McCormick & Schmicks Seafood Restaurants Inc. - FORM 10-Q

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EX-32.1 - SECTION 906 CEO CERTIFICATION - McCormick & Schmicks Seafood Restaurants Inc.	d240666dex321.htm
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EX-31.1 - SECTION 302 CEO CERTIFICATION - McCormick & Schmicks Seafood Restaurants Inc.	d240666dex311.htm
EX-10.1 - CREDIT AGREEMENT - McCormick & Schmicks Seafood Restaurants Inc.	d240666dex101.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - McCormick & Schmicks Seafood Restaurants Inc.	d240666dex322.htm

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 September 28, 2011

¨	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 001-35148

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)

1414 NW Northrup Street, Suite 700 Portland, Oregon				97209
(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). x 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 14,889,523 shares of common stock outstanding as of November 1, 2011.

MCCORMICK & SCHMICK’S SEAFOOD RESTAURANTS, INC.

INDEX TO FORM 10-Q


		Page
PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 28, 2011 (unaudited) and December 29, 2010		1

	Condensed Consolidated Statements of Operations for the thirteen and thirty-nine week periods ended September 28, 2011 and September 25, 2010 – Unaudited		2

	Condensed Consolidated Statements of Cash Flows for the thirty-nine week periods ended September 28, 2011 and September 25, 2010 – Unaudited		3

	Notes to Condensed Consolidated Financial Statements – Unaudited		4

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		7

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19

Item 4.	Controls and Procedures		19

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		20

Item 1A.	Risk Factors		20

Item 6.	Exhibits		26

Signatures			27

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)


	September 28, 2011			December 29, 2010
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	8,730		$	5,796
Trade accounts receivable, net		6,326			6,818
Tenant improvement allowance receivables		8			124
Income tax receivable		387			547
Inventories		5,438			5,972
Prepaid expenses and other current assets		3,849			3,361

Total current assets		24,738			22,618
Property and equipment, net		121,564			129,436
Other assets		7,094			5,760

Total assets	$	153,396		$	157,814

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	16,212		$	15,329
Accrued expenses		24,289			25,381
Deferred income taxes		699			712

Total current liabilities		41,200			41,422
Revolving credit facility		7,000			4,000
Capital lease obligations		3,349			3,307
Deferred income taxes		1,621			1,549
Other long-term liabilities		35,917			37,132

Total liabilities		89,087			87,410
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.001 par value, 100 authorized, no shares issued and outstanding at September 28, 2011 and December 29, 2010		—			—
Common stock, $0.001 par value, 120,000 shares authorized, 14,890 and 14,835 shares issued and outstanding at September 28, 2011 and December 29, 2010, respectively		15			15
Additional paid-in-capital		149,765			149,390
Accumulated other comprehensive income		20			335
Accumulated deficit		(85,491	)		(79,336	)

Total stockholders’ equity		64,309			70,404

Total liabilities and stockholders’ equity	$	153,396		$	157,814

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

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

Condensed Consolidated Statements of Operations—Unaudited

(In thousands, except per share data)


	For the Thirteen Week Period Ended					For the Thirty-Nine Week Period Ended
	September 28, 2011			September 25, 2010		September 28, 2011			September 25, 2010
Revenues	$	81,363		$	84,900	$	254,071		$	259,455
Restaurant operating costs:
Food and beverage		24,011			24,550		75,251			77,230
Labor		28,613			27,779		86,990			85,339
Operating		12,851			13,063		39,342			38,516
Occupancy		8,959			9,723		27,304			28,268

Total restaurant operating costs		74,434			75,115		228,887			229,353
General and administrative expenses		4,792			4,088		16,194			13,819
Restaurant pre-opening costs		245			93		267			1,226
Depreciation and amortization		3,593			3,955		10,718			11,614
Impairment, restructuring and other charges		—			—		2,499			—

Total costs and expenses		83,064			83,251		258,565			256,012

Operating income (loss)		(1,701	)		1,649		(4,494	)		3,443
Interest expense, net		330			430		983			1,236

Income (loss) before income taxes		(2,031	)		1,219		(5,477	)		2,207
Income tax expense		477			183		678			327

Net income (loss)	$	(2,508	)	$	1,036	$	(6,155	)	$	1,880

Basic net income (loss) per share	$	(0.17	)	$	0.07	$	(0.41	)	$	0.13
Diluted net income (loss) per share	$	(0.17	)	$	0.07	$	(0.41	)	$	0.13
Shares used in per share calculations:
Basic		14,870			14,814		14,844			14,802
Diluted		14,870			14,908		14,844			14,922

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

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

Condensed Consolidated Statements of Cash Flows—Unaudited

(In thousands)


	For the Thirty-Nine Week Period Ended
	September 28, 2011			September 25, 2010
Cash flows from operating activities:
Net income (loss)	$	(6,155	)	$	1,880
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		10,718			11,614
Loss on disposition of assets		353			25
Deferred income taxes		(9	)		241
Share-based compensation		382			603
Impairment, restructuring and other charges		2,496			—
Changes in operating assets and liabilities:
Trade accounts receivable, net		483			2,298
Tenant improvement allowance receivables		116			204
Income tax receivable		424			(427	)
Inventories		477			21
Prepaid expenses and other current assets		(491	)		(808	)
Accounts payable		720			(3,492	)
Accrued expenses		(1,303	)		(6,891	)
Other long-term liabilities		(188	)		1,851

Net cash provided by operating activities		8,023			7,119

Cash flows from investing activities:
Purchase of property and equipment		(8,305	)		(9,154	)
Disposition of property and equipment		402			—
Change in other assets		147			(492	)

Net cash used in investing activities		(7,756	)		(9,646	)

Cash flows from financing activities:
Borrowings made on revolving credit facility		61,000			71,500
Payments made on revolving credit facility		(58,000	)		(72,500	)
Net change in capital lease and note payable obligations		77			55
Deemed landlord financing payments		(260	)		(260	)

Net cash provided by (used in) financing activities		2,817			(1,205	)

Effect of exchange rate changes		(150	)		57

Increase (decrease) in cash and cash equivalents		2,934			(3,675	)
Cash and cash equivalents:
Beginning of period		5,796			8,623

End of period	$	8,730		$	4,948

Supplemental Cash Flow Information:
Cash paid for interest	$	334		$	698
Cash paid (received) for income taxes, net of refunds	$	(303	)	$	424
Non-cash financing	$	(1,800	)	$	481

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

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

Notes to Condensed Consolidated Financial Statements—Unaudited

1. The Business and Organization

McCormick & Schmick’s Seafood Restaurants, Inc. (referred to herein as the “Company” or in the first person notations “we,” “us” and “our”) is a leading national seafood restaurant operator in the affordable upscale dining segment and, as of September 28, 2011, operated 92 restaurants including 85 restaurants in 25 states throughout the United States, including one pursuant to a management agreement, and seven restaurants under The Boathouse Restaurant 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 (“GAAP”) 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 GAAP 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 and thirty-nine week period ended September 28, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2011. Certain amounts reported in the previous year have been reclassified to conform to the current year presentation.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions, based upon all known facts and circumstances, that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates. Estimates are used in accounting for, among other things, useful lives for depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, share-based compensation expense, income taxes and commitments and contingencies.

The condensed consolidated balance sheet at December 29, 2010 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP 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 29, 2010.

3. Share-Based Compensation

Share-based compensation expense was $0.1 million and $0.2 million for the thirteen week periods ended September 28, 2011 and September 25, 2010, respectively, and $0.4 million and $0.6 million for the thirty-nine week periods ended September 28, 2011 and September 25, 2010, respectively, which related to employee stock options and restricted stock awards.

