<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 July 12, 1998
Commission file number O-18629
-------
O'Charley's Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1192475
------------------------------ -------------------
(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
- --------------------------------------------------------------------------------
(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 August 20, 1998
----- ---------------------------------
Common Stock, no par value 15,380,799 shares
<PAGE> 2
O'Charley's Inc.
Form 10-Q
For Quarter Ended July 12, 1998
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial statements
Item 1. Financial statements:
Balance sheets as of July 12, 1998 and
December 28, 1997 3
Statements of earnings for the twelve weeks
ended July 12, 1998 and July 13, 1997 4
Statements of earnings for the twenty-eight weeks
ended July 12, 1998 and July 13, 1997 5
Statements of cash flows for the twenty-eight weeks
ended July 12, 1998 and July 13, 1997 6
Notes to unaudited financial statements 7-8
Item 2. Management's discussion and analysis of
financial condition and results of operations 9-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II - Other Information
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a vote of Security Holders 14
Item 6. Exhibits and reports on form 8-K 15
Signatures 16
</TABLE>
<PAGE> 3
O'Charley's Inc.
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
July 12, December 28,
1998 1997
-------- --------
<S> <C> <C>
Assets
Current Assets:
Cash $ 2,416 $ 1,965
Accounts receivable 2,353 2,204
Inventories 6,993 4,600
Preopening costs 1,644 1,340
Deferred income taxes 807 807
Other current assets 2,599 2,231
-------- --------
Total current assets 16,812 13,147
Property and Equipment, net 153,026 136,051
Other Assets 2,399 1,317
-------- --------
$172,237 $150,515
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 6,848 $ 5,529
Accrued payroll and related expenses 5,626 4,603
Accrued expenses 5,276 6,463
Federal, state and local taxes 4,981 3,240
Current portion of long-term debt and capitalized leases 5,060 4,621
-------- --------
Total current liabilities 27,791 24,456
Deferred Income Taxes 3,358 2,958
Long-Term Debt 24,656 13,679
Capitalized Lease Obligations 14,076 14,039
Shareholders' Equity:
Common stock - No par value; authorized, 50,000,000
shares; issued and outstanding, 15,355,119 in 1998
and 15,264,921 in 1997 65,676 65,249
Additional paid-in capital 652 652
Retained earnings 36,028 29,482
-------- --------
102,356 95,383
-------- --------
$172,237 $150,515
======== ========
</TABLE>
See notes to financial statements.
-3-
<PAGE> 4
O'Charley's Inc.
Statements of Earnings
Twelve Weeks Ended July 12, 1998 and July 13, 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands, except per
share data)
<S> <C> <C>
Revenues:
Restaurant sales $ 56,021 $ 45,710
Commissary sales 568 694
Franchise revenue -- 7
-------- --------
56,589 46,411
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 19,320 15,771
Payroll and benefits 17,024 14,079
Restaurant operating costs 7,886 6,572
Cost of commissary sales 532 640
Advertising, general and administrative expenses 3,479 3,016
Depreciation and amortization 3,023 2,332
-------- --------
51,264 42,410
-------- --------
Income from Operations 5,325 4,001
Other (Income) Expense:
Interest expense, net 639 934
Other, net (56) (76)
-------- --------
583 858
-------- --------
Earnings Before Income Taxes 4,742 3,143
Income Taxes 1,659 1,132
-------- --------
Net Earnings $ 3,083 $ 2,011
======== ========
Earnings per Common Share - Basic $ 0.20 $ 0.17
======== ========
Earnings per Common Share - Diluted $ 0.19 $ 0.16
======== ========
Weighted Average Basic Common Shares Outstanding 15,323 11,829
======== ========
Weighted Average Dilutive Common Shares Outstanding 16,481 12,696
======== ========
</TABLE>
See notes to financial statements.
-4-
<PAGE> 5
O'Charley's Inc.
