<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 9, 2000
Commission file number O-18629
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O'Charley's Inc.
----------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1192475
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3038 Sidco Drive, Nashville, Tennessee 37204
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(615)256-8500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
<TABLE>
<CAPTION>
Class Outstanding as of August 18, 2000
----- ---------------------------------
<S> <C>
Common Stock, no par value 15,618,091 shares
</TABLE>
<PAGE> 2
O'Charley's Inc.
Form 10-Q
For Quarter Ended July 9, 2000
Index
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Statements
Item 1. Financial statements (unaudited):
Balance sheets as of July 9, 2000 and
December 26, 1999 3
Statements of earnings for the twelve weeks
ended July 9, 2000 and July 11, 1999 4
Statements of earnings for the twenty-eight weeks
ended July 9, 2000 and July 11, 1999 5
Statements of cash flows for the twenty-eight weeks
ended July 9, 2000 and July 11, 1999 7
Notes to unaudited financial statements 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 11
Item 3. Quantitative and qualitative disclosures about market risk 17
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and reports on Form 8-K 18
Signatures 19
</TABLE>
<PAGE> 3
O'Charley's Inc.
Balance Sheets (unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
July 9, December 26,
2000 1999
--------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,515 $ 3,178
Accounts receivable 3,062 2,195
Inventories 14,163 8,776
Deferred income taxes 1,138 1,138
Other current assets 1,533 794
--------- ---------
Total current assets 21,411 16,081
Property and Equipment, net 248,875 219,749
Goodwill, net 10,740 186
Other Assets 4,947 4,164
--------- ---------
$ 285,973 $ 240,180
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 11,647 $ 9,318
Accrued payroll and related expenses 8,165 6,524
Accrued expenses 5,540 7,470
Federal, state and local taxes 6,865 5,167
Current portion of long-term debt and capitalized
leases 7,384 7,013
--------- ---------
Total current liabilities 39,601 35,492
Deferred Income Taxes 6,301 6,243
Other Liabilities 2,668 2,298
Long-Term Debt 84,364 54,441
Capitalized Lease Obligations 19,833 19,017
Shareholders' Equity:
Common stock - No par value; authorized, 50,000,000
shares; issued and outstanding, 15,608,839 in 2000
and 15,502,182 in 1999 66,188 65,732
Accumulated other comprehensive loss, net of tax (79) (186)
Retained earnings 67,097 57,143
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133,206 122,689
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$ 285,973 $ 240,180
========= =========
</TABLE>
See notes to financial statements.
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<PAGE> 4
O'Charley's Inc.
Statements of Earnings (unaudited)
Twelve Weeks Ended July 9, 2000 and July 11, 1999
<TABLE>
<CAPTION>
2000 1999
-------- -------
(in thousands, except per share data)
<S> <C> <C>
Revenues:
Restaurant sales $84,532 $69,490
Commissary sales 879 735
------- -------
85,411 70,225
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 27,574 23,166
Payroll and benefits 26,136 21,136
Restaurant operating costs 11,855 9,806
Cost of commissary sales 823 695
Advertising, general and administrative expenses 5,590 4,422
Depreciation and amortization 4,046 3,245
Preopening costs 1,162 1,165
------- -------
77,186 63,635
------- -------
Income from Operations 8,225 6,590
Other (Income) Expense:
Interest expense, net 1,657 965
Other, net 7 43
------- -------
1,664 1,008
------- -------
Earnings Before Income Taxes 6,561 5,582
Income Taxes 2,296 1,953
------- -------
Net Earnings $ 4,265 $ 3,629
======= =======
Basic Earnings per Share
Earnings per Common Share $ 0.27 $ 0.24
======= =======
Weighted Average Common Shares Outstanding 15,574 15,420
======= =======
Diluted Earnings per Share:
Earnings per Common Share $ 0.26 $ 0.22
======= =======
Weighted Average Common Shares Outstanding 16,579 16,640
======= =======
</TABLE>
See notes to financial statements.
-4-
<PAGE> 5
O'Charley's Inc.