4. Comprehensive Income (Loss)

The components of comprehensive income (loss) for the thirteen and thirty-nine week periods ended September 28, 2011 and September 25, 2010 were as follows (in thousands):


	Thirteen week period ended					Thirty-nine week period ended
	September 28, 2011			September 25, 2010		September 28, 2011			September 25, 2010
Net income (loss)	$	(2,508	)	$	1,036	$	(6,155	)	$	1,880
Other comprehensive income (loss) – foreign currency translation		(555	)		138		(315	)		210

Total comprehensive income (loss)	$	(3,063	)	$	1,174	$	(6,470	)	$	2,090

5. Related Party Transactions

The Company leases certain properties from landlords deemed to be related parties of the Company pursuant to Item 404(a) of Regulation S-K, promulgated pursuant to the Securities and Exchange Act of 1934, as amended. Total rent paid to these landlords was $0.1 million and $0.3 million for the thirteen week period ended September 28, 2011 and September 25, 2010, respectively, and $0.3 million and $0.7 million for the thirty-nine week periods ended September 28, 2011 and September 25, 2010, respectively.

6. 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.

The Company’s primary insurer in 2004 has informed the Company it believes the Company has exhausted its insurance coverage with respect to employment 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 accounting for employment related liabilities. The Company has initiated litigation to contest the insurer’s conclusion. If the Company is unsuccessful, and if it is determined that other existing employment claims arose in 2004 and are therefore not covered, the resolution of those claims could negatively affect the Company’s results of operations and financial position. The amount of claims currently in dispute is $2.0 million, which represents costs already incurred by the Company in which we are seeking to recover. The Company has accounted for the litigation with the insurer in accordance with the applicable guidance for accounting for contingencies under GAAP and management has concluded that no liability should be recorded at this time.

7. Net Income (Loss) Per Share

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


	Thirteen week period ended				Thirty-nine week period ended
	September 28, 2011		September 25, 2010		September 28, 2011		September 25, 2010
Shares used for basic net income (loss) per share		14,870		14,814		14,844		14,802
Dilutive effect of stock options and restricted stock		—		94		—		120

Shares used for diluted net income (loss) per share		14,870		14,908		14,844		14,922

Shares not included in dilutive per share calculations because they were antidilutive		467		386		383		284

8. Impairment, Restructuring and Other Charges

A summary of impairment, restructuring and other charges are as follows:


	For the Thirteen Week Period Ended				For the Thirty-Nine Week Period Ended
	September 28, 2011		September 25, 2010		September 28, 2011			September 25, 2010
Impairment	$	—	$	—	$	2,858		$	—
Restructuring and other charges		—		—		(359	)		—

Total		—		—	$	2,499			—

Impairment

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. The Company’s assessment of recoverability of property and equipment is performed on a restaurant-by-restaurant basis. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. In evaluating long-lived restaurant assets for impairment, the Company considers a number of factors including current period cash flows combined with a history of cash flows and an undiscounted cash flow projection associated with the use of the underlying long-lived asset. If the carrying amount of an asset exceeds the 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. Fair value is estimated primarily through the use of a discounted cash flow analysis. Actual results could differ significantly from the Company’s estimates.

The Company’s impairment assessment process requires the use of estimates and assumptions regarding future cash flows, growth rates, operating margins, weighted average cost of capital and other information which are subject to a significant degree of judgment based on experience and knowledge. These estimates can be significantly impacted by changes in the economic environment, real estate market conditions and overall operating performance. Impairment charges could be triggered in the future if expected restaurant performance will not support the net book value of the underlying long-lived assets on a future undiscounted cash flow basis or if management decides to close that location.

During the second quarter of 2011, the Company experienced a triggering event for an impairment evaluation for long-lived assets. The triggering event that resulted in the second quarter impairment evaluation included the continued difficult economic environment which was disproportionately affecting certain restaurants, coupled with the shortfall of anticipated second quarter improvements for those restaurants, which ultimately led to the lowering of future anticipated results for the affected restaurants. The Company recorded an impairment charge of $2.9 million including the impairment of fixtures, equipment and leasehold improvements at three restaurants during the second quarter of 2011. There was no triggering event during the third quarter of 2011.

Restructuring and other charges

During the second quarter of 2011, the Company strategically closed three restaurants. One of the restaurants was owned by the Company and was sold for $0.4 million in cash and a $1.8 million two year note receivable. Two restaurants were operated under lease agreements which were assigned to other parties. The closing of these restaurants resulted in the release of deferred rent credits of $0.8 million associated with these locations, partially offset by costs associated with closing these restaurants and other termination benefits paid to employees. The result was a net credit of $0.4 million for the thirty-nine week period ended September 28, 2011.

9. Revolving Credit Facility

As of September 28, 2011, the outstanding balance on the Company’s revolving credit facility was $7.0 million and the Company had maximum exposure under standby letters of credit of $2.8 million.

On November 1, 2011, the existing revolving credit facility was amended. In conjunction with the amendment, the availability under the facility was reduced from $40.0 million to $25.0 million. The amended facility also makes certain financial covenants less restrictive and redefines “Consolidated EBITDA” for any fiscal period through the first quarter of fiscal year 2012 by adding to that amount certain one-time charges consisting of advisory, legal, bonus and other similar expenses incurred in connection with the unsolicited tender offer, potential sale process and broad evaluation of the Company’s other strategic alternatives of up to $4.0 million.

10. Recent Developments

On April 4, 2011, LSRI Holdings, Inc. (“LSRI Holdings”), a wholly owned subsidiary of Landry’s Restaurants, Inc., which is controlled by Tilman J. Fertitta, announced that it was commencing a tender offer to purchase all of the outstanding shares of common stock, par value $0.001 per share (“Common Shares”) of the Company (other than Common Shares already owned by Mr. Fertitta and his affiliates) at a purchase price of $9.25 per share, net to seller in cash without interest thereon and less any required withholding tax (the “Offer”). On April 20, 2011, the Company’s board of directors unanimously recommended that Company stockholders reject the Offer and not tender their Common Shares in the Offer.

In addition, on April 17, 2011, after careful consideration and consultation with the Company’s financial and legal advisors, the Company’s board of directors, by unanimous vote of the directors authorized the execution of the McCormick & Schmick’s Seafood Restaurants, Inc. Stockholder Rights Plan, dated as of April 18, 2011 between the Company and Computershare Trust Company, N.A., as rights agent (the “Rights Plan”). The Rights Plan requires any party seeking to acquire 15% or more of the outstanding Common Shares of the Company to obtain the approval of the Company’s board of directors or else the rights held by the Company stockholders other than the acquiror become exercisable for Common Shares of the Company, or common stock of the acquiror, at a discounted price that would significantly dilute the acquiror’s position and likely make the acquisition prohibitively expensive. The Rights Plan will terminate automatically on April 18, 2012.

On April 20, 2011, in connection with the Rights Plan, the Board of Directors declared a dividend of one preferred share purchase right (a “Right”) payable on April 28, 2011, for each Common Share, outstanding on April 28, 2011 (the “Record Date”) to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company, following certain triggering events, one one-thousandth of a share of Series A Preferred Stock, par value $0.001 per share (the “Preferred Shares”), of the Company, at a price of $45.00 per one one-thousandth of a Preferred Share represented by a Right, subject to adjustment.

On May 2, 2011, the Company’s board of directors announced that it had determined to engage in a sale process as well as a broad evaluation of the Company’s other strategic alternatives, with the assistance of its financial and legal advisors, to enhance value for all of the Company’s stockholders. In addition, the Company’s board of directors announced that management will continue to refine and execute the Company's previously announced strategic revitalization plan.