Statements of Earnings
Twenty-Eight Weeks Ended July 12, 1998 and July 13, 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands, except per
share data)
<S> <C> <C>
Revenues:
Restaurant sales $126,078 $101,655
Commissary sales 1,461 1,375
Franchise revenue 11 16
-------- --------
127,550 103,046
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 43,671 35,247
Payroll and benefits 38,464 31,361
Restaurant operating costs 17,764 14,748
Cost of commissary sales 1,369 1,289
Advertising, general and administrative expenses 8,124 6,739
Depreciation and amortization 6,711 5,161
-------- --------
116,103 94,545
-------- --------
Income from Operations 11,447 8,501
Other (Income) Expense:
Interest expense, net 1,416 1,971
Other, net (39) (147)
-------- --------
1,377 1,824
-------- --------
Earnings Before Income Taxes 10,070 6,677
Income Taxes 3,524 2,404
-------- --------
Net Earnings $ 6,546 $ 4,273
======== ========
Earnings per Common Share - Basic $ 0.43 $ 0.36
======== ========
Earnings per Common Share - Diluted $ 0.40 $ 0.34
======== ========
Weighted Average Basic Common Shares Outstanding 15,303 11,817
======== ========
Weighted Average Dilutive Common Shares Outstanding 16,409 12,626
======== ========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 6
O'Charley's Inc.
Statements of Cash Flows
Twenty-Eight Weeks Ended July 12, 1998 and July 13, 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 6,546 $ 4,273
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 5,279 3,937
Amortization of preopening costs 1,432 1,224
Provision for deferred income taxes 400 422
(Gain) loss on the sale of assets (250) 73
Changes in assets and liabilities:
Accounts receivable (149) (224)
Inventories (2,393) (1,227)
Additions to preopening costs (1,736) (1,449)
Other current assets (368) (847)
Accounts payable 1,319 1,204
Accrued payroll and other accrued expenses 1,577 1,324
-------- --------
Net cash provided by operating activities 11,657 8,710
Cash Flows from Investing Activities:
Additions to property and equipment (20,669) (16,202)
Proceeds from the sale of assets 1,734 1,025
Other, net (1,093) 53
-------- --------
Net cash used by investing activities (20,028) (15,124)
Cash Flows from Financing Activities:
Proceeds from long-term debt 11,042 8,400
Payments on long-term debt and capitalized
lease obligations (2,647) (2,021)
Exercise of employee incentive stock options 427 102
-------- --------
Net cash provided by financing activities 8,822 6,481
-------- --------
Increase in Cash 451 67
Cash at Beginning of the Period 1,965 1,616
-------- --------
Cash at End of the Period $ 2,416 $ 1,683
======== ========
</TABLE>
See notes to financial statements.
-6-
<PAGE> 7
O'Charley's Inc.
Notes To Unaudited Financial Statements
Twelve Weeks Ended July 12, 1998 and July 13, 1997
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. The Company's
fiscal year ends on the last Sunday in December with its first quarter
consisting of sixteen weeks and the remaining three quarters consisting of
twelve weeks each.
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 28, 1997.
B. Earnings Per Common Share
The Board of Directors of the Company approved a 3-for-2 stock split
effected as a 50% stock dividend for shareholders of record on May 20, 1998. The
new shares were distributed on June 1, 1998. On May 20, 1998, the total number
of outstanding shares of common stock increased 5,114,762 shares from 10,229,524
shares to 15,344,286 shares as a result of the stock split. The statements of
earnings for the twelve and twenty-eight weeks ended July 12, 1998 and July 13,
1997 reflect the adjusted weighted average basic and dilutive common shares
outstanding and earnings per common share basic and diluted as adjusted for the
stock split.
The Company adopted Statement of Financial Accounting Standards No. 128
("FAS 128"), Earnings Per Share, during the fourth quarter of 1997. All prior
periods earnings per share ("EPS") data have been restated to reflect the
implementation of FAS 128. FAS 128 establishes standards for both the computing
and presentation of basic and diluted EPS on the face of the statements of
earnings. Basic earnings per common share have been computed on the basis of the
weighted average number of common shares outstanding, and diluted earnings per
common share have been computed on the basis of the weighted average number of
common shares outstanding plus the dilutive effect of options outstanding.
-7-
<PAGE> 8
The following is a reconciliation of the Company's basic and diluted
earnings per share in accordance with FAS 128.
