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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 27, 1998
Commission file number 0-18629
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 Identification No.)
incorporation or organization)
3038 Sidco Drive
Nashville, Tennessee 37204
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 256-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par
value
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 23, 1999 was approximately $177.8 million. For
purposes of this calculation, shares held by non-affiliates excludes only those
shares beneficially owned by officers, directors and shareholders beneficially
owning 10% or more of the outstanding common stock. The market value calculation
was determined using the closing sale price of the registrant's common stock on
March 23, 1999 ($13.38) as reported on The Nasdaq Stock Market's National
Market.
The number of shares of common stock outstanding on March 23, 1999 was
15,414,712.
DOCUMENTS INCORPORATED BY REFERENCE
Documents from which portions are
Part of Form 10-K incorporated by reference
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Part III Proxy Statement relating to the registrant's
Annual Meeting of Shareholders to be held
May 6, 1999
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O'CHARLEY'S INC.
PART I
ITEM 1. BUSINESS
At December 27, 1998, the Company owned and operated 99 O'Charley's
restaurants located in Alabama, Florida, Georgia, Indiana, Kentucky,
Mississippi, North Carolina, Ohio, South Carolina, Tennessee, and Virginia.
O'Charley's restaurants are intended to appeal to traditional casual dining
customers as well as value-oriented customers by offering high quality food at
moderate prices with outstanding customer service. O'Charley's restaurants are
open seven days a week, and most offer full bar service.
THE O'CHARLEY'S CONCEPT
O'Charley's restaurants provide fresh, high quality food at moderate
prices in a relaxed atmosphere. The key elements of the O'Charley's concept
include the following:
Variety of Freshly Prepared Items. O'Charley's restaurants offer a
varied menu of distinctive American fare made from original recipes. The
Company's menu features approximately 45 items including prime rib, steaks,
chicken, seafood, made-from-scratch soups, entree salads, sandwiches, pastas and
an assortment of appetizers and desserts. All specialty entrees are prepared
using aged beef and fresh chicken and seafood, are cooked to order and are
served with a choice of soup or salad, fresh yeast rolls and a side item. Most
items are prepared on premises using fresh ingredients. To maintain freshness
and quality, the Company operates its own commissary at which it ages and cuts
its beef and prepares the yeast rolls and salad dressings served in its
restaurants. The Company is continually developing new menu items to respond to
changing customer tastes and preferences. In addition to its normal menu, the
Company's restaurants offer an Express Lunch, a Sunday brunch, a children's menu
and seasonal menu offerings.
Attractive Menu Pricing. The Company believes its menu offers a
compelling value to the traditional casual dining customer while remaining
competitive with restaurants targeting value-oriented customers. The Company's
prices range from $5.99 to $16.99 for entrees, with many items priced under
$10.00. Additionally, the Company offers a "Kids Eat Free" program for children
ten and under in most of its restaurants. In 1998, the average check per
customer, including beverages, was approximately $10.45.
Casual Ambiance. The Company seeks to create a casual, neighborhood
atmosphere in its restaurants. The interior decor of the Company's prototype
restaurant is open, casual and well lighted and features an exposed kitchen,
warm woods, polished brass and brick and neon accents. Hand-painted murals
depicting local history, people, places and events tailor the decor of many of
the restaurants to the local community. The Company remodels its restaurants on
average every three to five years to reflect refinements in the Company's
prototype restaurant and changes in customer tastes.
OPERATING STRATEGY
The Company's objective is to differentiate its restaurants by
exceeding customer expectations as to the quality of food and the friendliness
of service. To achieve this objective, the Company employs the following key
operating strategies:
Quality Assurance. The Company is committed to providing a broad menu
of freshly prepared, high quality items. The Company believes that its menu
offerings allow for simplified food preparation, efficient
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delivery and consistent quality. Unlike most casual dining restaurants, the
Company operates its own commissary, which enables the Company to better control
its food quality and costs. The commissary purchases and distributes food and
other supplies to all of the Company's restaurants, operates a USDA approved
facility at which it ages and cuts its beef and prepares fresh breads and salad
dressings. Management believes the commissary also provides the Company with a
competitive advantage by simplifying purchasing duties of restaurant level
management, thus enabling them to focus on restaurant operations.
Commitment to Value. Management believes that the food quality and
service at the Company's restaurants are comparable or superior to that of other
casual dining restaurants. The Company believes that its pricing strategy
creates an attractive price-to-value relationship, thereby increasing the
Company's ability to attract value-oriented customers as well as traditional
casual dining customers. O'Charley's restaurants serve fresh yeast rolls with
every order and a choice of soup or salad with specialty entree items.
Additionally, programs such as "Express Lunch" and "Kids Eat Free" reinforce the
Company's value-oriented philosophy.
Focus on Customer Service. The Company believes that it must provide
prompt, friendly and efficient service to ensure customer satisfaction. The
Company staffs each restaurant with an experienced management team and keeps
table-to-server ratios low. Through the use of customer surveys, management
receives valuable feedback on its restaurants and through prompt response
demonstrates a continuing dedication to customer satisfaction. The Company also
employs a "mystery shopper" program to independently monitor quality control in
areas such as timeliness of service, atmosphere, employee attitude and food
quality.
Well-Trained and Highly Motivated Employees. The Company believes a
well-trained, highly motivated restaurant management team is critical to
achieving the Company's operating objectives. The Company's training and
compensation systems are designed to create accountability at the restaurant
level for the performance of each restaurant. The Company expends significant
resources to train, motivate and educate its restaurant level managers and
hourly coworkers. The Company operates a management training facility at its
home office in Nashville, Tennessee. Each new manager participates in a
comprehensive 12-week training program which combines hands-on experience in
one of the Company's training restaurants and instruction at the training
facility. To instill a sense of ownership in restaurant management, compensation
is based, in part, on restaurant profit, employee turnover and mystery shopper
reports. Management believes this focus on unit level operations creates a
"single store mentality" and provides an incentive for managers to focus on
increasing same store sales and restaurant profitability.
GROWTH STRATEGY
The Company's growth strategy is to open new Company-owned restaurants
and increase sales at existing restaurants. The Company intends to continue
clustering new restaurants in existing metropolitan markets, which management
believes enhances supervisory, marketing and distribution efficiencies. The
Company attempts to cluster restaurants in a manner that does not result in a
material decrease in sales at existing restaurants. The Company also intends to
develop restaurants in selected new metropolitan markets in the Southeast and
Midwest and in smaller markets in close proximity to the Company's existing
metropolitan markets to enable the Company to utilize existing supervisory,
marketing and distribution systems. The Company expects to open 17 to 19 new
Company-owned restaurants in 1999.
During 1998, the Company opened 16 new restaurants in the following
markets:
Dothan, Alabama Atlanta, Georgia
Canton, Georgia Cumming, Georgia
Macon, Georgia Snellville, Georgia
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Lafayette, Indiana Frankfort, Kentucky
Jackson, Mississippi Southhaven, Mississippi
Fayetteville, North Carolina Dayton, Ohio
Columbia, South Carolina Rock Hill, South Carolina
Gallatin, Tennessee Bristol, Virginia
Management devotes significant time and resources to analyzing
prospective restaurant sites and gathering appropriate cost, demographic and
traffic data. The Company utilizes an in-house construction and real estate
department to develop architectural and engineering plans and to oversee new
construction. While the Company prefers to develop its prototype restaurant, the
Company considers developing additional O'Charley's restaurants in existing
buildings where appropriate. Management believes that its ability to remodel an
existing building into an O'Charley's restaurant permits greater accessibility
to quality sites in more developed markets. The Company prefers to own, rather
than lease, its restaurants.
In the past, the Company has entered into joint ventures for the
development of other restaurant concepts, and from time to time the Company may
consider developing additional restaurant concepts.
RESTAURANT DESIGN
The prototypical O'Charley's restaurant is a freestanding building
containing approximately 6,500 square feet and seating for approximately 260
customers, including approximately 50 bar seats. The exterior features old-style
red brick, bright red and green neon borders, multi-colored awnings and
attractive landscaping. The interior is open, casual and well lighted and
features an exposed kitchen, warm woods, polished brass, brick and neon accents,
and hand-painted murals depicting local history, people, places and events. In
addition, the kitchen design provides the Company with flexibility in the types
of food items that can be prepared so that it can adapt to changing customer
tastes and preferences.
The Company remodels its restaurants on average every three to five
years to reflect refinements in the Company's prototype restaurant and changes
in customer tastes. The Company remodeled 16 restaurants in 1998 and plans to
remodel an additional 12 restaurants in 1999. The average cost to remodel the
Company's restaurants in 1998 approximated $190,000 per restaurant.
RESTAURANT OPERATIONS
Restaurant Management. The Company believes that each O'Charley's
restaurant requires an effective management team in order to ensure high quality
food and attentive service. Each restaurant typically has six managers (a
general manager, three assistant managers, a kitchen manager and an assistant
kitchen manager) and approximately 80 full-time and part-time employees. The
Company employs area supervisors who have day-to-day responsibility for the
operating performance of three to five restaurants. The Company's five regional
directors currently supervise 15 to 27 restaurants in their region and are
directly involved in the development of new restaurants. The Company's Director
of Operations oversees all restaurant operations of the Company.
The Company has a "3-Point Compensation Plan" that gives general
managers an opportunity to participate in the growth of their restaurant and the
Company. Pursuant to the 3-Point Compensation Plan, general managers receive a
competitive minimum base salary, a quarterly bonus based upon a certain
percentage of the profit of the restaurant for which the manager has
responsibility and long-term performance-based stock options that provide an
incentive for general managers to increase store level profitability and
shareholder value. The quarterly bonuses are based on the attainment of certain
performance targets that the managers establish each year for their own
restaurants.
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As an incentive for restaurant managers to improve sales and operating
efficiency, the Company also has a monthly incentive compensation plan. Pursuant
to this plan, each member of the restaurant management team may earn a bonus,
payable during each four-week accounting period, based on a percentage of the
sales of the restaurant for which the manager has responsibility. The period
bonus is earned when budgeted financial results are achieved, subject to
adjustment based upon same store sales increases and certain operating
performance factors. In addition, in 1998 the Company instituted a store
management stock option program pursuant to which each member of the restaurant
management team is eligible to receive annual grants of options upon the
attainment of certain performance-based goals.
The Company believes that its compensation plans, particularly the
quarterly bonus, encourage the general managers to establish and implement an
annual strategy. The Company's area supervisors, regional directors and senior
management also receive incentive based cash bonuses and participate in the
Company's senior management stock program pursuant to which they receive
performance-based stock options, the vesting of which is based on the Company
achieving certain budgeted levels of profitability and the individual achieving
goals related to their area of responsibility.
Recruiting and Training. The Company emphasizes the careful selection
and training of all restaurant employees. The restaurant management recruiting
and training program begins with an evaluation and screening program. In
addition to multiple interviews, and background and experience verification, the
Company conducts a testing procedure designed to identify those applicants who
are best suited to manage the Company's restaurant operations. Management
trainees are required to complete a 12-week training program, a portion of which
is conducted at the Company's training center in Nashville, Tennessee. The
training facility has a theater-style auditorium, facilities for operational and
information services training and an area for team-building exercises. The
program familiarizes new managers with all the responsibilities required at an
individual restaurant and with the Company's operations, management objectives,
controls and evaluation criteria before they assume restaurant management
responsibility. Each new hourly coworker is trained by a qualified in-store
trainer called an "ETE" (Educator Through Excellence). Each store has
approximately 11 ETE's who are qualified and tested in their area of
responsibility. Restaurant level management is responsible for the hiring and
training of employees, but they involve the Company's hourly coworkers in the
process.
SUPPORT OPERATIONS
Commissary Operations. The Company operates its own commissary in
Nashville, Tennessee through which it purchases and distributes most of its food
products and restaurant supplies. At the commissary, the Company operates a
USDA-approved meat processing facility at which it ages and cuts its beef and
prepares salad dressings and fresh breads. The commissary primarily services the
Company's restaurants; however, it also sells food products and supplies to
certain other customers, including retail grocery chains, mass merchandisers and
wholesale clubs. Food products and other restaurant supplies are distributed to
the Company's restaurants twice each week by Company-operated trucks. Seafood,
poultry and most produce, which require more frequent deliveries, are typically
purchased locally by restaurant management to ensure freshness. The commissary
contains approximately 45,000 square feet of dry storage, 36,500 square feet of
refrigerated storage and 16,500 square feet of production facilities.
Management believes that its commissary enhances its restaurant
operations by assisting the Company in maintaining consistent food quality and
controlling costs. The commissary also simplifies the restaurant managers'
purchasing duties by providing fixed prices on food items and supplies, which
allows unit level management to focus on other areas of restaurant operations.
The Company establishes food and other product quality standards, and the
commissary negotiates directly with food manufacturers and other suppliers to
obtain
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the lowest possible prices at the required quality. The Company also utilizes
select long-term contracts on certain items to mitigate short-term food cost
fluctuations.
Quality Control. The Company uses written customer evaluations, which
are available to customers in the restaurants, as a means of monitoring customer
satisfaction. The Company also employs a "mystery shopper" program to
independently monitor quality control in areas such as timeliness of service,
atmosphere, cleanliness, employee attitude and food quality. In addition, the
Company has established a customer service department that receives calls and
routes comments to the appropriate personnel.
Advertising and Marketing. The Company has an ongoing defined
advertising and marketing plan for the development of television, radio and
newspaper advertising and also uses point of sale and local store marketing. The
Company's advertising focuses on building brand loyalty and emphasizing the
distinctiveness of the O'Charley's atmosphere and menu offerings. The Company
conducts annual studies of changes in customer tastes and preferences and is
constantly evaluating the quality of its menu offerings. The Company expended
2.7% of its 1998 restaurant sales on advertising. In addition to advertising,
the Company encourages unit level personnel to become active in their
communities through local charities and other organizations and sponsorships.
Restaurant Reporting. Systems and technology are essential for the
management oversight needed to monitor the Company's restaurant operations.