On July 15, 2011, the Company entered into a confidentiality and standstill agreement with Landry’s, Inc. (“Landry’s”) pursuant to which Landry’s and certain of its affiliates and other related parties are obligated to, among other things, keep confidential information provided to Landry’s and such related parties by the Company obtained during due diligence to be performed by Landry’s in connection with the Company’s previously announced sales process. The agreement also contains customary standstill provisions that limit or prevent Landry’s and its affiliates and other related parties from acquiring additional shares of the Company’s common stock and taking certain other actions to increase their influence over, or gain control of, the Company. The confidentiality and standstill agreement requires Landry’s to terminate the Offer made by LSRI Holdings, a wholly owned subsidiary of Landry’s. On July 15, 2011, LSRI Holdings announced that it had terminated the Offer.

Since the commencement of the evaluation of strategic alternatives, numerous other confidentiality agreements were entered into with numerous parties, all of which contain terms similar to the agreement with Landry’s.

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 on Form 10-Q. This discussion highlights key information as determined by management, but may not contain all of the information that is important to you. For a more complete understanding, the following should be read in conjunction with the Company’s 2010 Annual Report on Form 10-K, including the audited financial statements therein (and notes to such financial statements) and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in that report.

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements include those regarding anticipated restaurant openings, anticipated costs and sizes of future restaurants, anticipated cost 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. These statements are not guarantees of future performance, and therefore, you should not put undue reliance upon them. Some of the statements that are forward-looking include: our ability to continue to successfully implement our previously announced revitalization program; the impact of our previously announced potential sale process and broad evaluation of other strategic alternatives; our expectations about capital expenditures and business interruptions associated with our revitalization initiatives; our expectations for the effects of that program; our estimates of revenues and of other expenses associated with our operations; our ability to anticipate and respond adequately to changes in guest preference; our ability to respond to increasing competition and to changes in consumer preferences in the restaurant industry; our ability to generate sufficient cash flows and maintain adequate sources of liquidity to finance our ongoing operations and our capital expenditures; our ability to comply with governmental regulations; our ability to absorb increasing labor costs, particularly including but not limited to increasing benefits costs associated with the pending healthcare legislation; our ability to implement our cost control initiatives without adversely impacting either product quality or guest experiences; and our ability to maintain a positive image for our brands. As with any business, there are a large number of factors that can cause us to deviate from our plans or to fall short of our expectations. Of course, our business as a whole is subject to a number of risks, and to the extent we know those risks to be material, we have listed and discussed them in Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q. Please remember also that forward-looking statements are current as of today. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law.

OVERVIEW

Our company was founded in 1972 with our acquisition of Jake’s Famous Crawfish in Portland, Oregon. As of September 28, 2011 we have expanded our restaurant base to 92 restaurants, including one restaurant operated pursuant to a management agreement and seven restaurants operating in Canada under The Boathouse Restaurant name.

We offer our guests a daily-printed menu in most of our locations, with a broad selection of affordable, quality fresh seafood in an upscale environment, serviced by knowledgeable and professional management and staff. Our revenues are generated by sales at our restaurants, including banquets.

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 over 120,000 primary members and over 90,000 secondary members since its inception in 2006, and our online marketing e-mail club database includes over 420,000 members.

We measure performance using key operating indicators such as comparable restaurant sales, food and beverage costs, and restaurant operating expenses, with a focus on labor as a percentage of revenues, and total occupancy costs. We also track trends in average weekly revenues at both the restaurant level and on a consolidated basis as an indicator of our performance. The key financial measure used by management in evaluating our operating results is operating income. Operating income is calculated by deducting restaurant operating costs, general and administrative expenses, restaurant pre-opening costs, depreciation and amortization and other corporate costs from revenues. We monitor general and administrative expenses as a percentage of revenues against budgeted levels. 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.

Our most significant restaurant operating costs are food and beverage costs and labor and related employee benefits. We believe our national and regional presence allow us to achieve better quality and pricing on key products than most of our competitors. We closely monitor food and beverage costs and regularly review our selection of preferred vendors on the basis of several key metrics, including pricing. In addition, because we print our menu daily in most of our locations, 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. Our employee benefits include health insurance, the cost of which continues to increase faster than the general rate of inflation. We monitor this cost and review strategies to effectively control increases, but we are subject to the overall trend of increases in healthcare costs. General and administrative expenses are controlled in absolute amounts and monitored as a percentage of revenues.

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. We evaluate acquisition opportunities as they arise, paying particular attention to how restaurants or restaurant groups would fit with our existing restaurants and our business plan.

STRATEGIC FOCUS AND OPERATING OUTLOOK

Our primary business focus for more than 39 years has been to consistently offer a broad selection of high quality, fresh seafood, which we believe commands strong loyalty from our guests. We have successfully expanded our McCormick & Schmick’s seafood restaurant concept throughout the United States and have competed effectively with both national and regional restaurant chains as well as with local operators.

Our objective is to continue to prudently expand the McCormick & Schmick’s seafood restaurant base in existing and new markets. Earlier in 2011, following a comprehensive review of McCormick & Schmick’s business, the Company announced a strategic revitalization plan that includes a multi-year service, hospitality and portfolio upgrade program designed to increase restaurant revenue and profitability, while also enhancing the overall guest experience. This plan includes initiatives to improve service and hospitality, continue to elevate our culinary program, further advance our private dining program, better align our brand with local market guest preferences, expand our social/digital marketing reach, add strength to the executive team and board of directors and upgrade selected units. The Company expects the plan will improve revenue per location and provide strong returns on invested capital. The Company is also continuing to consider expanding The Boathouse Restaurant concept in Canada, as well as utilizing it as a complementary concept within the United States.

Part of the revitalization program as outlined, is the reinvestment back into certain properties to improve top-line sales and restaurant level margins in those locations. We expect the restaurant designs to blend traditional elements that have been instrumental to our success over the past four decades with more updated features that will better connect with guest preferences.

We have now successfully completed the first six of the seven remodel projects we had planned for 2011 as part of our strategic revitalization project. Based on early sales results at these locations, we are on track for these projects to generate return on investments above the 20% hurdle rate that we previously discussed.

FINANCIAL PERFORMANCE OVERVIEW

The following are highlights of our financial performance for the thirteen week period ended September 28, 2011 compared to the thirteen week period ended September 25, 2010:

•

Revenues of $81.4 million for Q3 2011 down from $84.9 million for Q3 2010

•

Comparable restaurant sales decreased 1.0% from Q3 2010 to Q3 2011

•

Operating loss of $1.7 million for Q3 2011 versus operating income of $1.6 million for Q3 2010

•

Net loss of $2.5 million for Q3 2011 versus net income of $1.0 million for Q3 2010

•

Diluted net loss per share of $0.17 for Q3 2011 versus diluted net income of $0.07 per share for Q3 2010

RECENT DEVELOPMENTS

On April 4, 2011, LSRI Holdings, Inc. (“LSRI Holdings”), a wholly owned subsidiary of Landry’s Restaurants, Inc., which is controlled by Tilman J. Fertitta, announced that it was commencing a tender offer to purchase all of the outstanding shares of our common stock, par value $0.001 per share (“Common Shares”) of our Company (other than Common Shares already owned by Mr. Fertitta and his affiliates) at a purchase price of $9.25 per share, net to seller in cash without interest thereon and less any required withholding tax (the “Offer”). On April 20, 2011, after careful consideration and consultation with our financial and legal advisors, our board of directors unanimously recommended that our stockholders reject the offer and not tender their Common Shares in the Offer because the Offer undervalues our current and future business prospects, is highly conditional, and is not in the best interests of our company or our stockholders.

