<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 11, 1999
Commission file number O-18629
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O'Charley's Inc.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1192475
- ---------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3038 Sidco Drive, Nashville, Tennessee 37204
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(615)256-8500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding as of August 20, 1999
----- ---------------------------------
Common Stock, no par value 15,479,525 shares
<PAGE> 2
O'Charley's Inc.
Form 10-Q
For Quarter Ended July 11, 1999
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Statements
Item 1. Financial statements:
Balance sheets as of July 11, 1999 and
December 27, 1998 3
Statements of earnings for the twelve weeks
ended July 11, 1999 and July 12, 1998 4
Statements of earnings for the twenty-eight weeks
ended July 11, 1999 and July 12, 1998 5
Statements of cash flows for the twenty-eight weeks ended July 11,
1999 and July 12, 1998 7
Notes to unaudited financial statements 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 10
Item 3. Quantitative and qualitative disclosures about market risk 16
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE> 3
O'Charley's Inc.
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
July 11, December 27,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 878 $ 3,068
Accounts receivable 2,583 2,371
Inventories 8,077 7,029
Preopening costs -- 2,074
Deferred income taxes 869 143
Other current assets 3,601 2,553
--------- ---------
Total current assets 16,008 17,238
Property and Equipment, net 199,586 174,196
Other Assets 2,168 2,348
--------- ---------
$ 217,762 $ 193,782
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 9,316 $ 6,941
Accrued payroll and related expenses 6,582 5,104
Accrued expenses 6,901 7,351
Federal, state and local taxes 5,753 3,984
Current portion of long-term debt and capitalized leases 5,297 5,429
--------- ---------
Total current liabilities 33,849 28,809
Deferred Income Taxes 4,290 4,290
Long-Term Debt 50,494 35,566
Capitalized Lease Obligations 13,475 16,343
Shareholders' Equity:
Common stock - No par value; authorized, 50,000,000
shares; issued and outstanding, 15,425,650 in 1999
and 15,394,128 in 1998 66,115 65,986
Additional paid-in capital 509 509
Accumulated other comprehensive loss, net of tax (103) (103)
Retained earnings 49,133 42,382
--------- ---------
115,654 108,774
--------- ---------
$ 217,762 $ 193,782
========= =========
</TABLE>
See notes to financial statements.
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<PAGE> 4
O'Charley's Inc.
Statements of Earnings
Twelve Weeks Ended July 11, 1999 and July 12, 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(in thousands, except
per share data)
<S> <C> <C>
Revenues:
Restaurant sales $ 69,490 $ 56,021
Commissary sales 735 568
--------- ---------
70,225 56,589
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 23,166 19,320
Payroll and benefits 21,136 17,024
Restaurant operating costs 9,806 7,886
Cost of commissary sales 695 532
Advertising, general and administrative expenses 4,422 3,479
Depreciation and amortization 3,245 3,023
Preopening costs 1,165 --
--------- ---------
63,635 51,264
--------- ---------
Income from Operations 6,590 5,325
Other (Income) Expense:
Interest expense, net 965 639
Other, net 43 (56)
--------- ---------
1,008 583
--------- ---------
Earnings Before Income Taxes 5,582 4,742
Income Taxes 1,953 1,659
--------- ---------
Net Earnings $ 3,629 $ 3,083
========= =========
Basic Earnings per Share:
Earnings per Common Share $ 0.24 $ 0.20
========= =========
Weighted Average Common Shares Outstanding 15,420 15,323
========= =========
Diluted Earnings per Share:
Earnings per Common Share $ 0.22 $ 0.19
========= =========
Weighted Average Common Shares Outstanding 16,640 16,481
========= =========
</TABLE>
See notes to financial statements.
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<PAGE> 5
O'Charley's Inc.
Statements of Earnings
Twenty-Eight Weeks Ended July 11, 1999 and July 12, 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(in thousands, except
per share data)
<S> <C> <C>
Revenues:
Restaurant sales $ 156,345 $ 126,078
Commissary sales 1,729 1,461
Franchise revenue -- 11
--------- ---------
158,074 127,550
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 52,225 43,671
Payroll and benefits 47,670 38,464
Restaurant operating costs 22,091 17,764
Cost of commissary sales 1,631 1,369
Advertising, general and administrative expenses 10,227 8,124
Depreciation and amortization 7,097 6,711
Preopening costs 2,459 --
--------- ---------
143,400 116,103
--------- ---------
Income from Operations 14,674 11,447
Other (Income) Expense:
Interest expense, net 2,140 1,416
Other, net 75 (39)
--------- ---------
2,215 1,377
--------- ---------
Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 12,459 10,070
Income Taxes 4,360 3,524
--------- ---------
Earnings Before Cumulative Effect of
Change in Accounting Principle 8,099 6,546
Cumulative Effect of Change in Accounting
Principle (net of tax benefit) (1,348) --
========= =========
Net Earnings $ 6,751 $ 6,546
========= =========
</TABLE>
See notes to financial statements.