Operational and financial controls are maintained through the use of point of
sale systems in each restaurant and an automated data processing system at the
home office. The management accounting system polls data from the point of sale
system and generates daily reports of sales, sales mix, customer counts, check
average, cash, labor and food cost. Inventories are taken of key products daily
and of all products at the end of each four-week accounting period. Management
utilizes this data to monitor the effectiveness of controls and to prepare
periodic financial and management reports. The system is also utilized for
financial and budgetary analysis, including analysis of sales by restaurant,
product mix and labor utilization.
Real Estate and Construction. The Company maintains an in-house
construction and real estate department to assist in the site selection process,
develop architectural and engineering plans and oversee new construction. The
Company's Director of Real Estate, Chief Executive Officer and Chief Operating
Officer, together with other members of management, analyze prospective sites
and maintain a broad database of possible sites. Once a site is selected, the
Director of Real Estate oversees the zoning process, obtains all required
governmental permits, develops detailed building plans and specifications and
equips the restaurants.
Human Resources. The Company maintains a human resources department
that supports restaurant operations through the design and implementation of
policies, programs, procedures and benefits for the Company's employees. The
human resources department also includes an employee relations manager and
maintains a toll-free number for employee comments and questions. The Company
has had in place for several years a plan to foster diversity throughout its
workforce.
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RESTAURANT LOCATIONS
At December 27, 1998, the Company operated 99 O'Charley's restaurants.
The following table sets forth the locations (including the number of
restaurants at each location) of the Company's restaurants.
ALABAMA KENTUCKY SOUTH CAROLINA
Birmingham (4) Bowling Green Anderson
Decatur Elizabethtown Columbia
Dothan Florence Greenville
Huntsville Frankfort Rock Hill
Mobile Lexington (2) Spartanburg
Montgomery Louisville (5) TENNESSEE
Oxford Owensboro Chattanooga (2)
Tuscaloosa Paducah Clarksville (2)
FLORIDA Richmond Cleveland
Pensacola MISSISSIPPI Cookeville
GEORGIA Biloxi Franklin
Atlanta (5) Hattiesburg Gallatin
Canton Jackson Gatlinburg
Conyers Meridian Jackson
Cumming Southhaven Johnson City
Dalton NORTH CAROLINA Knoxville (5)
Gainesville Asheville Lebanon
Macon Fayetteville Memphis (3)
Snellville Raleigh (3) Murfreesboro
Warner Robbins Winston-Salem Nashville (6)
INDIANA OHIO Pigeon Forge
Clarksville Cincinnati (5) VIRGINIA
Evansville Dayton (2) Bristol
Indianapolis (5)
Lafayette
SERVICE MARKS
The Company has registered the name "O'Charley's" and its logo as a
service mark with the United States Patent and Trademark Office. The Company is
aware of names and marks similar to the service marks of the Company used by
third parties in certain limited geographical areas. Such third party use may
prevent the Company from licensing the use of its service marks for restaurants
in such areas. Except for these limited geographical areas, the Company is not
aware of any infringing uses that could materially affect its business. The
Company intends to protect its service mark by appropriate legal action whenever
necessary.
GOVERNMENT REGULATION
The Company is subject to various federal, state, and local laws
affecting its business. The Company's commissary is licensed and subject to
regulation by the USDA. In addition, each of the Company's restaurants is
subject to licensing and regulation by a number of governmental authorities,
which may include alcoholic beverage control, health, safety, sanitation,
building, and fire agencies in the state or municipality in which the restaurant
is located. Most municipalities in which the Company's restaurants are located
require local business
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licenses. Difficulties in obtaining or failures to obtain the required licenses
or approvals could delay or prevent the development of a new restaurant in a
particular area. The Company is also subject to federal and state environmental
regulations, but such regulations have not had a material adverse effect on the
Company's operations to date.
Approximately 11.3% of the Company's restaurant sales in 1998 was
attributable to the sale of alcoholic beverages. Each restaurant, where
permitted by local law, has appropriate licenses from regulatory authorities
allowing it to sell liquor, beer and wine, and in some states or localities to
provide service for extended hours and on Sunday. Each restaurant has food
service licenses from local health authorities, and similar licenses would be
required for each new restaurant. The failure of a restaurant to obtain or
retain liquor or food service licenses could adversely affect or, in an extreme
case, terminate its operations. However, each restaurant is operated in
accordance with standardized procedures designed to assure compliance with all
applicable codes and regulations. The Company is subject in most states in which
it operates restaurants to "dram-shop" statutes or judicial interpretations,
which generally provide a person injured by an intoxicated person the right to
recover damages from an establishment that wrongfully served alcoholic beverages
to such person. The Company carries liquor liability coverage as part of its
existing comprehensive general liability insurance.
The Federal Americans With Disabilities Act prohibits discrimination on
the basis of disability in public accommodations and employment. The Company
currently designs its restaurants to be accessible to the disabled and believes
that it is in substantial compliance with all current applicable regulations
relating to restaurant accommodations for the disabled. The Company intends to
comply with future regulations relating to accommodating the needs of the
disabled, and the Company does not currently anticipate that such compliance
will require the Company to expend substantial funds.
The development and construction of additional restaurants will be
subject to compliance with applicable zoning, land use and environmental
regulations. The Company's restaurant operations are also subject to federal and
state minimum wage laws and other laws governing such matters as working
conditions, citizenship requirements, overtime and tip credits. In the event a
proposal is adopted that materially increases the applicable minimum wage, such
an increase would result in an increase in the Company's payroll and benefits
expense.
EMPLOYEES
At December 27, 1998, the Company employed approximately 8,000 persons,
125 of whom were home office management and staff personnel, 140 of whom were
commissary personnel and the remainder of whom were restaurant personnel. A
substantial number of the Company's restaurant personnel are employed on a
part-time basis. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
FORWARD-LOOKING STATEMENTS/RISK FACTORS
This report contains certain forward-looking statements within the
meaning of the federal securities laws that 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 factors set forth below. 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
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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.
Expansion Risks. The Company's continued growth depends on its ability
to locate acceptable sites, open new restaurants and operate such restaurants
profitably. The Company's growth strategy includes opening new restaurants in
geographic markets in which the Company has limited or no previous operating
experience. The Company's growth strategy also includes opening new restaurants
in geographic markets in which there are a number of existing O'Charley's
restaurants, which could have an adverse effect on sales and profitability at
these existing restaurants. The Company's ability to expand the number of its
restaurants will depend on a number of factors, including the selection and
availability of quality restaurant sites, the negotiation of acceptable lease or
purchase terms, the securing of required governmental permits and approvals, the
adequate supervision of construction, the hiring, training and retaining of
skilled management and other personnel, the availability of adequate financing
and other factors, many of which are beyond the control of the Company. The
hiring and retention of management and other personnel may be difficult given
the low unemployment rates in certain areas in which the Company operates. There
can be no assurance that the Company will be successful in opening new
restaurants in accordance with the Company's proposed schedule. Furthermore,
there can be no assurance that the Company's new restaurants will generate
revenues or profit margins consistent with those of the Company's existing
restaurants or that the new restaurants will operate profitably.
Geographic Concentration. The Company's existing restaurants are
located predominantly in the Southeastern and Midwestern United States, with 28
of the 99 O'Charley's restaurants located in Tennessee. The Company's plans
include further expansion in the Southeast and Midwest. As a result, the
Company's business, financial or operating results may be materially adversely
affected by economic, weather or business conditions in the Southeast and
Midwest, as well as other geographic regions in which the Company locates
restaurants.
Increases in Operating Costs. The profitability of the Company is
significantly dependent on its ability to anticipate and react to changes in the
prices of food, commodities, labor, employee benefits and similar items. Many
restaurant commodities are subject to seasonal fluctuations in prices as a
result of weather, changes in demand and other factors. Most of the factors
affecting costs are beyond the control of the Company. There can be no assurance
that the Company will be able to anticipate and react to changing costs through
its purchasing practices or menu price adjustments without a material adverse
effect on the Company's business, financial condition or operating results.
Labor Cost and Availability. The Company competes with other
restaurants for experienced management personnel and hourly employees. Given the
low unemployment rates in certain areas in which the Company operates, the
hiring and retention of qualified management and other personnel may be
difficult. The Company may be forced to enhance its wage and benefits package in
order to attract qualified management and other personnel. No assurance can be
given that the Company's labor costs will not increase or that, if they do
increase, they can be absorbed by the Company or offset by menu price
adjustments. Any failure by the Company to attract and retain qualified
management and other personnel, control its labor costs or offset any increased
labor costs through menu price adjustments could have a material adverse effect
on the Company's business, financial condition and operating results.
Competition. The restaurant industry is intensely competitive with
respect to price, service, location and food quality, and there are many
well-established competitors with substantially greater financial and other
resources than the Company. Such competitors include a large number of national
and regional restaurant chains. Some of the Company's competitors have been in
existence for a substantially longer period than the Company
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and may be better established in the markets where the Company's restaurants are
or may be located. The Company's restaurants located in larger cities and
metropolitan areas generally face more intense competition than restaurants
located in smaller markets. Historically, the restaurant business has been
affected by changes in consumer tastes and by national, regional or local
economic conditions and demographic trends. The performance of individual
restaurants may be affected by factors such as traffic patterns and the type,
number and location of competing restaurants. The Company also competes with
other restaurants and retail establishments for quality sites.
EXECUTIVE OFFICERS
Officers of the Company are elected by the Board of Directors and serve
at the pleasure of the Board of Directors. There are no family relationships
among any officers. The following table sets forth certain information regarding
the executive officers of the Company.
Name Age Position
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Gregory L. Burns 44 President, Chief Executive Officer, and Chairman
of the Board of Directors
Steven J. Hislop 39 Executive Vice President and Chief Operating
Officer
A. Chad Fitzhugh 38 Chief Financial Officer, Secretary, and Treasurer
William E. Hall, Jr. 44 Vice President, Operations
Herman A. Moore, Jr. 47 Vice President, Commissary Operations
The following is a brief summary of the business experience of each of
the executive officers of the Company.
Gregory L. Burns has served as Chairman of the Board and Chief
Executive Officer of the Company since February 1994, and as President of the
Company since September 1996. Mr. Burns, a director of the Company since 1990,
served as Chief Financial Officer of the Company from October 1983 to September
1996, as Executive Vice President and Secretary of the Company from October 1983
to May 1993, and as President of the Company from May 1993 to February 1994. Mr.
Burns is a certified public accountant.
Steven J. Hislop has served as Executive Vice President and Chief
Operating Officer of the Company since March 1997 and as a director of the
Company since March 1998. Mr. Hislop served as Senior Vice President -
Operations from January 1993 to March 1997, and as Vice President - Operations
from April 1990 to January 1993.
A. Chad Fitzhugh has served as Chief Financial Officer since September
1996, as Secretary of the Company since May 1993, and as Treasurer since April
1990. Mr. Fitzhugh served as Controller from 1987 until his appointment as Chief
Financial Officer. Mr. Fitzhugh is a certified public accountant.
William E. Hall, Jr. has served as Vice President, Operations since
March 1997. Mr. Hall served as Director of Operations from December 1996 to
March 1997, as a Regional Director of the Company from July 1992 to December
1996, and as an Area Supervisor of the Company from May 1991 to July 1992.
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Herman A. Moore, Jr. has served as Vice President, Commissary
Operations since January 1996. Mr. Moore served as Director of Commissary
Operations from 1988 to January 1996.
ITEM 2. PROPERTIES
Of the 99 O'Charley's restaurants in operation at December 27, 1998, 58
are owned by the Company and the remainder are leased. Seven of the leased
locations are owned by partnerships whose partners are affiliated with the
Company. Restaurant lease expirations range from 1999 to 2019, with the majority
of the leases providing for an option to renew for additional terms ranging from
five to 20 years. All of the Company's leases provide for a specified annual
rental, and some leases call for additional rental based on sales volume at the
particular location over specified minimum levels. Generally, the leases are net
leases which require the Company to pay the cost of insurance and taxes. The
Company's executive offices and its commissary are located in Nashville,
Tennessee in approximately 138,000 square feet of office and warehouse space
under a lease that expires in March 2017. The Company has an option to extend
the lease for two additional five-year terms. The Company has an option to
purchase the property at various times during the lease term.
ITEM 3. LEGAL PROCEEDINGS
In February 1999, the Company and a former employee of the Company
settled a previously disclosed lawsuit in the United States District Court for
the Middle District of Tennessee. The lawsuit involved claims by the Company
against the former employee alleging wrongful conversion of Company funds and
fraudulent misrepresentation, and claims by the employee against the Company
alleging malicious prosecution, intentional infliction of emotional distress,
breach of contract, and race discrimination. The Company paid the employee
$22,000 in settlement of all claims.
The Company is also involved in litigation and proceedings in the
ordinary course of its business. The Company does not believe the outcome of any
such litigation will have a material adverse effect upon the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth
quarter ended December 27, 1998.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market's National
Market under the symbol "CHUX." As of March 23, 1999, there were approximately
640 shareholders of record. The following table shows quarterly high and low
closing prices for the Common Stock for the periods indicated, as reported by
the Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal 1997 High Low
---------- ---------
<S> <C> <C>
First Quarter............................................... $ 9.33 $ 8.00
Second Quarter.............................................. 11.92 8.42
Third Quarter............................................... 11.83 9.83
Fourth Quarter.............................................. 12.75 10.33
<CAPTION>
Fiscal 1998 High Low
---------- ---------
<S> <C> <C>
First Quarter............................................... $14.75 $10.00
Second Quarter.............................................. 15.00 12.92
Third Quarter............................................... 15.00 9.25
Fourth Quarter.............................................. 13.88 7.31
</TABLE>
The Company has never paid a dividend on its Common Stock. The Company
intends to retain its earnings to finance the growth and development of its
business and does not expect to pay any cash dividends in the foreseeable
future. The Company's revolving credit facility prohibits the payment of cash
dividends on the Common Stock without the consent of the participating banks.
