<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 20, 1997
Commission file number O-18629
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O'Charley's Inc.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1192475
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3038 Sidco Drive, Nashville, Tennessee 37204
- ---------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(615) 256-8500
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(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding as of May 27, 1997
----- ------------------------------
Common Stock, no par value 7,880,571 shares
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O'Charley's Inc.
Form 10-Q
For Quarter Ended April 20, 1997
Index
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Information
Item 1. Financial statements:
Balance sheets as of April 20, 1997 and
December 29, 1996 3
Statements of earnings for the sixteen weeks
ended April 20, 1997 and April 21, 1996 4
Statements of cash flows for the sixteen weeks
ended April 20, 1997 and April 21, 1996 5
Notes to unaudited financial statements 6
Item 2. Management's discussion and analysis of
financial condition and results of operations 7-10
Part II - Other Information
Item 1. Legal Proceedings 11
Item 4. Submission of matters to a vote of security holders 11
Item 6. Exhibits and reports on form 8-K 11
Signatures 12
</TABLE>
<PAGE> 3
O'Charley's Inc.
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
April 20, December 29,
1997 1996
--------- ------------
Assets
<S> <C> <C>
Current Assets:
Cash $ 1,552 $ 1,616
Accounts receivable 1,555 1,546
Inventories 6,973 4,505
Preopening costs 1,385 1,097
Deferred income taxes 2,334 2,334
Other current assets 1,868 1,357
-------- --------
Total current assets 15,667 12,455
Property and Equipment, net 111,082 103,281
Other Assets 1,237 1,423
-------- --------
$127,986 $117,159
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 5,026 $ 5,022
Accrued payroll and related expenses 4,196 3,365
Accrued expenses 7,871 9,162
Federal, state and local taxes 3,089 2,461
Current portion of long-term debt and capitalized
leases 3,614 3,309
-------- --------
Total current liabilities 23,796 23,319
Deferred Income Taxes 1,295 1,295
Long-Term Debt 37,272 29,822
Capitalized Lease Obligations 12,374 11,797
Shareholders' Equity:
Common stock - No par value;authorized, 50,000,000
shares; issued and outstanding, 7,872,146 in 1997
and 7,854,368 in 1996 29,653 29,592
Additional paid-in capital 652 652
Retained earnings 22,944 20,682
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53,249 50,926
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$127,986 $117,159
======== ========
</TABLE>
See notes to financial statements
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O'Charley's Inc.
Statements of Earnings
Sixteen Weeks Ended April 20, 1997 and April 21, 1996
<TABLE>
<CAPTION>
1997 1996
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(in thousands, except per share data)
<S> <C> <C>
Revenues:
Restaurant sales $ 55,945 $ 46,380
Commissary sales 681 690
Franchise revenue 9 9
-------- --------
56,635 47,079
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 19,476 16,590
Payroll and benefits 17,282 14,309
Restaurant operating costs 8,176 7,167
Cost of commissary sales 649 654
Advertising, general and administrative expenses 3,723 2,703
Depreciation and amortization 2,829 2,398
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52,135 43,821
-------- --------
Income from Operations 4,500 3,258
Other(Income)Expense:
Interest expense, net 1,037 699
Other, net (71) 108
-------- --------
966 807
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Earnings Before Income Taxes 3,534 2,451
Income Tax Expense 1,272 882
-------- --------
Net Earnings $ 2,262 $ 1,569
======== ========
Earnings per Common Share $ 0.27 $ 0.19
======== ========
Weighted Average Common Shares Outstanding 8,383 8,423
======== ========
</TABLE>
See notes to financial statements.
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O'Charley's Inc.
Statements of Cash Flows
Sixteen Weeks Ended April 20, 1997 and April 21, 1996
<TABLE>
<CAPTION>
1997 1996
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(in thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 2,262 $ 1,569
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 2,153 1,753
Amortization of preopening costs 676 645
(Gain)Loss on the sale of assets 73 (171)
Changes in assets and liabilities:
Accounts receivable (8) (93)
Inventories (2,468) (3,036)
Additions to preopening costs (964) (681)
Other current assets (512) (188)
Accounts payable 4 (136)
Accrued payroll and other accrued expenses 168 (1,444)
-------- --------
Net cash provided by operating activities 1,384 (1,782)
Cash Flows from Investing Activities:
Additions to property and equipment (9,123) (8,904)
Proceeds from the sale of assets 1,025 171
Other, net 173 143
-------- --------
Net cash used by investing activities (7,925) (8,590)
Cash Flows from Financing Activities:
Proceeds from long-term debt 7,500 11,100
Payments on long-term debt and capitalized
lease obligations (1,092) (2,390)
Distribution to Shoex, Inc. shareholders -- (315)
Exercise of employee incentive stock options 69 35
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Net cash provided by financing activities 6,477 8,430
-------- --------
Decrease in Cash (64) (1,942)
Cash at Beginning of the Period 1,616 2,576
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Cash at End of the Period $ 1,552 $ 634
======== ========
</TABLE>
See notes to financial statements.