Statements of Earnings (unaudited)
Twenty-Eight Weeks Ended July 9, 2000 and July 11, 1999
<TABLE>
<CAPTION>
2000 1999
-------- ---------
(in thousands, except per share data)
<S> <C> <C>
Revenues:
Restaurant sales $189,736 $ 156,345
Commissary sales 1,973 1,729
-------- ---------
191,709 158,074
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 61,493 52,225
Payroll and benefits 58,417 47,670
Restaurant operating costs 26,730 22,091
Cost of commissary sales 1,845 1,631
Advertising, general and administrative expenses 12,675 10,227
Depreciation and amortization 9,002 7,097
Preopening costs 2,773 2,459
-------- ---------
172,935 143,400
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Income from Operations 18,774 14,674
Other (Income) Expense:
Interest expense, net 3,439 2,140
Other, net 21 75
-------- ---------
3,460 2,215
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Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 15,314 12,459
Income Taxes 5,360 4,360
-------- ---------
Earnings Before Cumulative Effect of
Change in Accounting Principle 9,954 8,099
Cumulative Effect of Change in Accounting
Principle (net of tax benefit) -- (1,348)
-------- ---------
Net Earnings $ 9,954 $ 6,751
======== =========
</TABLE>
See notes to financial statements.
-5-
<PAGE> 6
O'Charley's Inc.
Statements of Earnings (unaudited)
Twenty-Eight Weeks Ended July 9, 2000 and July 11, 1999
<TABLE>
<CAPTION>
2000 1999
--------- ---------
(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 $ 0.64 $ 0.53
Cumulative Effect of Change in Accounting Principle -- $ (0.09)
---------- ----------
Basic Earnings per Common Share $ 0.64 $ 0.44
========== ==========
Weighted Average Common Shares Outstanding 15,529 15,407
========== ==========
Diluted Earnings per Share:
Earnings per Common Share Before Cumulative
Effect of Change in Accounting Principle $ 0.61 $ 0.49
Cumulative Effect of Change in Accounting
Principle -- $ (0.08)
---------- ----------
Diluted Earnings per Common Share $ 0.61 $ 0.41
========== ==========
Weighted Average Common Shares Outstanding 16,430 16,631
========== ==========
</TABLE>
See notes to financial statements.
-6-
<PAGE> 7
O'Charley's Inc.
Statements of Cash Flows (unaudited)
Twenty-Eight Weeks Ended July 9, 2000 and July 11, 1999
<TABLE>
<CAPTION>
2000 1999
-------- -------
(in thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 9,954 $ 6,751
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 9,002 7,097
Provision for deferred income taxes 58 --
Loss on the sale of assets 10 --
Changes in assets and liabilities:
Accounts receivable (867) (212)
Inventories (5,238) (1,048)
Other current assets (736) (1,048)
Accounts payable 2,329 2,375
Accrued payroll and other accrued expenses 1,417 2,797
-------- --------
Net cash provided by operating activities 15,929 18,060
Cash Flows from Investing Activities:
Additions to property and equipment (28,516) (32,514)
Acquisition of company, net of cash acquired (13,977) --
Proceeds from the sale of assets 291 --
Other, net (309) 207
-------- --------
Net cash used by investing activities (42,511) (32,307)
Cash Flows from Financing Activities:
Proceeds from long-term debt 57,448 26,235
Payments on long-term debt and capitalized
lease obligations (32,985) (14,307)
Exercise of employee incentive stock options 1,040 129
Payments to acquire common stock (584) --
-------- --------
Net cash provided by financing activities 24,919 12,057
-------- --------
Decrease in Cash (1,663) (2,190)
Cash at Beginning of the Period 3,178 3,068
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Cash at End of the Period $ 1,515 $ 878
======== ========
Supplemental disclosures:
Cash paid for interest $ 4,145 $ 2,217
======== ========
Additions to capitalized lease obligations $ 4,828 $ 3,491
======== ========
Income taxes paid $ 5,618 $ 4,012
======== ========
Effects of acquisition:
Estimated fair value of assets acquired $ 5,170
Purchase price in excess of the net assets
acquired (goodwill) 10,624
Less fair value of liabilities assumed (1,811)
--------
Cash Paid 13,983
Less cash acquired (6)
--------
Net cash paid for acquisition $ 13,977
========
</TABLE>
See notes to financial statements.
