O Charleys (CHUX) 10-Q 2011 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended October 2, 2011

Commission file number 0-18629

O’Charley’s Inc.

(Exact name of registrant as specified in its charter)

Tennessee	62-1192475
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

3038 Sidco Drive, Nashville, Tennessee	37204
(Address of principal executive offices)	(Zip Code)

(615) 256-8500

(Registrant’s telephone number, including area code)

       Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

       Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x  No  o

       Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer o Accelerated filer x Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of October 31, 2011
Common Stock, no par value	21,968,347 shares

O’Charley’s Inc.

Form 10-Q

Index

	Page No.
Part I — Financial Information
Item 1. Consolidated Financial Statements (Unaudited):		3
Consolidated Balance Sheets as of October 2, 2011 and December 26, 2010		3
Consolidated Statements of Operations for the 12 weeks ended October 2, 2011 and October 3, 2010		4
Consolidated Statements of Operations for the 40 weeks ended October 2, 2011 and October 3, 2010		5
Consolidated Statements of Cash Flows for the 40 weeks ended October 2, 2011 and October 3, 2010		6
Consolidated Statements of Shareholders’ Equity and Comprehensive Loss for the
40 weeks ended October 2, 2011		7
Notes to Unaudited Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		37
Item 4. Controls and Procedures		37
Part II — Other Information
Item 1. Legal Proceedings		38
Item 1A. Risk Factors		38
Item 2. Issuer Purchases of Equity Securities		38
Item 6. Exhibits		39
Signatures		40

EX-31.1                Section 302 Certification of the Chief Executive Officer

EX-31.2                Section 302 Certification of the Chief Financial Officer

EX-32.1                Section 906 Certification of the Chief Executive Officer

EX-32.2                Section 906 Certification of the Chief Financial Officer

EX-101.INS          XBRL Instance Document

EX-101.SCH         XBRL Schema Document

EX-101.CAL         XBRL Calculation Linkbase Document

EX-101.DEF         XBRL Definition Linkbase Document

EX-101.LAB        XBRL Label Linkbase Document

EX-101.PRE         XBRL Presentation Linkbase Document

2

PART I — FINANCIAL INFORMATION

 Item 1. Consolidated Financial Statements (Unaudited)

O’CHARLEY’S INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)

		October 2,		December 26,
		2011		2010
ASSETS
Current Assets:
Cash and cash equivalents	$	30,773	$	29,693
Trade accounts receivable, net		11,176		12,080
Income taxes receivable		3,183		2,851
Inventories		8,228		9,071
Assets held for sale		3,979		4,847
Other current assets		6,847		4,201
Total current assets		64,186		62,743
Property and equipment, net of accumulated depreciation of $404,063
and $379,580, respectively		301,487		320,011
Trade names and other intangible assets		25,946		25,946
Other assets		11,297		14,041
Total Assets	$	402,916	$	422,741
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Trade accounts payable	$	7,974	$	8,211
Accrued payroll and related expenses		14,694		14,639
Accrued expenses		25,905		24,314
Deferred revenue		5,362		17,584
Federal, state and local taxes		10,654		9,998
Current portion of long-term debt and capitalized lease obligations		219		1,710
Total current liabilities		64,808		76,456
Deferred income taxes		3,916		4,034
Other liabilities		41,525		46,853
Long-term debt and capitalized lease obligations, less current portion		116,670		117,164
Shareholders’ Equity:
Common stock — No par value; authorized, 50,000 shares; issued and outstanding,
21,969 in 2011 and 21,713 in 2010		167,384		165,547
Retained earnings		8,613		12,687
Total shareholders’ equity		175,997		178,234
Total Liabilities and Shareholders’ Equity	$	402,916	$	422,741

See accompanying notes to unaudited consolidated financial statements

3

O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

12 Weeks Ended October 2, 2011 and October 3, 2010

(in thousands, except per share data)

(Unaudited)

		2011			2010
Revenues:
Restaurant sales	$	186,392		$	188,291
Franchise and other revenue		196			351
		186,588			188,642
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		59,862			56,933
Payroll and benefits		64,848			67,015
Restaurant operating costs		40,160			41,502
Cost of restaurant sales, exclusive of depreciation and		164,870			165,450
amortization shown separately below
Advertising and marketing		8,197			7,947
General and administrative		5,554			8,282
Depreciation and amortization of property and equipment		8,425			9,629
Impairment and disposal charges, net		177			2,497
		187,223			193,805
Loss from Operations		(635	)		(5,163	)
Other Expense (Income):
Interest expense, net		3,161			2,488
Other, net		—			(6	)
		3,161			2,482
Loss from Continuing Operations Before Income Taxes		(3,796	)		(7,645	)
Income Tax Expense (Benefit)		157			(615	)
Loss from Continuing Operations		(3,953	)		(7,030	)
Loss from Discontinued Operations, Net		(59	)		(408	)
Net Loss	$	(4,012	)	$	(7,438	)
Net Loss Attributable to Common Shareholders – basic and diluted:
Loss from Continuing Operations	$	(0.18	)	$	(0.33	)
Loss from Discontinued Operations, Net		(0.01	)		(0.02	)
Net Loss Attributable to Common Shareholders	$	(0.19	)	$	(0.35	)
Weighted Average Shares Used to Compute Net Loss Attributable to Common Shareholders
– basic and diluted:		21,591			21,267

See accompanying notes to unaudited consolidated financial statements

4

O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

40 Weeks Ended October 2, 2011 and October 3, 2010

(in thousands, except per share data)

(Unaudited)

		2011			2010
Revenues:
Restaurant sales	$	644,186		$	645,737
Franchise and other revenue		741			922
		644,927			646,659
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		203,814			191,642
Payroll and benefits		223,189			226,954
Restaurant operating costs		132,576			134,632
Cost of restaurant sales, excluding depreciation and		559,579			553,228
amortization shown separately below
Advertising and marketing		27,421			27,489
General and administrative		24,192			29,420
Depreciation and amortization of property and equipment		28,587			32,932
Impairment and disposal charges, net		(184	)		5,752
Pre-opening		—			7
		639,595			648,828
Income (Loss) from Operations		5,332			(2,169	)
Other Expense (Income):
Interest expense, net		9,075			9,405
Other, net		3			(5	)
		9,078			9,400
Loss from Continuing Operations Before Income Taxes		(3,746	)		(11,569	)
Income Tax Expense (Benefit)		20			(694	)
Loss from Continuing Operations		(3,766	)		(10,875	)
Loss from Discontinued Operations, Net		(308	)		(3,430	)
Net Loss	$	(4,074	)	$	(14,305	)
Net Loss Attributable to Common Shareholders – basic and diluted:
Loss from Continuing Operations	$	(0.18	)	$	(0.51	)
Loss from Discontinued Operations, Net		(0.01	)		(0.17	)
Net Loss Attributable to Common Shareholders	$	(0.19	)	$	(0.68	)
Weighted Average Shares Used to Compute Net Loss Attributable to Common Shareholders
– basic and diluted:		21,500			21,175

See accompanying notes to unaudited consolidated financial statements

5

O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

40 Weeks Ended October 2, 2011 and October 3, 2010

(in thousands)

(Unaudited)

		2011			2010
Cash Flows from Operating Activities:
Net Loss	$	(4,074	)	$	(14,305	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property and equipment		28,587			33,278
Amortization of debt issuance costs and swap termination payment		297			643
Share-based compensation		1,374			3,062
Loss on early extinguishment of debt		—			198
Amortization of deferred gain on sale-leasebacks		(813	)		(813	)
Deferred income taxes and other income tax related items		526			2,084
Loss on the sale of assets		113			86
Impairment and disposal charges, net		(592	)		8,184
Changes in assets and liabilities:
Trade accounts and other receivables		904			4,390
Income taxes receivable		(332	)		(2,827	)
Inventories		843			2,201
Other current assets		(2,646	)		(2,193	)
Trade accounts payable		(237	)		511
Deferred revenue		(12,222	)		(12,427	)
Accrued payroll, accrued expenses, and federal, state and local taxes		1,290			3,248
Other long-term assets and liabilities		(1,926	)		(1,917	)
Net cash provided by operating activities		11,092			23,403
Cash Flows from Investing Activities:
Additions to property and equipment		(11,072	)		(10,876	)
Proceeds from the sale of assets		2,186			1,137
Other, net		86			(5	)
Net cash used in investing activities		(8,800	)		(9,744	)
Cash Flows from Financing Activities:
Payments on long-term debt and capitalized lease obligations		(1,550	)		(1,627	)
Repurchase of senior notes		—			(9,993	)
Debt issuance costs		(125	)		(1,647	)
Proceeds from the exercise of stock options and issuances under CHUX Ownership Plan		615			739
Shares tendered and retired for minimum tax withholdings		(169	)		(277	)
Excess tax benefit from share-based payments		17			8
Dividends paid		—			(3	)
Net cash used in financing activities		(1,212	)		(12,800	)
Increase in cash and cash equivalents		1,080			859
Cash and cash equivalents at beginning of the period		29,693			21,880
Cash and cash equivalents at end of the period	$	30,773		$	22,739