No securities of the Company were sold during the fiscal year ended
December 27, 1998 without registration under the Securities Act of 1933, as
amended.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, DECEMBER 27, DECEMBER 28, DECEMBER 29, DECEMBER 31, DECEMBER 25,
EXCEPT PER SHARE DATA) 1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
RESULTS OF OPERATIONS
Revenues $ 246,046 $ 200,403 $ 164,530 $ 147,557 $ 122,697
Restaurant Operating Margin 51,284 39,976 29,320 25,016 19,904
Advertising, General and 7,717
Administrative Expenses 15,533 12,932 9,370 8,187
Depreciation and Amortization 13,452 10,331 8,141 6,164 4,711
Asset Revaluation -- -- 5,110 -- --
Income From Operations 22,461 16,920 6,838 11,138 8,051
Litigation -- -- 6,200 1,000 --
Earnings (Loss) Before Income
Taxes 19,846 13,686 (1,944) 16,662 7,465
Income Tax Expense (Benefit)(1) 6,946 4,886 (797) 6,071 2,492
Net Earnings (Loss)(1) 12,900 8,800 (1,147) 10,591 4,973
--------- --------- --------- --------- ---------
EARNINGS PER SHARE DATA (DILUTED) (2)
Net Earnings (Loss)(1) $ 0.79 $ 0.66 $ (0.10) $ 0.85 $ 0.41
Weighted Average Common Shares
Outstanding 16,392 13,361 11,714 12,462 12,206
--------- --------- --------- --------- ---------
AT YEAR END
FINANCIAL POSITION
Cash $ 3,068 $ 1,965 $ 1,616 $ 2,576 $ 1,727
Working Capital (Deficit) (11,571) (11,309) (10,864) (7,344) (3,050)
Property and Equipment, net 174,196 136,051 103,281 81,512 64,609
Total Assets 193,782 150,515 117,159 93,351 76,082
Long-Term Debt, net 35,566 13,679 29,822 11,990 15,140
Capitalized Lease Obligations, net 16,343 14,039 11,797 9,272 5,744
Shareholders' Equity 108,774 95,383 50,926 51,787 40,804
--------- --------- --------- --------- ---------
</TABLE>
(1) The income tax expense, net earnings and per share data for fiscal
years 1995 and 1994 represent pro forma amounts.
(2) Share and per share data have been restated to reflect the
three-for-two stock split in 1998.
13
<PAGE> 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
At December 27, 1998, we owned and operated 99 O'Charley's restaurants in
Alabama, Florida, Georgia, Indiana, Kentucky, Mississippi, North Carolina, Ohio,
South Carolina, Tennessee and Virginia. O'Charley's are full service, casual
dining restaurants that appeal to traditional casual dining customers as well
as value-oriented customers by offering high quality food at moderate pricing
with outstanding service. Our restaurants are open seven days a week, and most
offer alcoholic beverages as well as food. We expect to increase revenues by
opening new units and by increasing same store sales. Our growth strategy is to
continue fully penetrating existing and new targeted major metropolitan areas
while opening new units in smaller secondary markets in close proximity to our
major markets. We operate a commissary for the primary purpose of providing our
restaurants with consistent quality food products that meet our specifications
while obtaining the best possible prices for those items. The majority of the
food products served in our restaurants are distributed to the stores by the
commissary. In addition to purchasing food and supply products, the commissary
manufactures certain proprietary products and ages and cuts red meat into steaks
in its USDA-approved meat facility. All sales from the commissary to the
restaurants are eliminated in the consolidated financial statements.
The following table reflects changes in the number of company-owned restaurants
for the periods presented:
<TABLE>
<CAPTION>
Restaurants 1998 1997 1996
-----------------------------------------------------------------
<S> <C> <C> <C>
In operation, beginning of period 82 69 55
Restaurants opened 16 13 12
Restaurants acquired from franchisees 1 -- 6
Restaurants closed -- -- (4)
-- -- --
In operation, end of period 99 82 69
== == ==
</TABLE>
Revenues consist of restaurant sales and to a lesser extent commissary sales.
Restaurant sales include food and beverage sales and are net of applicable state
and local sales taxes. Commissary sales represent sales to outside parties
consisting primarily of sales of O'Charley's label food items, primarily salad
dressings, to retail grocery chains, mass merchandisers and wholesale clubs.
Consistent with industry trends, liquor sales as a percentage of restaurant
sales has declined in each of the last three fiscal years.
Cost of food, beverage and supplies primarily consists of the costs of beef,
poultry, seafood, produce and alcoholic and non-alcoholic beverages. Various
factors beyond our control, including adverse weather, cause periodic
fluctuations in food costs. Generally, temporary increases are absorbed and are
not passed on to customers; however, we typically adjust menu prices to
compensate for increased costs of a more permanent nature.
Payroll and benefits include payroll and related costs and expenses directly
relating to restaurant level activities including restaurant management salaries
and bonuses, hourly wages for store level employees, payroll taxes, workers'
compensation, various health, life and dental insurance programs, vacation
expense and sick pay. We have an incentive bonus plan that compensates store
management for achieving and exceeding certain store level financial targets and
performance goals.
Restaurant operating costs include occupancy and other expenses at the
restaurant level, except property and equipment depreciation and amortization.
Rent, supervisory salaries, bonuses and expenses, management training salaries,
property insurance, property taxes, utilities, repairs and maintenance, outside
services and credit card fees account for the major expenses in this category.
Restaurant operating margin is defined as restaurant sales less cost of
restaurant sales. Cost of restaurant sales, for purposes of this discussion,
consists of cost of food, beverage and supplies, payroll and benefits and
restaurant operating costs.
Advertising, general and administrative expenses include all advertising and
home office administrative functions that support the existing restaurant base
and provide the infrastructure for future growth. Advertising, executive
management and support staff salaries, bonuses and related expenses, data
processing, legal and accounting expenses and office expenses account for the
major expenses in this category.
14
<PAGE> 15
Depreciation and amortization primarily includes depreciation on property and
equipment calculated on a straight-line basis over an estimated useful life and
amortization of preopening costs for new restaurants, which includes costs of
hiring and training the initial staff and certain other costs. Depreciation and
amortization as a percentage of total revenues may increase as the number of new
store openings increases.
Beginning in the first quarter of 1999, preopening costs will be expensed as
incurred in accordance with SOP 98-5 (see New Accounting Pronouncement) rather
than amortized over one year. This new accounting method affects when preopening
costs are expensed and may impact earnings relative to the current method from
quarter to quarter and year to year depending on when these costs are incurred.
We will continue to capture preopening costs, which will be recorded in a new
line item category on the statement of operations. The depreciation and
amortization category, beginning in 1999, will no longer include the
amortization of preopening costs.
The following section should be read in conjunction with "Selected Financial
Data" and our financial statements and the related notes thereto included
elsewhere herein. The following table highlights the operating results for
fiscal years 1998, 1997 and 1996 as a percentage of total revenues unless
otherwise indicated. Fiscal years 1998, 1997 and 1996 are each comprised of 52
weeks.
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales 98.9% 98.6% 98.6%
Commissary sales 1.1 1.4 1.4
----- ----- -----
100.0 100.0 100.0
COSTS AND EXPENSES:
Cost of restaurant sales: (1)
Cost of food, beverage and supplies 34.7 34.7 35.9
Payroll and benefits 30.2 30.6 30.9
Restaurant operating costs 14.0 14.5 15.1
----- ----- -----
78.9 79.8 81.9
----- ----- -----
Restaurant operating margin (2) 21.1 20.2 18.1
Cost of commissary sales (3) 94.3 93.7 95.2
Advertising, general and administrative expenses 6.3 6.5 5.7
Depreciation and amortization 5.5 5.2 4.9
Asset revaluation -- -- 3.1
----- ----- -----
INCOME FROM OPERATIONS 9.1 8.4 4.2
OTHER (INCOME) EXPENSE:
Interest expense, net 1.1 1.7 1.6
Litigation -- -- 3.8
Other, net (0.1) (0.1) --
----- ----- -----
EARNINGS (LOSS) BEFORE INCOME TAXES 8.1 6.8 (1.2)
INCOME TAX EXPENSE (BENEFIT) 2.8 2.4 (0.5)
----- ----- -----
NET EARNINGS (LOSS) 5.2% 4.4% (0.7%)
===== ===== =====
</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.
15
<PAGE> 16
FISCAL YEAR 1998 COMPARED WITH FISCAL YEAR 1997
Total revenues in 1998 increased $45.6 million, or 22.8%, to $246.0 million from
$200.4 million in 1997 primarily as a result of an increase in restaurant sales
of $45.9 million, or 23.2%. The increase in restaurant sales was attributable to
the addition of 16 new restaurants, an increase in same store sales of 5.2% and
the acquisition of our remaining franchisee's operations. The increase in same
store sales was the result of an increase in customer traffic of approximately
3.2% and an increase in the average check of approximately 2.0%, which was
primarily the result of a menu price increase taken in March 1998. We believe
the increase in customer traffic is partly the result of an increase, since the
fourth quarter of 1996, in the total marketing dollars expended as a percentage
of sales. Additionally, we believe our growth strategy of opening several stores
in existing major markets and back filling in secondary markets has contributed
to an increase in consumer awareness in our markets.
Cost of food, beverage and supplies in 1998 increased $15.8 million, or 23.0%,
to $84.4 million from $68.6 million in 1997. As a percentage of restaurant
sales, cost of food, beverage and supplies remained at 34.7%. Although the
overall food cost percentage remained the same, there were some items that
positively and negatively affected food cost. Our menu price increase in March
1998 and improved operating efficiencies lowered food cost as a percentage of
sales. These improvements were offset by cost increases in poultry, primarily
chicken tenders, red meat, cheese and dairy products and potatoes. Except for
those food items mentioned above, the impact of inflation on food cost was
minimal. Currently, we expect nominal increases in the cost of food items in
1999; however, there can be no assurance that events outside our control will
not result in increased food costs.
Payroll and benefits increased $13.1 million, or 21.7%, to $73.6 million in 1998
from $60.4 million in 1997. Payroll and benefits as a percentage of restaurant
sales decreased to 30.2% in 1998 from 30.6% in 1997. Consistent with the
previous year, we continued to achieve a lower payroll cost as a percentage of
restaurant sales due to the economies achieved from higher average unit sales
volumes, reduced management and hourly turnover and from certain reduced
employee benefit cost reductions. Store level bonus increases and higher average
wage rates partially offset the decreases in payroll and benefit costs. Our
markets generally have low unemployment rates and we compete with other
restaurants for employees. We anticipate continued wage rate increases in 1999.
Restaurant operating costs in 1998 increased $5.6 million, or 19.7%, to $34.2
million from $28.6 million in 1997. As a percentage of restaurant sales,
restaurant operating costs decreased to 14.0% in 1998 from 14.5%. This decrease
is primarily attributable to economies generated from higher average unit
volumes and lower rent expense as we have generally purchased our restaurant
sites in recent years. Decreases in the restaurant operating cost percentage
were partially offset by higher bonuses earned by supervisor and regional level
management and by increases in training expenses for store management. Each of
the supervisors and regional managers participate in an incentive-based
compensation plan tied directly to their financial results and performance
goals. We increased management training in 1998 to prepare for the additional
units expected to open in 1999 including stores in two new geographical markets,
Charlotte, North Carolina, and Columbus, Ohio. Typically, we incur higher
initial supervision and other operating costs when entering new markets. We did
not enter any new major market in 1998.
Restaurant operating margin increased 28.3% to $51.3 million in 1998 from $40.0
million in 1997. As a percentage of restaurant sales, restaurant operating
margin improved to 21.1% in 1998 from 20.2% in 1997. This improvement is due to
the increase in overall average sales and decreases in payroll and benefit cost
and other restaurant operating costs as a percentage of sales.
Advertising, general and administrative expenses increased $2.6 million, or
20.1%, to $15.5 million in 1998 from $12.9 million in 1997. As a percentage of
total revenue, advertising, general and administrative expenses decreased to
6.3% from 6.5%. Advertising expenditures increased 20.2% to $6.6 million in 1998
from $5.5 million in 1997 and, as a percentage of restaurant sales, decreased to
2.7% in 1998 from 2.8% in 1997. General and administrative expenses increased
20.0% to $9.0 million in 1998 from $7.5 million in 1997.
Depreciation and amortization in 1998 increased $3.1 million, or 30.2%, to $13.5
million from $10.3 million in 1997. As a percentage of total revenue,
depreciation and amortization increased to 5.5% in 1998 from 5.2% in 1997.
Amortization of preopening expenses remained at 1.2% of total revenue in 1998
while depreciation expense increased to 4.3% of total revenue in 1998 from 4.0%
in 1997. The increase in depreciation expense is primarily attributable to
additional capital expenditures for the remodeling of certain existing stores.
See "New Accounting Pronouncement" for changes in the reporting of preopening
costs, beginning in the first quarter of 1999.
16
<PAGE> 17
Income from operations increased $5.5 million, or 32.7%, to $22.5 million in
1998 from $16.9 million in 1997. After adjusting for the interest expense
reduction in 1998, earnings before income taxes increased $6.2 million, or
45.0%, to $19.8 million from $13.7 million in 1997.
Interest expense, net decreased $658,000 in 1998 to $2.8 million from $3.5
million in 1997. We reduced our long-term debt by approximately $34.7 million in
the fourth quarter of 1997 from the net proceeds received from the sale of
common stock that reduced interest expense in 1998.
Income tax expense increased $2.1 million, or 42.2%, to $6.9 million in 1998
from $4.9 million in 1997. As a percentage of earnings before income taxes,
income tax expense was 35.0% in 1998 versus 35.7% in 1997. This reduction is
primarily attributable to an overall lower state income tax expense in 1998.
FISCAL YEAR 1997 COMPARED WITH FISCAL YEAR 1996
Total revenues in 1997 increased $35.9 million, or 21.8%, to $200.4 million from
$164.5 million in 1996 primarily as a result of an increase in restaurant sales
of $35.3 million, or 21.8%, and an increase in commissary sales of $555,000, or
24.5%. The increase in restaurant sales was primarily attributable to the
addition of 13 restaurants in 1997 and an increase in same store sales of 4.7%.