<TABLE>
<CAPTION>
Twelve Twelve Twenty-eight Twenty-eight
(In Thousands, weeks ended weeks ended weeks ended weeks ended
Except Per Share Data) July 12, 1998 July 13, 1997 July 12, 1998 July 13, 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Earnings $ 3,083 $ 2,011 $ 6,546 $ 4,273
=======================================================
Basic Earnings Per Share:
Weighted shares outstanding 15,323 11,829 15,303 11,817
Basic earnings per share $ 0.20 $ 0.17 $ 0.43 $ 0.36
=======================================================
Diluted Earnings Per Share:
Weighted shares outstanding 15,323 11,829 15,303 11,817
Incremental stock option
Shares outstanding 1,158 867 1,106 809
------------------------------------------------------
Total diluted shares
Outstanding 16,481 12,696 16,409 12,626
Diluted earnings per share $ 0.19 $ 0.16 $ 0.40 $ 0.34
=======================================================
</TABLE>
C. New Accounting Pronouncements
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP
98-5) which will be effective for financial statements issued for fiscal years
beginning after December 15, 1998. The SOP requires that costs incurred during a
start-up activity be expensed as incurred. Currently the Company capitalizes its
preopening costs and amortizes these costs over a 12-month period. At July 12,
1998, the Company had $1.6 million in unamortized preopening costs. Management
currently anticipates that it will adopt SOP 98-5 in the first quarter of 1999.
As a result, the Company will recognize, as a cumulative effect of a change in
accounting principle, a charge equal to the after tax effect of the unamortized
preopening costs at the beginning of 1999. Management is currently evaluating
the presentation of such costs in the Company's statements of earnings
subsequent to the adoption of SOP 98-5.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information, which
supersedes SFAS No. 14. This pronouncement is effective for fiscal years
beginning after December 15, 1997. Management is evaluating the impact of
reporting information about operating segments in the Company's financial
statements.
-8-
<PAGE> 9
O'Charley's Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Twenty-Eight Weeks Ended July 12, 1998 and July 13, 1997
This report contains certain forward-looking statements within the meaning
of the federal securities laws, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
all statements regarding the intent, belief and expectations of the Company and
its management such as statements concerning the Company's future profitability
and its operating and growth strategy. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, the risks discussed in the Company's Annual Report on Form 10-K for
the fiscal year ended December 28, 1997, including increases in food, labor and
employee benefit costs, the availability of experienced management and hourly
coworkers, 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 that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The Company
undertakes no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.
New Accounting Pronouncements
The Company currently expects to adopt Statement of Position 98-5,
Reporting on the Costs of Start-up Activities (SOP 98-5), at the beginning of
the first quarter of 1999. As discussed in Note C in Notes to Unaudited
Financial Statements, SOP 98-5 requires that costs incurred during a start-up
activity be expensed as incurred. The Company currently capitalizes its
preopening costs and amortizes these costs over a 12-month period. As a result
of the adoption of SOP 98-5, the Company will recognize, as a cumulative effect
of a change in accounting principle, a charge equal to the after tax effect of
the unamortized preopening costs at the beginning of 1999. At July 12, 1998, the
Company had $1.6 million in unamortized preopening costs. The Company currently
expects to open seven additional restaurants during the remainder of 1998. The
majority of preopening costs is typically incurred in the two months prior to
the opening of a new restaurant and averages approximately $180,000 per
restaurant. As a result of the adoption of SOP 98-5, the Company's earnings in
future periods could be affected depending on the timing of the preopening store
expenditures. Management is currently evaluating the presentation of such costs
in the Company's statements of earnings subsequent to the adoption of SOP 98-5.
-9-
<PAGE> 10
Results of Operations
The following table highlights the operating results for the second quarter
and first half of 1998 and 1997 as a percentage of total revenue unless
otherwise indicated. Each of the second quarters is comprised of 12 weeks. Each
of the first halves is comprised of 28 weeks. All comparisons included in
management's discussion and analysis compares the respective second quarter and
first half of 1998 to the second quarter and first half of 1997 unless otherwise
indicated.