-7-
<PAGE> 8
O'Charley's Inc.
Notes To Unaudited Financial Statements
Twelve Weeks Ended July 9, 2000 and July 11, 1999
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. Fiscal 2000 will consist of fifty-three weeks compared to
fifty-two weeks in 1999, with the fourth quarter consisting of 13 weeks compared
to twelve weeks in the fourth quarter of 1999.
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 26, 1999.
B. Earnings Per Common Share
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.
-8-
<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 9, July 11, July 9, July 11,
except per share data) 2000 1999 2000 1999
--------------------------------------------------------------------------- ---------------------
<S> <C> <C> <C> <C>
Earnings Before Cumulative Effect of
Change in Accounting Principle $ 4,265 $ 3,629 $ 9,954 $ 8,099
Cumulative Effect of Change in
Accounting Principle (net of tax benefit) -- -- -- (1,348)
-------------------- ----------------------
Net Earnings $ 4,265 $ 3,629 $ 9,954 $ 6,751
-------------------- ----------------------
Basic Earnings Per Share:
Weighted average shares outstanding 15,574 15,420 15,529 15,407
-------------------- ----------------------
Earnings per share before cumulative
effect of change in accounting principle $ 0.27 $ 0.24 $ 0.64 $ 0.53
Cumulative effect of accounting change -- -- -- (0.09)
-------------------- ----------------------
Basic earnings per share $ 0.27 $ 0.24 $ 0.64 $ 0.44
-------------------- ----------------------
Diluted Earnings Per Share:
Weighted average shares outstanding 15,574 15,420 15,529 15,407
Incremental stock option shares outstanding 1,005 1,220 901 1,224
-------------------- ----------------------
Weighted average diluted shares outstanding 16,579 16,640 16,430 16,631
==================== ======================
Earnings per share before cumulative
effect of change in accounting principle $ 0.26 $ 0.22 $ 0.61 $ 0.49
Cumulative effect of accounting change -- -- -- (0.08)
-------------------- ----------------------
Diluted earnings per share $ 0.26 $ 0.22 $ 0.61 $ 0.41
==================== ======================
</TABLE>
Options for approximately 1,065,000 and 826,700 shares were excluded from the
2000 and 1999 twenty-eight weeks diluted weighted average shares calculation,
respectively, due to these shares being anti-dilutive.
C. New Accounting Pronouncements
Effective December 28, 1998, the Company adopted SOP 98-5, Reporting the
Costs of Start-up Activities, which requires costs incurred during a start-up
activity be expensed as incurred. As a result, the Company recognized as a
cumulative effect of the change in accounting principle a charge of $1.3
million, net of tax, or $0.08 per diluted share during the first quarter of
1999.
-9-
<PAGE> 10
D. Comprehensive Income
Comprehensive income consists of net earnings and other comprehensive income
attributable to unrealized gains and losses on available for sale securities.
Other comprehensive loss, net of tax, for the second quarter of 2000 was
$69,000. Other comprehensive gain for the twenty-eight weeks ended July 9, 2000
was $108,000. Comprehensive income for the second quarter and twenty-eight weeks
ended July 11, 1999 was comprised solely of net earnings.
E. Asset Purchase
On May 26, 2000, the Company purchased two existing Stoney River Legendary
Steaks restaurants and all associated trademarks and intellectual property for
approximately $14.0 million and the assumption of approximately $1.8 million in
debt. In addition, the transaction includes an earn-out provision pursuant to
which the owners may receive up to $1.25 million at the end of 2002, $1.25
million at the end of 2003, and $2.5 million at the end of 2004, in each case
based on the Stoney River concept achieving certain performance thresholds
(income before taxes and preopening costs) for such year. The transaction was
accounted for using the purchase method of accounting. The Stoney River concept
is being operated as a wholly-owned subsidiary of the Company. Goodwill
resulting from the acquisition is being amortized on a straight-line basis over
twenty years. The allocation of the purchase price to the acquired net assets is
preliminary.