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O'Charley's Inc.
Statements of Earnings (Continued)
Twenty-Eight Weeks Ended July 11, 1999 and July 12, 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
(in thousands, except
per share data)
<S> <C> <C>
Basic Earnings per Share:
Earnings per Common Share Before Cumulative
Effect of Change in Accounting Principle $ 0.53 $ 0.43
Cumulative Effect of Change in Accounting
Principle ($ 0.09) --
--------- ---------
Basic Earnings per Common Share $ 0.44 $ 0.43
========= =========
Weighted Average Common Shares Outstanding 15,407 15,303
========= =========
Diluted Earnings per Share:
Earnings per Common Share Before Cumulative
Effect of Change in Accounting Principle $ 0.49 $ 0.40
Cumulative Effect of Change in Accounting
Principle ($ 0.08) --
--------- ---------
Diluted Earnings per Common Share $ 0.41 $ 0.40
========= =========
Weighted Average Common Shares Outstanding 16,631 16,409
========= =========
</TABLE>
See notes to financial statements.
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<PAGE> 7
O'Charley's Inc.
Statements of Cash Flows
Twenty-Eight Weeks Ended July 11, 1999 and July 12, 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 6,751 $ 6,546
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of accounting change, net of tax 1,348 --
Depreciation and amortization 7,097 5,279
Amortization of preopening costs -- 1,432
Provision for deferred income taxes -- 400
Loss on the sale of assets -- (250)
Changes in assets and liabilities:
Accounts receivable (212) (149)
Inventories (1,048) (2,393)
Additions to preopening costs -- (1,736)
Other current assets (1,048) (368)
Accounts payable 2,375 1,319
Accrued payroll and other accrued expenses 2,797 1,577
-------- --------
Net cash provided by operating activities 18,060 11,657
Cash Flows from Investing Activities:
Additions to property and equipment (32,514) (20,669)
Proceeds from the sale of assets -- 1,734
Other, net 207 (1,093)
-------- --------
Net cash used by investing activities (32,307) (20,028)
Cash Flows from Financing Activities:
Proceeds from long-term debt 15,000 11,042
Payments on long-term debt and capitalized
lease obligations (3,072) (2,647)
Exercise of employee incentive stock options 129 427
-------- --------
Net cash provided by financing activities 12,057 8,822
-------- --------
(Decrease) Increase in Cash (2,190) 451
Cash at Beginning of the Period 3,068 1,965
-------- --------
Cash at End of the Period $ 878 $ 2,416
======== ========
</TABLE>
See notes to financial statements.
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<PAGE> 8
O'Charley's Inc.
Notes To Unaudited Financial Statements
Twelve Weeks Ended July 11, 1999 and July 12, 1998
A. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X. The Company's
fiscal year ends on the last Sunday in December with its first quarter
consisting of sixteen weeks and the remaining three quarters consisting of
twelve weeks each.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals, which are necessary for a fair presentation of the financial
position, and the results of operations for the interim periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year.
These financial statements, footnote disclosures and other information
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 27, 1998.
B. Earnings Per Common Share
The Board of Directors of the Company approved a 3-for-2 stock split
effected as a 50% stock dividend for shareholders of record on May 20, 1998. The
new shares were distributed on June 1, 1998. On May 20, 1998, the total number
of outstanding shares of common stock increased 5,114,762 shares from 10,229,524
shares to 15,344,286 shares as a result of the stock split. All share and per
share information in the financial statements have been adjusted for the stock
split.
The Company follows Statement of Financial Accounting Standards No. 128
("FAS 128"), Earnings Per Share. FAS 128 establishes standards for both the
computing and presentation of basic and diluted EPS on the face of the
statements of earnings. Basic earnings per common share have been computed on
the basis of the weighted average number of common shares outstanding, and
diluted earnings per common share have been computed on the basis of the
weighted average number of common shares outstanding plus the dilutive effect of
options outstanding.