<TABLE>
<CAPTION>
Second Quarter Year To Date
--------------------- ---------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales 99.0% 98.5% 98.9% 98.7%
Commissary sales 1.0% 1.5% 1.1% 1.3%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of restaurant sales: (1)
Cost of food, beverage and supplies 34.5% 34.5% 34.6% 34.7%
Payroll and benefits 30.4% 30.8% 30.5% 30.9%
Restaurant operating costs 14.1% 14.4% 14.1% 14.5%
----- ----- ----- -----
79.0% 79.7% 79.2% 80.0%
Restaurant operating margin (2) 21.0% 20.3% 20.8% 20.0%
Cost of commissary sales (3) 93.7% 92.2% 93.7% 93.7%
Advertising, general and
administrative expenses 6.1% 6.5% 6.4% 6.5%
Depreciation and amortization 5.3% 5.0% 5.3% 5.0%
Income from Operations 9.4% 8.6% 9.0% 8.2%
Other(Income)Expense:
Interest expense, net 1.1% 2.0% 1.1% 1.9%
Other, net -0.1% -0.2% -0.0% -0.1%
Earnings Before Income Taxes 8.4% 6.8% 7.9% 6.5%
Net Earnings 5.4% 4.3% 5.1% 4.1%
===== ===== ===== =====
</TABLE>
(1) As a percentage of restaurant sales.
(2) Reflects restaurant sales less cost of restaurant sales, expressed as a
percentage of restaurant sales.
(3) As a percentage of commissary sales.
-10-
<PAGE> 11
TOTAL REVENUES increased $10.2 million, or 21.9%, to $56.6 million for the
second quarter of 1998 and $24.5 million, or 23.8%, to $127.6 million for the
first twenty-eight weeks of 1998. Restaurant sales increased $10.3 million, or
22.6%, to $56.0 million and $24.4 million, or 24.0%, to $126.1 million in the
second quarter and first half of 1998, respectively. These increases were
primarily attributable to the addition of ten restaurants in the first half of
1998 and an increase in same store sales of 4.2% for the second quarter and 6.5%
for the first half of 1998. The following table presents the number of
restaurants in operation for each of the first two quarters in 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Beginning number of Company restaurants 82 69
Opened during the first quarter 5 6
Opened during the second quarter 4 3
Restaurant formerly operated by franchisee 1 --
---- ----
Ending number of Company restaurants 92 78
==== ====
</TABLE>
The same store sales increases were primarily the result of increased
customer counts and, to a lesser extent, menu price increases. Management
attributes the increase in customer counts to increased advertising
expenditures, more favorable weather conditions in 1998 and overall improved
restaurant operations. Menu price increases instituted during 1997 and the first
quarter of 1998 resulted in an increased check average of approximately 1.7%.
Liquor sales as a percentage of restaurant sales decreased to 10.9% in the
second quarter of 1998 from 11.7%. The Company also terminated its franchisee
agreement with the sole remaining franchisee at the beginning of the second
quarter and now operates the restaurant as a company-owned restaurant.
COST OF FOOD, BEVERAGE AND SUPPLIES increased $3.5 million, or 22.5%, in the
second quarter of 1998, to $19.3 million and $8.4 million, or 23.9%, in the
first half of 1998 to $43.7 million. As a percentage of restaurant sales, cost
of food, beverage and supplies was unchanged for the second quarter of 1998 and
decreased 0.1% for the first twenty-eight weeks of 1998. While the effect of
food inflation during 1998 has been minimal, the Company did experience
increases in certain food items including poultry and certain produce items,
particularly potatoes and lettuce. These increases were offset by the effect of
menu price increases and improved operating efficiencies and economies at the
Company's commissary. Certain dairy items including cheese, butter and sour
cream experienced price increases at the end of the second quarter due to short
supplies in butterfat. These increases are expected to continue through most of
the third quarter and may increase food cost as a percentage of restaurant
sales.
PAYROLL AND BENEFITS increased $2.9 million, or 20.9%, to $17.0 million and
$7.1 million, or 22.7%, to $38.5 million in the second quarter and the first
half of 1998, respectively. As a percentage of restaurant sales, payroll and
benefits decreased 0.4% for both the second quarter and first half of 1998. The
Company achieved certain economies from overall higher sales volumes and reduced
hourly and store management turnover that offset increases in restaurant
management bonuses and hourly wage rates. The increased bonus expense was
primarily the result of higher bonuses being earned by restaurant management
upon the improvement in restaurant level profits in 1998.