In addition, on April 17, 2011, after careful consideration and consultation with our financial and legal advisors, our board of directors, by unanimous vote of the directors authorized the execution of the McCormick & Schmick’s Seafood Restaurants, Inc. Stockholder Rights Plan, dated as of April 18, 2011 between the Company and Computershare Trust Company, N.A., as rights agent (the “Rights Plan”). The Rights Plan requires any party seeking to acquire 15% or more of our outstanding Common Shares to obtain the approval of our board of directors or else the rights held by our stockholders other than the acquiror become exercisable for Common Shares, or common stock of the acquiror, at a discounted price that would significantly dilute the acquiror’s position and likely make the acquisition prohibitively expensive. The Rights Plan will terminate automatically on April 18, 2012.

On April 20, 2011, in connection with the Rights Plan, our Board of Directors declared a dividend of one preferred share purchase right (a “Right”) payable on April 28, 2011, for each outstanding Common Share, outstanding on April 28, 2011 (the “Record Date”) to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company, following certain triggering events, one one-thousandth of a share of Series A Preferred Stock, par value $0.001 per share (the “Preferred Shares”), of the Company, at a price of $45.00 per one one-thousandth of a Preferred Share represented by a Right, subject to adjustment.

On May 2, 2011, our board of directors announced that it had determined to engage in a sale process as well as a broad evaluation of our other strategic alternatives, with the assistance of its financial and legal advisors, to enhance value for all our stockholders. In addition, our board of directors announced that management will continue to refine and execute our previously announced strategic revitalization plan. There can be no assurance that the sale process, or the evaluation of other strategic alternatives, will result in any transaction or otherwise modify or replace our current strategic plan.

On July 15, 2011, we entered into a confidentiality and standstill agreement with Landry’s, Inc. (“Landry’s”) pursuant to which Landry’s and certain of its affiliates and other related parties are obligated to, among other things, keep confidential information provided to Landry’s and such related parties by us obtained during due diligence to be performed by Landry’s in connection with our previously announced sales process. The agreement also contains customary standstill provisions that limit or prevent Landry’s and its affiliates and other related parties from acquiring additional shares of our company’s common stock and taking certain other actions to increase their influence over, or gain control of, our company. The confidentiality and standstill agreement requires Landry’s to terminate the Offer made by LSRI Holdings, a wholly owned subsidiary of Landry’s. On July 15, 2011, LSRI Holdings announced that it had terminated the Offer.

Since the commencement of the evaluation of strategic alternatives, numerous other confidentiality agreements have been entered into with numerous parties, all of which contain terms similar to the agreement with Landry’s.

RESULTS OF OPERATIONS: Thirteen week period ended September 28, 2011 compared to thirteen week period ended September 25, 2010


	Thirteen week period ended⁽¹⁾
	September 28, 2011						September 25, 2010
(Dollars in thousands)	Dollars			% of revenues			Dollars		% of revenues
Revenues	$	81,363			100.0	%	$	84,900		100.0	%
Restaurant operating costs:
Food and beverage		24,011			29.5			24,550		28.9
Labor		28,613			35.2			27,779		32.7
Operating		12,851			15.8			13,063		15.4
Occupancy		8,959			11.0			9,723		11.5

Total restaurant operating costs		74,434			91.5			75,115		88.5
General and administrative expenses		4,792			5.9			4,088		4.8
Restaurant pre-opening costs		245			0.3			93		0.1
Depreciation and amortization		3,593			4.4			3,955		4.7

Total costs and expenses		83,064			102.1			83,251		98.1

Operating income (loss)		(1,701	)		(2.1	)		1,649		1.9
Interest expense, net		330			0.4			430		0.5

Income (loss) before income tax expense		(2,031	)		(2.5	)		1,219		1.4
Income tax expense		477			0.6			183		0.2

Net income (loss)	$	(2,508	)		(3.1	)%	$	1,036		1.2	%

(1)	Percentages may not add due to rounding.

Revenues and Restaurant Operating Costs


	Thirteen Week Period Ended				Dollar Change			% Change
(Dollars in thousands)	September 28, 2011		September 25, 2010		Dollar Change			% Change
Revenues	$	81,363	$	84,900	$	(3,537	)		(4.2	)%
Restaurant operating costs:
Food and beverage	$	24,011	$	24,550	$	(539	)		(2.2	)%
Labor		28,613		27,779		834			3.0	%
Operating		12,851		13,063		(212	)		(1.6	)%
Occupancy		8,959		9,723		(764	)		(7.9	)%

Total restaurant operating costs	$	74,434	$	75,115	$	(681	)		(0.9	)%


	Thirteen Week Period Ended
	September 28, 2011		September 25, 2010
Store operating weeks		1,170		1,235
Number of company owned restaurants at the end of the period		91		95

Revenues

Our revenues are derived primarily from food and beverage sales.

Revenues decreased $3.5 million, or 4.2% to $81.4 million in the thirteen week period ended September 28, 2011, compared to $84.9 million in the comparable period of 2010. The decrease in revenues was primarily attributable to a 1.0% decrease in comparable restaurant sales and a decrease in store operating weeks due to four fewer restaurants in operation compared to the same period of 2010.

Income from gift card breakage was $0.1 million for the thirteen week period ended September 28, 2011 and $0.3 million in the comparable period of 2010.

Food and Beverage Costs

Food and beverage costs include the cost of all food and beverage utilized in our restaurant operations.

Food and beverage costs decreased $0.5 million or 2.2%, to $24.0 million in the thirteen week period ended September 28, 2011, compared to $24.6 million in the comparable period of 2010. The decrease in food and beverage costs was primarily due to lower restaurant sales. The increase in food and beverage costs as a percentage of revenues was primarily due to the impact of higher commodity costs.

Labor Costs

Labor costs include salaries and wages and related payroll costs for employees engaged in the direct operations of the restaurants.

Labor costs increased $0.8 million or 3.0%, to $28.6 million in the thirteen week period ended September 28, 2011, compared to $27.8 million in the comparable period of 2010. The increase in labor costs in dollars and as a percentage of revenue was primarily related to compensation related adjustments in the prior year and the investment in our service and hospitality initiative during the thirteen week period ended September 28, 2011 compared to the same period of 2010.

Operating Costs

Operating costs consist primarily of various restaurant-level costs such as repairs and maintenance, janitorial, utilities, business taxes, marketing and advertising, certain of which are variable and may fluctuate with revenues. Also, expenditures associated with marketing programs are discretionary in nature and the timing and amount of marketing expenses will vary.

Operating costs decreased $0.2 million or 1.6%, to $12.9 million in the thirteen week period ended September 28, 2011, compared to $13.1 million in the comparable period of 2010. The decrease in operating costs primarily relates to a decrease in marketing related expenses.

Occupancy Costs

Occupancy costs include both fixed and variable portions of rent, common area maintenance charges and property taxes.

Occupancy costs decreased $0.8 million or 7.9%, to $9.0 million in the thirteen week period ended September 28, 2011, compared to $9.7 million in the comparable period of 2010. The decrease in occupancy costs primarily relates to four fewer units in operation compared to the same period of 2010, a decrease in percentage rent due a decline in revenue and a decrease in deferred rent expense due to previously impaired restaurants.

General and Administrative Expenses, Restaurant Pre-Opening Costs and Depreciation and Amortization


	Thirteen Week Period Ended				Dollar Change			% Change
(Dollars in thousands)	September 28, 2011		September 25, 2010		Dollar Change			% Change
General and administrative expenses	$	4,792	$	4,088	$	704			17.2	%
Restaurant pre-opening costs		245		93		152			*
Depreciation and amortization		3,593		3,955		(362	)		(9.2	)%

*	Not meaningful

General and Administrative Expenses

General and administrative expenses consist of expenses associated with corporate administrative functions that support development and restaurant operations including management and staff compensation, employee benefits, travel, legal fees, professional fees and technology expense.