See accompanying notes to unaudited consolidated financial statements

6

O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND

COMPREHENSIVE LOSS

40 Weeks Ended October 2, 2011

(in thousands)

(Unaudited)

	Common Stock						Retained
	Shares			Amount			Earnings			Total
Balance, December 26, 2010	21,713		$	165,547		$	12,687		$	178,234
Comprehensive loss:
Net loss							(4,074	)		(4,074	)
Shares issued under CHUX Ownership Plan and exercise of stock options	127			615						615
Shares tendered and retired for minimum tax withholdings	(27	)		(169	)					(169	)
Excess tax benefit from share-based payments				17						17
Share-based compensation expense	156			1,374						1,374
Balance, October 2, 2011	21,969		$	167,384		$	8,613		$	175,997

See accompanying notes to unaudited consolidated financial statements

7

O’CHARLEY’S INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12 and 40 Weeks Ended October 2, 2011 and October 3, 2010

(Unaudited)

A.    BASIS OF PRESENTATION

O’Charley’s Inc. (the “Company”) operates 221 (at October 2, 2011) full-service restaurant facilities in 17 states in the East, Southeast and Midwest under the trade name “O’Charley’s,” 106 full-service restaurant facilities in seven states throughout New England and upstate New York under the trade name “Ninety Nine Restaurants,” and 10 full-service restaurant facilities in six states in the Southeast and Midwest under the trade name “Stoney River Legendary Steaks.” As of October 2, 2011, the Company had six franchised O’Charley’s restaurants in four states.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 its second, third and fourth quarters consisting of twelve weeks each in most years.

In the opinion of management, the unaudited interim consolidated financial statements contained in this report reflect all adjustments, consisting primarily of normal recurring accruals, which are necessary for a fair presentation of the consolidated 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.

The Company’s significant interim accounting policies include the recognition of certain advertising and marketing costs, generally in proportion to revenue.

These unaudited interim consolidated financial statements and footnote disclosures should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 26, 2010. Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the unaudited interim consolidated financial statements and the reported amounts of revenues and expenses during the period to prepare these unaudited interim consolidated financial statements in conformity with GAAP.

 B.  DISCONTINUED OPERATIONS

During fiscal year 2010, the Company closed 24 underperforming restaurants: 14 O’Charley’s restaurants and 10 Ninety Nine restaurants.  The decision to close these restaurants was the result of an extensive review of the Company’s restaurant portfolio that examined each restaurant’s recent and historical financial and operating performance, its position in the marketplace, and other operating considerations. Given the geographic location of certain restaurants and in accordance with relevant GAAP, nine of these restaurants were considered discontinued operations.  Due to the consideration of these nine restaurants as discontinued operations, prior-year revenues and expenses have been revised in the accompanying unaudited interim consolidated statements of operations.

During the 12 week period ended October 2, 2011, the Company recorded a $0.1 million loss from discontinued operations, net of taxes, which represents exit and disposal costs, partly offset by a net gain on the sale of the remaining assets from one Ninety Nine restaurant location. During the 12 week period ended October 3, 2010, the Company recorded a $0.4 million loss from discontinued operations, net of taxes, which represents net loss from operations. During the 40 week period ended October 2, 2011, the Company recorded a $0.3 million loss from discontinued operations, net of taxes, which represents $0.6 million of exit and disposal costs, partly offset by a $0.3 million gain on the sale of an O’Charley’s restaurant location as well as a minimal net gain on the sale of the remaining assets from two O’Charley’s restaurant locations and one Ninety Nine restaurant location. During the 40 week period ended October 3, 2010, the Company recorded a $3.4 million loss from discontinued operations, net of taxes, which represents $2.4 million in asset impairments and a $1.0 million net loss from operations.

8

The results of discontinued operations for the 12 and 40 week periods ended October 2, 2011 and October 3, 2010 were as follows (in thousands):

		12 Weeks Ended						40 Weeks Ended
		October 2,			October 3,			October 2,			October 3,
		2011			2010			2011			2010
Revenues	$	—		$	3,107		$	—		$	10,662
Loss before income taxes		(59	)		(397	)		(308	)		(3,474	)
Income tax expense (benefit)		—			11			—			(44	)
Net Loss	$	(59	)	$	(408	)	$	(308	)	$	(3,430	)

C.  FAIR VALUE MEASUREMENTS

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825, “Fair Value of Financial Instruments” (“ASC 825”),requires disclosure of the fair values of most on- and off-balance sheet financial instruments for which it is practicable to estimate that value. The scope of ASC 825 excludes certain financial instruments, such as trade receivables and payables when the carrying value approximates the fair value, employee benefit obligations, lease contracts, and all nonfinancial instruments, such as land, buildings, and equipment. The fair values of the financial instruments are estimates based upon current market conditions and quoted market prices for the same or similar instruments as of October 2, 2011 and December 26, 2010.  Book value approximates fair value for substantially all of the Company’s financial assets and liabilities that fall under the scope of ASC 825, except for the Company’s nine percent senior subordinated notes (the “Senior Notes”). The fair value of the Senior Notes was $108.9 million and $116.4 million as of October 2, 2011 and December 26, 2010, respectively, compared to the carrying value of $115.2 million as of both October 2, 2011 and December 26, 2010. The fair value of the Senior Notes was based on quoted market prices as of the last day of the third quarter of fiscal 2011 and the last day of fiscal 2010.See Note L- “Subsequent Events” for additional information.

ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  Fair value is defined under ASC 820 as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date.

Level 1                      Inputs based on quoted prices in active markets for identical assets.

Level 2                      Inputs other than quoted prices included within Level 1 that are observable for the asset, either directly

or indirectly.

Level 3                      Inputs that are unobservable for the asset.

There were no transfers among levels within the fair value hierarchy during the 12 and 40 week periods ended October 2, 2011 or during the same prior year periods. Assets measured at fair value on a recurring basis are summarized in the table below (in thousands):

	Fair Value Measurement
Description	Level		October 2, 2011		December 26, 2010
Deferred compensation plan assets/liabilities	1	$	3,590	$	4,227

The deferred compensation plan assets are comprised of various investment funds, which are valued based upon their quoted market prices.

9

There were no significant adjustments to assets and liabilities measured at fair value on a nonrecurring basis during the third quarter of fiscal 2011. In certain prior periods significant adjustments were made to assets and liabilities where observable inputs were not available. As such, when future positive cash flows are projected, but less than the carrying value, Level 3 fair value is determined by projected future discounted cash flows for each restaurant location. The discount rate is the Company’s weighted average borrowing rate on outstanding debt, which the Company believes is commensurate with the required rate of return that a potential buyer would expect to receive when purchasing a similar restaurant and the related long-lived assets. The Company limits assumptions about important factors such as sales and margin change to those that are supportable for the restaurant.

D.    IMPAIRMENT AND DISPOSAL CHARGES, NET

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the 12 week period ended October 2, 2011, the Company recorded a charge of $0.2 million due to an increase in the future lease obligations of previously closed locations of $0.1 million and $0.1 million of exit and disposal costs, as compared to a $2.5 million charge in the same prior-year period. During the 40 week period ended October 2, 2011, the Company recorded a net gain of $0.2 million due to net reductions of previously closed locations future lease obligations of $0.6 million, partly offset by $0.4 million of exit and disposal costs, as compared to a $5.8 million charge in the same prior-year period.

During the 12 and 40 week periods ended October 2, 2011, there are exit and disposal costs included in continuing and discontinued operations associated with lease obligations from previously closed restaurants and the Bellingham, Massachusetts distribution center. These locations currently have operating lease obligations with lease termination dates ranging from 2011 to 2021. The liability associated with the lease obligations is included in accrued expenses and other long-term liabilities on the unaudited interim consolidated balance sheet as of October 2, 2011.

A reconciliation of the liability balance is summarized in the table below (in millions):

Exit and Disposal Liability
Balance, December 26, 2010	$	4.8
Exit and Disposal Costs- Continuing Operations		(0.3	)
Payments- Continuing Operations		(1.6	)
Discontinued Operations Activity		(0.7	)
Balance, October 2, 2011	$	2.2

E.   SHARE-BASED COMPENSATION

Total net share-based compensation was a benefit of $0.2 million and an expense of $1.4 million for the 12 and 40 week periods ended October 2, 2011, respectively, compared to expense of $0.8 million and $3.1 million for the 12 and 40 week periods ended October 3, 2010, respectively. The Company’s net share-based compensation benefit primarily consisted of expense associated with restricted stock awards and, to a lesser extent, expenses associated with unvested stock options and the Company’s employee share purchase plan and in the current quarter included the reversal of expense due to forfeitures.

During the 12 and 40 week periods ended October 2, 2011, the Company issued 30,000 and 181,770 shares, respectively, of restricted stock awards to its Board of Directors and certain other employees. The Company also issued 104,000 and 297,500 shares of non-qualified stock options to certain members of senior management during the 12 and 40 week periods ended October 2, 2011, respectively. As of October 2, 2011, there were 1.6 million options outstanding and 0.3 million restricted stock awards outstanding.