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<PAGE> 9
Following is a reconciliation of the Company's basic and diluted earnings per
share in accordance with FAS 128.
<TABLE>
<CAPTION>
Twelve weeks ended Twenty-eight weeks ended
---------------------- -------------------------
(In thousands, July 11, July 12, July 11, July 12,
except per share data) 1999 1998 1999 1998
- ------------------------------------------------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
Earnings Before Cumulative Effect of
Change in Accounting Principle $ 3,629 $ 3,083 $ 8,099 $ 6,546
Cumulative Effect of Change in
Accounting Principle (net of tax benefit) -- -- (1,348) --
------- ------- -------- -------
Net Earnings $ 3,629 $ 3,083 $ 6,751 $ 6,546
======= ======= ======== =======
Basic Earnings Per Share:
Weighted average shares outstanding 15,420 15,323 15,407 15,303
======= ======= ======== =======
Earnings per share before cumulative
effect of change in accounting principle $ 0.24 $ 0.20 $ 0.53 $ 0.43
Cumulative effect of accounting change -- -- (0.09) --
------- ------- -------- -------
Basic earnings per share $ 0.24 $ 0.20 $ 0.44 $ 0.43
======= ======= ======== =======
Diluted Earnings Per Share:
Weighted average shares outstanding 15,420 15,323 15,407 15,303
Incremental stock option shares outstanding 1,220 1,158 1,224 1,106
------- ------- -------- -------
Weighted average diluted shares outstanding 16,640 16,481 16,631 16,409
======= ======= ======== =======
Earnings per share before cumulative
effect of change in accounting principle $ 0.22 $ 0.19 $ 0.49 $ 0.40
Cumulative effect of accounting change -- -- (0.08) --
------- ------- -------- -------
Diluted earnings per share $ 0.22 $ 0.19 $ 0.41 $ 0.40
======= ======= ======== =======
</TABLE>
Options for approximately 826,700 shares were excluded from the 1999 diluted
weighted average shares calculation due to these shares being anti-dilutive.
C. New Accounting Pronouncements
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP
98-5) which 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. The Company adopted SOP 98-5
effective December 28, 1998. As a result, the Company recognized as a cumulative
effect of the accounting change a charge of $1.3 million, net of tax benefit, or
$0.08 per diluted share during the first quarter of 1999. The effect of adopting
SOP 98-5 on earnings before the cumulative effect of the change in accounting
principle was an additional expense of $223,000, or $0.01 per diluted share for
the second quarter and $415,000, or $0.02 per diluted share for the twenty-eight
weeks ended July 11, 1999.
D. Comprehensive Income
There were no components of other comprehensive income for the
twenty-eight week periods ended July 11, 1999 and July 12, 1998. Comprehensive
income for such periods was comprised solely of net earnings.
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<PAGE> 10
O'Charley's Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Twenty-Eight Weeks Ended July 11, 1999 and July 12, 1998
RESULTS OF OPERATIONS
GENERAL
At July 11, 1999, we owned and operated 111 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, which appeal to traditional casual dining customers as well as
value-oriented customers by offering high quality food at moderate pricing with
outstanding service. 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, which 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.
During the first quarter of 1999, we adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activity", which requires that preopening
and start-up costs be expensed as incurred rather than capitalized. Before the
accounting change, preopening costs were amortized over one year. The cumulative
effect of the accounting change totaled $2.1 million pre-tax and $1.3 million
net of tax, or $0.08 per diluted share. Net earnings for the first twenty-eight
weeks of 1999 were $6.8 million, or $0.41 per diluted share.
Earnings before the cumulative effect of the change in accounting principle were
$8.1 million, or $0.49 per diluted share for the first twenty-eight weeks of
1999 as compared with $6.5 million, or $0.40 per diluted share for the same
period in 1998.
The following table reflects changes in the number of Company-owned restaurants
for the first half of 1999 and 1998.
<TABLE>
<CAPTION>
Restaurants 1999 1998
----------- ---- ----
<S> <C> <C>
In operation, beginning of period 99 82
Restaurants opened first quarter 7 5
Restaurants opened second quarter 5 4
Restaurants formerly operated by franchisee -- 1
--- ---
In operation, end of period 111 92
=== ===
</TABLE>
Revenues consist almost entirely of restaurant sales. Restaurant sales include
food and beverage sales and are net of applicable state and local sales taxes.