General and administrative expenses increased $0.7 million or 17.2%, to $4.8 million in the thirteen week period ended September 28, 2011, compared to $4.1 million in the comparable period of 2010. The increase in general and administrative expenses is primarily due to $0.8 million incurred related to the unsolicited tender offer, potential sale process and broad evaluation of the Company's other strategic alternatives.

Restaurant Pre-Opening Costs

Restaurant pre-opening costs, which are expensed as incurred, consist of costs incurred prior to opening a new restaurant or re-opening an existing restaurant and are comprised principally of manager salaries, relocation, employee payroll and related training costs for new employees, including practice and rehearsal of service activities and local marketing costs. Restaurant pre-opening costs also include rent expense during the construction period.

We incurred $0.2 million in restaurant pre-opening costs for the thirteen week period ended September 28, 2011 related to re-opening of remodeled restaurants and incurred $0.1 million in the comparable period of 2010.

Depreciation and Amortization

Depreciation and amortization expenses include the depreciation of fixed assets and the amortization of intangible and other assets.

Depreciation and amortization decreased $0.4 million or 9.2%, to $3.6 million in the thirteen week period ended September 28, 2011, compared to $4.0 million in the comparable period of 2010. The decrease in depreciation and amortization was primarily due to the reduction of expense attributable to assets impaired in fiscal 2010 and 2011.

Operating Income (Loss), Interest Expense, Net, Income Tax Expense and Net Income (Loss)


	Thirteen week period ended					Dollar Change			% Change
(Dollars in thousands)	September 28, 2011			September 25, 2010		Dollar Change			% Change
Operating income (loss)		(1,701	)		1,649		(3,350	)		*
Interest expense, net		330			430		(100	)		(23.3	)%
Income tax expense		477			183		294			*
Net income (loss)		(2,508	)		1,036		(3,544	)		*

*	Not meaningful

Operating Income (Loss)

Operating income (loss) decreased by $3.4 million to an operating loss of $1.7 million in the thirteen week period ended September 28, 2011, compared to an operating income of $1.6 million in the comparable period of 2010. The decrease was primarily related to a decline in revenue, higher labor costs and costs incurred related to the unsolicited tender offer, potential sale process and broad evaluation of the Company’s other strategic alternatives.

Interest Expense, Net

Interest expense, net, was $0.3 million for the thirteen week period ended September 28, 2011, compared to $0.4 million in the comparable period of 2010. The decrease is primarily attributed to a decline in the balance of our revolving credit facility compared to the same period of 2010.

Income Tax Expense

Income tax was an expense in the thirteen week period ended September 28, 2011, with an effective tax rate of 23.5%, compared to 15.0% in the comparable period of 2010. The effective tax rate in fiscal 2011 is expected to be affected by the release of a portion of the valuation allowance against deferred tax assets as we project modest taxable income for the fiscal year in certain tax jurisdictions.

Net Income (Loss)

Net income (loss) decreased by $3.5 million to a net loss of $2.5 million in the thirteen week period ended September 28, 2011, compared to a net income of $1.0 million in the comparable period of 2010 primarily due to a decline in revenue, higher labor costs and costs incurred related to the unsolicited tender offer, potential sale process and broad evaluation of the Company’s other strategic alternatives.

Thirty-nine week Period Ended September 28, 2011 Compared to Thirty-nine week Period Ended September 25, 2010

The following are results of our financial performance for the thirty-nine week period ended September 28, 2011 compared to the thirty-nine week period ended September 25, 2010:

•

Revenues of $254.1 million versus $259.5 million

•

Comparable restaurant sales decreased 2.3% from the same period last year

•

Operating loss of $4.5 million versus operating income of $3.4 million

•

Net loss of $6.2 million versus $1.9 million net income

•

Diluted net loss per share of $0.41 per share versus diluted net income of $0.13 per share


	Thirty-nine week period ended⁽¹⁾
	September 28, 2011						September 25, 2010
(dollars in thousands)	Dollars			% of revenues			Dollars		% of revenues
Revenues	$	254,071			100.0	%	$	259,455		100.0	%
Restaurant operating costs:
Food and beverage		75,251			29.6			77,230		29.8
Labor		86,990			34.2			85,339		32.9
Operating		39,342			15.5			38,516		14.8
Occupancy		27,304			10.7			28,268		10.9

Total restaurant operating costs		228,887			90.1			229,353		88.4
General and administrative expenses		16,194			6.4			13,819		5.3
Restaurant pre-opening costs		267			0.1			1,226		0.5
Depreciation and amortization		10,718			4.2			11,614		4.5
Impairment, restructuring and other charges		2,499			1.0			—		—

Total costs and expenses		258,565			101.8			256,012		98.7

Operating income (loss)		(4,494	)		(1.8	)		3,443		1.3
Interest expense, net		983			0.4			1,236		0.5

Income (loss) before income taxes		(5,477	)		(2.2	)		2,207		0.9
Income tax expense		678			0.3			327		0.1

Net income (loss)	$	(6,155	)		(2.4	)%	$	1,880		0.7	%

(1)	Percentages may not add due to rounding.

Revenues and Restaurant Operating Costs


	Thirty-nine week period ended				Dollar Change			% Change
(dollars in thousands)	September 28, 2011		September 25, 2010		Dollar Change			% Change
Revenues	$	254,071	$	259,455	$	(5,384	)		(2.1	)%
Restaurant operating costs:
Food and beverage	$	75,251	$	77,230	$	(1,979	)		(2.6	)%
Labor		86,990		85,339		1,651			1.9	%
Operating		39,342		38,516		826			2.1	%
Occupancy		27,304		28,268		(964	)		(3.4	)%

Total restaurant operating costs	$	228,887	$	229,353	$	(466	)		(0.2	)%


	Thirty-nine week period ended
	September 28, 2011		September 25, 2010
Store operating weeks		3,620		3,653
Number of company owned restaurants at the end of the period		91		95

Revenues

Revenues decreased $5.4 million, or 2.1%, to $254.1 million in the thirty-nine week period ended September 28, 2011, compared to $259.5 million in the comparable period of 2010. The decrease in revenues was primarily attributable to a 2.3% decrease in comparable restaurant sales and a decrease in store operating weeks due to fewer restaurants in operation compared to the same period of 2010.

Income from gift card breakage was $0.3 million for the thirty-nine week period ended September 28, 2011 and in the comparable period of 2010.

Food and Beverage Costs

Food and beverage costs decreased $2.0 million, or 2.6%, to $75.3 million in the thirty-nine week period ended September 28, 2011, compared to $77.2 million in the comparable period of 2010. The decrease in food and beverage costs was primarily due to lower restaurant sales. The decrease in food and beverage costs as a percentage of revenues was primarily due to proactive management of these costs despite an increase in commodity costs.

Labor Costs

Labor costs increased $1.7 million, or 1.9%, to $87.0 million in the thirty-nine week period ended September 28, 2011, compared to $85.3 million in the comparable period of 2010. The increase in labor costs was primarily related to our new restaurants, net of closed restaurants and as a result of the investment in our service and hospitality initiative during the thirty-nine week period ending September 28, 2011 compared to the comparable period of 2010.

Operating Costs

Operating costs increased $0.8 million, or 2.1%, to $39.3 million in the thirty-nine week period ended September 28, 2011, compared to $38.5 million in the comparable period of 2010. The increase in operating costs primarily relates to an increase in marketing, utilities and supplies expense during the thirty-nine week period ending September 28, 2011 compared to the comparable period of 2010.

Occupancy Costs

Occupancy costs decreased $1.0 million, or 3.4%, to $27.3 million in the thirty-nine week period ended September 28, 2011, compared to $28.3 million in the comparable period of 2010. The decrease in occupancy costs primarily relates to fewer units in operation compared to the same period of 2010, a decrease in percentage rent due a decline in revenue and a decrease in deferred rent expense due to previously impaired restaurants.