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O'Charley's Inc.
Notes To Unaudited Financial Statements
Sixteen Weeks Ended April 20, 1997 and April 21, 1996
A. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals which are necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year.
These financial statements, footnote disclosures and other information
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 29, 1996.
B. Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share (FAS 128) which specifies the computations, presentation
and disclosure requirements for earnings per share for publicly held companies.
FAS 128 replaces Accounting Principles Board Opinion No. 15 and is effective for
both interim and annual periods ending after December 15, 1997 with earlier
application not permitted. Management believes that the Company's adoption of
this standard, when effective, will not have a significant impact on the
Company's financial statements.
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O'Charley's Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Sixteen Weeks Ended April 20, 1997 and April 21, 1996
Results of Operations
The following table highlights the operating results for the first quarters
of 1997 and 1996 as a percentage of total revenue unless otherwise indicated.
Each of the quarters is comprised of 16 weeks.
<TABLE>
<CAPTION>
First Quarter
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1997 1996
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<S> <C> <C>
Revenues:
Restuarant sales 98.8% 98.5%
Commissary sales 1.2% 1.5%
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100.0% 100.0%
Costs and Expenses:
Cost of restaurant sales: (1)
Cost of food, beverage and supplies 34.8% 35.8%
Payroll and benefits 30.9% 30.9%
Restaurant operating costs 14.6% 15.4%
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80.3% 82.1%
Restaurant operating margin 19.7% 17.9%
Cost of commissary sales (2) 95.3% 94.8%
Advertising, general and
administrative expenses 6.6% 5.7%
Depreciation and amortization 5.0% 5.1%
Other(Income)Expense:
Interest expense, net 1.8% 1.5%
Other, net -0.1% 0.2%
Earnings Before Income Taxes 6.2% 5.2%
Net Earnings 4.0% 3.3%
====== ======
</TABLE>
(1) As a percentage of restaurant sales.
(2) As a percentage of commissary sales.
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The following discussion includes certain forward-looking statements. Actual
results could differ materially from those reflected by the forward-looking
statements and a number of factors may affect future results, liquidity and
capital resources. These factors include increased food, labor and employee
benefit costs, the availability of experienced management and hourly employees,
the Company's ability to locate and open new restaurants and to operate such
restaurants profitably and the intense competition in the restaurant industry.
Although the Company believes it has the business strategy and resources needed
for improved operations, future revenue and margin trends cannot be reliably
predicted and may cause the Company to adjust the strategy during fiscal 1997.
TOTAL REVENUES in the first quarter of 1997 increased $9,556,000 or 20.3%
primarily as a result of operating additional stores in 1997 and an increase in
same store sales of 4.7%. The following table presents the number of restaurants
in operation for each of the respective first quarters:
<TABLE>
<CAPTION>
1997 1996
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<S> <C> <C>
Beginning number of Company restaurants 69 61
Newly opened during the quarter 6 5
-- --
Ending number of Company restaurants 75 66
== ==
</TABLE>
Management believes the increase in same store sales was primarily the
result of a new menu and advertising campaign which was introduced in September
1996, milder winter weather in 1997 as compared to 1996 and a menu price
increase of approximately 1.4% taken in the last 6 weeks of the first quarter of
1997. An increase in customer traffic contributed to the increase in same store
sales while the Company's check average was slightly down due to promotional
discounts during the quarter.
RESTAURANT OPERATING MARGIN, defined as restaurant sales less cost of
restaurant sales, increased $2.7 million or 32.4% in the first quarter of 1997.
As a percentage of restaurant sales, the restaurant operating margin increased
1.8% in 1997 to 19.7% from 17.9%. This percentage increase was due to a
percentage decrease in the cost of food, beverage and supplies and restaurant
operating costs.
COST OF FOOD, BEVERAGE AND SUPPLIES as a percentage of restaurant sales
decreased 1.0% in the first quarter of 1997. This decrease was primarily
attributable to cost reductions in certain high volume food commodities,
increased purchasing power and operating efficiencies of the Company's
commissary and overall lower produce costs due primarily to potatoes. The new
menu introduced in the fourth quarter of 1996 slightly lowered the overall food
cost percentage.
PAYROLL AND BENEFITS as a percentage of restaurant sales was unchanged for
the first quarter of 1997. Increases in store bonus expense, wage rates and
vacation expense were offset by certain employee benefit cost reductions
including workers compensation, health insurance and economies achieved from
overall higher sales volume. The increase in store bonus expense was a result of
the higher bonuses earned by store management upon the improvement in restaurant
level profits in 1997 as compared to 1996. The federal minimum wage rate will
increase another $.50 per hour on October 1, 1997, which will have a slight
impact on payroll costs in the fourth quarter of 1997.