10

F.   LONG-TERM DEBT

On January 26, 2010 the Company entered into its Third Amended and Restated Credit Agreement (the “Credit Agreement”). The maximum borrowing capacity under the Credit Agreement is $45 million. The maximum adjusted leverage ratio is 5.25. Under the Credit Agreement, the Company is permitted to repurchase its Senior Notes due in 2013, subject to certain limitations. The Credit Agreement also permits sale-leaseback transactions, subject to certain limitations. At October 2, 2011, the Company had no amounts outstanding on its revolving credit facility and $12.8 million outstanding in letters of credit, which reduced its available borrowing capacity under the Credit Agreement to $32.2 million. The $116.9 million of debt recorded on the unaudited interim consolidated balance sheet as of October 2, 2011 is comprised of $115.2 million in Senior Notes, $1.4 million related to a swap termination agreement, $0.1 million in notes payable and $0.2 million in capital leases. See Note L- “Subsequent Events” for additional information.

G.   NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS

The following is a reconciliation of the Company’s basic and diluted loss per share calculation. As the Company incurred a net loss in the 12 and 40 week periods ended October 2, 2011, the weighted average common shares outstanding used in the determination of basic loss per common share are used for the diluted loss per common share as well.

		12 Weeks Ended						40 Weeks Ended
		October 2,			October 3,			October 2,			October 3,
		2011			2010			2011			2010
(in thousands, except per share data)
Loss from Continuing Operations	$	(3,953	)	$	(7,030	)	$	(3,766	)	$	(10,875	)
Loss from Discontinued Operations, Net		(59	)		(408	)		(308	)		(3,430	)
Net Loss	$	(4,012	)	$	(7,438	)	$	(4,074	)	$	(14,305	)
Weighted average common shares outstanding
– basic and diluted:		21,591			21,267			21,500			21,175
Net Loss Attributable to Common Shareholders
– basic and diluted:
Loss from Continuing Operations	$	(0.18	)	$	(0.33	)	$	(0.18	)	$	(0.51	)
Loss from Discontinued Operations, Net		(0.01	)		(0.02	)		(0.01	)		(0.17	)
Net Loss Attributable to Common Shareholders	$	(0.19	)	$	(0.35	)	$	(0.19	)	$	(0.68	)

Options for 1.6 million shares were excluded from the 12 and 40 week periods ended October 2, 2011 diluted weighted average share calculations and options for 1.9 million shares were excluded from the 12 and 40 weeks ended October 3, 2010 diluted weighted average share calculations, due to these shares being anti-dilutive.  In addition, restricted stock awards for 0.3 million shares were excluded from the 12 and 40 weeks ended October 2, 2011 diluted weighted average share calculations and 0.4 million shares were excluded from the 12 and 40 weeks ended October 3, 2010 diluted weighted average share calculations, due to these shares being anti-dilutive.

H.    LEGAL PROCEEDINGS

       The Company is a defendant from time to time in various legal proceedings arising in the ordinary course of its business, including claims relating to injury or wrongful death under “dram shop” laws that allow a person to sue the Company based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of its restaurants; claims relating to workplace, workers’ compensation and employment matters, discrimination and similar matters; claims resulting from “slip and fall” accidents; claims relating to lease and contractual obligations; claims  relating to its franchising initiatives; and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns.

       The Company does not believe that any of the legal proceedings pending against it as of the date of this report will have a material adverse effect on its liquidity or financial condition. The Company may incur liabilities, receive benefits, settle disputes, sustain judgments, or accrue expenses relating to legal proceedings in a particular fiscal quarter which may adversely affect its results of operations, or on occasion, receive settlements that favorably affect results of operations.

11

I.    ASSETS HELD FOR SALE

As of October 2, 2011, the $4.0 million shown in assets held for sale on the unaudited interim consolidated balance sheet consisted of the assets related to seven restaurants closed in the fourth quarter of 2010, four liquor licenses from restaurants closed in the fourth quarter of 2010, assets related to a site previously subleased which the Company no longer intends to sublease and assets related to a site the Company no longer plans to utilize.  The Company ceases recognizing depreciation expense for all assets that are being held for sale.

J.    INCOME TAXES

During the third quarter ended October 2, 2011, the Company performed its quarterly assessment of its net deferred tax assets. Under ASC 740, “Income Taxes” (“ASC 740”), companies are required to assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. In evaluating all of the positive and negative evidence in determining that a valuation allowance was required, pursuant to ASC 740, the Company evaluated future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years, if applicable, and tax planning strategies, and compared the likelihood of these sources of income in light of the recent pre-tax losses and determined that it is more likely than not that the Company will not be able to realize its net deferred tax assets in the future. A cumulative pre-tax loss is given considerably more weight than projections of future income, and a recent historical cumulative loss is considered a significant factor that is difficult to overcome. The Company has a three-year cumulative pre-tax loss.

Under ASC 740, companies are required to apply their estimated full-year tax rate on a year-to-date basis in each interim period. Under ASC 740, companies should not apply the estimated full-year tax rate to interim financial results if the estimated full-year tax rate is not reliably predictable. In this situation, the interim tax rate should be based on the actual year-to-date results. Based on the Company’s current projections, a small change in pre-tax earnings would result in a material change in the estimated annual effective rate, producing significant variations in the customary relationship between income tax expense and pre-tax accounting income in interim periods.  As such, the Company recorded a tax expense for the third quarter of 2011 based on the actual year-to-date results, in accordance with ASC 740.

For the 12 and 40 weeks ended October 2, 2011, the Company has recorded an income tax expense on income from continuing operations of $0.2 million and less than $0.1 million, respectively, compared to a tax benefit of $0.6 million and $0.7 million in the comparable prior-year periods, respectively. The change in the effective tax rate from fiscal 2010 to fiscal 2011 is the result of fluctuations in pre-tax net loss and the related rate impacts of federal tax credits, as well as changes in the fiscal 2011 valuation allowance.  Additionally, there was no income tax benefit related to discontinued operations for the third quarter of 2011, compared to an income tax benefit of less than $0.1 million in the prior-year period.  The Company estimates that its tax credits, which are primarily the FICA (Social Security and Medicare taxes) tip credits and the WOTC (Work Opportunity Tax Credit), are $5.1 million through the third quarter of 2011 and are largely offset by a full valuation allowance.  The FICA tip credit is a non-refundable federal income tax credit available to offset a portion of employer’s FICA tax paid on employee cash tips.  WOTC is available for wages paid by employers who hire individuals from certain targeted groups of hard-to-employ individuals.

K.   RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820)-Fair Value Measurement (“ASU 2011-04”), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 is effective for the Company in its first quarter of fiscal 2012 and will be applied prospectively. The Company is currently evaluating the impact of adopting ASU 2011-04, but currently believes there will be no significant impact on its consolidated financial statements.

12

L.   SUBSEQUENT EVENTS

On October 17, 2011, the Company completed a sale-leaseback of 50 O’Charley’srestaurant properties, which produced gross proceeds of approximately $105 million. During the fourth fiscal quarter, the Company will be using the net proceeds from the sale-leaseback of approximately $103.8 million and approximately $11.4 million of available cash to redeem at par the $115.2 million principal amount of the Senior Notes.

The anticipated impact of the two transactions will be a decrease in annual interest expense associated with the Senior Notes of approximately $10.0 million, as well as approximately $2.5 million less in annual depreciation, which will be partly offset by approximately $8.9 million of incremental annual rent expense.  The incremental annual rent expense includes straight-line rent, and the annual amortization of related deferred finance costs and the deferred gain on the sale of certain properties included in the sale-leaseback transaction. The full impact of these changes will be reflected in the Company’s 2012 results. In addition, the Company expects to record a loss in the fiscal fourth quarter of approximately $1.2 million on the sale of certain properties included in the sale-leaseback transaction.

During the fourth fiscal quarter, the Company also entered into a Fourth Amended and Restated Credit Agreement with its existing banks, under which it has reduced its revolving credit facility to $30 million from $45 million and extended the facility’s term to 2016.  While the facility’s terms are substantially consistent with the relevant terms of the prior facility, which was to mature in August 2013, the Company is permitted to make capital expenditures for restaurant remodels and expansion under the new facility of up to $5 million for 2011 and up to 35% of Earnings Before Interest Taxes Depreciation and Amortization or EBITDA (as defined therein) for 2012 and the years thereafter.

13

M.    SUPPLEMENTARY CONSOLIDATING FINANCIAL INFORMATION OF SUBSIDIARY GUARANTORS

Presented below is supplementary consolidating financial information for the Company and the subsidiary guarantors as of October 2, 2011 and December 26, 2010 and for the 12 and 40 week periods ended October 2, 2011 and October 3, 2010.