Revenues also include commissary sales, which 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. We have historically
maintained a "kids eat free" program where we provide meals from a selected menu
to kids 10 years old and under. In select markets, we are currently testing a
value oriented kids program where we provide a meal from a kid's menu, which
includes a beverage and a dessert for a set price. It is too premature to
understand the impact of this test. Early results indicate that we will realize
a higher check average and a lower number of customers from the new value kids
meals.
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<PAGE> 11
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 includes 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 includes 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.
Depreciation and amortization primarily includes depreciation on property and
equipment calculated on a straight-line basis over an estimated useful life and
in 1998, includes 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 are expensed as
incurred in accordance with SOP 98-5 rather than amortized over one year. This
new accounting method affects when preopening costs are expensed and may impact
earnings relative to the previous method from quarter to quarter and year to
year depending on when these costs are incurred. We will continue to capture
preopening costs and these costs, beginning in 1999, are recorded in a new line
item category on the statement of earnings. The depreciation and amortization
category, beginning in 1999, no longer includes any preopening costs or
amortization thereon.
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<PAGE> 12
The following table highlights the operating results for the second quarter and
the first half of 1999 and 1998 as a percentage of total revenues unless
otherwise indicated. Each of the second quarters are comprised of 12 weeks. The
first half results are comprised of the first twenty-eight weeks of the fiscal
year.
<TABLE>
<CAPTION>
Second Quarter First Twenty-Eight Weeks
---------------------- ------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES:
Restaurant sales 99.0% 99.0% 98.9% 98.9%
Commissary sales 1.0% 1.0% 1.1% 1.1%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Cost of restaurant sales: (1)
Cost of food, beverage and supplies 33.4% 34.5% 33.4% 34.6%
Payroll and benefits 30.4% 30.4% 30.5% 30.5%
Restaurant operating costs 14.1% 14.1% 14.1% 14.1%
------ ------ ------ ------
77.9% 79.0% 78.0% 79.2%
------ ------ ------ ------
Restaurant operating margin(2) 22.1% 21.0% 22.0% 20.8%
Cost of commissary sales(3) 94.6% 93.7% 94.3% 93.7%
Advertising, general and administrative expenses 6.3% 6.1% 6.5% 6.4%
Depreciation and amortization 4.6% 5.3% 4.5% 5.3%
Preopening costs 1.7% -- 1.6% --
------ ------ ------ ------
INCOME FROM OPERATIONS 9.4% 9.4% 9.3% 9.0%
OTHER (INCOME) EXPENSE:
Interest expense, net 1.4% 1.1% 1.4% 1.1%
Other, net 0.1% (0.1%) 0.0% 0.0%
------ ------ ------ ------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7.9% 8.4% 7.9% 7.9%
INCOME TAXES 2.8% 2.9% 2.8% 2.8%
------ ------ ------ ------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 5.2% 5.4% 5.1% 5.1%
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- -- (0.8%) --
------ ------ ------ ------
NET EARNINGS 5.2% 5.4% 4.3% 5.1%
====== ====== ====== ======
</TABLE>
(1) As a percentage of restaurant sales.
(2) Reflects restaurant sales less cost of restaurant sales, expressed as a
percentage of restaurant sales.
(3) As a percentage of commissary sales.
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<PAGE> 13
SECOND QUARTER AND FIRST HALF OF 1999 VERSUS SECOND QUARTER AND FIRST HALF OF
1998
TOTAL REVENUES in the second quarter of 1999 increased $13.6 million, or 24.1%,
to $70.2 million from $56.6 million in the second quarter of 1998 primarily as a
result of an increase in restaurant sales of $13.5 million, or 24.0%. For the
first twenty-eight weeks of 1999, total revenues increased $30.5 million, or
23.9%, to $158.1 million from $127.6 million in 1998 as restaurant sales
increased $30.3 million and commissary sales increased $268,000. The increase in
restaurant sales was attributable to additional units in operation in 1999 and
increases in same store sales. We operated 19 additional units in each of the
first and second quarters of 1999 as compared to the same periods in 1998. In
1999, we opened seven new units in the first quarter and five new units in the
second quarter. Same store sales increased in the second quarter by 2.9% and
increased in the first twenty-eight weeks by 3.4%. In March 1999 we increased
menu prices by approximately 2%.