RESTAURANT OPERATING COSTS increased $1.3 million, or 20.0%, to $7.9 million
and $3.0 million, or 20.5%, to $17.8 million in the second quarter and first
half of 1998, respectively. As a percentage of restaurant sales, the restaurant
operating costs decreased 0.3% to 14.1% in the second quarter and 0.4% to 14.1%
in the first twenty-eight weeks of 1998. The Company has continued to open
stores in existing geographical markets which has contributed to slower growth
rates in certain expenses, particularly supervisory costs. Additionally, rent
expenses as a percentage of restaurant sales was lower as the Company continued
to purchase most of its restaurant sites.
-11-
<PAGE> 12
RESTAURANT OPERATING MARGIN, defined as restaurant sales less cost of
restaurant sales, increased $2.5 million, or 26.9%, to $11.8 million and $5.9
million, or 29.0%, to $26.2 million in the second quarter and first half of
1998, respectively. As a percentage of restaurant sales, the restaurant
operating margin increased 0.7% to 21.0% and 0.8% to 20.8% in the second quarter
and first half of 1998, respectively, from 20.3% and 20.0%, respectively, in the
comparable periods in 1997. The improvement was primarily attributable to the
leverage achieved from overall higher sales volumes.
ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES increased $463,000, or
15.4%, to $3.5 million and $1.4 million, or 20.6%, to $8.1 million in the second
quarter and first half of 1998, respectively. As a percentage of total revenue,
advertising, general and administrative expenses decreased 0.4% to 6.1% and 0.1%
to 6.4% in the second quarter and first half of 1998, respectively. These
decreases were primarily the result of certain administrative expenses,
particularly salaries and advertising, being allocated over higher overall
revenues. Advertising expenses decreased to 2.6% of restaurant sales in the
second quarter and 2.7% of restaurant sales in the first half of 1998 from 2.7%
and 2.8%, respectively, in the comparable periods in 1997.
DEPRECIATION AND AMORTIZATION EXPENSE in the second quarter and first
twenty-eight weeks of 1998 increased $691,000, or 29.6%, to $3.0 million and
$1.6 million, or 30.0%, to $6.7 million, respectively. As a percentage of total
revenues, depreciation and amortization expense increased 0.3% to 5.3% for both
the second quarter and first half of 1998. The increase was primarily
attributable to the Company incurring additional capital expenditures for the
remodeling of certain existing restaurants and the relocation of two
restaurants. See "-- New Accounting Pronouncements" and Note C in the notes to
unaudited financial statements regarding new accounting pronouncements for
changes in the reporting of preopening costs.
INCOME FROM OPERATIONS increased $1.3 million, or 33.1%, to $5.3 million and
$2.9 million, or 34.7%, to $11.4 million in the second quarter and first half of
1998, respectively. As a percentage of total revenue, income from operations
increased 0.8% in both the second quarter and first half of 1998 to 9.4% and
9.0%, respectively, from 8.6% and 8.2%, respectively, in the comparable periods
in 1997. This increase was primarily the result of improved restaurant operating
margin and advertising, general and administrative expenses which were partially
offset by increased depreciation and amortization expense.
INTEREST EXPENSE, NET, decreased $295,000, or 31.6%, to $639,000 and
$555,000, or 28.2%, to $1.4 million in the second quarter and first half of
1998, respectively. The decreases were primarily the result of reduced
borrowings under the Company's revolving credit facility. The Company reduced
its long-term debt by approximately $34.7 million in the fourth quarter of 1997
using the net proceeds received from the sale of common stock.
INCOME TAX EXPENSE as a percentage of earnings before income taxes was
35.0% in both the second and first half of 1998 as compared to 36.0% for the
comparable periods in 1997. The lower tax rate in 1998 is primarily attributable
to a lower overall effective state income tax rate.
Liquidity and Capital Resources
The Company's principal capital needs arise from the development of new
restaurants and the maintenance and improvement of existing restaurants.