Consolidating Balance Sheet

As of October 2, 2011

(Unaudited)

								Minor
								Subsidiaries and
		Parent			Subsidiary			Consolidating
		Company			Guarantor			Adjustments			Consolidated
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	1,464		$	29,309		$	—		$	30,773
Trade accounts receivable, net		5,401			6,725			(950	)		11,176
Income taxes receivable		—			3,183			—			3,183
Intercompany (payable) receivable		(282,269	)		251,783			30,486			—
Inventories		3,734			4,494			—			8,228
Assets held for sale		3,334			645			—			3,979
Other current assets		2,693			2,708			1,446			6,847
Total current (liabilities) assets		(265,643	)		298,847			30,982			64,186
Property and equipment, net		217,032			84,455			—			301,487
Trade names and other intangible assets		25			25,921			—			25,946
Other assets		208,719			28,811			(226,233	)		11,297
Total Assets (Liabilities)	$	160,133		$	438,034		$	(195,251	)	$	402,916
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable	$	7,523		$	(1,624	)	$	2,075		$	7,974
Accrued payroll and related expenses		10,548			4,146			—			14,694
Accrued expenses		20,286			6,569			(950	)		25,905
Deferred revenue		—			5,991			(629	)		5,362
Federal, state and local taxes		(14,163	)		24,817			—			10,654
Current portion of long-term debt and capitalized
lease obligations		154			65			—			219
Total current liabilities		24,348			39,964			496			64,808
Deferred income taxes		3,916			—			—			3,916
Other liabilities		22,335			19,091			99			41,525
Long-term debt and capitalized lease obligations,
less current portion		141,246			80			(24,656	)		116,670
Shareholders’ Equity (Deficit):
Common stock		125,008			343,431			(301,055	)		167,384
Retained (deficit) earnings		(156,720	)		35,468			129,865			8,613
Total shareholders’ (deficit) equity		(31,712	)		378,899			(171,190	)		175,997
Total Liabilities and Shareholders’ Equity (Deficit)	$	160,133		$	438,034		$	(195,251	)	$	402,916

14

Consolidating Balance Sheet

As of December 26, 2010

(Unaudited)

							Minor
							Subsidiaries and
		Parent			Subsidiary		Consolidating
		Company			Guarantors		Adjustments			Consolidated
	(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	1,744		$	27,949	$	—		$	29,693
Trade accounts receivable, net		6,659			5,639		(218	)		12,080
Income taxes receivable		—			2,851		—			2,851
Intercompany (payable) receivable		(277,713	)		247,227		30,486			—
Inventories		4,045			5,026		—			9,071
Assets held for sale		3,828			1,019		—			4,847
Other current assets		1,733			2,468		—			4,201
Total current (liabilities) assets		(259,704	)		292,179		30,268			62,743
Property and equipment, net		226,929			93,082		—			320,011
Trade names and other intangible assets		25			25,921		—			25,946
Other assets		210,649			29,624		(226,232	)		14,041
Total Assets (Liabilities)	$	177,899		$	440,806	$	(195,964	)	$	422,741
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable	$	7,502		$	80	$	629		$	8,211
Accrued payroll and related expenses		10,630			4,009		—			14,639
Accrued expenses		17,708			6,824		(218	)		24,314
Deferred revenue		—			18,213		(629	)		17,584
Federal, state and local taxes		(14,382	)		24,380		—			9,998
Current portion of long-term debt and capitalized
lease obligations		1,567			143		—			1,710
Total current liabilities (assets)		23,025			53,649		(218	)		76,456
Deferred income taxes		4,034			—		—			4,034
Other liabilities		25,901			20,852		100			46,853
Long-term debt, less current portion		141,613			207		(24,656	)		117,164
Shareholders’ Equity (Deficit):
Common stock		123,171			343,431		(301,055	)		165,547
Retained (deficit) earnings		(139,845	)		22,667		129,865			12,687
Total shareholders’ (deficit) equity		(16,674	)		366,098		(171,190	)		178,234
Total Liabilities and Shareholders’ Equity (Deficit)	$	177,899		$	440,806	$	(195,964	)	$	422,741

15

Consolidating Statement of Operations

12 Weeks Ended October 2, 2011

(Unaudited)

								Minor
								Subsidiaries and
		Parent			Subsidiary			Consolidating
		Company			Guarantors			Adjustments			Consolidated
	(in thousands)
Revenues:
Restaurant sales	$	102,795		$	80,453		$	3,144		$	186,392
Franchise and other revenue		153			43			—			196
		102,948			80,496			3,144			186,588
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		33,437			25,238			1,187			59,862
Payroll and benefits		37,982			28,811			(1,945	)		64,848
Restaurant operating costs		21,245			15,520			3,395			40,160
Cost of restaurant sales, exclusive of depreciation and
amortization shown separately below		92,664			69,569			2,637			164,870
Advertising and marketing		—			8,165			32			8,197
General and administrative		902			4,766			(114	)		5,554
Depreciation and amortization of property and equipment		4,794			3,536			95			8,425
Impairment and disposal charges, net		127			50			—			177
		98,487			86,086			2,650			187,223
Income (Loss) from Operations		4,461			(5,590	)		494			(635	)
Other Expense (Income):
Interest expense, net		3,035			126			—			3,161
Other, net		10,069			(10,069	)		—			—
		13,104			(9,943	)		—			3,161
(Loss) Income from Continuing Operations Before Income Taxes		(8,643	)		4,353			494			(3,796	)
Income Tax Expense (Benefit)		167			(10	)		—			157
(Loss) Income from Continuing Operations		(8,810	)		4,363			494			(3,953	)
Loss from Discontinued Operations, net		(33	)		(26	)		—			(59	)
Net (Loss) Income	$	(8,843	)	$	4,337		$	494		$	(4,012	)

16

Consolidating Statement of Operations

12 Weeks Ended October 3, 2010

(Unaudited)

								Minor
								Subsidiaries and
		Parent			Subsidiary			Consolidating
		Company			Guarantors			Adjustments			Consolidated
		(in thousands)
Revenues:
Restaurant sales	$	106,370		$	78,944		$	2,977		$	188,291
Franchise and other revenue		273			78			—			351
		106,643			79,022			2,977			188,642
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		32,204			23,626			1,103			56,933
Payroll and benefits		40,373			28,514			(1,872	)		67,015
Restaurant operating costs		22,366			15,816			3,320			41,502
Cost of restaurant sales, exclusive of depreciation
and amortization shown separately below		94,943			67,956			2,551			165,450
Advertising and marketing		—			7,912			35			7,947
General and administrative		1,420			7,036			(174	)		8,282
Depreciation and amortization of property and equipment		5,328			4,188			113			9,629
Impairment and disposal charges, net		2,494			3			—			2,497
		104,185			87,095			2,525			193,805
Income (Loss) from Operations		2,458			(8,073	)		452			(5,163	)
Other Expense (Income):
Interest expense, net		2,354			134			—			2,488
Other, net		43,733			(43,739	)		—			(6	)
		46,087			(43,605	)		—			2,482
(Loss) Income from Continuing Operations Before Income Taxes		(43,629	)		35,532			452			(7,645	)
Income Tax (Benefit) Expense		(699	)		84			—			(615	)
(Loss) Income from Continuing Operations		(42,930	)		35,448			452			(7,030	)
Loss from Discontinued Operations, Net		(186	)		(222	)		—			(408	)
Net (Loss) Income	$	(43,116	)	$	35,226		$	452		$	(7,438	)

17

Consolidating Statement of Operations

40 Weeks Ended October 2, 2011

(Unaudited)

								Minor
								Subsidiaries and
		Parent			Subsidiary			Consolidating
		Company			Guarantors			Adjustments			Consolidated
	(in thousands)
Revenues:
Restaurant sales	$	363,137		$	270,319		$	10,730		$	644,186
Franchise and other revenue		526			215			—			741
		363,663			270,534			10,730			644,927
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		116,421			83,389			4,004			203,814
Payroll and benefits		132,106			96,914			(5,831	)		223,189
Restaurant operating costs		70,129			51,728			10,719			132,576
Cost of restaurant sales, exclusive of depreciation and
amortization shown separately below		318,656			232,031			8,892			559,579
Advertising and marketing		—			27,323			98			27,421
General and administrative		3,805			20,818			(431	)		24,192
Depreciation and amortization of property and equipment		16,294			11,977			316			28,587
Impairment and disposal charges, net		158			(342	)		—			(184	)
		338,913			291,807			8,875			639,595
Income (Loss) from Operations		24,750			(21,273	)		1,855			5,332
Other Expense (Income):
Interest expense, net		8,655			420			—			9,075
Other, net		33,141			(33,138	)		—			3
		41,796			(32,718	)		—			9,078
(Loss) Income from Continuing Operations Before Income Taxes		(17,046	)		11,445			1,855			(3,746	)
Income Tax Expense		20			—			—			20
(Loss) Income from Continuing Operations		(17,066	)		11,445			1,855			(3,766	)
Income (Loss) from Discontinued Operations, Net		181			(489	)		—			(308	)
Net (Loss) Income	$	(16,885	)	$	10,956		$	1,855		$	(4,074	)

18

Consolidating Statement of Operations

40 Weeks Ended October 3, 2010

(Unaudited)