-10-
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Twenty-Eight Weeks Ended July 9, 2000 and July 11, 1999
RESULTS OF OPERATIONS
GENERAL
At July 9, 2000, we owned and operated 131 O'Charley's and 2 Stoney River
Legendary Steaks restaurants in Alabama, Florida, Georgia, Illinois, 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.
O'Charley's 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. Stoney River Legendary Steaks
are full service, upscale steakhouses with a "mountain lodge" theme which appeal
to upper-end casual dining customers by offering hand-cut, premium mid-western
beef along with fresh seafood and poultry at reasonable prices with outstanding
service in a warm, friendly and relaxed environment. Stoney River's growth
strategy is to concentrate on major metropolitan markets in the Southeast and
Midwest with disciplined, controlled development with the potential to
accelerate development over the next several years.
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 Activities", 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.
The following table reflects changes in the number of Company-owned O'Charley's
restaurants for the first half of 2000 and 1999.
<TABLE>
<CAPTION>
Restaurants 2000 1999
------------------------------------------------------------------
<S> <C> <C>
In operation, beginning of period 117 99
Restaurants opened first quarter 8 7
Restaurants opened second quarter 6 5
------------------------
In operation, end of period 131 111
------------------------
</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.
Liquor sales as a percentage of restaurant sales have declined in each of the
last three fiscal years.
We have historically maintained a "kids eat free" program where we provide meals
without charge from a selected menu to kids 10 years old and under. In select
markets, we are currently offering a value-oriented kid's program where we
provide a meal from a kid's menu, which includes a beverage and a dessert, for a
set price. The results indicate that there are no material differences in
profitability at restaurants that implement the value-oriented kid's program.
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<PAGE> 12
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. Currently, Congress is contemplating an increase in the
federal minimum wage rate. We typically pay our employees more than minimum
wage; thus, we do not expect an immediate adverse effect on our financial
performance from such an increase. However, as in prior years, we do expect that
overall wage inflation will be higher for several years following any minimum
wage increase that may affect payroll costs in the future. As Congress has
raised the federal minimum wage rate in recent years, the base wage rate for
tipped employees has remained at $2.13. Any increase to that amount would have
an effect on payroll and benefits. Currently, we do not expect an increase to
the base wage rate.
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 includes depreciation on property and equipment
calculated on a straight-line basis over an estimated useful life, and
amortization of goodwill, primarily related to the purchase of the Stoney River
concept, on a straight-line basis over twenty years. Depreciation and
amortization as a percentage of total revenues may increase as the number of new
store openings increases.
Preopening costs includes operating costs and expenses incurred prior to a new
restaurant opening. Beginning in the first quarter of 1999, preopening costs are
expensed as incurred in accordance with SOP 98-5 rather than capitalized and
amortized over one year as was the practice prior to the implementation of this
new accounting pronouncement. This new accounting method affects when preopening
costs are expensed and may impact earnings relative to the previous method on a
quarter to quarter and year to year basis depending on when these costs are
incurred. Preopening costs are now reflected on a separate line item labeled
"preopening costs" on the statement of earnings. The amount of preopening costs
incurred in any one period may include costs associated with stores expected to
open subsequent to that period. We typically incur average preopening costs of
approximately $200,000 for each new store.
RECENT ACQUISITION
On May 26, 2000, we purchased two existing Stoney River Legendary Steaks
restaurants and all associated trademarks and intellectual property for
approximately $14.0 million and the assumption of approximately $1.8 million in
debt. In addition, the transaction includes an earn-out provision pursuant to
which the owners may receive up to $1.25 million at the end of 2002, $1.25
million at the end of 2003, and $2.5 million at the end of 2004, in each case
based on the Stoney River concept achieving certain performance thresholds
(income before taxes and preopening costs) for such year. The transaction was
accounted for using the purchase method of accounting. The Stoney River concept
is being operated as a wholly-owned subsidiary of the Company.