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


	Thirty-nine week Period ended				Dollar Change			% Change
(dollars in thousands)	September 28, 2011		September 25, 2010		Dollar Change			% Change
General and administrative expenses	$	16,194	$	13,819	$	2,375			17.2	%
Restaurant pre-opening costs		267		1,226		(959	)		*
Depreciation and amortization		10,718		11,614		(896	)		(7.7	)%
Impairment, restructuring and other charges		2,499		—		2,499			*

*	Not meaningful

General and Administrative Expenses

General and administrative expenses increased $2.4 million, or 17.2 %, to $16.2 million in the thirty-nine week period ended September 28, 2011, compared to $13.8 million in the comparable period of 2010. The increase in general and administrative expenses is primarily due to $2.6 million incurred related to the unsolicited tender offer, potential sale process and broad evaluation of the Company’s other strategic alternatives.

Restaurant Pre-Opening Costs

We incurred $0.3 million of restaurant pre-opening costs in the thirty-nine week period ended September 28, 2011 related to the re-opening of remodeled restaurants, compared to $1.2 million in the comparable period of 2010 related to the opening of three new restaurants.

Depreciation and Amortization

Depreciation and amortization decreased $0.9 million, or 7.7%, to $10.7 million in the thirty-nine week period ended September 28, 2011, compared to $11.6 million in the comparable period of 2010. The decrease in depreciation and amortization was primarily due to the reduction of expense attributable to assets written down in fiscal 2010 and 2011.

Impairment, Restructuring and Other Charges

Impairment, restructuring and other charges of $2.5 million in the thirty-nine week period ended September 28, 2011 primarily related to a $2.9 million impairment charge of fixtures, equipment and leasehold improvements at three restaurants.

Operating Income (Loss), Interest Expense, Net, Income Tax Expense and Net Income (Loss)


	Thirty-nine week period ended					Dollar Change			% Change
(dollars in thousands)	September 28, 2011			September 25, 2010		Dollar Change			% Change
Operating income (loss)	$	(4,494	)	$	3,443	$	(7,937	)		*
Interest expense, net		983			1,236		(253	)		(20.5	%)
Income tax expense		678			327		351			*
Net income (loss)		(6,155	)		1,880		(8,035	)		*

*	Not meaningful

Operating Income (Loss)

Operating income (loss) decreased by $7.9 million to an operating loss of $4.5 million in the thirty-nine week period ended September 28, 2011, compared to operating income of $3.4 million in the comparable period of 2010. The decrease was primarily related to a decline in revenue, high labor and operating costs, impairment charges and costs incurred related to the unsolicited tender offer, potential sale process and broad evaluation of the Company’s other strategic alternatives.

Interest Expense, Net

Interest expense, net, was $1.0 million for the thirty-nine week period ended September 28, 2011, compared to $1.2 million in the comparable period of 2010. The decrease is primarily attributed to a decline in the balance of our revolving credit facility.

Income Tax Expense

Income tax was an expense in the first thirty-nine weeks of fiscal 2011 with an effective tax rate of 12.4%, compared to 14.8% in the comparable period of 2010. The effective tax rate in fiscal 2011 is expected to be affected by the release of a portion of the valuation allowance against deferred tax assets as we project modest taxable income for the fiscal year in certain tax jurisdictions.

Net Income (Loss)

Net income (loss) decreased by $8.0 million to a net loss of $6.2 million in the thirty-nine week period ended September 28, 2011, compared to net income of $1.9 million in the comparable period of 2010. The decrease is primarily due to a decline in revenue, higher labor and operating costs, impairment charges and costs incurred related to the unsolicited tender offer, potential sale process and broad evaluation of the Company’s other strategic alternatives.

LIQUIDITY AND CAPITAL RESOURCES

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


	Thirty-nine week Period Ended
(Dollars in thousands)	September 28, 2011			September 25, 2010
Net cash provided by operating activities	$	8,023		$	7,119
Net cash used in investing activities		(7,756	)		(9,646	)
Net cash provided by (used in) financing activities		2,817			(1,205	)
Effect of exchange rate changes on cash and cash equivalents		(150	)		57

Net increase (decrease) in cash and cash equivalents	$	2,934		$	(3,675	)

For much of our history, we have successfully operated with a negative working capital balance. Our operations have not required significant working capital and, like many restaurant companies, we have been able to operate with negative working capital because we are able to sell many of our food inventory items before payment is due to our suppliers. Credit card receivables, our primary type of receivable, are collected within a few business days of a guest’s payment by credit card. We have operated successfully with levels of working capital deficit similar to the deficit as of September 28, 2011 as this level does not fluctuate greatly from year to year. For the reasons stated above, we believe this is the appropriate level to support our operations. Funds available from revenues not needed immediately for working capital purposes historically have been used for capital expenditures or to repay debt.

We had a working capital deficit of $16.5 million at September 28, 2011, compared to $18.8 million at December 29, 2010 and our current ratio was 0.60 at September 28, 2011, compared to 0.55 at December 29, 2010. We utilize our credit facility to cover working capital shortfalls by drawing on our facility daily as needed and then repaying promptly as funds become available.

We are engaged in a number of ongoing initiatives to enhance our facilities, including the previously announced revitalization plan and we regularly invest in our information technology systems to support future growth and development of our restaurant operations. From time to time we also evaluate programs that, if adopted, would require us to make additional capital expenditures, some of which may be material. Capital expenditures would be managed to balance liquidity and working capital needs with any extraordinary expenses and capital expenditures, taking into account any additional resources such as borrowings under existing or future credit arrangements. Capital expenditures for 2011 are expected to be between $12 million and $14 million.

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, our revitalization plan and pre-opening costs and potential initial operating losses related to new restaurant openings, for at least the next 12 month period. However, circumstances could change, perhaps significantly, if the economy does not improve or worsens. In addition, our revitalization plan will require the temporary closure of individual restaurants, which will eliminate revenues for the affected sites for a period of time. If one or more site closures are longer than expected, our revenues and cash flow from operations for such sites are likely to fall short of our expectations for those sites.

Cash Flow from Operating Activities

Net cash provided by operating activities was $8.0 million in the thirty-nine week period ended September 28, 2011, compared to net cash provided by operating activities of $7.1 million in the thirty-nine week period ended September 25, 2010. The increase in cash provided by operating activities primarily relates to the timing of payroll payments offset by a decrease in net income compared to the same period in the prior year. Guests pay for food and beverage purchases at the time of sale in cash or by credit card, which are converted to cash within a few business days. Our primary uses of cash are for inventory purchases, labor and occupancy which closely approximate the cash basis of accounting as these items are settled in cash within a short period of time.

Cash Flow from Investing Activities

Net cash used in investing activities in the thirty-nine week period ended September 28, 2011 was $7.8 million and consisted of capital expenditures. Cash was used primarily for equipment purchases and to upgrade existing restaurants.

Cash Flow from Financing Activities

Net cash provided by financing activities was $2.8 million in the thirty-nine week period ended September 28, 2011 and consisted primarily of net borrowings on our revolving credit facility. We utilize our revolving credit facility to fund capital expenditures as well as fund our ongoing operations.

As of September 28, 2011, the outstanding balance on our revolving credit facility was $7.0 million at an effective interest rate of 3.7% and we had maximum exposure under standby letters of credit of $2.8 million. As of September 28, 2011, there was $33.0 million available for future borrowings under the credit facility. Under the revolving credit facility agreement, we are subject to certain financial covenants. We were in compliance with these covenants as of September 28, 2011.