								Minor
								Subsidiaries and
		Parent			Subsidiary			Consolidating
		Company			Guarantors			Adjustments			Consolidated
	(in thousands)
Revenues:
Restaurant sales	$	369,438		$	266,054		$	10,245		$	645,737
Franchise and other revenue		641			281			—			922
		370,079			266,335			10,245			646,659
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		109,398			78,510			3,734			191,642
Payroll and benefits		136,854			96,085			(5,985	)		226,954
Restaurant operating costs		71,554			52,176			10,902			134,632
Cost of restaurant sales, exclusive of depreciation
and amortization shown separately below		317,806			226,771			8,651			553,228
Advertising and marketing		—			27,371			118			27,489
General and administrative		4,495			25,532			(607	)		29,420
Depreciation and amortization of property and equipment		18,405			14,136			391			32,932
Impairment and disposal charges, net		5,211			541			—			5,752
Pre-opening		—			7			—			7
		345,917			294,358			8,553			648,828
Income (Loss) from Operations		24,162			(28,023	)		1,692			(2,169	)
Other Expense:
Interest expense, net		8,956			449			—			9,405
Other, net		43,734			(43,739	)		—			(5	)
		52,690			(43,290	)		—			9,400
(Loss) Income from Continuing Operations Before Income Taxes		(28,528	)		15,267			1,692			(11,569	)
Income Tax Benefit		(680	)		(14	)		—			(694	)
(Loss) Income from Continuing Operations		(27,848	)		15,281			1,692			(10,875	)
Loss from Discontinued Operations, Net		(2,886	)		(544	)		—			(3,430	)
Net (Loss) Income	$	(30,734	)	$	14,737		$	1,692		$	(14,305	)

19

Consolidating Statement of Cash Flows

40 weeks Ended October 2, 2011

(Unaudited)

								Minor
								Subsidiaries and
		Parent			Subsidiary			Consolidating
		Company			Guarantors			Adjustments			Consolidated
		(in thousands)
Cash Flows from Operating Activities:
Net (loss) income	$	(16,886	)	$	10,957		$	1,855		$	(4,074	)
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization of property and equipment		16,294			11,977			316			28,587
Amortization of debt issuance costs and swap termination payment		297			—			—			297
Share–based compensation		1,374			—			—			1,374
Amortization of deferred gain on sale-leasebacks		(813	)		—			—			(813	)
Deferred income taxes and other income tax related items		526			—			—			526
Loss on the sale of assets		80			28			5			113
Impairment and disposal charges, net		(246	)		(346	)		—			(592	)
Changes in assets and liabilities:
Trade accounts and other receivables		1,259			(1,087	)		732			904
Income taxes receivable		—			(332	)		—			(332	)
Inventories		311			532			—			843
Other current assets		(961	)		(239	)		(1,446	)		(2,646	)
Trade accounts payable		22			(1,705	)		1,446			(237	)
Deferred revenue		—			(12,222	)		—			(12,222	)
Accrued payroll, accrued expenses, and federal, state
and local taxes		1,702			320			(732	)		1,290
Other long-term assets and liabilities		(921	)		(1,005	)		—			(1,926	)
Net cash provided by operating activities		2,038			6,878			2,176			11,092
Cash Flows from Investing Activities:
Additions to property and equipment		(7,604	)		(3,357	)		(111	)		(11,072	)
Proceeds from the sale of assets		36			2,150			—			2,186
Other, net		6,461			(4,310	)		(2,065	)		86
Net cash used in investing activities		(1,107	)		(5, 517	)		(2,176	)		(8,800	)
Cash Flows from Financing Activities:
Payments on long-term debt and capitalized lease obligations		(1,550	)		—			—			(1,550	)
Debt issuance costs		(125	)		—			—			(125	)
Proceeds from the exercise of stock options and issuances
under CHUX ownership plan		615			—			—			615
Shares tendered and retired for minimum tax withholding		(169	)		—			—			(169	)
Excess tax benefit from share-based payments		17			—			—			17
Net cash used in financing activities		(1,212	)		—			—			(1,212	)
(Decrease) Increase in cash and cash equivalents		(281	)		1,361			—			1,080
Cash and cash equivalents at beginning of the period		1,744			27,949			—			29,693
Cash and cash equivalents at end of the period	$	1,463		$	29,310		$	—		$	30,773

20

Consolidating Statement of Cash Flows

40 Weeks Ended October 3, 2010

(Unaudited)

								Minor
								Subsidiaries and
		Parent			Subsidiary			Consolidating
		Company			Guarantors			Adjustments			Consolidated
	(in thousands)
Cash Flows from Operating Activities:
Net (loss) income	$	(30,657	)	$	14,659		$	1,693		$	(14,305	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization of property and equipment		18,564			14,324			390			33,278
Amortization of debt issuance costs and swap termination payment		643			—			—			643
Share–based compensation		3,062			—			—			3,062
Loss on early extinguishment of debt		198			—			—			198
Amortization of deferred gain on sale-leasebacks		(813	)		—			—			(813	)
Deferred income taxes and other income tax related items		2,084			—			—			2,084
Loss on the sale of assets		46			40			—			86
Impairment and disposal charges, net		7,569			615			—			8,184
Changes in assets and liabilities:
Trade accounts and other receivables		2,659			1,019			712			4,390
Income taxes receivable		—			(2,827	)		—			(2,827	)
Inventories		937			1,264			—			2,201
Other current assets		(1,177	)		(994	)		(22	)		(2,193	)
Trade accounts payable		2,684			(2,173	)		—			511
Deferred revenue		—			(12,427	)		—			(12,427	)
Accrued payroll, accrued expenses, and federal, state and local taxes		3,504			426			(682	)		3,248
Other long-term assets and liabilities		(2,305	)		388			—			(1,917	)
Net cash provided by operating activities		6,998			14,314			2,091			23,403
Cash Flows from Investing Activities:
Additions to property and equipment		(6,055	)		(4,430	)		(391	)		(10,876	)
Proceeds from the sale of assets		7			1,130			—			1,137
Other, net		11,246			(9,551	)		(1,700	)		(5	)
Net cash provided by (used in) investing activities		5,198			(12,851	)		(2,091	)		(9,744	)
Cash Flows from Financing Activities:
Payments on long-term debt and capitalized lease obligations		(1,627	)		—			—			(1,627	)
Repurchase of Senior Notes		(9,993	)		—			—			(9,993	)
Debt issuance costs		(1,647	)		—			—			(1,647	)
Proceeds from the exercise of stock options and issuances under CHUX
Ownership Plan		739			—			—			739
Shares tendered and retired for minimum tax withholding		(277	)		—			—			(277	)
Excess tax benefit from share-based payments		8			—			—			8
Dividends paid		(3	)		—			—			(3	)
Net cash used in financing activities		(12,800	)		—			—			(12,800	)
(Decrease) increase in cash and cash equivalents		(604	)		1,463			—			859
Cash and cash equivalents at beginning of the period		2,127			19,753			—			21,880
Cash and cash equivalents at end of the period	$	1,523		$	21,216		$	—		$	22,739

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Note Regarding Forward-Looking Statements

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 estimated results in future periods, operating and growth strategy, and financing plans. Forward-looking statements are generally identifiable by the use of the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend,” “seek,” “forecast,” or similar expressions.  These forward-looking statements may be affected by certain risks and uncertainties, including, but not limited to, the continued deterioration in the United States economy and the related adverse effect on our sales of decreases in consumer spending; our ability to achieve our internal forecast of sales and profitability; our ability to comply with the terms and conditions of our financing agreements;our ability to maintain or increase comparable sales and operating margins at our restaurants; food-borne illness concerns, including negative publicity related to food safety that could harm our reputation; the effects that increases in food, labor, energy, interest costs and other expenses have on our results of operations; the effect of increased competition; our ability to successfully implement changes to our supply chain; our ability to sell or sublease closed restaurants and other surplus assets; our ability to successfully implement and realize projected benefits of our turnaround and transformation process, and other initiatives; the resolution of outstanding legal proceedings; and the other risks described in our Annual Report on Form 10-K for the fiscal year ended December 26, 2010 under the caption “Risk Factors” and in our other filings with the Securities and Exchange Commission (the “Commission”). 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 our objectives and plans 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.

Overview

We are a multi-concept restaurant company headquartered in Nashville, Tennessee. We operate three restaurant concepts under the “O’Charley’s,” “Ninety Nine Restaurants” (“Ninety Nine”) and “Stoney River Legendary Steaks” (“Stoney River”) trade names. As of October 2, 2011, we operated 221 O’Charley’s restaurants in 17 states in the East, Southeast and Midwest, 106 Ninety Nine restaurants in seven states throughout New England and upstate New York, and 10 Stoney River restaurants in six states in the Southeast and Midwest. As of October 2, 2011, we had six franchised O’Charley’s restaurants in four states.  Our fiscal year ends on the last Sunday of the calendar year.  We have one reportable segment.

In response to the macroeconomic conditions of the past several years, much of management’s focus has been on improving guest satisfaction, stabilizing and increasing guest counts and sales, controlling margins, reducing overhead costs, maximizing cash flow, and reducing debt. While we believe that we have made progress in these areas, and that the tools we applied, such as our food, labor, and beverage cost management systems, continue to contribute positively to our operating results, we believe that we still have considerable opportunities to improve our financial performance.