COST OF FOOD, BEVERAGE AND SUPPLIES in the second quarter of 1999 increased $3.8
million, or 19.9%, to $23.2 million from $19.3 million in the second quarter of
1998. As a percentage of restaurant sales, cost of food, beverage and supplies
decreased to 33.4% in the second quarter of 1999 from 34.5% in the second
quarter of 1998. For the first twenty-eight weeks of 1999, cost of food,
beverage and supplies increased $8.6 million, or 19.6%, to $52.2 million from
$43.7 million in the same period of 1998. As a percentage of restaurant sales,
these costs decreased to 33.4% in the first half of 1999 from 34.6% in the first
half of 1998. We attribute these lower food cost percentages primarily to three
factors: we took a menu price increase in March 1999 which increased the average
check, the cost of several food items decreased, and we improved our purchasing
and operating efficiencies in our stores and in our commissary. The above
improvements were partially offset by an increase in red meat costs. For the
remainder of 1999, we expect nominal increases in the cost of food items and
expect to experience the normal seasonal fluctuations for certain items,
including produce and poultry, and we expect red meat costs to remain higher.
There can be no assurance that events outside our control will not result in
increased food costs.
PAYROLL AND BENEFITS in the second quarter of 1999 increased $4.1 million, or
24.2%, to $21.1 million from $17.0 million in the second quarter of 1998. As a
percentage of restaurant sales, payroll and benefits remained at 30.4%. For the
first twenty-eight weeks of 1999, payroll and benefits increased $9.2 million,
or 23.9%, to $47.7 million from $38.5 million in the same period of 1998. As a
percentage of restaurant sales, payroll and benefits remained at 30.5% for the
first twenty-eight weeks of 1999. Wage rates and salaries for restaurant support
staff and management continued to increase in 1999. Those higher wages and
salaries were offset due to the economies achieved from higher average unit
sales volumes.
RESTAURANT OPERATING COSTS in the second quarter of 1999 increased $1.9 million,
or 24.3%, to $9.8 million from $7.9 million in the second quarter of 1998. For
the first twenty-eight weeks of 1999, restaurant operating costs increased $4.3
million, or 24.4%, to $22.1 million from $17.8 million in 1998. Restaurant
operating costs, as a percentage of restaurant sales, remained at 14.1% for each
of the second quarters and first half of the years. We continued to see lower
restaurant operating costs for certain expense items as a percentage of
restaurant sales due to the economies generated from higher average unit
volumes. These improvements were offset by higher salary, bonus and training
expenses. Additionally, we entered two new major markets in 1999, Charlotte,
North Carolina in the first quarter and Columbus, Ohio in the second quarter,
which increased certain supervision costs. Typically, we incur higher initial
supervision and other operating costs when entering new markets.
RESTAURANT OPERATING MARGIN in the second quarter of 1999 increased $3.6
million, or 30.5%, to $15.4 million from $11.8 million in the second quarter of
1998. For the first twenty-eight weeks of 1999, restaurant operating margin
increased $8.2 million, or 31.2%, to $34.4 million from $26.2 million in the
same period of 1998.
ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES in the second quarter of 1999
increased $943,000, or 27.1%, to $4.4 million from $3.5 million in the second
quarter of 1998. As a percentage of total revenue, advertising, general and
administrative expenses increased to 6.3% from 6.1% in the second quarter of
1998. This increase is primarily attributable to an increase in the amount of
advertising expenditures to 2.7% of sales in 1999 from 2.6% of sales in 1998.
Overall advertising expenditures were $1.9 million in 1999, an increase of 30.5%
from the $1.5 million expended in 1998. General and administrative expenses
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<PAGE> 14
increased 24.7% to $2.5 million in 1999 from $2.0 million in 1998. General and
administrative expenses increased due primarily to higher incentive bonus
compensation, increased salaries, employee benefits and legal expenses. For the
first twenty-eight weeks of 1999, advertising, general and administrative
expenses increased $2.1 million, or 25.9% to $10.2 million from $8.1 million in
1998. As a percentage of revenue, advertising, general and administrative
expenses increased to 6.5% in the first half of 1999 from 6.4% for the same
period in 1998. Advertising expenditures in the first half of 1999 increased
$1.0 million, or 29% to $4.3 million from $3.4 million in 1998. As a percentage
of revenue, advertising increased to 2.7% in the first half of 1999 from 2.6% in
1998.