Historically, the Company's primary sources for working capital have been cash
provided from operations, bank indebtedness and capitalized lease obligations.
During the first twenty-eight weeks of 1998, the Company expended approximately
$23.7 million in capital expenditures for new stores and improvements to
existing facilities (including $3.1 million of equipment financed under
capitalized lease arrangements). Additionally, the Company
-12-
<PAGE> 13
repaid $2.6 million in principal on its long-term debt and capitalized lease
obligations. These capital outlays were funded primarily by borrowings of $11.0
million on the Company's revolving credit facility (the "Revolver"), borrowings
of approximately $3.1 million under capitalized lease obligations, $11.7 million
in cash provided by operating activities and approximately $1.7 million in
proceeds from the sale of certain assets.
The Company opened nine new restaurants in the first two quarters of 1998.
As of July 12, 1998, the Company had five additional restaurants under
construction, four of which are expected to open in the third quarter of 1998.
For fiscal year 1998, the Company expects to open sixteen new Company-owned
restaurants. Management estimates that the Company will spend approximately
$40.0 million in capital expenditures in 1998. 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 financing
the furniture, fixtures and equipment for its new stores with capitalized lease
obligations.
As of July 12, 1998, $24.1 million of indebtedness was outstanding under the
Revolver, which bore interest at a weighted average rate of 6.4%. The Revolver
provides for a maximum borrowing capacity of $100.0 million and matures on
November 30, 2000. The Revolver includes a provision to extend the maturity by
one year, at the first anniversary (December 8, 1998). Management believes that
available cash, cash generated from operations and borrowings under the Revolver
and capitalized lease obligations will be sufficient to finance the Company's
operations and expected growth through 1999.
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could adversely affect the Company's operations. A majority
of the Company's employees are paid hourly rates related to federal and state
minimum wage laws. As a result of increased competition and the low unemployment
rates in the markets in which the Company's restaurants are located, the Company
has continued to increase wages and benefits in order to attract and retain
management personnel and hourly coworkers. In addition, most of the Company's
leases require the Company to pay taxes, insurance, maintenance, repairs and
utility costs, and these costs are subject to inflationary pressures. The
Company may attempt to offset the effect of inflation through periodic menu
price increases, economies of scale in purchasing and cost controls and
efficiencies at existing restaurants.
A business issue exists with regard to existing software applications and
the ability of these applications to process date values. Specifically, many
computer applications are written in two digits rather than four to define the
applicable year. Beginning in the year 2000, these applications will need to be
capable of recognizing four digit dates in order to properly distinguish the
year 2000 from prior periods. Management of the Company is considering the
impact of the year 2000 issues on its business and operations and is developing
a remediation plan. The Company has completed testing of its information
technology ("IT") systems. The Company's financial and time keeping software
packages are currently not year 2000 compliant. The financial software package
is expected to be updated by September 30, 1998 and the time keeping software
package is expected to be compliant by March 31, 1999. The Company is currently
testing its non-IT systems and anticipates completing such testing by June 30,
1999. The Company is currently making inquiries to its suppliers and other
third-party entities with which it has business relations as to their own year
2000 issues. The Company expects to complete such inquiries by September 30,
1999. The Company expenses all costs associated with system changes as the costs
are incurred. A significant portion of the Company's year 2000 related costs are
already included in its software support agreements, therefore, management does
not believe the impact of the year 2000 issue will have a significant impact on
the Company's operations or liquidity. The Company is in the process of
developing contingency plans to be implemented in the event any IT system,
non-IT system, third party or supplier is not year 2000 compliant by January 1,
2000.