Our Guest Satisfaction Index (GSI) scores, which we believe are often a barometer signifying a guest’s intent to return to the restaurant, continued to improve during the third quarter of fiscal 2011. The percentage of respondents who gave the highest rating for overall satisfaction improved by 400 basis points at O’Charley’s, by 500 basis points at Ninety Nine, and by 200 basis points at Stoney River in the third quarter of fiscal 2011 compared to the prior-year period.  Going forward, we believe that our primary focus must be on positioning each of our restaurant concepts to increase guest counts, sales, and profitability.

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During the third fiscal quarter of 2011, both the Ninety Nine and the Stoney River restaurant concepts produced their fifth consecutive quarter of improved comparable sales. Although two of our three concepts generated positive comparable sales, negative comparable sales at our O’Charley’s concept and the closure of 12 restaurants, excluding those considered as discontinued operations, since the end of the second fiscal quarter of 2010, resulted in a reduction in total restaurant sales when compared to the prior year periods.  Guest counts increased at two of our three restaurant concepts and average check per guest increased at all three restaurant concepts.  We are pleased to report this very real progress; however, we are in the early stages of improving our ability to produce sustainable, long-term profitable growth. We believe that success will come from continuing to focus on the key points of our turnaround plan: (1) lead with food and win with food: serving a menu of memorable offerings priced to provide a compelling value for our guests; (2) operate great restaurants: consistently delivering a quality dining experience; (3) drive guest counts through effective messages: clearly communicating the attributes of our concepts; and (4) provide attractive and comfortable restaurants: delivering a great environment for our guests every day at each O’Charley’s, Ninety Nine and Stoney River.

At our O’Charley’s restaurants, we saw a decline in our comparable sales as compared to the same prior-year quarter.  While sales declined, our average check per guest increased.  We believe a change in year-over-year promotions contributed to this shift in sales and average check.  Beginning in August of 2010 we re-introduced the “2 Meals for $14.99” promotion which ended in January 2011, as compared to the “8 Meals for Under $8” offering during the third quarter of 2011.  While the pricing of our third quarter 2011 offering improved our average check, we believe this difference in our value offering, in part, drove our decline in sales.  We continue to build upon the concept’s existing strengths by simplifying the menu and improving the quality of menu items. We are also actively working with our advertising agency to enhance our value messaging.   During the third quarter we announced the hiring of Marc Buehler as the concept President for O’Charley’s.  Mr. Buehler has extensive experience in casual dining, most recently as President, CEO and a director of Kona Grill, Inc.  Previously, he served as CEO of LS Management, Inc. the operator of nearly 200 locations: Lone Star Steakhouse and Saloon and Texas Land & Cattle Steak House.

At our Ninety Nine restaurants, we continue to focus on our core guests, who we believe appreciate a friendly environment that offers generous portions of high-quality traditional fare at moderate prices.  This “back to the basics” approach has now produced five consecutive quarters of accelerating comparable sales and improved guest counts for the past three quarters.  We believe this trend of improved performance as well as the favorable comparison to Knapp Track is largely attributed to returning this concept to its historic roots as a neighborhood bar and grill.  This was evidenced by our successful guest loyalty “Red Sox Win/Kids Eat Free” promotion and the  meaningful sales growth in our promotion of our lobster roll.

At our Stoney River restaurants, our focus on broadening the appeal of this brand to a wider audience continues to show favorable results.  We are now focused on refreshing our menu choices as well as bringing Stoney River’s cost structure in line with a lower check average.  We are pleased that the average check per guest increased at Stoney River, which is the first time since the first quarter of 2009.  In addition, our third quarter comparable sales increase is the fifth consecutive quarter of increased comparable sales and the eighth consecutive quarter of increased comparable guest counts. We believe this on-going sales improvement, coupled with a modest increase in check average, is evidence of the long-term success of our repositioning efforts.

        In addition to operational improvements, we believe we made significant progress toward reducing our future financing risks by the planned fiscal fourth quarter 2011 redemption at par of the $115.2 million principal amount of Senior Notes which were to mature in November 2013.  The gross proceeds of approximately $105 million from the sale-leaseback of 50 O’Charley’s restaurant properties combined with available cash will fund the redemption of the Senior Notes. Both the sale-leaseback and Senior Note redemption notifications were completed and announced on October 17, 2011, after the end of the fiscal third quarter.

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Following is an explanation of certain items in our consolidated statements of operations:

Revenues consist primarily of company-operated restaurant sales and, to a lesser extent, royalty and franchise revenue.  Restaurant sales include food and beverage sales and are net of applicable state and local sales taxes and discounts.  Franchise and other revenue consists of development fees, royalties on sales by franchised units, and royalties on sales of branded food items, particularly salad dressings. The development fees are recognized during the reporting period in which the developed restaurant begins operation. The royalties are recognized as revenue in the period corresponding to the franchisees’ sales. Revenue resulting from the sale of gift cards is recognized in the period redeemed.  A percentage of gift card redemptions, based upon actual experience, is recognized as a reduction in restaurant operating costs for gift cards sold that will not be redeemed.

Cost of Food and Beverage primarily consists of the costs of beef, poultry, seafood, and alcoholic and non-alcoholic beverages, net of vendor discounts and rebates. The three most significant commodities that may affect our cost of food and beverage are beef, poultry and seafood, which accounted for approximately 24 percent, 10 percent and 15 percent, respectively, of our overall cost of food and beverage in the first 40 weeks of fiscal 2011. Generally, temporary increases in these costs are not passed on to guests; however, in the past, we have adjusted 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, bonuses, share-based compensation, 401(k) compensation match, hourly wages for restaurant level team members, payroll taxes, workers’ compensation programs, various health, life and dental insurance programs, vacation expense and sick pay. We have various incentive plans that compensate restaurant management for achieving certain restaurant level financial targets and performance goals.

Restaurant Operating Costs include occupancy and other expenses at the restaurant level, except property and equipment depreciation and amortization. In addition to occupancy costs, supplies, straight-line rent, supervisory salaries, bonuses, share-based compensation, 401(k) and deferred compensation match for multi-unit operational employees and related expenses, management training salaries, general liability and property insurance programs, property taxes, utilities, repairs and maintenance, outside services and credit card fees account for the major expenses in this category. A percentage of gift card redemptions, based upon actual experience, is recognized as a reduction in restaurant operating costs for gift cards sold that will not be redeemed.

Advertising and Marketing Expenses include all advertising and marketing-related expenses for the various programs that we utilize to promote traffic and brand recognition for our three restaurant concepts. This category also includes the administrative costs of our marketing departments. We expense advertising and marketing costs in the year incurred, except for certain advertising production costs that are initially capitalized and subsequently expensed the first time the advertising takes place.  On a quarterly basis and for purposes of interim reporting, we expense a portion of the projected annual advertising and marketing expenses in proportion to revenue for the quarter compared to projected annual revenue.

General and Administrative Expenses include the costs of the administrative functions that support the existing restaurant base and provide the infrastructure for future growth. Executive management and support staff salaries, bonuses, share-based compensation, 401(k) and deferred compensation match for support employees, benefits and related expenses, legal and accounting expenses, changes in the liabilities associated with plan gains or losses in employees’ self-directed non-qualified deferred compensation plan accounts and office expenses account for the major expenses in this category. This category also includes recruiting, relocation and most severance-related expenses.

Depreciation and Amortization, Property and Equipment primarily includes depreciation on property and equipment calculated on a straight-line basis over the estimated useful lives of the respective assets or the base lease term plus one renewal term for leasehold improvements, if shorter.  Based on the size of the investment that we make, the economic penalty incurred by discontinuing use of the leased facility, our historical experience with respect to the length of time a restaurant operates at a specific location and leases that typically have multiple five-year renewal options that are exercised entirely at our discretion, we have concluded that one five-year renewal option is reasonably assured.

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Impairment and Disposal Charges, net includes asset impairments, either operating or held for sale, exit and disposal costs related to restaurant closings, asset disposals, and gains and losses incurred upon the sale of assets or from insurance proceeds, net of deductibles. Impairment charges are taken for land, buildings and equipment and certain other assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets.  The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Impairment charges for assets that are held for sale represent the difference between their current book value and the estimated net sales proceeds.  Disposal charges include the costs incurred to prepare the asset or assets for sale, including repair and maintenance; clean-up costs; broker commissions; and independent appraisals. Exit and disposal costs are primarily future lease obligations net of expected sublease income, if any, or changes in these net future lease obligations.

We evaluate restaurant closures for potential disclosure as discontinued operations based on an assessment of quantitative and qualitative factors, including the nature of the closure, potential for revenue migration to other company-operated and franchised restaurants, planned market development in the area of the closed restaurant and the significance of the impact on the related consolidated financial statement line items.