DEPRECIATION AND AMORTIZATION in the second quarter of 1999 increased $222,000
to $3.2 million from $3.0 million in the second quarter of 1998. We adopted SOP
98-5 in the first quarter of 1999, which requires preopening costs to be
expensed as incurred. Previously, we capitalized preopening costs and amortized
these amounts over one year from the opening of each store. The depreciation and
amortization expense in the second quarter of 1998 included preopening cost
amortization of $650,000. Preopening costs are now recorded in a separate line
item category and the depreciation and amortization line, beginning in 1999, no
longer includes any preopening cost amortization. Excluding the preopening cost
amortization, depreciation expense in the second quarter of 1999 increased
$872,000 or 36.7%, to $3.2 million from $2.4 million in 1998, and on a
year-to-date basis, depreciation expense increased $1.8 million, or 34.4% to
$7.1 million from $5.3 million in 1998. The increase in depreciation expense is
primarily attributable to additional capital expenditures for new units and for
the remodeling of certain existing stores.
PREOPENING COSTS, excluding the one-time cumulative adjustment for the change in
accounting principle as measured under SOP 98-5, were $1.2 million in the second
quarter of 1999 and $2.5 million for the first twenty-eight weeks of 1999.
Preopening costs includes operating costs and expenses incurred prior to a new
restaurant opening. This new accounting method affects when preopening costs are
expensed and may impact earnings relative to the previous method from quarter to
quarter and year to year depending on when these costs are incurred. We
typically incur average preopening costs of approximately $190,000 for each new
store. The amount of preopening costs incurred in any one quarter will include
costs associated with new stores opened during that particular quarter and most
likely will include costs associated with stores expected to open subsequent to
the quarter. As a percentage of total revenue, preopening costs were 1.7% and
1.6% in the second quarter and first half of 1999, respectively, as compared
with preopening cost amortization of 1.1% of total revenue in each corresponding
period in 1998.
INCOME FROM OPERATIONS in the second quarter of 1999 increased $1.3 million, or
23.7%, to $6.6 million from $5.3 million in 1998. For the first twenty-eight
weeks of 1999, income from operations increased $3.2 million or 28.2% to $14.7
million from $11.4 million in 1998.
INTEREST EXPENSE in the second quarter of 1999 increased $326,000, or 51.0%, to
$965,000 from $639,000 in 1998. For the first twenty-eight weeks, interest
expense increased $724,000, or 51.1% to $2.1 million from $1.4 million in 1998.
This increase is primarily related to the increased borrowings under our
revolving line of credit. During the fourth quarter of 1997, we reduced our
long-term debt by $34.7 million with the net proceeds received from the sale of
common stock, which reduced interest expense in the first quarter of 1998.
EARNINGS FOR THE SECOND QUARTER increased $546,000 or 17.7%, to $3.6 million
from $3.1 million in 1998.
THE CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE, recorded in the
first quarter of 1999 and included in the results for the first twenty-eight
weeks, represented the write-off of unamortized preopening costs in accordance
with SOP 98-5. The $2.1 million of unamortized preopening costs remaining on our
balance sheet at December 28, 1998 was written off in this one-time adjustment.
After adjusting for the tax benefit, the net cumulative adjustment was $1.3
million.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of capital have historically been cash provided by
operations, borrowings under our bank credit facilities and capitalized lease
obligations. Our principal capital needs arise primarily from the purchase and
development of new restaurants, equipment replacement and improvements to
existing restaurants.
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<PAGE> 15
Property and equipment expenditures were $32.5 million in the first twenty-eight
weeks of 1999. These expenditures were made primarily for new stores opened
during the year, stores under construction at July 11, 1999 and for improvements
to existing restaurants. Additionally, we repaid $3.1 million in principal on
our long-term debt and capitalized lease obligations. These cash outlays were
funded primarily by $18.1 million in cash provided by operations and net
borrowings of $15.0 million under our revolving credit agreement (the
"Revolver"). Total sources and uses of cash decreased available cash by $2.2
million in 1999.