On November 1, 2011, our existing revolving credit facility was amended. In conjunction with the amendment, the availability under the facility was reduced from $40.0 million to $25.0 million. The amended facility also makes certain financial covenants less restrictive and redefines “Consolidated EBITDA” for any fiscal period through the first quarter of fiscal year 2012 by adding to that amount certain one-time charges consisting of advisory, legal, bonus and other similar expenses incurred in connection with the unsolicited tender offer, potential sale process and broad evaluation of the Company's other strategic alternatives of up to $4.0 million.

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 September 28, 2011 we had not repurchased any shares.

SEASONALITY

Our business is subject to seasonal fluctuations. Historically, sales are highest in the fourth quarter. Holidays, changes in the economy, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

We reaffirm the critical accounting policies and estimates as reported in the management’s discussion and analysis of financial condition and results of operations in Form 10-K for the year ended December 29, 2010.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We reaffirm the significant accounting policies in our notes to consolidated financial statements reported in Form 10-K for the year ended December 29, 2010.

RECENT ACCOUNTING PRONOUNCEMENTS

There are no recent accounting pronouncements that we believe will have a material effect on our results of operations, cash flows or financial position.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks since the filing of our Form 10-K (Item 7A) for the year ended December 29, 2010.

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 and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rules 13a-15(e) and 15-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of September 28, 2011.

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. We are currently a defendant in several disputes that may be litigated in court. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on our financial position, results of operations or cash flows.

Our primary insurer in 2004 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 2008, we initiated litigation to contest the insurer's conclusion. The amount of claims currently in dispute with our insurer is $2.0 million which represents costs we already incurred in which we are seeking to recover. We have accounted for the litigation with our insurer in accordance with the applicable guidance for accounting for contingencies under GAAP and determined that no liability should be recorded at this time.

Item 1A.

Risk Factors

Financial and Operational Risk Factors

We face risks and uncertainties associated with our previously announced sale process and exploration of strategic alternatives.

In response to an unsolicited tender offer for our common stock, which was announced in March 2011 and withdrawn in July 2011, we announced on May 2, 2011 that we intended to engage in a process to solicit interested buyers for the Company and to engage in a broad evaluation of the Company's strategic alternatives. This process may create instability in our relationships with key employees and vendors and may create concerns or negative impressions among our customers and prospective customers.

The process also has resulted, and we expect that it may continue to result, in our incurring substantial expenses. Since the announcement of the Landry’s tender offer on April 4, 2011, we have incurred fees and expenses of $2.6 million directly related to our response to the Landry’s offer and the ongoing exploration of our strategic alternatives. We expect that these costs will continue, albeit potentially at a reduced level, through the remainder of 2011, thus reducing the capital resources we might otherwise dedicate to the ongoing operation of our business.

Moreover, the sale process and exploration of strategic alternatives imposes significant demands upon our management resources, which among other things may distract our executives and our board of directors from devoting an optimum amount of time, attention and resources to our ongoing business operations.

Further, the process may not result in offers to consummate the sale of the Company on terms acceptable to our board of directors, or at all, and any resulting abandonment of the sale process may result in further volatility in our stock price. Moreover, should the sale process result in an acquisition, the terms of such a transaction may trigger litigation or may include a price lower than our stockholders might anticipate or desire.

These factors, alone or in combination with other circumstances and events, may have a material adverse effect upon our business, results of operations and financial condition.

Our operating results may fluctuate significantly. The failure of our existing or new restaurants to achieve expected results could have a negative impact on our revenues and financial results, including potential impairment of long-lived assets. Our results could fall below the expectations of securities analysts and investors due to seasonality and other factors, resulting in a decline in our stock price.

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

•

Our ability to implement our previously announced revitalization plan;

•

Our ability to achieve market acceptance, particularly in new markets;

•

Our ability to raise capital, or the availability of expansion capital generally;

•

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 our restaurants;

•

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;

•

The effect of widespread adverse weather conditions;

•

Economic trends generally;

•

The ability of real estate developers, landlords and co-tenants, to meet commitments to fill space in developments where our restaurants are to be located, which would decrease guest traffic to our restaurants; and

•

Reduced corporate expenditures on meetings and/or conventions may impact our private dining business.

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.

The terms of our revolving credit facility impose financial restrictions that may be affected as we respond to changing business and economic conditions.

We and our subsidiaries have agreed to a negative pledge on assets, with certain customary exceptions, and the credit facility places certain restrictions on our activities, including financial covenants and restrictions on certain payments to related parties and on capital expenditures. Our ability to comply with these provisions may be affected by events outside of our control. A breach of any of these provisions or our inability to comply with required financial ratios could result in a default under the credit facility. If that were to occur, the lenders have the right to declare all borrowings to be immediately due and payable.

We have adopted a Stockholder Rights Plan, which may have a negative effect on the price of our common stock.

On April 20, 2011, in response to the unsolicited acquisition proposal announced by Landry’s Seafood Restaurants, Inc., our board of directors adopted a Stockholder Rights Plan which is designed to afford our board of directors an adequate opportunity to examine our various strategic alternatives and, if appropriate, to locate a suitable buyer on terms that are fair to and in the best interests of our stockholders. It is possible that this plan could discourage potential acquisition proposals and could delay or prevent a change in control of our company even under circumstances that some stockholders might otherwise find attractive. Further, the adoption or maintenance of this plan may subject us to increased litigation risk in connection with our exploration of alternatives or otherwise.

Failure to establish, maintain and apply adequate internal control over our financial reporting could affect our reported results of operations.

We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. These provisions provide for the identification of material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. If we experience a material weakness in internal controls, there can be no assurance that we will be able to remediate that material weakness in a timely manner or maintain all of the controls necessary to remain in compliance which may impact our ability to detect and prevent fraud. Any failure to maintain an effective system of internal controls over financial reporting could limit the ability to report our financial results accurately and timely which could affect our reported results of operations.

Macro Economic Risk Factors

The global economic crisis adversely impacted our business and financial results during recent years. Challenging economic factors such as a decline in business travelers, changes in consumer preferences spending, labor shortages or increases in labor costs and increases in food costs could adversely affect our business.

The restaurant industry is being adversely affected by economic factors, including changes in national, regional, and local economic conditions, employment levels and consumer spending patterns. The 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.

We depend on both local residents and business travelers to frequent our locations. If the number of visitors who frequent our locations 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.

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 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. 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.

Our profitability depends significantly on our ability to anticipate and react to changes in food costs. We rely on local, regional and national suppliers to provide our seafood, produce, beef and other ingredients. 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.

Adverse weather conditions could unfavorably affect our restaurant sales.

Many of our restaurants are located in regions that may be susceptible to severe weather conditions. Adverse weather conditions can impact guest traffic at our restaurants, cause the temporary underutilization of outdoor patio seating, and cause temporary closures, sometimes for prolonged periods.

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 September 28, 2011, we operated five restaurants in the Seattle, Washington area, six in the Portland, Oregon area, 14 in California, and seven in the greater Vancouver, British Columbia area; our East Coast restaurants are concentrated in and around Washington, D.C. and Baltimore. 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 or events outside of our control regarding any of our restaurants in these areas could have a material adverse effect on our business and operations.

Growth Risk Factors

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.

Our failure to drive sufficient profitable sales growth through brand relevance, operating excellence, opening new restaurants, successfully refining existing restaurants and developing or acquiring new restaurants could adversely affect our results of operations.

As part of our business strategy, we intend to drive profitable sales growth by increasing same-restaurant sales at existing restaurants, continuing to expand our current portfolio of restaurant brands, and developing or acquiring additional brands that can be expanded profitably. This strategy involves numerous risks, and we may not be able to achieve our growth objectives. We may not be able to maintain brand relevance and restaurant operating excellence at existing brands to achieve sustainable same-restaurant sales growth and warrant new unit growth. In addition, we may not be able to open all of our planned new restaurants, and the new restaurants that we open may not be profitable or as profitable as our existing restaurants. New restaurants typically experience an adjustment period before sales levels and operating margins normalize, and even sales at successful newly-opened restaurants generally do not make a significant contribution to profitability in their initial months of operation. The opening of new restaurants can also have an adverse effect on sales levels at existing restaurants. Furthermore, we may not be able to develop or acquire additional brands that are as profitable as our existing restaurants.