The increase in same store sales resulted from an increase in customer traffic
and menu price increases. We attribute the increase in customer traffic to the
introduction of a redesigned menu, a new advertising campaign, increased
promotional items, improved restaurant operations and milder weather in our
markets during the first quarter of 1997 compared with 1996. We initiated a new
advertising campaign beginning in the fourth quarter of 1996 that continued
through 1997. This new advertising effort focused on our defining differences
and in some cases highlighted certain promotional items. Menu price increases
were instituted during the first and third quarters of 1997 which realized
approximately 1%. Liquor sales as a percentage of restaurant sales decreased to
11.9% in 1997 reflecting industry trends.
Cost of food, beverage and supplies in 1997 increased $10.4 million, or 17.9%,
to $68.6 million from $58.2 million in the prior year. Cost of food, beverage
and supplies as a percentage of restaurant sales decreased to 34.7% in 1997 from
35.9% in 1996. This decrease was primarily attributable to cost reductions in
certain high volume food commodities, increased operating efficiencies at our
commissary and overall lower produce costs due primarily to lower potato costs.
Our redesigned menu and seasonal promotions also contributed to lower food cost
by offering a mix of menu items competitively priced that produced a lower food
cost percentage while enhancing our quality standards. Overall, the impact of
inflation on food cost was minimal.
Payroll and benefits increased $10.2 million, or 20.3%, to $60.4 million in 1997
from $50.2 million in the prior year. Payroll and benefits as a percentage of
restaurant sales decreased to 30.6% in 1997 from 30.9% in 1996. We achieved a
lower percentage of payroll and benefit costs due primarily to the economies
achieved from higher average unit sales volumes, reduced management and hourly
turnover and from certain employee benefit cost reductions. These decreases were
partially offset by increases in restaurant management bonus expense and wage
rates. Bonus expense increased due to a larger percentage of stores meeting and
exceeding their financial targets and performance goals in 1997 compared with
1996. As a result of increased competition and the low unemployment rates in the
markets in which O'Charley's restaurants are located, we continued to increase
wages and benefits in order to attract and retain management and hourly
coworkers.
Restaurant operating costs in 1997 increased $4.1 million, or 16.6%, to $28.6
million from $24.5 million in the prior year. Restaurant operating costs as a
percentage of restaurant sales decreased to 14.5% in 1997 from 15.1% in 1996.
This decrease was primarily attributable to the allocation of certain
supervisory and overhead costs over a greater number of restaurants and
economies achieved from higher average unit sales. Since January 1996, we have
generally opened new stores in existing geographical markets, 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 we continued to purchase most of our restaurant sites. These
decreases in the restaurant operating percentage were partially offset by an
increase in the amount of bonus expense earned by supervisory management. Bonus
expense increased due to the improved financial and performance results in 1997.
17
<PAGE> 18
Restaurant operating margin increased 36.3% to $40.0 million in 1997 from $29.3
million in 1996. As a percentage of restaurant sales, the restaurant operating
margin increased to 20.2% in 1997 from 18.1% in 1996. This improvement was
primarily attributable to the leverage achieved from overall higher average unit
volumes and lower food cost.
Advertising, general and administrative expenses increased $3.5 million, or
38.0%, to $12.9 million in 1997 from $9.4 million in the prior year.
Advertising, general and administrative expenses as a percentage of total
revenues increased to 6.5% in 1997 from 5.7% in 1996. This increase was
primarily the result of an increase in advertising expenditures and bonus
expense for home office management. We introduced a television and radio
advertising campaign in the fourth quarter of 1996 in conjunction with the
introduction of a redesigned menu. These advertising expenses increased to 2.8%
of restaurant sales in 1997 compared with approximately 2.4% in 1996. Bonus
expense increased primarily as a result of an increase in the bonus compensation
of senior management and executive officers that is based in part on a formula
that rewards increased profits.
Depreciation and amortization in 1997 increased $2.2 million, or 26.9%, to $10.3
million from $8.1 million in the prior year. Depreciation and amortization as a
percentage of total revenues increased to 5.2% in 1997 from 4.9% in 1996. The
increase is primarily due to our additional capital expenditures for the
remodeling of certain existing stores and the relocation of two stores.
A $5.1 million charge relating to the revaluation of certain assets was recorded
in 1996 pursuant to the provisions of FAS 121. During 1996, we identified
certain restaurant units for possible impairment. Once identified, we estimated
the undiscounted future cash flows for each unit and determined that for each
unit the asset's net book value exceeded its related undiscounted cash flows;
and as a result, we recognized asset write-downs. See Note 16 of Notes to our
financial statements.
Income from operations increased $10.1 million, or 147.4%, to $16.9 million in
1997 from $6.8 million in 1996. This increase was primarily the result of the
$5.1 million charge in 1996 for assets impaired under FAS 121. Excluding the
$5.1 million charge in 1996, income from operations in 1996 would have been
$11.9 million and the increase in 1997 would have been $5.0 million, or 41.6%,
over 1996. Income from operations as a percentage of total revenues, excluding
the FAS 121 charge in 1996, would have increased from 7.3% in 1996 to 8.4% in
1997. This increase was primarily a result of an improved restaurant operating
margin, which was partially offset by increased general and administrative and
depreciation and amortization expenses.
Interest expense, net increased $871,000, or 33.7%, to $3.5 million in 1997 from
$2.6 million in 1996. This increase in interest expense was primarily the result
of increased average borrowings under the revolving line of credit and
capitalized lease obligations to fund our growth. We reduced our long-term debt
by approximately $34.7 million in the fourth quarter of 1997 from net proceeds
received from the sale of common stock.
Litigation expense of $6.2 million in 1996 represented expenses relating to the
settlement of a two-year old class action discrimination lawsuit against the
Company.
Income tax expense was $4.9 million in 1997 compared with income tax benefit of
$797,000 in the prior year. Income tax expense (benefit) as a percentage of
earnings (loss) before income taxes for 1997 was 35.7% compared with (41.0%) in
1996. The income tax benefit in 1996 was higher than the expected rate because
of the amount of the Federal Insurance Contribution Act tip credits in relation
to a lower taxable income.
Earnings (loss) before income taxes was $13.7 million in 1997 versus a $1.9
million loss in 1997. Excluding the asset revaluation and litigation charges in
1996, earnings before income taxes in 1996 would have been $9.4 million, which
represents an increase of $4.3 million, or 46.1% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of capital have historically been generated from cash
provided by operations, borrowings under our bank credit facilities and
additions to capitalized lease obligations. Our principal capital needs arise
primarily from the purchase and development of new restaurants, equipment
replacement and improvements to existing restaurants. Property and equipment
additions of $50.4 million in 1998, including $7.9 million financed by
capitalized lease
18
<PAGE> 19
obligations, were incurred primarily for the development of 16 new restaurants
and improvements to existing restaurants. Additionally, we repaid $4.9 million,
net, in principal on our long-term debt and capitalized lease obligations and
incurred other investment expenditures of $1.2 million. These cash outlays were
funded primarily by $25.0 million in cash provided by operations, net borrowings
of $22.0 million under our revolving credit agreement (the "Revolver"),
borrowings of approximately $7.9 million under capitalized lease obligations,
approximately $2.2 million in proceeds from the sale and involuntary conversion
of certain assets and approximately $0.6 million from the exercise of employee
stock options. The above sources and uses of cash increased cash by $1.1 million
in 1998.
We believe we will need additional capital of approximately $53.0 million to
$58.0 million in 1999 to fund capital expenditures for the planned 17 to 19 new
restaurants and for improvements to existing units. As of December 27, 1998, we
had nine restaurants under construction, six to seven of which are expected to
open during the first quarter of 1999. In addition, we have plans for several
new capital projects in 1999, including an expected $3.5 million for a new
freezer and the possible purchase of the existing commissary and home office
land and building facilities which are currently under an operating lease. The
purchase of the commissary and home office facilities is currently being
considered. If purchased, we estimate the cost to be approximately $5.0 to $6.0
million; however, we do have the option to continue leasing these facilities.
Financing to fund these projects is currently being evaluated and may include
borrowings under the Revolver and/or off balance sheet financing. Actual capital
expenditures in 1999 may vary from the above estimate based on a number of
factors, including the timing of additional purchases of future restaurant
sites. We intend to continue financing the furniture, fixtures and equipment for
our new stores with capitalized lease obligations.
The Revolver provides for a maximum borrowing capacity of $100 million. As of
December 27, 1998, $35.0 million was outstanding under the Revolver and bore
interest at an average rate of 6.0%. The maturity date on $70 million of the
Revolver is November 30, 2001, while the remaining $30 million matures on
December 7, 1999. The maturities may be extended annually by one year, at the
participating banks' option, beginning on each of the anniversaries of the
Revolver. The Revolver imposes restrictions on us with respect to the
maintenance of certain financial ratios, the incurrence of indebtedness, the
sale of assets, mergers and the payment of dividends.
Our working capital historically has had current liabilities in excess of
current assets due to cash reinvestments in long-term assets, mostly property
and equipment additions. At December 27, 1998, the working capital deficiency
and the current ratio were $11.6 million and 0.6 to 1, respectively.
On September 2, 1998, the Board of Directors of the Company approved the
repurchase of up to 5.0% of our outstanding common stock. As of December 27,
1998, approximately 14,000 shares had been repurchased. While we do not
anticipate repurchasing any additional shares at this time, we continually
evaluate the best uses of our capital and may repurchase additional shares in
the future.
During 1999, we believe that available cash, cash generated from operations and
borrowings under the Revolver and capitalized lease obligations will be
sufficient to finance our operations and expected capital outlays.
NEW ACCOUNTING PRONOUNCEMENT
In December 1997, the AICPA Accounting Standards Executive Committee (AcSEC)
approved for issuance the Statement of Position (SOP 98-5), Reporting on the
Costs of Start-Up Activities. This SOP is 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, we
capitalize our preopening costs and amortize these costs over a 12-month period.
At December 27, 1998, we had $2.1 million in unamortized preopening costs. We
will recognize in the first quarter of 1999, as a cumulative effect of a change
in accounting principle, a charge equal to the after-tax effect of these
unamortized preopening costs. Thereafter, preopening costs will be expensed as
incurred. The adoption of the SOP will not impact cash flows from operations.
YEAR 2000
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.
19
<PAGE> 20
We are considering the impact of the year 2000 issues on our business and
operations, and we have a remediation plan. We have completed testing of our
information technology ("IT") systems, and we are compliant. We are currently
testing our non-IT systems and anticipate completing such testing by June 30,
1999. We are currently making inquiries to our suppliers and other third-party
entities with which we have business relations as to their own year 2000 issues.
We expect to complete such inquiries by June 30, 1999. We are 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. We expense all costs associated with system changes as the costs are
incurred. A significant portion of our year 2000-related costs are already
included in our software support agreements; therefore, we do not believe the
year 2000 issues will have a significant impact on our operations or liquidity.
However, the malfunction or complete failure of our systems would likely have a
material adverse effect on the results of operations and financial condition of
the Company. Should the remaining review of our year 2000 risks reveal
potentially non-compliant systems or material third-party risks, contingency
plans will be developed to address the deficiencies revealed at that time. Our
statements regarding year 2000 issues are dependent on many factors, some of
which are beyond our control. Due to the general uncertainty inherent in the
year 2000 problem, resulting in part from the uncertainty of the year 2000
readiness of third-party suppliers and customers, we are unable to determine at
this time whether the consequences of year 2000 failures will have a material
impact on our operations, liquidity or financial condition.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could adversely affect our operations. A majority of our
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 our restaurants are located, we have continued to increase
wages and benefits in order to attract and retain management personnel and
hourly coworkers. In addition, most of our leases require us to pay taxes,
insurance, maintenance, repairs and utility costs, and these costs are subject
to inflationary pressures. We 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.
NOTE REGARDING FORWARD-LOOKING INFORMATION
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 our intent, belief and expectations such as statements
concerning our future profitability and our operating growth strategy. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties including, without limitation, increases in food, labor and
employee benefit costs, the availability of experienced management and hourly
coworkers, our ability to locate and open new restaurants and to operate such
restaurants profitably, our ability to compete successfully in new markets we
intend to enter and the intense competition in the restaurant industry. Although
we believe 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 us
or any other person that the objectives and plans of the Company will be
achieved. We undertake 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.
20
<PAGE> 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Disclosure About Interest Rate Risk. The Company is subject to market
risk from exposure to changes in interest rates based on its financing,
investing, and cash management activities. The Company utilizes a balanced mix
of debt maturities along with both fixed-rate and variable-rate debt to manage
its exposures to changes in interest rates. (See Notes 5 and 6 to the Financial
Statements appearing elsewhere in this Form 10-K.) The Company does not expect
changes in interest rates to have a material effect on income or cash flows in
fiscal 1999, although there can be no assurances that interest rates will not
significantly change.
21
<PAGE> 22
Item 8. Financial Statements and Supplementary Data
Balance Sheets
<TABLE>
<CAPTION>
December 27, December 28,
(Dollars in Thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 3,068 $ 1,965
Accounts receivable, less allowance for doubtful
accounts of $87 in 1998 and $72 in 1997 2,371 2,204
Inventories 7,029 4,600
Preopening costs 2,074 1,340
Deferred income taxes 143 807
Other current assets 2,553 2,231
--------- --------
Total current assets 17,238 13,147
PROPERTY AND EQUIPMENT, net 174,196 136,051
OTHER ASSETS 2,348 1,317
--------- --------
$ 193,782 $150,515
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,941 $ 5,529
Accrued payroll and related expenses 5,104 4,603
Accrued expenses 7,351 6,463
Federal, state and local taxes 3,984 3,240
Current portion of long-term debt and capitalized leases 5,429 4,621
--------- --------
Total current liabilities 28,809 24,456
DEFERRED INCOME TAXES 4,290 2,958
LONG-TERM DEBT, net of current portion 35,566 13,679
CAPITALIZED LEASE OBLIGATIONS, net of current portion 16,343 14,039
SHAREHOLDERS' EQUITY:
Common stock--No par value; authorized, 50,000,000 shares; issued and
outstanding, 15,394,128 in 1998 and 15,264,921 in 1997 65,986 65,249
Additional paid-in capital 509 652
Accumulated other comprehensive loss, net of tax (103) --
Retained earnings 42,382 29,482
--------- --------
Total shareholders' equity 108,774 95,383
--------- --------
$ 193,782 $150,515
========= ========
</TABLE>
See notes to financial statements.