For the remainder of 1999, we believe we will incur additional capital
expenditures of approximately $17 to $20 million for the planned six additional
new restaurants in 1999, for improvements to existing units and our commissary
and for the purchase and construction for certain stores expected to open in
2000. As of July 11, 1999, we had seven restaurants under construction, three of
which are expected to open during the third quarter of 1999. In addition, we
have plans for several new capital projects in 1999 for our commissary including
approximately $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 and, if purchased, we estimate
the cost to be approximately $5.0 to $6.0 million. Financing to fund these
projects is currently being evaluated and may include borrowings under the
Revolver and 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
July 11, 1999, $50.0 million was outstanding under the Revolver and bore
interest at an average rate of 5.7%. The Revolver matures on November 30, 2001,
which may be extended annually by one year, at the participating banks' option,
on each anniversary 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 July 11, 1999, the working capital deficiency and
the current ratio were $17.8 million and 0.5 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 July 11, 1999
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 buy back additional shares in the future.
For the next twelve months, 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. Our
growth strategy includes the consideration of acquisitions or strategic joint
ventures. Any such acquisitions, or joint ventures on other growth opportunities
may require additional external financing, and the Company may from time to time
seek to obtain additional funds from public or private issuances of equity or
debt securities.
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.
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 have completed
inquiries to our suppliers and other third-party entities with which we have
business relations as to their own year 2000 issues. 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
-15-
<PAGE> 16
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 the Company's operations. A majority
of the Company's employees are paid hourly rates related to federal and state
minimum wage laws. As a result of increased competition and the low unemployment
rates in the markets in which the Company's restaurants are located, the Company
has continued to increase wages and benefits in order to attract and retain
management personnel and hourly coworkers. In addition, most of the Company's
leases require the Company to pay taxes, insurance, maintenance, repairs and
utility costs, and these costs are subject to inflationary pressures. The
Company may attempt to offset the effect of inflation through periodic menu
price increases, economies of scale in purchasing and cost controls and
efficiencies at existing restaurants.
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, those set forth under the caption
"Forward-Looking Statements/Risk Factors" in our Annual Report on Form 10-K for
the fiscal year ended December 27, 1998. 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.
Item 3. QUANTITATIVE AND QUALITATIVE MARKET 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. 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.
-16-
<PAGE> 17
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting, the Shareholders elected three Class III
directors to hold office for a term of three years and until their successors
are elected and qualified. The following table sets forth the votes cast for and
withhold/abstain with respect to each of the director nominees:
<TABLE>
<CAPTION>
Director For Abstain
-------- --- -------
<S> <C> <C>
Richard Reiss, Jr. 9,590,597 1,588,568
G. Nicholas Spiva 11,166,009 13,156
Shirley A. Zeitlin 7,689,737 3,489,428
</TABLE>
In addition to the foregoing directors, the following table sets forth
the other members of the Board of directors whose terms of office continued
after the meeting and the year in which his term expires:
<TABLE>
<CAPTION>
Name Term Expires
---- ------------
<S> <C>
John W. Stokes, Jr. 2001
H. Steve Tidwell 2001
Samuel H. Howard 2001
Gregory L. Burns 2000
Steven J. Hislop 2000
C. Warren Neel 2000
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the twelve
weeks ended July 11, 1999.
-17-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
O'Charley's Inc.
(Registrant)
Date: August 25, 1999 By: /s/ Gregory L. Burns
--------------------- ----------------------------------
Gregory L. Burns
Chief Executive Officer
Date: August 25, 1999 By: /s/ A. Chad Fitzhugh
--------------------- ----------------------------------
A. Chad Fitzhugh
Chief Financial Officer
-18-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE O'CHARLEY'S INC. FOR THE SIX MONTHS ENDED JULY 11,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> JUL-11-1999
<CASH> 878
<SECURITIES> 0
<RECEIVABLES> 2,583
<ALLOWANCES> 0
<INVENTORY> 8,077
<CURRENT-ASSETS> 16,008
<PP&E> 199,586
<DEPRECIATION> 0
<TOTAL-ASSETS> 217,762
<CURRENT-LIABILITIES> 33,849
<BONDS> 0
0
0
<COMMON> 66,115
<OTHER-SE> 49,539
<TOTAL-LIABILITY-AND-EQUITY> 217,632
<SALES> 156,345
<TOTAL-REVENUES> 158,074
<CGS> 121,986
<TOTAL-COSTS> 143,400
<OTHER-EXPENSES> 75
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,140
<INCOME-PRETAX> 12,459
<INCOME-TAX> 4,360
<INCOME-CONTINUING> 8,099
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,348)
<NET-INCOME> 6,751
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.41
</TABLE>
