,098	4,130,801	977
James R. Parish	11,279,829	2,732,580	9,467
David B. Pittaway	9,922,528	4,089,681	9,669
Douglas L. Schmick	11,721,941	2,308,060	875
*  Mr. Hilario resigned his position as a director July 21, 2009.

20

PricewaterhouseCoopers LLP was ratified as our independent public accounting firm for 2008 as follows:

For	Against	Abstain
13,994,887	27,140	160

ITEM 5. OTHER INFORMATION

None.

21

ITEM 6. EXHIBITS

Items identified with an asterisk (*) are management contracts or compensatory plan arrangements.

3.1	Certificate of Incorporation of McCormick & Schmick’s Seafood Restaurants, Inc., as amended. Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, File No. 333-114977.
3.2	Amended and Restated Bylaws of McCormick & Schmick’s Seafood Restaurants, Inc., as amended (incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed April 17, 2009)
31.1	Certification of the Chief Executive Officer and interim Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

22

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

McCORMICK & SCHMICK’S SEAFOOD RESTAURANTS, INC.
By:	/s/    WILLIAM T. FREEMAN
	William T. Freeman
	Chief Executive Officer and interim Chief Financial Officer
	(principal executive officer and principalfinancial and accounting officer)

Date: August 5, 2009

23