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<PAGE> 13
We expect the Stoney River transaction to have a negative impact on earnings of
$0.05 for 2000 and $0.03 for 2001 due principally to the investment costs and
costs associated with the integration and expansion of the concept. The areas
significantly affected will be depreciation and amortization, due principally to
the amortization of $10.6 million of goodwill, and interest expense, due to the
increased borrowings under the Revolver for the purchase of the concept. The
goodwill recognized will be amortized on a straight-line basis over twenty
years. The cost of food, beverage and supplies will also be affected, as a
percentage of restaurant sales, due to the product mix of the Stoney River
restaurants. Other expense categories will increase, but not necessarily as a
percentage of increased revenues.
FINANCIAL HIGHLIGHTS
The following table highlights the operating results for the second quarter and
the first half of 2000 and 1999 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
-------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales 99.0% 99.0% 99.0% 98.9%
Commissary sales 1.0% 1.0% 1.0% 1.1%
------------------- --------------------
100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of restaurant sales: (1)
Cost of food, beverage and supplies 32.6% 33.4% 32.4% 33.4%
Payroll and benefits 30.9% 30.4% 30.8% 30.5%
Restaurant operating costs 14.1% 14.1% 14.1% 14.1%
------------------- --------------------
77.6% 77.9% 77.3% 78.0%
------------------- --------------------
Restaurant operating margin (2) 22.4% 22.1% 22.7% 22.0%
Cost of commissary sales (3) 93.6% 94.6% 93.5% 94.3%
Advertising, general and administrative expenses 6.5% 6.3% 6.6% 6.5%
Depreciation and amortization 4.7% 4.6% 4.7% 4.5%
Preopening costs 1.4% 1.7% 1.4% 1.6%
------------------- --------------------
Income from Operations 9.6% 9.4% 9.8% 9.3%
Other (Income) Expense:
Interest expense, net 1.9% 1.4% 1.8% 1.4%
Other, net 0.0% 0.1% 0.0% 0.0%
------------------- --------------------
Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 7.7% 7.9% 8.0% 7.9%
Income Taxes 2.7% 2.8% 2.8% 2.8%
------------------- --------------------
Earnings Before Cumulative Effect of Change in
Accounting Principle 5.0% 5.2% 5.2% 5.1%
Cumulative Effect of Change in Accounting
Principle -- -- -- (0.8%)
------------------- --------------------
Net Earnings 5.0% 5.2% 5.2% 4.3%
------------------- --------------------
</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.
-13-
<PAGE> 14
SECOND QUARTER AND FIRST TWENTY-EIGHT WEEKS OF 2000 VERSUS SECOND QUARTER AND
FIRST TWENTY-EIGHT WEEKS OF 1999
TOTAL REVENUES in the second quarter of 2000 increased $15.2 million, or 21.6%,
to $85.4 million from $70.2 million in the second quarter of 1999. For the first
twenty-eight weeks of 2000, total revenues increased $33.6 million, or 21.3%, to
$191.7 million from $158.1 million in 1999. The inclusion of Stoney River sales
provided an additional $1.1 million compared to 1999. O'Charley's restaurant
sales increased $13.9 million, or 20.1%, in the second quarter of 2000. For the
first twenty-eight weeks of 2000, restaurant sales increased $32.3 million, or
20.7%, over 1999. The increase in restaurant sales was attributable to
additional units in operation in 2000 and increases in same store sales. We
operated 19 additional units in the first quarter and 20 additional units in the
second quarter of 2000 as compared to the same periods in 1999. In 2000, we
opened eight new units in the first quarter and six new units in the second
quarter. Same store sales increased in the second quarter by 2.0% and increased
in the first twenty-eight weeks of 2000 by 3.0%. The increase in same store
sales was primarily the result of an increase in the average check. In March
2000, we increased menu prices by approximately 2%, which increased our average
check. At July 9, 2000, we had approximately 45% of our stores offering the Kids
Value Meal program compared to approximately 30% at July 11, 1999. Our remaining
stores offer a Kids Eat Free program. The average check is approximately 2.5%
higher in stores offering the Kids Value Meal program compared to stores
offering the Kids Eat Free program.