Pre-opening Costs represent costs associated with our restaurant opening teams, as well as other costs associated with opening a new restaurant. These costs are expensed as incurred. These costs also include straight-line rent related to leased properties for the period of time between when we have waived any contingencies regarding use of the leased property and the date on which the restaurant opens. The amount of pre-opening costs incurred in any one period includes costs incurred during the period for new or recently opened restaurants and those under development. Our pre-opening costs may vary significantly from period to period primarily due to the timing of restaurant development and openings.  Pre-opening costs were not material in 2010 and are not expected to be material in 2011 due to curtailment of development activity. Pre-opening costs also include training, supply, and other incremental costs necessary to prepare for the re-opening of an existing restaurant as part of remodeling initiatives.

Interest Expense, net represents the sum of the following: interest on our 9% Senior Subordinated Notes due 2013 (the “Senior Notes”);  interest and fees associated with our credit facility; amortization of prepaid interest and finance charges; amortization of a swap exit payment; changes in the value of the assets associated with our non-qualified deferred compensation plan resulting from gains and losses in the underlying funds; interest on capital lease obligations; and the premiums paid over the face value of any Senior Notes repurchased during the relevant fiscal period.

Income Tax Expense (Benefit) represents the provision for income taxes, including the impact of permanent tax differences, uncertain tax positions and valuation allowances on our income tax provision.

Loss from Discontinued Operations, Net includes the operating results of closed locations classified as discontinued operations and impairment, disposal and exit costs related to these restaurants and ongoing real estate, utility and maintenance costs, net of income taxes. Impairment charges are taken for land, buildings and equipment and certain other assets and are measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset based upon the future highest and best use of the impaired asset. Exit costs represent activities necessary to close the restaurant, including termination benefits such as severance, contract termination costs, and other contract costs that will remain without future economic benefit, such as operating leases. Remaining operating lease obligations are reduced by estimated sublease rentals that could be reasonably obtained.

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The following sections should be read in conjunction with our unaudited interim consolidated financial statements and the related notes thereto included elsewhere herein.

Operating Results

The following table highlights the operating results for the 12 and 40 week periods ended October 2, 2011 and October 3, 2010 as a percentage of total revenues unless specified otherwise. Operating results for the 12 and 40 week periods ended October 3, 2010 have been adjusted to reflect the discontinued operations of certain restaurant locations closed during the fourth quarter of fiscal 2010.

	12 Weeks Ended				40 Weeks Ended
	October 2,		October 3,		October 2,		October 3,
	2011		2010		2011		2010
Revenues:
Restaurant sales	99.9	%	99.8	%	99.9	%	99.9	%
Franchise and other revenue	0.1		0.2		0.1		0.1
	100.0	%	100.0	%	100.0	%	100.0	%
Costs and Expenses:
Cost of restaurant sales: (1)
Cost of food and beverage	32.1	%	30.2	%	31.6	%	29.7	%
Payroll and benefits	34.8		35.6		34.6		35.1
Restaurant operating costs	21.5		22.0		20.6		20.8
Cost of restaurant sales, exclusive of depreciation and	88.5	%	87.9	%	86.9	%	85.7	%
amortization shown separately below
Advertising and marketing	4.4	%	4.2	%	4.3	%	4.3	%
General and administrative	3.0		4.4		3.8		4.5
Depreciation and amortization	4.5		5.1		4.4		5.1
Impairment, and disposal charges, net	0.1		1.3		0.0		0.9
Pre-opening costs	0.0		0.0		0.0		0.0
	100.3	%	102.7	%	99.2	%	100.3	%
(Loss) Income from Operations	(0.3	)%	(2.7	)%	0.8	%	(0.3	)%
Other Expense:
Interest expense, net	1.7	%	1.3	%	1.4	%	1.5	%
Other, net	0.0		0.0		0.0		0.0
	1.7	%	1.3	%	1.4	%	1.5	%
Loss before Income Taxes	(2.0	)	(4.1	)	(0.6	)	(1.8	)
Income Tax Expense (Benefit)	0.1		(0.3	)	0.0		(0.1	)
Loss from Continuing Operations	(2.1	)	(3.7	)	(0.6	)	(1.7	)
Loss from Discontinued Operations, Net	0.0		(0.2	)	0.0		(0.5	)
Net Loss	(2.1	)%	(3.9	)%	(0.6	)%	(2.2	)%

(1) Percentages calculated as a percentage of restaurant sales.

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Adjusted EBITDA

The following table is a reconciliation of U.S. generally accepted accounting principles (“GAAP”) financial measure of (Loss) Income from Operations to Adjusted EBITDA, a non-GAAP financial measure, for the 12 and 40 week periods ended October 2, 2011 and October 3, 2010 (1):

		12 Weeks Ended						40 Weeks Ended
		October 2,			October 3,			October 2,			October 3,
(in thousands)		2011			2010			2011			2010
(Loss) Income from Operations	$	(635	)	$	(5,163	)	$	5,332		$	(2,169	)
Add:
Depreciation and amortization		8,425			9,629			28,587			32,932
Impairment and disposal charges, net (2)		177			2,497			(184	)		5,752
Share-based compensation expense (3)		(190	)		850			1,374			3,062
Severance, recruiting and relocation expense (4)		559			—			932			2,395
Changes in deferred compensation balances (5)		(535	)		138			(270	)		138
Adjusted EBITDA	$	7,801		$	7,951		$	35,771		$	42,110

(1)   We present Adjusted EBITDA as a supplemental measure which we believe supplements a discussion and analysis of our results of operations.  We define Adjusted EBITDA as Income (Loss) from Operations plus (i) depreciation and amortization, (ii) impairment and disposal charges, net, (iii) share-based compensation expense, (iv) severance, recruiting and relocation costs for management changes, and (v) changes in deferred compensation balances. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis.  In evaluating Adjusted EBITDA, you should be aware that it is reasonable to expect we will incur expenses that are the same as or similar to some of the adjustments in this presentation, but the amounts recognized can vary significantly from period to period, may not directly relate to the ongoing operations of our restaurants and complicate period comparisons of our results of operations and operations comparisons to other restaurant companies.

Adjusted EBITDA is not a measure of financial performance under GAAP, and should not be considered an alternative to Income from Operations as a measure of operating performance. Because Adjusted EBITDA is not a measure determined in accordance with GAAP and is susceptible to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures presented by other companies.

Adjusted EBITDA has limitations as an analytical tool.  Some of these limitations are:

·   Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

·   Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

·   Adjusted EBITDA does not reflect significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debts;

·   although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and

·   non-cash compensation is a key element of our overall long-term incentive compensation package, although we exclude it as an expense when evaluating our ongoing operating performance for a particular period.

(2)   Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Charges include the non-cash write-down of assets to their estimated recovery value as well as certain cash expenses related to the holding and disposition of assets no longer in service.  Adjustments to expected lease obligations, net of sublease income, are also included and may result in the recognition of a gain or loss.

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(3)   Includes charges relating to the “discount” on the Company’s employee stock purchase plan and share-based compensation.

(4)   Includes cash and non-cash charges relating to significant organizational changes.

(5)   The Company sponsors a deferred compensation plan for certain management employees, which is fully funded with a “Rabbi Trust.”  Changes in the value of the employee’s self-directed balances are reported in compensation expense, with an offsetting amount in interest expense, net.

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Concept Performance Measures

The following table reflects margin performance of each of our concepts for the 12 and 40 week periods ended October 2, 2011 and October 3, 2010. Margin performance for the 12 and 40 week periods ended October 3, 2010 has been adjusted to reflect the discontinued operations of certain restaurant locations closed during the fourth quarter of fiscal 2010.

		12 Weeks Ended					40 Weeks Ended
	October 2,			October 3,			October 2,			October 3,
		2011			2010			2011			2010
			($ in millions)						($ in millions)
O’Charley’s Concept:
Restaurant Sales	$	115.2		$	118.9		$	407.1		$	413.3
Cost and expenses: (1)
Cost of food and beverage		32.6	%		30.3	%		32.1	%		29.6	%
Payroll and benefits		34.9	%		36.0	%		34.6	%		35.2	%
Restaurant operating costs (2)		21.9	%		22.1	%		20.2	%		20.4	%
Cost of restaurant sales, exclusive of
depreciation and amortization		89.4	%		88.4	%		86.9	%		85.2	%
Ninety Nine Concept:
Restaurant Sales	$	63.8		$	62.0		$	211.5		$	207.2
Cost and expenses: (1)
Cost of food and beverage		30.7	%		29.4	%		30.2	%		29.0	%
Payroll and benefits		35.4	%		35.7	%		35.7	%		36.1	%
Restaurant operating costs (2)		21.2	%		22.3	%		21.2	%		21.8	%
Cost of restaurant sales, exclusive of
depreciation and amortization		87.3	%		87.4	%		87.1	%		86.9	%
Stoney River Concept:
Restaurant Sales	$	7.4		$	7.3		$	25.6		$	25.2
Cost and expenses: (1)
Cost of food and beverage		37.2	%		36.5	%		36.7	%		35.9	%
Payroll and benefits		27.7	%		27.5	%		27.5	%		26.8	%
Restaurant operating costs (2)		19.7	%		19.1	%		19.7	%		20.3	%
Cost of restaurant sales, exclusive of
depreciation and amortization		84.6	%		83.1	%		83.9	%		83.0	%

(1)	Shown as a percentage of restaurant sales.
(2)	Includes rent, where 100 percent of the Ninety Nine restaurant locations are leased compared to 57 percent of O’Charley’s restaurant locations and 70 percent of Stoney River restaurant locations.