22
<PAGE> 23
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------------
December 27, December 28, December 29,
(In Thousands, Except Per Share Data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Restaurant sales $ 243,405 $ 197,554 $ 162,235
Commissary sales 2,630 2,819 2,264
Franchise revenue 11 30 31
--------- --------- ---------
246,046 200,403 164,530
COSTS AND EXPENSES:
Cost of restaurant sales:
Cost of food, beverage and supplies 84,370 68,584 58,184
Payroll and benefits 73,561 60,431 50,227
Restaurant operating costs 34,190 28,563 24,504
Cost of commissary sales 2,479 2,642 2,156
Advertising, general and administrative expenses 15,533 12,932 9,370
Depreciation and amortization 13,452 10,331 8,141
Asset revaluation -- -- 5,110
--------- --------- ---------
223,585 183,483 157,692
--------- --------- ---------
INCOME FROM OPERATIONS 22,461 16,920 6,838
OTHER (INCOME) EXPENSE:
Interest expense, net 2,801 3,459 2,588
Litigation -- -- 6,200
Other, net (186) (225) (6)
--------- --------- ---------
2,615 3,234 8,782
--------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES 19,846 13,686 (1,944)
INCOME TAX EXPENSE (BENEFIT) 6,946 4,886 (797)
NET EARNINGS (LOSS) $ 12,900 $ 8,800 $ (1,147)
========= ========= =========
BASIC EARNINGS (LOSS) PER COMMON SHARE $ 0.84 $ 0.71 $ (0.10)
========= ========= =========
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ 0.79 $ 0.66 $ (0.10)
========= ========= =========
</TABLE>
See notes to financial statements.
23
<PAGE> 24
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
-------------------- Paid-in Comprehensive Retained
(In Thousands) Shares Amount Capital Loss, net Earnings Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 11,657 $28,991 $ 967 $ -- $21,829 $ 51,787
Comprehensive income:
1996 net loss -- -- -- -- (1,147) (1,147)
Cash distribution to
Shoex, Inc. shareholders -- -- (315) -- -- (315)
Exercise of employee stock options
including tax benefits 98 446 -- -- -- 446
Shares issued under CHUX
Ownership Plan 27 155 -- -- -- 155
------ ------- ----- -------- -------- ---------
Balance, December 29, 1996 11,782 29,592 652 -- 20,682 50,926
Comprehensive income:
1997 net earnings -- -- -- -- 8,800 8,800
Shares of common stock sold 3,348 34,726 -- -- -- 34,726
Litigation shares issued 46 445 -- -- -- 445
Exercise of employee stock options
including tax benefits 70 336 -- -- -- 336
Shares issued under CHUX
Ownership Plan 19 150 -- -- -- 150
------ ------- ----- -------- -------- ---------
Balance, December 28, 1997 15,265 65,249 652 -- 29,482 95,383
Comprehensive income:
1998 net earnings -- -- -- -- 12,900 12,900
Change in unrealized loss on
available for sale securities,
net of tax -- -- -- (103) -- (103)
---------
12,797
---------
Repurchase of common stock (14) -- (143) -- -- (143)
Exercise of employee stock options
including tax benefits 95 447 -- -- -- 447
Stock donation 8 97 -- -- -- 97
Shares issued under CHUX
Ownership Plan 40 193 -- -- -- 193
------ ------- ----- -------- -------- ---------
Balance, December 27, 1998 15,394 $65,986 $ 509 $ (103) $ 42,382 $ 108,774
====== ======= ===== ======== ======== =========
</TABLE>
See notes to financial statements.
24
<PAGE> 25
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------
December 27, December 28, December 29,
(In Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 12,900 $ 8,800 $ (1,147)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 10,558 7,920 5,982
Amortization of preopening costs 2,894 2,411 2,159
Deferred income taxes 2,052 3,190 (2,595)
(Gain) loss on sale of assets (522) 73 (157)
Asset revaluation -- -- 5,110
Changes in assets and liabilities:
Accounts receivable (167) (658) (302)
Due from related parties -- -- 108
Inventories (2,429) (95) (725)
Additions to preopening costs (3,628) (2,654) (2,211)
Other current assets (322) (874) (386)
Accounts payable 1,412 507 599
Accrued payroll and other accrued expenses 2,230 (237) 4,297
-------- -------- --------
Net cash provided by operating activities 24,978 18,383 10,732
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (42,550) (34,621) (27,744)
Proceeds from sale and involuntary conversion of assets 2,238 1,025 1,341
Purchase of equity securities (612) -- --
Other, net (595) 85 (516)
-------- -------- --------
Net cash used by investing activities (41,519) (33,511) (26,919)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 43,822 16,400 18,503
Payments on long-term debt and capitalized lease obligations (26,675) (36,135) (3,563)
Distribution to shareholders of acquired entity -- -- (315)
Net proceeds from sale of common stock -- 34,726 --
Exercise of employee incentive stock options 640 486 602
Repurchase of common stock (143) -- --
-------- -------- --------
Net cash provided by financing activities 17,644 15,477 15,227
-------- -------- --------
Increase (decrease) in cash 1,103 349 (960)
Cash at beginning of the period 1,965 1,616 2,576
-------- -------- --------
Cash at end of the period $ 3,068 $ 1,965 $ 1,616
======== ======== ========
</TABLE>
See notes to financial statements.
25
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
O'Charley's Inc. (the "Company") owns and operates 99 (at December 27, 1998)
full-service restaurant facilities in 11 southeastern and midwestern states
under the trade name of "O'Charley's." The financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The Company's
fiscal year ends on the last Sunday in December. Fiscal years 1998, 1997 and
1996 were comprised of 52 weeks, which ended December 27, December 28, and
December 29, respectively.
Inventories are valued at the lower of cost (first-in, first-out method) or
market and consist primarily of food, beverages and supplies.
Preopening Costs represent costs incurred prior to a restaurant opening. These
costs are capitalized and amortized over a 12-month period commencing the date
the restaurant opens.
On April 13, 1998, the AICPA Accounting Standards Executive Committee (AcSEC)
issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activity.
SOP 98-5 is effective for financial statements issued for fiscal years beginning
after December 15, 1998. The SOP requires that costs incurred during a start-up
activity (including organization costs) be expensed as incurred. The Company
will adopt SOP 98-5 effective 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 recorded on the accompanying balance sheet at December 27, 1998, and
expense such costs as incurred thereafter.
Investments. The Company owns certain equity securities, which are accounted for
in accordance with Financial Accounting Standards No. 115, Accounting for
Certain Debt and Equity Securities. Such investment securities are carried at
fair value, with the unrealized gain (loss) excluded from earnings and reported
as a separate component of shareholders' equity, net of tax.
Property and Equipment are stated at cost and depreciated on a straight-line
method over the following estimated useful lives: buildings and improvements-30
years; furniture, fixtures and equipment-3 to 10 years. Leasehold improvements
are amortized over the lesser of the asset's estimated useful life or the lease
term. Equipment under capitalized leases is amortized to its expected value to
the Company at the end of the lease term. Gains or losses are recognized upon
the disposal of property and equipment, and the asset and related accumulated
depreciation and amortization are removed from the accounts. Maintenance,
repairs and betterments that do not enhance the value of or increase the life of
the assets are expensed as incurred.
Excess of Cost Over Fair Value of Net Assets Acquired, which is included in
other assets, is amortized over 20 years using the straight-line method. The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the asset balance over its remaining useful life can
be recovered through undiscounted future operating cash flows of the acquired
operations. The amount of asset impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average costs of funds. The assessment of the
recoverability of the asset will be impacted if estimated future operating cash
flows are not achieved.
Advertising Costs. The Company expenses advertising costs as incurred, except
for certain advertising production costs that are expensed the first time the
advertising takes place. Advertising expense for fiscal years 1998, 1997 and
1996 totaled $6,569,000, $5,464,000 and $3,956,000, respectively.
Deferred Revenue, which is included in accrued expenses, includes deferred gift
certificate revenue. The Company records a deferred liability as certificates
are sold at an amount equal to the anticipated redemption value. The deferred
liability is reduced and revenue is recorded as restaurant sales when gift
certificates are redeemed.
26
<PAGE> 27
Income Taxes are accounted for in accordance with the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statement
of operations in the period that includes the enactment date.
Stock Option Plan. Prior to January 1, 1996, the Company accounted for its stock
option plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, the compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-based
Compensation, which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of the grant.
Alternatively, FAS 123 also allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net earnings and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in FAS 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of FAS 123.
Franchise Revenues. Initial franchise fees are recognized when all material
services have been substantially performed by the Company and the restaurant has
opened for business. Franchise royalties, which are based on a percentage of
monthly sales, are recognized as income on the accrual basis. Costs associated
with franchise operations are expensed as incurred. As of December 27, 1998, the
Company no longer has any franchisees.
Per Share Data. The Company adopted Statement of Financial Accounting Standards
No. 128 ("FAS 128"), Earnings Per Share, during the fourth quarter of 1997. All
prior period earnings (loss) 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
statement of operations. Basic earnings per common share have been computed by
dividing net earnings (loss) by the weighted average number of common shares
outstanding during each year presented. Diluted earnings per common share have
been computed by dividing net earnings (loss) by the weighted average number of
common shares outstanding plus the dilutive effect of options outstanding during
the applicable periods.
Stock Repurchase. Under Tennessee law, when a corporation purchases its common
stock in the open market, such repurchased shares become authorized but
unissued. The Company reflects the purchase price of any such repurchased shares
as a reduction of additional paid-in capital.
Fair Value of Financial Instruments. The Company has adopted Statement of
Financial Accounting Standards No. 107 ("FAS 107"), Disclosures about Fair Value
of Financial Instruments, which requires disclosure of the fair values of most
on- and off-balance sheet financial instruments for which it is practicable to
estimate that value. The scope of FAS 107 excludes certain financial instruments
such as trade receivables and payables when the carrying value approximates the
fair value, employee benefit obligations, lease contracts, and all nonfinancial
instruments such as land, buildings, and equipment. The fair values of the
financial instruments are estimates based upon current market conditions and
quoted market prices for the same or similar instruments as of December 27,
1998. Book value approximates fair value for substantially all of the Company's
assets and liabilities that fall under the scope of FAS 107.
Impairment of Long-Lived Assets. The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 121 ("FAS 121"), Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset
27
<PAGE> 28
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of carrying
amount or fair value less costs to sell.
Comprehensive Income. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("FAS 130"), Reporting Comprehensive Income. This
statement establishes rules for the reporting of comprehensive income and its
components. Comprehensive income, presented in the Statement of Shareholders'
Equity, consists of net income (loss) and, in 1998, unrealized losses on
available for sale securities. There were no components of other comprehensive
income for 1997 or 1996.
Operating Segments. The Company adopted Statement of Financial Accounting
Standards No. 131 ("FAS 131"), Disclosures About Segments of an Enterprise and
Related Information, in 1998 which changes the way the Company reports
information about operating segments. The Company operates in one segment as
defined by FAS 131.
Use of Estimates. Management of the Company has made certain estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from these estimates.
Certain Reclassifications have been made to the accompanying financial
statements for the previous fiscal years to conform to the 1998 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at year end:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 43,864 $ 32,940
Buildings and improvements 62,489 49,296
Furniture, fixtures and equipment 44,691 35,330
Leasehold improvements 33,926 25,943
Equipment under capitalized leases 32,747 25,805
Property leased to others 82 957
--------- ---------
217,799 170,271
Less accumulated depreciation and amortization (43,603) (34,220)
--------- ---------
$ 174,196 $ 136,051
========= =========
</TABLE>
3. OTHER ASSETS
Other assets consist of the following at year end:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Excess of cost over fair value of net assets
acquired, net of accumulated amortization
of $115 in 1998 and $99 in 1997 $ 207 $ 223
Prepaid and other assets 775 535
Marketable securities 452 --
Notes receivable 914 559
------ ------
$2,348 $1,317
====== ======
</TABLE>
28
<PAGE> 29
4. ACCRUED EXPENSES
Accrued expenses include the following at year end:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Deferred revenue-gift certificates $2,002 $1,522
Workers' compensation expenses 1,441 1,458
Other accrued expenses 3,908 3,483
------ ------
$7,351 $6,463
====== ======
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following at year end:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Revolving line of credit $ 35,000 $ 13,000
Secured mortgage notes payable 233 243
Installment notes payable 446 580
-------- --------
35,679 13,823
Less current maturities (113) (144)
-------- --------
$ 35,566 $ 13,679
======== ========
</TABLE>
On December 8, 1997, the Company entered into an amended and restated revolving
credit agreement (the "Credit Agreement") which increased its unsecured line of
credit facility to $100 million from $70 million. The Credit Agreement requires
monthly interest payments at a floating rate based on the bank's prime rate plus
or minus a certain percentage spread or the Libor rate plus a certain percentage
spread. The interest rate spread on the restructured facility is based on
certain financial ratios achieved by the Company and is recomputed quarterly. At
December 27, 1998, the $35,000,000 outstanding balance carried interest rates
from 5.84% to 6.30%. On December 7, 1998, the Company entered an assumption and
amendment agreement which included a credit facility provision to set the
maturity date on the first $70,000,000 outstanding under the credit facility to
November 30, 2001, and the remaining $30,000,000 to December 7, 1999. The Credit
Agreement also requires the Company to meet certain financial and other
covenants, including restrictions on the incurrence of indebtedness, the sale of
assets, mergers and dividend payments. The Company has entered into an interest
rate swap agreement with a notional amount of $20.0 million. The swap agreement
effectively fixes the interest rate on an equivalent amount of the Company's
debt to approximately 6.3% (LIBOR plus a certain spread) at December 27, 1998.