COST OF FOOD, BEVERAGE AND SUPPLIES in the second quarter of 2000 increased $4.4
million, or 19.0%, to $27.6 million from $23.2 million in the second quarter of
1999. As a percentage of restaurant sales, cost of food, beverage and supplies
decreased to 32.6% in the second quarter of 2000 from 33.4% in the second
quarter of 1999. For the first twenty-eight weeks of 2000, cost of food,
beverage and supplies increased $9.3 million, or 17.7%, to $61.5 million from
$52.2 million in the same period of 1999. As a percentage of restaurant sales,
these costs decreased to 32.4% in the first twenty-eight weeks of 2000 from
33.4% in the first twenty-eight weeks of 1999. We attribute these lower food
cost percentages primarily to three factors: we increased menu prices in March
2000 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 and baby back rib costs. Currently, we are anticipating
increases in red meat and poultry costs for the remainder of 2000, and expect to
experience the normal seasonal fluctuations for certain other items. 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 2000 increased $5.0 million, or
23.7%, to $26.1 million from $21.1 million in the second quarter of 1999. As a
percentage of restaurant sales, payroll and benefits increased to 30.9% from
30.4% in the second quarter of 1999. For the first twenty-eight weeks of 2000,
payroll and benefits increased $10.7 million, or 22.5%, to $58.4 million from
$47.7 million in the same period of 1999. As a percentage of restaurant sales,
payroll and benefits increased to 30.8% for the first twenty-eight weeks of 2000
from 30.5% for the first twenty-eight weeks of 1999. The increase was
attributable to increasing wage rates and salaries for restaurant support staff
and management along with higher workers compensation and health insurance costs
in 2000. Those higher costs were partially offset by economies achieved from
higher average unit sales volumes. Our markets generally have low unemployment
rates and, as a result, we anticipate continued wage rate increases for the
remainder of 2000.
RESTAURANT OPERATING COSTS in the second quarter of 2000 increased $2.0 million,
or 20.9%, to $11.9 million from $9.8 million in the second quarter of 1999. For
the first twenty-eight weeks of 2000, restaurant operating costs increased $4.6
million, or 21.0%, to $26.7 million from $22.1 million in 1999. Restaurant
operating costs, as a percentage of restaurant sales, remained at 14.1% for the
second quarter and first twenty-eight weeks of 2000 and 1999. Store level
operating costs as a percentage of sales increased slightly compared to 1999,
but were offset by a reduction in certain supervisory costs.
RESTAURANT OPERATING MARGIN in the second quarter of 2000 increased $3.6
million, or 23.3%, to $19.0 million from $15.4 million in the second quarter of
1999. For the first twenty-eight weeks of 2000, restaurant operating margin
increased $8.7 million, or 25.4%, to $43.1 million from $34.4 million in the
same period of 1999.
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<PAGE> 15
ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES in the second quarter of 2000
increased $1.2 million or 26.4%, to $5.6 million from $4.4 million in the second
quarter of 1999. As a percentage of total revenue, advertising, general and
administrative expenses increased to 6.5% from 6.3% in the second quarter of
1999. Advertising expenditures were $2.1 million in the first twenty-eight weeks
of 2000, an increase of 12.2% from the $1.9 million expended in the same period
in 1999. As a percentage of restaurant sales, advertising decreased to 2.5% in
the first twenty-eight weeks of 2000 from 2.7% in the same period in 1999.
General and administrative expenses increased 37.0% to $3.5 million in the
second quarter of 2000 from $2.5 million in the second quarter of 1999. For the
first twenty-eight weeks of 2000, advertising, general and administrative
expenses increased $2.4 million, or 23.9%, to $12.7 million from $10.2 million
in the same period in 1999. As a percentage of revenue, advertising, general and
administrative expenses increased to 6.6% in the first twenty-eight weeks of
2000 from 6.5% for the same period in 1999. Advertising expenditures in the
first twenty-eight weeks of 2000 increased $641,000 or 14.8% to $5.0 million
from $4.3 million in the same period in 1999. As a percentage of revenue,
advertising decreased to 2.6% in the first twenty-eight weeks of 2000 from 2.8%
in the same period in 1999. General and administrative expenses increased 30.6%
to $7.7 million in the first twenty-eight weeks of 2000 from $5.9 million in the
first twenty-eight weeks of 1999. General and administrative expenses increased
due primarily to higher incentive bonus compensation and legal expenses.