Our business may suffer if we do not successfully, timely and economically implement our revitalization plan.

In early 2011, following a comprehensive review of McCormick & Schmick’s business, the Company announced a strategic revitalization plan that includes a multi-year service, hospitality and portfolio upgrade program designed to increase restaurant revenue and profitability, while also enhancing the overall guest experience. This plan includes initiatives to improve service and hospitality, continue to elevate our culinary program, further advance our private dining program, better align our brand with local market guest preferences, expand our social/digital marketing reach, add strength to the executive team and board of directors and upgrade selected units. The Company expects the plan will improve revenue per location and provide strong returns on invested capital. The Company is also continuing to consider expanding The Boathouse Restaurant concept in Canada, as well as utilizing it as a complementary concept within the United States. If we fail to implement this program effectively, we may be unable to strengthen our customer base (which would represent a failure to reap the intended results of our investments) or we may alienate a significant portion of our existing customer base (which would harm our revenues).

Moreover, we have budgeted significant capital expenditures toward enhancing our restaurant portfolio. A significant majority of those investments are targeting upgrades to individual properties based upon a variety of factors, with a goal of enhancing the dining experience, growing our customer base and traffic counts, and improving per-site revenues. Some of these projects will require the temporary closure of individual restaurants, which will eliminate revenues for the affected sites for a period of time. If one or more site closures are longer than expected, our revenues for such sites are likely to fall short of our expectations for those sites. Any of these potential outcomes, alone or in combination, may materially and adversely affect our financial condition, results of operations or cash flows.

Operational Risk Factors

We rely on information technology in our operations, and any material failure, inadequacy or interruption could harm our ability to effectively operate our business.

We rely on information systems across our operations, including for management of our supply chain, point-of-sale processing system in our restaurants, and various other processes and transactions. Our ability to effectively manage our business and coordinate the production, distribution and sale of our products depends on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could cause delays in customer service and reduce efficiency in our operations, and significant capital investments could be required to remediate the problem.

A failure to develop and recruit effective leaders or the loss of key personnel could harm our ability to effectively operate our business.

Our future growth depends substantially on the contributions and abilities of key executives and other employees. Our future growth also depends substantially on our ability to recruit and retain high-quality employees to work in and manage our restaurants. We must continue to recruit, retain and motivate management and other employees in order to maintain our current business and support our projected growth. A failure to maintain leadership excellence and build adequate bench strength, a loss of key employees or a significant shortage of high-quality restaurant employees could jeopardize our ability to meet our growth targets.

We occupy most of our restaurants under long-term non-cancelable leases which may limit our flexibility as economic conditions change.

Most of our restaurants are located in leased premises with long-term non-cancelable leases. If we close restaurants, we may be obligated to continue making rental payments or make a lump-sum payment to exit the lease, which could have a material adverse effect on our business

and results of operations. Alternatively, at the end of the lease term and any renewal period for a restaurant, we may be unable to renew the lease without substantial additional cost, if at all. If we are unable to renew our restaurant leases, we would have to close or relocate a restaurant, which could subject us to construction and other costs and risks, and could have a material adverse effect on our business and results of operations.

Legal, Regulatory and Health Risk Factors

Restaurant companies have been the target of class-actions and other lawsuits alleging, among other things, violation of federal and state law. Litigation could have a material adverse effect on our business.

We are subject to a variety of claims arising in the ordinary course of our business brought by or on behalf of our guests 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. In 2007, we incurred a $2.2 million charge for a class action legal settlement relating to an employment claim. Regardless of whether any claims against us are valid or whether we are ultimately determined to be liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment significantly in excess of our insurance coverage for any claims could materially adversely affect our financial condition or results of operations, and adverse publicity resulting from these allegations may materially adversely affect our business. We may incur substantial damages and expenses resulting from lawsuits, which could have a material adverse effect on our business.

Our 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 in 2004 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. We may not succeed in our contest of our insurer's conclusion. If we are unsuccessful, and if it is determined that other existing employment claims arose in 2004 and are therefore not covered, our resolution of those claims would be more expensive.

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.

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 would increase our labor costs and could harm our operating results and financial condition. We may be unable to increase our prices in order to pass these increased labor costs on to our guests, in which case our margins would be negatively affected. Because our labor costs are, as a percentage of revenues, higher than other industries, we may be significantly harmed by labor cost increases.

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.

We may become subject to litigation relating to our adoption of a stockholder rights plan.

On April 18, 2011, our board of directors unanimously adopted a Stockholders Rights Plan dated April 18, 2011, between our Company and Computershare Trust Company, N.A., as rights agent (the “Rights Plan”) in order to restrict the accumulation in excess of 15% of our common stock by a stockholder whose interest may not be aligned with the best interest of our other stockholders. The Rights Plan requires any party seeking to acquire 15% or more of our outstanding common stock to obtain the approval of our board of directors or else the rights held by stockholders other than the acquiror become exercisable for common stock, or common stock of the acquiror, at a discounted price that would significantly dilute the acquiror’s position and likely make the acquisition prohibitively expensive. The Rights Plan terminates on April 18, 2012, and has been tailored in a manner that our board of directors believes appropriately protects stockholders by providing the board of directors leverage to resist disadvantageous acquisition proposals and to oversee an orderly sale process and broad evaluation of strategic alternatives, while at the same time avoiding excessive anti-takeover protections that ultimately may adversely impact stockholder value. However, there can be no assurance that the adoption of the Rights Plan will not result in litigation against us.

Before noon on April 4, 2011, the day that LSRI Holdings announced that it was commencing a tender offer, no fewer than three self-described “stockholder rights” law firms had announced “investigations” into our board of directors’ response to the proposed tender offer. In a number of analogous situations in the past, stockholders represented by such firms have brought lawsuits against companies and boards of directors, often claiming that a defendant or group of defendants should have acted in a manner differently than they actually acted, and that in so doing, they breached some duty that resulted in harm to the stockholders. Our Company’s board of directors believes that it has behaved properly and that it has relied appropriately upon the advice of legal counsel, financial advisors and other professionals in responding to the tender offer, and it would expect to defend any such lawsuits vigorously. Moreover, we maintain insurance covering a substantial portion of any such risks. However, there can be no assurance that any such litigation will not result in additional and uninsured costs or that such actions, alone or in combination with other factors, will not divert our attention in a manner that results in an adverse impact upon our financial condition, results of operations, or cash flows.

Item 6.

Exhibits

The following exhibits are filed herewith or incorporated by reference hereto and this list is intended to constitute the exhibit index:


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)

10.1		Amendment No. 4 to Amended and Restated Revolving Credit Agreement dated August 2, 2011.

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

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

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

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

101		The following financial information from the Quarterly Report on Form 10-Q for the period ended September 28, 2011, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Cash Flows; (iv) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

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
		(principal executive officer)

McCORMICK & SCHMICK’S SEAFOOD RESTAURANTS, INC.


By:		/s/ MICHELLE M. LANTOW
		Michelle M. Lantow
		Chief Financial Officer
		(principal financial and accounting officer)

Date: November 7, 2011

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McCormick & Schmicks Seafood Restaurants Inc. Reports

McCormick & Schmicks Seafood Restaurants Inc. - FORM 10-Q - November 7, 2011

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McCormick & Schmicks Seafood Restaurants Inc. Reports