RESTAURANT OPERATING COSTS include certain expenses which are primarily
fixed and do not fluctuate greatly with changes in revenues. As a percentage of
restaurant sales, the restaurant operating costs decreased .8% to 14.6% in the
first quarter of 1997. The Company continued to lower the restaurant operating
cost percentages by allocating certain supervisory and overhead costs over a
greater number of stores and higher average unit sales. The Company has
generally opened new stores in existing geographical markets since January 1996
which has contributed to a slower growth rate in certain expenses, particularly
supervisory costs. Additionally, rent expense as a percentage of restaurant
sales was lower as the Company continued to purchase most of its restaurant
sites.
ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of total
revenue increased .9% in the first quarter of 1997. The increase was primarily
due to an increase in the amount of advertising expenditures and bonus expense.
The Company continued its television and radio advertising campaign in the first
quarter of 1997 which was introduced in the fall of 1996 in conjunction with its
new menu. These increased amounts of advertising expenses, approximately 2.9% of
restaurant sales in 1997 as compared to approximately 2.2% in 1996, are expected
to continue into the second quarter of 1997. Bonus expense increased primarily
due to an increase in
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<PAGE> 9
executive bonus compensation which is based in part on a formula of increased
profits.
DEPRECIATION AND AMORTIZATION EXPENSE as a percentage of total revenues
decreased .1% in 1997. This decrease is primarily due to pre-opening
amortization not increasing relative to the higher revenues.
INTEREST EXPENSE, NET, increased $338,000 or 48.0% in 1997. The increase in
interest expense was primarily the result of increased borrowings under the
Company's line of credit facility and increased borrowings under capitalized
lease obligations to fund the Company's expansion of new restaurants.
OTHER (INCOME) EXPENSE, NET was net income of $71,000 in 1997 and a net
expense of $108,000 in 1996, a $179,000 decrease in net expenses. During the
first quarter of 1996, the Company expensed approximately $290,000 in
acquisition cost associated with merger of Shoex, Inc., a former franchisee of
the Company which owned and operated six O'Charley's restaurants in Alabama.
INCOME TAXES as a percentage of pretax earnings were 36.0% for both quarters
in 1997 and 1996.
Liquidity and Capital Resources
During the first quarter of 1997, the Company expended approximately $11.0
million in capital expenditures for new stores and improvements to existing
facilities. Additionally, the Company made $1.1 million in principal reductions
in its capitalized lease obligations and long-term debt. These cash outlays were
funded primarily by borrowings of $7.5 million on the Company's line of credit
facility, borrowings under capitalized lease obligations of approximately $1.9
million, $1.4 million in cash provided by operating activities and approximately
$1.0 million in proceeds from the sale of certain assets.
The Company has a revolving unsecured credit facility of $70 million which
expires November 30, 1999. The credit facility requires monthly interest
payments at a floating rate based on the bank's prime rate plus or minus a
certain percentage spread in the LIBOR rate plus a certain percentage spread.
The interest rate spread on the facility may vary and will be recalculated
quarterly based on certain financial ratios achieved by the Company. The
facility includes a provision to extend the maturity annually by one year
beginning on the first anniversary of the facility. At April 20, 1997, $36.5
million was outstanding under the facility compared to $29 million at December
29, 1996. The increase in borrowings is primarily attributable to the
expenditures incurred for new stores and remodeling costs. At April 20, 1997,
the $36.5 million outstanding carried interest rates from 6.8% (LIBOR rate plus
1.25%) to 8.0% (prime minus .5%). The Company is in compliance with the
financial and other covenants of the credit facility.
The Company opened 6 new stores in the first quarter of 1997. As of April
20, 1997, the Company had 3 additional restaurants under construction, all of
which are expected to open in the second quarter of 1997. For fiscal year 1997,
the Company expects to open between 12 and 14 new company-owned restaurants.
Management estimates that the Company will spend approximately $34 million in
capital expenditures in 1997. Actual capital expenditures may increase based on
a number of factors, including the timing of additional purchases of future
restaurant sites. The Company intends to continue to finance the furniture,
fixtures and equipment for its new stores with capitalized lease obligations.
Management believes that available cash, cash generated from operations and
borrowings under its available credit facility and capitalized lease obligations
will be sufficient to finance its operations and expected growth through 1998.