DEPRECIATION AND AMORTIZATION in the second quarter of 2000 increased $801,000,
or 24.7%, to $4.0 million from $3.2 million in the second quarter of 1999. As a
percentage of total revenue, depreciation and amortization increased to 4.7% in
the second quarter of 2000 from 4.6% in the same period in 1999. On a
year-to-date basis, depreciation expense increased $1.9 million, or 26.8% to
$9.0 million from $7.1 million in 1999, and as a percentage of revenue,
increased to 4.7% in 2000 from 4.5% in 1999. The increase in depreciation
expense is primarily attributable to the growth in the number of new stores and
additional capital expenditures for the remodeling of certain existing stores.
For the remainder of 2000, depreciation and amortization, as a percentage of
total revenue, will continue to increase due principally to the amortization of
goodwill associated with the Stoney River acquisition.
PREOPENING COSTS in the second quarter of 2000 remained level with 1999 at $1.2
million. As a percentage of total revenues preopening costs decreased to 1.4% in
the second quarter of 2000 from 1.7% in 1999. For the first twenty-eight weeks,
preopening costs, excluding the one-time cumulative adjustment for the change in
accounting principle as measured under SOP 98-5, increased 12.8% in 2000 to $2.8
million from $2.5 million in 1999. As a percentage of total revenue, preopening
costs decreased to 1.4% in the first twenty-eight weeks of 2000 from 1.6% in the
same period in 1999.
INCOME FROM OPERATIONS in the second quarter of 2000 increased $1.6 million, or
24.8%, to $8.2 million from $6.6 million in 1999. For the first twenty-eight
weeks of 2000, income from operations increased $4.1 million or 28.0% to $18.8
million from $14.7 million in 1999.
INTEREST EXPENSE, NET in the second quarter of 2000 increased $692,000, or
71.7%, to $1.7 million from $965,000 in 1999. For the first twenty-eight weeks,
interest expense increased $1.3 million, or 60.7%, to $3.4 million from $2.1
million in 1999. This increase is primarily related to the increased borrowings
under our revolving line of credit.
THE CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE, recorded in the
first quarter of 1999, 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.
Property and equipment expenditures, excluding the Stoney River acquisition
discussed below, were $28.5 million in the first twenty-eight weeks of 2000.
These expenditures were made primarily for 14 new stores opened during the year,
stores under construction at July 9, 2000 and for improvements to existing
restaurants.
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<PAGE> 16
Additionally, we repaid $31.2 million in principal on our long-term debt and
capitalized lease obligations. These cash outlays were funded primarily by $15.9
million in cash provided by operations and borrowings of $57.4 million under our
revolving credit agreement (the "Revolver"). The total decrease in cash was $1.7
million in the first twenty-eight weeks of 2000.
Excluding expenditures for the Stoney River restaurants discussed below, we
believe we will incur additional capital expenditures of approximately $30
million for the remainder of 2000 for the planned six to seven new restaurants
and for improvements to existing units. We are currently anticipating capital
expenditures for 2001 to be between $60 and $65 million. We are currently
planning on opening approximately 24 to 26 new restaurants in 2001. As of July
9, 2000, we had seven restaurants under construction, four of which are expected
to open during the third quarter of 2000. We have exercised an option to acquire
our existing home office and commissary land and building facilities, which are
currently occupied pursuant to an operating lease. The option price is
approximately $5.9 million. Financing options are currently being evaluated and
include a direct purchase of the facilities financed with borrowings under the
Revolver or an off-balance sheet lease financing arrangement. Actual capital
expenditures for the remainder of 2000 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.
On May 26, 2000, we purchased two existing Stoney River Legendary Steaks
restaurants and all associated trademarks and intellectual property for
approximately $14.0 million. We also assumed approximately $1.8 million in debt
related to the buildings and equipment of the existing restaurants. In addition,
the transaction includes an earn-out provision pursuant to which the owners may
receive up to $1.25 million at the end of 2002, $1.25 million at the end of
2003, and $2.5 million at the end of 2004, in each case based on the Stoney
River concept achieving certain performance thresholds (income before taxes and
preopening costs) for such year. We currently anticipate additional capital
expenditures of approximately $3.0 million in 2000 for expansion of the Stoney
River concept. We anticipate opening two new Stoney River restaurants in 2001.