The swap agreement matures March 2002 and is cancelable at the bank's option at
the end of each quarter.
The secured mortgage note payable at December 27, 1998, bears interest at 10.6%
and is payable in monthly installments, including interest, through June 2010.
This debt is collateralized by land and buildings having a depreciated cost of
approximately $1,007,000 at December 27, 1998.
The installment notes payable at December 27, 1998, bear interest at 8.6% and
are payable in monthly installments, including interest, through October 2002.
Installment notes payable of $446,000 is secured by an airplane with a
depreciated cost of approximately $901,000 at December 27, 1998.
The annual maturities of long-term debt as of December 27, 1998, are:
$113,000-1999; $124,000-2000; $35,135,000- 2001; $125,000-2002; $15,000-2003;
and $167,000 thereafter.
29
<PAGE> 30
6. LEASE COMMITMENTS
The Company has various leases for certain restaurant land and buildings under
operating lease agreements. Under these leases, the Company pays taxes,
insurance and maintenance costs in addition to the lease payments. Certain
leases also provide for additional contingent rentals based on a percentage of
sales in excess of a minimum rent. The Company leases certain equipment and
fixtures under capital lease agreements having lease terms from five to seven
years. The Company expects to exercise its options under these agreements to
purchase the equipment in accordance with the provisions of the lease
agreements.
As of December 27, 1998, approximately $32,747,000 cost less $8,396,000
accumulated amortization of the Company's property and equipment is under
capitalized lease obligations. Interest rates on capitalized lease obligations
range from 5.3% to 11.3%. Future minimum lease payments at December 27, 1998,
are as follows:
<TABLE>
<CAPTION>
Capitalized
Equipment Operating
(In Thousands) Leases Leases
- -----------------------------------------------------------------------------
<C> <C> <C>
1999 $ 6,636 $ 4,718
2000 6,497 4,570
2001 5,039 4,585
2002 3,663 4,589
2003 1,762 4,444
Thereafter 1,284 40,690
-------- -------
Total minimum rentals 24,881 $63,596
Less amount representing interest (3,222) =======
--------
Net minimum lease payments 21,659
Less current maturities (5,316)
--------
Capitalized lease obligations $ 16,343
========
</TABLE>
Rent expense for the fiscal years ending in December for operating leases is as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $ 4,393 $ 4,022 $ 3,766
Contingent rentals 614 479 417
--------- --------- -------
$ 5,007 $ 4,501 $ 4,183
========= ========= =======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
On February 15, 1994, a class action suit was filed in the United States Federal
District Court against the Company and certain of the Company's executive
officers and directors. The suit alleged racially discriminatory practices by
the defendant parties in violation of federal law. During the fourth quarter of
1996, the Court approved a consent decree that approved a definitive settlement
agreement. The settlement agreement provided for 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,
reserved $700,000 for claims administration and fees, and included $2.0 million
for the attorneys representing the Class. Based on the relatively low number of
class members electing to participate in the settlement, the original $7.5
million total settlement amount was reduced to approximately $5.2 million. As of
December 27, 1998, the Company has paid all of its commitment to the plaintiff
class that included approximately $445,000 paid in 1997 with the issuance of
shares of the Company's common stock.
30
<PAGE> 31
The Company is involved in other legal actions incidental to its business. In
the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's operating results or financial
position.
8. INCOME TAXES
The total income tax expense (benefit) for each respective year is as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings $ 6,946 $ 4,886 $ (797)
Shareholders' equity, tax benefit derived from non-statutory stock
options exercised and unrealized loss on investment securities (162) (120) (200)
--------- --------- ---------
$ 6,784 $ 4,766 $ (997)
========= ========= =========
</TABLE>
Income tax expense (benefit) related to earnings for each respective year is as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 4,894 $ 1,696 $ 1,798
Deferred 2,052 3,190 (2,595)
--------- --------- ---------
$ 6,946 $ 4,886 $ (797)
========= ========= =========
</TABLE>
Income tax expense (benefit) attributable to earnings differs from the amounts
computed by applying the applicable U.S. federal income tax rate to pretax
earnings from operations as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% (34.0%)
Increase (decrease) in taxes due to:
State income taxes, net of federal tax benefit 2.9 3.7 (1.8)
Utilization of tax credits (2.9) (3.5) (21.3)
Adjustment to deferred tax assets and liabilities for
change in tax status of Shoex - - 12.1
Other - 0.5 4.0
---- ---- -----
35.0% 35.7% (41.0%)
==== ==== =====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at each of the
respective year ends are as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses, principally due to accruals for workers'
compensation, employee health and retirement benefits $ 1,333 $ 1,621
Other 240 23
--------- --------
Total gross deferred tax assets 1,573 1,644
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation and capitalized lease amortization 4,859 3,207
Preopening costs, due to cost in excess of amortization 785 517
Other 76 71
--------- --------
Total gross deferred tax liabilities 5,720 3,795
--------- --------
Net deferred tax liability $ 4,147 $ 2,151
========= ========
</TABLE>
31
<PAGE> 32
The net deferred tax liability (asset) at year end is recorded as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Deferred income taxes, long-term liability $4,290 $2,958
Deferred income taxes, current asset (143) (807)
------ ------
$4,147 $2,151
====== ======
</TABLE>
Based on the Company's history of annual increases in taxable income and
management's projections of future taxable income, the Company believes it is
more likely than not that all of the deferred assets will be realized; thus, no
valuation allowance is recorded.
9. SHAREHOLDERS' EQUITY
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. Previously
stated common shares outstanding and basic and dilutive weighted average common
shares outstanding used to compute basic and dilutive earnings per common share
have been adjusted to reflect the stock split. Previously reported basic and
dilutive earnings (loss) per common share were $(0.15) for both basic and
dilutive in 1996 and $1.06 and $0.99 in 1997, respectively.
In the fourth quarter of 1997, the Company completed a secondary public offering
of its common stock in which 3,348,000 shares were sold by the Company for net
proceeds of $34.7 million. The net proceeds were used to reduce the Company's
outstanding indebtedness under its revolving credit agreement.
On September 2, 1998, the Board of Directors of the Company approved the
repurchase of up to 750,000 shares of the Company's common stock. As of December
27, 1998, approximately 14,000 shares have been repurchased.
The Company's charter authorizes 100,000 shares of preferred stock of which the
Board of Directors may, without shareholder approval, issue with voting or
conversion rights upon the occurrence of certain events. At December 27, 1998,
no preferred shares had been issued.
10. EARNINGS PER SHARE
The following is a reconciliation of the Company's basic and diluted earnings
per share in accordance with FAS 128.
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Earnings (Loss) $12,900 $ 8,800 $ (1,147)
======= ======= ========
Basic Earnings per Share:
Weighted shares outstanding 15,344 12,467 11,714
Basic earnings (loss) per share $ 0.84 $ 0.71 $ (0.10)
======= ======= ========
Diluted Earnings per Share:
Weighted shares outstanding 15,344 12,467 11,714
Incremental stock option shares outstanding 1,048 894 --
------- ------- --------
Total diluted shares outstanding 16,392 13,361 11,714
Diluted earnings (loss) per share $ 0.79 $ 0.66 $ (0.10)
======= ======= ========
</TABLE>
During the first quarter of 1999, the Company issued 839,450 options at an
exercise price of $15.25.
32
<PAGE> 33
11. STOCK OPTION AND PURCHASE PLANS
The Company has four incentive stock option plans: the 1985 Stock Option Plan,
the 1989 Consultant Stock Program, the 1990 Employee Stock Plan and the 1991
Stock Option Plan for Outside Directors. Options under these plans include both
statutory and nonstatutory stock options and are issued to officers, key
employees, nonemployee directors and consultants of the Company. The Company has
reserved 8,795,500 shares of common stock for these plans under which the
options are granted at 100% of the fair market value of common stock on the date
of the grant, expire 10 years from the date of the grant and are exercisable at
various times as previously determined by the Board of Directors. The Company
applies APB Opinion No. 25 in accounting for its plan; and, accordingly, no
compensation cost has been recognized.
A summary of stock option activity during the past three years is as follows:
<TABLE>
<CAPTION>
Number of Weighted-Average
Shares Exercise Price
- -------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1995 2,926,753 $ 5.48
Granted 292,875 8.24
Exercised (98,505) 2.61
Forfeited (361,710) 6.77
--------- ---------
Balance at December 29, 1996 2,759,413 5.69
Granted 248,250 10.09
Exercised (74,325) 3.19
Forfeited (81,427) 8.02
--------- ---------
Balance at December 28, 1997 2,851,911 6.08
Granted 463,700 12.14
Exercised (95,260) 4.11
Forfeited (71,425) 8.89
--------- ---------
Balance at December 27, 1998 3,148,926 $ 6.98
========= =========
</TABLE>
The following table summarizes information about stock options outstanding at
December 27, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted-Avg.
Remaining Weighted-Avg. Weighted-Avg.
Exercise Price Number Contractual Life Exercise Price Number Exercise Price
- ------------------------------------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
$ 1.00 to 4.99 483,963 2.5 years $ 2.85 483,963 $ 2.85
$ 5.00 to 5.99 1,223,127 4.6 5.61 1,074,244 5.61
$ 6.00 to 7.99 466,573 5.8 7.48 228,659 7.42
$ 8.00 to 10.99 535,388 7.5 9.02 179,938 8.80
$11.00 to 13.99 439,875 9.0 12.34 36,625 12.76
- --------------- --------- --- ------- --------- -------
$ 1.00 to 13.99 3,148,926 5.6 $ 6.98 2,003,429 $ 5.57
=============== ========= === ======= ========= =======
</TABLE>
At the end of 1998, 1997 and 1996, the number of options exercisable was
approximately 2,003,000, 1,578,000 and 1,241,000, respectively, and the weighted
average exercise price of those options was $5.57, $5.01 and $4.73,
respectively.
33
<PAGE> 34
The Company has established the CHUX Ownership Plan for the purpose of providing
an opportunity for eligible employees of the Company to become shareholders in
O'Charley's. The Company has reserved 675,000 common shares for this plan. The
CHUX Ownership Plan is intended to be an employee stock purchase plan which
qualifies for favorable federal income tax treatment under Section 423 of the
Internal Revenue Code. The Plan allows participants to purchase common stock at
85% of the lower of 1) the closing market price per share of the Company's
Common Stock on the last trading date of the plan year or 2) the average of the
closing market price of the Company's Common Stock on the first and the last
trading day of the plan year. Contributions of up to 15% of base salary are made
by each participant through payroll deductions. The Plan year is from October 1
to September 30. As of December 27, 1998, 123,000 shares have been issued under
this Plan.
If compensation cost for these plans had been determined consistent with FAS
Statement No. 123, the Company's net earnings and earnings per share would have
been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Earnings (Loss): As reported $12,900 $8,800 $(1,147)
Pro forma, as adjusted under FAS 123 12,162 8,387 (1,493)
Basic Earnings (Loss) per
Common Share: As reported $ 0.84 $ 0.71 $ (0.10)
Pro forma, as adjusted under FAS 123 0.79 0.67 (0.13)
Diluted Earnings (Loss) per
Common Share: As reported $ 0.79 $ 0.66 $ (0.10)
Pro forma, as adjusted under FAS 123 0.74 0.63 (0.13)
</TABLE>
Because the FAS 123 method of accounting has not been applied to options granted
prior to January 1, 1996, the resulting pro forma compensation cost may not be
representative of that to be expected in future years. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted average assumptions used for grants in each
respective year is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free investment interest 5.3% 5.8% 6.7%
Expected life in years 7.9 7.8 7.4
Expected volatility 52.7% 50.5% 41.6%
Fair value of options granted
(per share) $ 7.73 $ 6.33 $ 4.70
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) salary reduction and profit-sharing plan called the
CHUX Savings Plan. Under the Plan, employees can make contributions up to 15% of
their annual compensation. The Company contributes annually to the Plan an
amount equal to 50% of employee contributions, subject to certain limitations.
Additional contributions are made at the discretion of the Board of Directors.
Company contributions vest at the rate of 20% each year beginning after the
employee's initial year of employment. Company contributions were approximately
$276,000 in 1998, $140,000 in 1997 and $105,000 in 1996.
The Company maintains a deferred compensation plan for a select group of
management employees to provide supplemental retirement income benefits through
deferrals of salary, bonus and deferral of contributions which cannot be made to
the Company's 401(k) Plan due to Internal Revenue code limitations. Participants
in this Plan can contribute, on a pre-tax basis, up to 15% of their total
compensation. The Company contributes annually to this Plan an amount equal to a
matching formula of each participant's deferrals. Contributions were $143,000 in
1998, $109,000 in 1997 and $86,000 in 1996.
34
<PAGE> 35
13. RELATED-PARTY TRANSACTIONS
As discussed in the Business Acquisition footnote, the Company merged with
Shoex, Inc. on January 5, 1996. An officer and a director of the Company each
had an interest in Shoex and, accordingly, received their respective pro rata
share of the Company's Common Stock that was issued to the shareholders of
Shoex. Previous to the merger, the Company's commissary sold food products and
supplies to Shoex, and the Company also received a fee for providing accounting
and administrative services. The merger with Shoex is accounted for as a
pooling-of-interests; therefore, all related-party transactions previously
reported have been eliminated through the restatement of the financial
statements.
An officer of the Company, a principal shareholder, and certain directors own a
certain percentage of partnerships which had lease agreements with the Company
for eight of its restaurant facilities at December 28, 1997. One of the leases
terminated during 1998, while subsequent to year end another lease was bought
out. The leases expire at various times through 2007, with options to renew for
a term of 10 years. Two of the remaining six lease agreements grant the Company
an option to purchase the properties at fair market value at any time during the
term of the lease.
In the opinion of management and the Company's Board of Directors, all
related-party transactions, including terms and amounts, are comparable to those
that could be obtained from unaffiliated third parties.