During the fourth quarter of 1996, a consent decree approving the
definitive settlement agreement of a two-year old class action lawsuit alleging
racial discrimination against the Company was approved by the U.S. District
Court. The settlement agreement created a settlement pool of $4.8 million for
the benefit of present and past African-American employees of O'Charley's (the
"Class") whose claims arose on or after March 31, 1992 and reserved $700,000 for
claims administration and fees, and included $2.0 million for the attorneys
representing the Class. The total settlement amount of $7.5 million plus an
additional $1.0 million for legal and other expenses related to the settlement
was recorded in the second quarter of 1996. In the fourth quarter of 1996, a
$2.3 million adjustment to the original $7.5 million accrual was recorded as
income as a result of the relatively low number of claims submitted by
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<PAGE> 10
members of the announced plaintiff class. After recalculating the actual level
of participation, the total settlement amount is approximately $5.2 million of
which approximately $750,000 will be paid through the issuance of Company stock
and the remainder of $4.5 million will be paid in cash. As of April 20, 1997,
approximately $2.3 million had been paid with the additional outlay of
approximately $2.2 million expected to be paid in the second quarter of 1997.
The additional cash will be funded by additional borrowings under the Company's
$70 million credit facility.
The Company does not believe that inflation has had a material effect on
net earnings during the past several years. The Company generally has been able
to increase menu prices or modify its operating procedures to substantially
offset increases in operating costs.
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Part II - Other Information
Item 1. Legal Proceedings
On February 15, 1994, a purported class action suit was filed in the
United States District Court in the Western District of Tennessee against
the Company, Mr. Burns, David K. Wachtel, Jr., and Charles F. McWhorter
(Messrs. Wachtel and McWhorter are former directors and executive officers
of the Company). The suit was later transferred to the United States
District Court for the Middle District of Tennessee. The suit alleged
racially discriminatory job selection, termination and work environment
practices in violation of federal law. The suit sought actual ,
compensatory and punitive damages in an unspecified amount. The court
approved a consent decree approving the definitive settlement of the suit
on December 18, 1996. The settlement agreement created a settlement pool
of $4.8 million for the benefit of the class members and reserved $700,000
for claims administration and fees, and included $2.0 million for the
attorneys representing the class and an additional $1.0 million for legal
and other expenses related to the settlement. Less than 30% of the
estimated pool of class members submitted claims against the settlement
fund. Therefore, an adjustment of approximately $2.3 million was made to
the settlement fund in December 1996.
Item 4. Submission of Matters to a Vote of Security Holders
On May 8, 1997, the Company held its Annual Meeting of Shareholders. The
Shareholders approved each of the items submitted for vote. The items
voted on at the meeting and the results of the votes are as follows:
1. The election of two Class I directors to hold office for a term of
three years and until their successors are elected and qualified;
<TABLE>
<CAPTION>
Director For Abstain
-------- --- -------
<S> <C> <C>
Gregory L. Burns 4,613,076 1,095,926
C. Warren Neel 4,619,858 1,089,144
</TABLE>
In addition to the foregoing directors, the following table sets forth
the other members of the Board of Directors whose term of office
continued after the meeting and the year in which this term expires:
<TABLE>
<CAPTION>
Name Term Expires
---- ------------
<S> <C>
Shirley A. Zeitlin 1999
G. Nicholas Spiva 1999
Richard Reiss, Jr. 1999
Samuel H. Howard 1998
John W. Stokes, Jr. 1998
H. Steve Tidwell 1998
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the sixteen
weeks ended April 20, 1997.
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<PAGE> 12
Signatures
Pursuant to the requirements 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.
O'Charley's Inc.
(Registrant)
Date: 6/3/97 By: /s/ Gregory L. Burns
------------- -----------------------
Gregory L. Burns
President and
Chief Executive Officer
Date: 6/3/97 By: /s/ A. Chad Fitzhugh.
------------- -----------------------
A. Chad Fitzhugh
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF O'CHARLEY'S INC. FOR THE FOUR MONTHS ENDED APRIL 20,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> DEC-30-1996
<PERIOD-END> APR-20-1997
<CASH> 1,552
<SECURITIES> 0
<RECEIVABLES> 1,555
<ALLOWANCES> 0
<INVENTORY> 6,973
<CURRENT-ASSETS> 15,667
<PP&E> 111,082
<DEPRECIATION> 0
<TOTAL-ASSETS> 127,986
<CURRENT-LIABILITIES> 23,796
<BONDS> 0
0
0
<COMMON> 29,653
<OTHER-SE> 22,944
<TOTAL-LIABILITY-AND-EQUITY> 127,986
<SALES> 55,945
<TOTAL-REVENUES> 56,635
<CGS> 44,934
<TOTAL-COSTS> 52,135
<OTHER-EXPENSES> (71)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,037
<INCOME-PRETAX> 3,534
<INCOME-TAX> 1,272
<INCOME-CONTINUING> 2,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,262
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