We expect to finance these capital additions under our Revolver.
On January 31, 2000, the Revolver was amended and restated to extend the
maturity date and increase the maximum borrowing capacity to $135 million from
$100 million. As of July 9, 2000, $84.0 million was outstanding under the
Revolver and bore interest at an average rate of 7.4%. The maturity date was
extended until May 31, 2003. The maturity date may be extended annually by one
year, at the participating banks' option, beginning 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 9, 2000, the working capital deficiency and the
current ratio were $18.2 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 9, 2000
approximately 301,000 shares, or 2% of our outstanding stock, had been
repurchased. We continually evaluate the best uses of our capital and may
repurchase additional shares in the future.
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 for the next twelve months.
Our growth strategy includes the consideration of acquisitions or strategic
joint ventures. Any such acquisitions, joint ventures or 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
We have not experienced any significant disruptions to our financial or
operating activities caused by the failure of our computerized systems, or those
of our suppliers, resulting from Year 2000 conversion issues. We do not expect
Year 2000 conversion issues to have a material adverse effect on our operations
or financial results in 2000.
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<PAGE> 17
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, operating growth strategy, and financing
plans. 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 26, 1999. 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
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, primarily capitalized leases, and
variable-rate, primarily the Revolver, debt to manage its exposures to changes
in interest rates. The outstanding debt under the Revolver at July 9, 2000 was
$84 million. The current interest rate environment is uncertain and overall
interest rates have been increasing in 2000. At July 9, 2000, the amounts
borrowed under the Revolver are subject to interest rate fluctuations, based
primarily on short-term LIBOR rates. See Notes 5 and 6 to the Financial
Statements in our Annual Report on Form 10-K for the fiscal year ended December
26, 1999. The Company does not expect changes in interest rates to have a
material effect on income or cash flows in fiscal 2000, although there can be no
assurances that interest rates will not significantly change.
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<PAGE> 18
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on May 4, 2000 (the
"Annual Meeting"). At the Annual Meeting, the shareholders elected four Class I
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 Withheld
-------- --- --------
<S> <C> <C>
Gregory L. Burns 9,370,711 1,096,025
Steven J. Hislop 9,370,711 1,096,025
C. Warren Neel 9,600,098 866,638
Robert J. Walker 9,599,198 867,538
</TABLE>
In addition to the foregoing directors, the following table sets forth
the other members of the Board of Directors whose term of office
continued after the meeting and the year in which his or her term
expires:
<TABLE>
<CAPTION>
Name Term Expires
---- ------------
<S> <C>
John W. Stokes, Jr. 2001
H. Steve Tidwell 2001
Samuel H. Howard 2001
Richard Reiss, Jr. 2002
G. Nicholas Spiva 2002
Shirley A. Zeitlin 2002
</TABLE>
The shareholders of the Company also approved the O'Charley's 2000
Stock Incentive Plan and certain amendments to the CHUX Ownership Plan. The
following table sets forth the votes cast for, votes cast against, votes
withheld/abstain and broker non-votes with respect to each of the proposed
plans:
<TABLE>
<CAPTION>
For Against Abstain Broker/Non-Vote
--- ------- ------- ---------------
<S> <C> <C> <C> <C>
2000 Stock Incentive Plan 4,610,929 3,159,784 27,700 2,668,323
CHUX Ownership Plan 10,309,221 112,705 44,810 --
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - O'Charley's 2000 Stock Incentive Plan
10.2 - CHUX Ownership Plan, as amended
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 9, 2000.
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<PAGE> 19
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 23, 2000 By: /s/ Gregory L. Burns
--------------- -----------------------------
Gregory L. Burns
Chief Executive Officer
Date: August 23, 2000 By: /s/ A. Chad Fitzhugh
--------------- -----------------------------
A. Chad Fitzhugh
Chief Financial Officer
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