The aforementioned related-party transactions are reflected in the financial
statements as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS Costs and Expenses:
Restaurant operating costs:
Rent expense $765 $861 $843
Contingent rentals 386 310 293
</TABLE>
14. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid for interest $3,021 $3,616 $3,074
Additions to capitalized lease obligations 7,852 7,146 5,922
Income taxes paid 4,613 1,582 1,979
Litigation shares issued - 445 -
</TABLE>
15. BUSINESS ACQUISITION
On January 5, 1996, the shareholders of the Company approved an Agreement and
Plan of Merger, dated October 9, 1995, to merge with Shoex, Inc. (Shoex), a
franchisee of the Company which owned and operated six O'Charley's restaurants
in Alabama. The transaction was accounted for as a pooling-of-interests. The
Company exchanged 999,999 shares of Company stock valued at approximately $9.5
million. The Company assumed approximately $1.9 million in net obligations of
Shoex, Inc. (defined as long-term debt, capitalized lease obligations and
working capital deficit). As a result of the merger, O'Charley's owns the six
restaurants and the rights to develop other O'Charley's restaurants in Alabama,
Mississippi and specific locations in Florida and Georgia.
35
<PAGE> 36
16. ASSET REVALUATION
Operating losses at certain restaurant units prompted an evaluation of net
realizable value of certain assets in accordance with FAS 121. Accordingly, in
1996 the Company recorded a $5.1 million charge to earnings for assets impaired
under FAS 121. This amount represented the difference between fair value and net
book value for certain identifiable assets consisting primarily of buildings,
improvements and equipment. The fair value for these assets was determined
primarily by reference to market prices for similar assets and, in the case of
the units to be disposed of, management's estimate of the cost to dispose of
such units. The $5.1 million charge was comprised of the following impaired
restaurant assets: (1) $2.5 million of assets to be disposed of including
$536,000 for two restaurant units which were closed in the third quarter of 1996
and were later sold in 1996, and $2.0 million for two units which were closed in
the third quarter of 1996, one of which was sold in 1997 and the other expected
to be disposed of in 1999 having a carrying value on December 27, 1998, of
$646,000; (2) $2.6 million of assets to be held including $445,000 primarily for
restaurant computer equipment and $2.2 million for five restaurant units
expected to remain open of which two have been or will be relocated. The 1996
results of operations include revenues of $4.3 million and costs and expenses of
$4.9 million for the four units closed. No impairments were identified during
1998 and 1997.
17. SELECTED QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 is shown below:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands, Except Per Share Data) (16 weeks) (12 weeks) (12 weeks) (12 weeks)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended December 27, 1998
Net revenues $70,961 $56,589 $58,251 $60,245
Income from operations 6,122 5,325 5,278 5,736
Net earnings 3,463 3,083 3,047 3,307
Basic earnings per common share 0.23 0.20 0.20 0.21
Diluted earnings per common share 0.21 0.19 0.19 0.20
======= ======= ======= =======
Year Ended December 28, 1997
Net revenues $56,635 $46,411 $47,546 $49,811
Income from operations 4,500 4,001 4,077 4,342
Net earnings 2,262 2,011 2,050 2,477
Basic earnings per common share 0.19 0.17 0.17 0.17
Diluted earnings per common share 0.18 0.16 0.16 0.16
======= ======= ======= =======
</TABLE>
36
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
O'Charley's Inc.
Nashville, Tennessee:
We have audited the accompanying balance sheets of O'Charley's Inc. as of
December 27, 1998 and December 28, 1997, and the related statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 27, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of O'Charley's Inc. as of December
27, 1998 and December 28, 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 27, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Nashville, Tennessee
February 5, 1999
37
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Proxy Statement issued in connection with the shareholders meeting
to be held on May 6, 1999, to be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(b), contains under the caption "Election of
Directors" information required by Item 10 of Form 10-K as to directors of the
Company and is incorporated herein by reference. Pursuant to General Instruction
G(3), certain information concerning executive officers of the Company is
included in Part I of this Form 10-K, under the caption "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
The Proxy Statement issued in connection with the shareholders meeting
to be held on May 6, 1999, to be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(b), contains under the caption "Executive
Compensation" information required by Item 11 of Form 10-K and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Proxy Statement issued in connection with the shareholders meeting
to be held on May 6, 1999, to be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(b), contains under the captions "Security
Ownership of Certain Beneficial Owners" and "Election of Directors" information
required by Item 12 of Form 10-K and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Proxy Statement issued in connection with the shareholders meeting
to be held on May 6, 1999, to be filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(b), contains under the caption "Certain
Transactions" information required by Item 13 of Form 10-K and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) 1. Financial Statements: See Item 8
2. Financial Statement Schedules: Not Applicable
3. Management Contracts and Compensatory Plans and Arrangements
- O'Charley's Inc. 1985 Stock Option Plan (included as
Exhibit 10.10)
- O'Charley's Inc. 1990 Employee Stock Plan (included
as Exhibit 10.11)
- First Amendment to O'Charley's Inc. 1990 Employee
Stock Plan (included as Exhibit 10.12)
38
<PAGE> 39
- Second Amendment to O'Charley's Inc. 1990 Employee
Stock Plan (included as Exhibit 10.13)
- Third Amendment to O'Charley's Inc. 1990 Employee
Stock Plan (included as Exhibit 10.14)
- O'Charley's 1991 Stock Option Plan for Outside
Directors, as amended (included as Exhibit 10.15)
- CHUX Ownership Plan (included as Exhibit 10.16)
- Severance Compensation Agreement, dated September 16,
1996, by and between O'Charley's Inc. and Gregory L.
Burns (included as Exhibit 10.17)
- Severance Compensation Agreement, dated as of March
4, 1998, by and between O'Charley's Inc. and A. Chad
Fitzhugh (included as Exhibit 10.18)
- Severance Compensation Agreement, dated as of March
4, 1998, by and between O'Charley's Inc. and Steven
J. Hislop (included as Exhibit 10.19)
4. Exhibits:
Exhibit
Number Description
3.1 -- Restated Charter of the Company (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-3,
Registration No. 333-33585)
3.2 -- Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 of the Company's Annual Report on Form 10-K
for the year ended December 30, 1990)
4.1 -- Form of Certificate for the Common Stock (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-35170)
10.1 -- Lease dated May 1, 1987 between CWF Associates and CWF Corporation
and all amendments thereto for 2895 Richmond Road, Lexington, KY
40509 (incorporated by reference to Exhibit 10.1 of the Company's
Registration Statement on Form S-1, Registration No. 33-35170)
10.2 -- Lease dated August 15, 1987 between CWF Associates and O'Charley's
Inc. and all amendments thereto for improvements located at 17 White
Bridge Road, Nashville, TN (incorporated by reference to Exhibit
10.3 of the Company's Registration Statement on Form S-1,
Registration No. 33-35170)
10.3 -- Lease dated October 25, 1985 between Two Mile Partners and CWF
Corporation and all amendments thereto for 912 Two Mile Parkway,
Goodlettsville, TN (incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement on Form S-1, Registration No.
33-35170)
10.4 -- Lease dated December 30, 1985 between Two Mile Partners and CWF
Corporation for 644 N. Riverside Dr., Clarksville, TN (incorporated
by reference to Exhibit 10.6 of the Company's Registration Statement
on Form S-1, Registration No. 33-35170)
39
<PAGE> 40
10.5 -- Lease dated September 9, 1985 between Two Mile Partners and CWF
Corporation for 1720 U.S. 31-W Bypass Building, Bowling Green, KY
(incorporated by reference to Exhibit 10.7 of the Company's
Registration Statement on Form S-1, Registration No. 33-35170)
10.6 -- Lease dated December 26, 1986 between Two Mile Partners and CWF
Corporation for 1006 Memorial Blvd., Murfreesboro, TN (incorporated
by reference to Exhibit 10.8 of the Company's Registration Statement
on Form S-1, Registration No. 33-35170)
10.7 -- Lease Agreement dated as of December 30, 1990 between Two Mile
Partners, II and O'Charley's Inc. (incorporated by reference to
Exhibit 10.26 of the Company's Annual Report on Form 10-K for the
year ended December 30, 1990)
10.8 -- Amended and Restated Revolving Credit Agreement, dated as of
December 8, 1997, among O'Charley's Inc. and Mercantile Bank
National Association, Bank One, N.A., First Union National Bank,
NationsBank of Tennessee, N.A., as Co-Agent, and First American
National Bank, as Agent (incorporated by reference to Exhibit 10.18
of the Company's Annual Report on Form 10-K for the year ended
December 28, 1997)
10.9 -- Assumption Agreement and Amendment to Amended and Restated Revolving
Credit Agreement, dated December 7, 1998, among O'Charley's Inc.,
OCI, Inc., O'Charley's Sports Bar, Inc., Air Travel Services, Inc.,
O'Charley's Management Company, Inc., DFI, Inc., O'Charley's
Restaurant Properties, LLC, Mercantile Bank National Association,
Bank One, N.A., First Union National Bank, NationsBank of Tennessee,
N.A., as Co-Agent, and First American National Bank, as Agent.
10.10 -- O'Charley's Inc. 1985 Stock Option Plan (incorporated by reference
to Exhibit 10.27 of the Company's Registration Statement on Form
S-1, Registration No. 33-35170)
10.11 -- O'Charley's Inc. 1990 Employee Stock Plan (incorporated by reference
to Exhibit 10.26 of the Company's Registration Statement on Form
S-1, Registration No. 33-35170)
10.12 -- First Amendment to O'Charley's Inc. 1990 Employee Stock Plan
(incorporated by reference to Exhibit 10.24 of the Company's Annual
Report on Form 10-K for the year ended December 29, 1991)
10.13 -- Second Amendment to O'Charley's Inc. 1990 Employee Stock Plan
(incorporated by reference to Exhibit 10.23 of the Company's Annual
Report on Form 10-K for the year ended December 26, 1993)
10.14 -- Third Amendment to O'Charley's Inc. 1990 Employee Stock Plan
10.15 -- O'Charley's Inc. 1991 Stock Option Plan for Outside Directors, As
Amended (incorporated by reference to Exhibit 4.4 of the Company's
Registration Statement on Form S-8, Registration No. 333-63495)
10.16 -- CHUX Ownership Plan (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended October 3, 1993)
40
<PAGE> 41
10.17 -- Severance Compensation Agreement, dated September 16, 1996, by and
between O'Charley's Inc. and Gregory L. Burns (incorporated by
reference to Exhibit 10.21 of the Company's Annual Report on Form
10-K for the year ended December 29, 1996)
10.18 -- Severance Compensation Agreement, dated March 4, 1998, by and
between O'Charley's Inc. and A. Chad Fitzhugh (incorporated by
reference to Exhibit 10.19 of the Company's Annual Report on Form
10-K for the year ended December 28, 1997)
10.19 -- Severance Compensation Agreement, dated March 4, 1998, by and
between O'Charley's Inc. and Steven J. Hislop (incorporated by
reference to Exhibit 10.20 of the Company's Annual Report on Form
10-K for the year ended December 28, 1997)
21 -- Subsidiaries of the Company (incorporated by reference to Exhibit
10.23 of the Company's Annual Report on Form 10-K for the year ended
December 28, 1997)
23 -- Consent of KPMG LLP
27 -- Financial Data Schedule
(b) During the quarter ended December 27, 1998, the Company did
not file any Reports on Form 8-K.
41
<PAGE> 42
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, in the City of Nashville,
State of Tennessee.
O'CHARLEY'S INC.
Date: March 29, 1999 By: /s/ Gregory L. Burns
--------------------------------------
Gregory L. Burns
President, Chief Executive Officer,
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------------------------------------------- ------------------------------------- ---------------
<S> <C> <C>
/s/ Gregory L. Burns President, Chief Executive Officer, March 29, 1999
- --------------------------------------------- and Chairman of the Board (Principal
(Gregory L. Burns) Executive Officer)
/s/ A. Chad Fitzhugh Chief Financial Officer, Secretary, March 29, 1999
- --------------------------------------------- and Treasurer (Principal Financial
(A. Chad Fitzhugh) and Accounting Officer)
/s/ John W. Stokes, Jr. Director March 29, 1999
- ---------------------------------------------
(John W. Stokes, Jr.)
/s/ Richard Reiss, Jr. Director March 29, 1999
- ---------------------------------------------
(Richard Reiss, Jr.)
/s/ G. Nicholas Spiva Director March 29, 1999
- ---------------------------------------------
(G. Nicholas Spiva)
/s/ H. Steve Tidwell Director March 29, 1999
- ---------------------------------------------
(H. Steve Tidwell)
/s/ C. Warren Neel Director March 29, 1999
- ---------------------------------------------
(C. Warren Neel)
/s/ Samuel H. Howard Director March 29, 1999
- ---------------------------------------------
(Samuel H. Howard)
Director
- ---------------------------------------------
(Shirley A. Zeitlin)
/s/ Steven J. Hislop Director March 29, 1999
- ---------------------------------------------
(Steven J. Hislop
</TABLE>
42
<PAGE> 1
EXHIBIT 10.9
ASSUMPTION AGREEMENT AND
AMENDMENT TO AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
THIS AMENDMENT, made this 7th day of December, 1998, is by and among
O'CHARLEY'S INC., a Tennessee corporation (the "Original Borrower"), OCI, INC.,
a Delaware corporation ("OCI"), O'CHARLEY'S SPORTS BAR, INC., an Alabama
corporation ("Sports Bar"), AIR TRAVEL SERVICES, INC., a Tennessee corporation
("Air Travel"), O'CHARLEY'S MANAGEMENT COMPANY, INC., a Tennessee corporation
("Management Company"), DFI, INC., a Tennessee corporation ("DFI"), O'CHARLEY'S
RESTAURANT PROPERTIES, LLC, a Delaware limited liability company ("Restaurant
Properties"; individually, OCI, Sports Bar, Air Travel, Management Company, DFI
and Restaurant Properties are sometimes referred to herein as a "New Borrower"
and when referencing two or more of such entities, they are sometimes referred
to herein as "New Borrowers"), each of the undersigned Banks, NATIONSBANK, N.A.,
a national banking association, as a Bank and as Co-Agent, and FIRST AMERICAN
NATIONAL BANK, a national banking association ("Agent") as a Bank and as Agent
for the Banks.