-13-
<PAGE> 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As of July 12, 1998, the Company is a party in a civil action in the United
States District Court for the Middle District of Tennessee involving a
former general manager of the Company. In September 1995, the Company filed
an action against the former employee alleging wrongful conversion of
Company funds and fraudulent misrepresentation. The former employee moved to
amend his answer in the civil action filed by the Company claiming damages
of $30.0 million relating to counterclaims alleging malicious prosecution
and intentional infliction of emotional distress and $600,000 relating to
counterclaims alleging breach of contract and race discrimination. The Court
has ruled that it will allow the former employee to pursue all of the
foregoing claims except the intentional infliction of emotional distress
claim. The Company believes the claims are without merit, intends to
vigorously prosecute its claims and vigorously defend any of the former
manager's claims. Based on the advice of counsel, the Company believes that
the malicious prosecution will be dismissed upon the Company's motion for
summary judgement. The Company does not believe the outcome of this
proceeding will materially affect its financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
On May 7, 1998, 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 one Class I director to hold office for a term of two
years and until his successor is elected and qualified;
<TABLE>
<CAPTION>
Director For* Abstain*
-------- ---- --------
<S> <C> <C>
Steven J. Hislop 7,824,939 60,401
</TABLE>
2. The election of three Class II 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>
John W. Stokes, Jr. 6,813,971 1,071,369
H. Steve Tidwell 6,815,471 1,069,869
Samuel H. Howard 7,805,670 79,670
</TABLE>
* - Does not give effect to a 3-for-2 stock split effective June 1,
1998.
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 his or her term
expires:
<TABLE>
<CAPTION>
Name Term Expires
---- ------------
<S> <C>
Gregory L. Burns 2000
C. Warren Neel 2000
Shirley A. Zeitlin 1999
G. Nicholas Spiva 1999
Richard Reiss, Jr. 1999
</TABLE>
-14-
<PAGE> 15
3. The shareholders of the Company also voted to amend the Company's 1991
Stock Option Plan for outside directors to increase the number of shares
authorized to be issued under the Plan. The amendment was approved by
the shareholders with 7,739,556 votes cast for the amendment and 122,893
votes cast against the amendment or withheld (vote counts do not give
effect to a 3-for-2 stock split effective June 1, 1998).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Restated 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 twelve weeks
ended July 12, 1998.
-15-
<PAGE> 16
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: 8/26/98 By: /s/ Gregory L. Burns
------------------------ -----------------------------------------
Gregory L. Burns
President and
Chief Executive Officer
Date: 8/26/98 By: /s/ A. Chad Fitzhugh
------------------------ -----------------------------------------
A. Chad Fitzhugh
Chief Financial Officer
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF O'CHARLEY'S INC. FOR THE QUARTER ENDED JULY 12, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> JUL-12-1998
<CASH> 2,416
<SECURITIES> 0
<RECEIVABLES> 2,353
<ALLOWANCES> 0
<INVENTORY> 6,993
<CURRENT-ASSETS> 16,812
<PP&E> 153,026
<DEPRECIATION> 0
<TOTAL-ASSETS> 172,237
<CURRENT-LIABILITIES> 27,791
<BONDS> 0
0
0
<COMMON> 65,676
<OTHER-SE> 36,680
<TOTAL-LIABILITY-AND-EQUITY> 172,237
<SALES> 126,078
<TOTAL-REVENUES> 127,550
<CGS> 99,899
<TOTAL-COSTS> 116,103
<OTHER-EXPENSES> (39)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,416
<INCOME-PRETAX> 10,070
<INCOME-TAX> 3,524
<INCOME-CONTINUING> 6,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,546
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.40
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF O'CHARLEY'S INC. FOR THE QUARTER ENDED JULY 13, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> JUL-13-1997
<CASH> 1,683
<SECURITIES> 0
<RECEIVABLES> 1,770
<ALLOWANCES> 0
<INVENTORY> 5,732
<CURRENT-ASSETS> 14,622
<PP&E> 118,389
<DEPRECIATION> 0
<TOTAL-ASSETS> 134,372
<CURRENT-LIABILITIES> 26,588
<BONDS> 0
0
0
<COMMON> 29,694
<OTHER-SE> 25,607
<TOTAL-LIABILITY-AND-EQUITY> 134,372
<SALES> 101,655
<TOTAL-REVENUES> 103,046
<CGS> 81,356
<TOTAL-COSTS> 94,545
<OTHER-EXPENSES> (147)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,971
<INCOME-PRETAX> 6,677
<INCOME-TAX> 2,404
<INCOME-CONTINUING> 4,273
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,273
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.34
</TABLE>