RECITALS:
Pursuant to that certain Amended and Restated Revolving Credit and
Security Agreement, dated as of December 8, 1997 (the "Agreement"), the Banks
made certain loans to the Original Borrower. Capitalized terms not otherwise
defined herein shall have the same meaning as in the Agreement. The Original
Borrower has requested that the Banks restructure such loans, and the Banks are
willing to do so, subject, among other things, to execution of this Agreement.
NOW, THEREFORE, IN CONSIDERATION OF THE FOREGOING PREMISES, and other
good and valuable consideration, the receipt and legal sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
Section 1. Definitions. The following definitions are added or amended:
"Borrowers" means the Original Borrower and the New Borrowers,
collectively.
"Loan Termination Date" means the earlier of (i) the occurrence of an
Event of Default which is not waived by the Agent in accordance with the terms
of this Agreement, or (ii) (A) November 30, 2001, in the case of Facility A, (B)
December 7, 1999, in the case of Facility B (or such later date as may be agreed
to by the Banks pursuant to Section 2.9 of this Agreement), or (C) November 30,
2001, in the case of the Swingline Facility.
"Loan" means any funds which any Bank has advanced or will advance to
the Borrowers on a revolving basis pursuant to its Commitment under Facility A,
Facility B or the Swingline Facility, and shall include advances in the form of
letters of credit issued in accordance with the terms of this Agreement, and
"Loans" means all such advances by all Banks up to the aggregate amount of One
Hundred Million and 00/100 Dollars ($100,000,000.00).
1
<PAGE> 2
"Note" means any of the promissory note or notes dated December 9, 1997
and delivered to the Banks in connection with the execution of the Agreement and
the Swingline Note, including any amendment, modification, renewal, extension,
or replacement thereof, and "Notes" means the Notes of each of the Banks
collectively.
"Swingline Facility" means the $5,000,000.00 swingline facility
described in Section 2.1
"Swingline Lender" means First American National Bank, and its
successors and assigns.
"Swingline Note" means a promissory note substantially in the form of
Exhibit A attached hereto, duly executed and delivered to the Swingline Lender
by Borrowers, including any amendment, modification, renewal, extension, or
replacement thereof.
Section 2. Assumption. The New Borrowers, jointly and severally, hereby join in
and assume, each of the obligations, covenants, and conditions set forth in the
Agreement and agree to be bound by all of the terms thereof and further assume
and agree to pay, jointly and severally with the Original Borrower, the
indebtedness evidenced by the Notes and all other Obligations.
Section 3. The Swingline. The following is added to the Agreement as Sections
2.1(D) and (E):
(D) Subject to the terms and conditions of the Agreement, as
amended hereby, the Swingline Lender agrees to fund to the Borrowers an
aggregate maximum principal amount of up to $5,000,000.00. The
Swingline Facility shall be a sublimit of Facility A. All Loans under
the Swingline Facility shall be Floating Rate Loans. Notwithstanding
that the Swingline Facility shall be evidenced by a separate promissory
note, the aggregate principal amount of all Loans that may be
outstanding at any one time may not exceed $100,000,000.00. All
outstanding principal and interest on the Swingline Facility shall be
due and payable in full, and the Swingline Facility shall terminate, on
the Loan Termination Date. The principal amount of all Loans under the
Swingline Facility shall be due and payable on the earlier of (i) the
maturity date agreed to by the Swingline Lender and the Borrowers with
respect to such Loan (which maturity date shall not be a date more than
thirty days from the date of the advance thereof) or (ii) the
Loan Termination Date. The Swingline Lender may, at any time, in its
sole discretion, by written notice to the Borrowers and the Banks,
demand repayment of the Swingline Facility by way of a Loan under
Facility A, in which case the Borrowers shall be deemed to have
requested a Floating Rate Loan under Facility A in the amount of the
then outstanding balance of the Swingline Facility; provided, however,
that any such demand shall be deemed to have been given one Business
Day prior to the Loan Termination Date and on the date of the
occurrence of any Event of Default and upon acceleration of the
Obligations. Each Bank hereby irrevocably agrees to make its pro rata
share of each such Loan in the amount, in the manner and on the date
specified in the preceding sentence notwithstanding (I) whether any
conditions specified in Section 3.2 are then satisfied, (II) whether a
Default or an Event of Default then exists, (III) failure of any such
request or deemed request for a Loan to be made by the time otherwise
required hereunder, (IV) whether the date of such borrowing is a date
on which Loans are otherwise permitted to be made hereunder, or (V) any
termination of the Commitments immediately prior to or
2
<PAGE> 3
contemporaneously with such borrowing. If a Loan cannot for any reason
be made on the date otherwise required above, then each Bank hereby
agrees to purchase (as of the date such borrowing would otherwise have
occurred, but adjusted for any payments received from the Borrowers on
or after such date and prior to such purchase) from the Swingline
Lender such participations in the outstanding Swingline Loans as shall
be necessary to cause each Bank to share in such Swingline Loans
ratably based upon its Commitment Percentage (determined before giving
effect to any termination of any Commitments), provided that (A) all
interest payable on the Swingline Loans shall be for the account of the
Swingline Lender until the date as of which the respective
participation is purchased and (B) at the time any purchase of
participations pursuant to this sentence is actually made, the
purchasing Bank shall be required to pay to the Swingline Lender, to
the extent not paid by the Borrowers, interest on the principal amount
of participation purchased, for each day from and including the day
upon which such borrowing would otherwise have occurred to but
excluding the date of payment for such participation, at the rate or
rates applicable to such Swingline Loan or Loans.
(E) No Loans may be made under Facility B unless Facility A is
fully funded.
Section 4. Representations and Warranties. The following representations and
warranties are added to Section 4.1 of the Agreement:
(R) Original Borrower owns 100% of the issued and outstanding
stock of OCI, Sports Bar, Air Travel, Management Company and DFI, and
DFI owns 100% of the outstanding membership interests of Restaurant
Properties. Except as set forth in the preceding sentence, none of the
Borrowers owns an interest in any Person.
(S) The Borrowers have (i) initiated a review and assessment
of all areas within their respective business and operations (including
those affected by suppliers and vendors) that could be adversely
affected by the "Year 2000 Problem" (that is, the risk that computer
applications used by the Borrowers (or its suppliers and vendors) may
be unable to recognize and perform properly date-sensitive functions
involving certain dates prior to and any date after December 31, 1999),
(ii) developed a plan and timeline for addressing the Year 2000 Problem
on a timely basis, and (iii) to date, implemented that plan in
accordance with that timetable. The Borrowers reasonably believe that
all computer applications (including those of its suppliers and
vendors) that are material to their respective business and operations
will on a timely basis be able to perform properly date-sensitive
functions for all dates before and after January 1, 2000 (that is, be
"Year 2000 compliant"), except to the extent that a failure to do so
could not reasonably be expected to have material adverse effect.
Section 5. Additional Covenants. The following covenants are added to Section
5.1 of the Agreement:
(M) The Borrowers will promptly notify the Agent in the event
the Borrowers discover or determine that any computer application
(including those of its suppliers and vendors) that is material to
their respective business and operations will not be
3
<PAGE> 4
Year 2000 compliant on a timely basis, except to the extent that such
failure could not reasonably be expected to have a material adverse
effect.
(N) On or before February 4, 1999, the Borrowers will deliver
to Agent a Certificate of Existence issued by the Tennessee Secretary
of State evidencing that all fees, taxes and penalties owed to the
State of Tennessee and affecting the existence of the Original Borrower
have been paid.
Section 6. Revised Covenant. Section 5.2(P) of the Agreement is revised as
follows:
(P) Borrower will not purchase, redeem or retire in excess of
$10,000,000.00 of Borrower's outstanding capital stock, without the
prior written consent of the Agent (with the consent of the Majority
Banks).
Section 7. Fees. In connection with the extension of Facility A and Facility B,
the Borrowers agree to pay to the Banks a fee in the amount of $35,000.00 for
Facility A and $30,000.00 for Facility B, each to be apportioned among the Bank
in accordance with their respective Commitment Percentages. In addition, the
Borrowers agree to pay all reasonable out-of-pocket fees of the Agent incurred
in connection with this Amendment, including, without limitation, reasonable
attorneys' fees and expenses.
Section 8. Ratification. Subject to the terms hereof, each Borrower hereby
restates and ratifies, as of the date hereof, all the representations,
warranties and covenants contained in the Agreement in favor of FANB, and
confirms that the terms and conditions of the Agreement, as amended hereby,
remain in full force and effect and that the terms of Article 8 of the Agreement
shall continue to govern the Agreement and shall govern this Amendment.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
AGENT BORROWERS
FIRST AMERICAN NATIONAL BANK O'CHARLEY'S INC.
BY: /s/ Mary E. Buckner BY: /s/ A. Chad Fitzhugh
------------------------------- ------------------------------
TITLE: Vice President TITLE: CFO
----------------------------- ---------------------------
CO-AGENT OCI, INC.
NATIONSBANK, N.A. BY: /s/ A. Chad Fitzhugh
------------------------------
BY: /s/ William H. Diehl TITLE: Secretary
------------------------------- ---------------------------
TITLE: Senior Vice President O'CHARLEY'S SPORTS BAR, INC.
----------------------------
BY: /s/ A. Chad Fitzhugh
------------------------------
TITLE: President
---------------------------
AIR TRAVEL SERVICES, INC.
BY: /s/ A. Chad Fitzhugh
------------------------------
TITLE: Secretary
---------------------------
O'CHARLEY'S MANAGEMENT COMPANY, INC.
BY: /s/ A. Chad Fitzhugh
------------------------------
TITLE: Secretary
---------------------------
DFI, INC.
BY: /s/ A. Chad Fitzhugh
------------------------------
TITLE: Secretary
---------------------------
O'CHARLEY'S RESTAURANT PROPERTIES, LLC
BY: /s/ A. Chad Fitzhugh
------------------------------
TITLE: Secretary
---------------------------
5
<PAGE> 6
BANKS:
FIRST AMERICAN NATIONAL
BANK
BY: /s/ Mary E. Buckner
-----------------------------------
TITLE: Vice President
--------------------------------
NATIONSBANK, N.A.
BY: /s/ William H. Diehl
-----------------------------------
TITLE: Senior Vice President
--------------------------------
MERCANTILE BANK
NATIONAL ASSOCIATION
BY: /s/ Donald A. Adam
-----------------------------------
TITLE: Vice President
--------------------------------
BANK ONE, N.A.
BY: /s/ Glenn T. Campbell
-----------------------------------
TITLE: Vice President
--------------------------------
FIRST UNION NATIONAL BANK
BY: /s/ Deborah L. Hurly
-----------------------------------
TITLE: Vice President
--------------------------------
6
<PAGE> 1
EXHIBIT 10.14
THIRD AMENDMENT TO THE O'CHARLEY'S INC.
1990 EMPLOYEE STOCK PLAN
1. The first paragraph of Section 3 is deleted in its entirety
and amended to read as follows:
"3. Stock Subject to Plan. The total number of shares of Stock
reserved and available for distribution under the Plan shall be
2,650,000 shares; provided, however, that no person shall be eligible
after March 25, 1996 to receive awards pursuant to the Plan to purchase
in excess of 100,000 shares of Common Stock in any one year period."
2. The third paragraph of Section 3 is deleted in its entirety
and amended to read as follows:
In the event of any merger, reorganization, consolidation,
recapitalization, Stock dividend, Stock split or other change in
corporate structure affecting the Stock, such substitution or
adjustment shall be made in the aggregate number of shares reserved for
issuance under the Plan, in the maximum number of shares a participant
may be eligible to purchase pursuant to awards under the Plan during a
one year period, in the number and option price of shares subject to
outstanding Options granted under the Plan, in the number and purchase
price of shares subject to outstanding Stock Purchase Rights under the
Plan, and in the number of shares subject to other outstanding awards
granted under the Plan as may be determined to be appropriate by the
Committee, in its sole discretion, provided that the number of shares
subject to any award shall always be a whole number. Such adjusted
option price shall also be used to determine the amount payable by the
Company upon the exercise of any Stock Appreciation Right associated
with any Stock Option.
<PAGE> 1
Exhibit 23
The Board of Directors
O'Charley's, Inc.
We consent to incorporation by reference in the registration statements (No.
33-39869, No. 33-39872, No. 33-51316, No. 33-51338, No. 333-63495 on Form S-8)
of O'Charley's, Inc. of our report dated February 5, 1999, relating to the
balance sheets of O'Charley's, Inc. as of December 27, 1998 and December 28,
1997, and the related statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 27, 1998,
which report appears in the December 27, 1998 annual report on Form 10-K of
O'Charley's, Inc.
Nashville, Tennessee KPMG LLP
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF O'CHARLEY'S INC. FOR THE YEAR ENDED DECEMBER 27, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> DEC-27-1998
<CASH> 3,068
<SECURITIES> 0
<RECEIVABLES> 2,371
<ALLOWANCES> 87
<INVENTORY> 2,074
<CURRENT-ASSETS> 17,238
<PP&E> 174,196
<DEPRECIATION> 43,603
<TOTAL-ASSETS> 193,782
<CURRENT-LIABILITIES> 28,809
<BONDS> 0
0
0
<COMMON> 65,986
<OTHER-SE> 406
<TOTAL-LIABILITY-AND-EQUITY> 193,782
<SALES> 246,046
<TOTAL-REVENUES> 246,046
<CGS> 194,600
<TOTAL-COSTS> 223,585
<OTHER-EXPENSES> 2,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,801
<INCOME-PRETAX> 19,846
<INCOME-TAX> 6,946
<INCOME-CONTINUING> 12,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,900
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.79
</TABLE>