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Concept Restaurant Count and Operating Statistics

The following table sets forth certain financial and other restaurant data for the 12 week periods ended October 2, 2011 and October 3, 2010. The 12 week period ended October 3, 2010 includes the operations of certain restaurant locations closed during 2010 which are classified as discontinued operations in the accompanying financial statements.

	October 2,			October 3,
	2011			2010
Number of Restaurants:
O’Charley’s Restaurants:
In operation, beginning of quarter		221			234
Restaurants opened		—			—
Restaurant closed		—			(1	)
In operation, end of quarter		221			233
Ninety Nine Restaurants:
In operation, beginning of quarter		106			113
Restaurants opened		—			—
Restaurants closed		—			—
In operation, end of quarter		106			113
Stoney River Restaurants:
In operation, beginning of quarter		10			11
Restaurants opened		—			—
Restaurants closed		—			—
In operation, end of quarter		10			11
Franchised / Joint Venture Restaurants (O’Charley’s)
In operation, beginning of quarter		6			9
Restaurants opened		—			—
Restaurants closed		—			—
In operation, end of quarter		6			9
Average Weekly Sales per Store:
O’Charley’s	$	43,446		$	42,851
Ninety Nine		50,161			47,133
Stoney River		61,360			55,544
Change in Comparable Sales (1):
O’Charley’s		(0.9	)%		(2.2	)%
Ninety Nine		4.1	%		1.2	%
Stoney River		6.8	%		1.7	%
Change in Comparable Guest Counts (1):
O’Charley’s		(4.5	)%		2.7	%
Ninety Nine		4.0	%		(0.6	)%
Stoney River		6.1	%		15.4	%
Change in Comparable Average Check per Guest (1):
O’Charley’s		3.8	%		(4.8	)%
Ninety Nine		0.1	%		1.8	%
��   Stoney River		0.6	%		(11.9	)%
Average Check per Guest (2):
O’Charley’s	$	12.75		$	12.26
Ninety Nine		14.55			14.51
Stoney River		35.03			34.69

(1)	When computing comparable sales and guest counts, restaurants open for at least 78 weeks are compared from period to period.
(2)	The average check per guest is computed using all restaurants open during the quarter.

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Third Quarter and First 40 Weeks of Fiscal 2011 versus Third Quarter and First 40 Weeks of Fiscal 2010

Revenues

During the 12 week period ended October 2, 2011, total revenues decreased 1.1 percent to $186.6 million from $188.6 million for the same prior-year period. This decrease in revenues primarily reflects the decrease in restaurant sales resulting from restaurant closures in the prior year partly offset by comparable sales growth. Total revenues for the first 40 weeks of 2011 decreased 0.3 percent to $644.9 million from $646.7 million in the same prior-year period.

Restaurant sales for O’Charley’s decreased $3.7 million, or 3.1 percent, to $115.2 million for the third quarter of 2011, reflecting a decrease in comparable sales of 0.9 percent and the closure of nine restaurants since the end of the second quarter of 2010. The closure of the nine restaurants reduced sales in the third quarter by $2.6 million. The comparable sales decrease of 0.9 percent was the result of a 4.5 percent decrease in guest counts partly offset by a 3.8 percent increase in average check.  The 4.5 percent decrease in guest counts reduced sales by $5.2 million compared to the prior-year period while the 3.8 percent increase in average check increased sales by $4.2 million compared to the prior-year period.  Restaurant sales for company-operated O’Charley’s restaurantsdecreased by $6.2 million to $407.1 million for the first 40 weeks of 2011 from $413.3 million for the first 40 weeks of 2010, reflecting a comparable sales increase of 0.8 percent and the closure of ten restaurants since the beginning of 2010. The closure of the ten restaurants reduced sales in the first 40 weeks of 2011 by $9.6 million. The comparable sales increase of 0.8 percent was the result of a 0.9 percent increase in average check partly offset by a 0.1 percent decrease in guest counts. The 0.9 percent increase in average check increased sales by $3.6 million compared to the prior-year period while the 0.1 percent decrease in guest count reduced sales by $0.4 million compared to the prior-year period.

Restaurant sales for Ninety Nine increased $1.8 million, or 2.9 percent, to $63.8 million in the third quarter of 2011, reflecting an increase in comparable sales of 4.1 percent, partly offset by the effect of closing two restaurants since the end of the second quarter of 2010. The closure of the two restaurants reduced sales in the current quarter by $0.6 million. The comparable sales increase of 4.1 percent was the result of a 4.0 percent increase in guest counts and a 0.1 percent increase in average check. The 4.0 percent increase in guest counts increased sales by $2.5 million compared to the prior-year period and the 0.1 percent increase in average check increased sales by $0.1 million compared to the prior-year period. Restaurant sales for Ninety Nine increased by $4.3 million to $211.5 million for the first 40 weeks of 2011 from $207.2 million for the first 40 weeks of 2010, reflecting a comparable sales increase of 3.5 percent, partly offset by the effect of closing five restaurants since the beginning of 2010. The closure of the five restaurants reduced sales in the first 40 weeks of 2011 by $2.5 million. The comparable sales increase of 3.5 percent was the result of a 2.6 percent increase in guest counts and a 0.8 percent increase in average check. The 2.6 percent increase in guest counts and the 0.8 percent increase in average check increased sales by $5.4 million and $1.7 million, respectively, compared to the prior-year period.

Restaurant sales for Stoney River Legendary Steaks were $7.4 million in the third quarter of 2011 compared to $7.3 million in the third quarter of 2010, reflecting a 6.8 percent increase in comparable sales offset by the closure of one restaurant since the end of the second quarter of 2010. The closure of the one restaurant decreased sales in the current quarter by $0.4 million. The comparable sales increase of 6.8 percent was the result of a 6.1 percent increase in guest counts and a 0.6 percent increase in average check. The 6.1 percent increase in guest counts and the 0.6 percent increase in average check increased sales by $0.4 million and $0.1 million compared to the prior-year periods, respectively. Restaurant sales for Stoney River Legendary Steaks increased $0.4 million, or 1.6 percent, to $25.6 million for the first 40 weeks of 2011 from $25.2 million for the first 40 weeks of 2010, reflecting a 7.3 percent increase in comparable sales partly offset by the closure of one restaurant since the end of fiscal 2010. The closure of the one restaurant reduced sales in the first 40 weeks of 2011 by $1.4 million. The comparable sales increase of 7.3 percent was the result of a 9.7 percent increase in guest counts partly offset by a 2.3 percent decrease in average check. The 9.7 percent increase in guest counts increased sales by $2.2 million compared to the prior-year period, while the 2.3 percent decrease in average check reduced sales by $0.6 million compared to the prior-year period.

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Cost of Food and Beverage

During the third quarter of 2011, our cost of food and beverage was $59.9 million, or 32.1 percent of restaurant sales, compared with $56.9 million, or 30.2 percent of restaurant sales, in the same prior-year period. A number of factors contributed to this $3.0 million increase in food and beverage costs. In addition to changes and trends in consumer behavior, we routinely adjust our product offerings, pricing and promotional incentives among other factors that collectively comprise our product mix during any given period. During the third quarter of 2011, we believe that increases in commodity costs, particularly beef, pork, produce, and dairy products, increased our cost of food and beverage by $4.7 million while the change to our product mix decreased our cost of food and beverage by approximately $1.2 million, and decreases in sales reduced our cost of food and beverage by $0.6 million. During the first 40 weeks of 2011, cost of food and beverage was $203.8 million, or 31.6 percent of restaurant sales, compared to $191.6 million, or 29.7 percent of restaurant sales, in the same prior-year period.  During the first 40 weeks of 2011, we believe the change to our product mix increased our cost of food and beverage by approximately $2.1 million increases in commodity costs increased our cost of food and beverage by $10.6 million and decreases in sales reduced our cost of food and beverage by $0.5 million. We expect commodity costs, as a percentage of restaurant sales to be higher than the comparable prior-year periods, during the remainder of 2011.

Payroll and Benefits

During the third quarter of 2011, payroll and benefits were $64.8 million, or 34.8 percent of restaurant sales, compared to $67.0 million, or 35.6 percent of restaurant sales, in the same prior-year period. During the first 40 weeks of 2011, payroll and benefits were $223.2 million, or 34.6 percent of restaurant sales, compared to $227.0 million, or 35.1 percent of restaurant sales, in the same prior-year period. As a percentage of restaurant sales, payroll and benefits declined in both the 12 and 40 week periods as compared to the prior-year periods due primarily to higher productivity from better utilization of our scheduling tools, partly offset by an increase in payroll taxes due to the prior-year period including a credit from the adoption of the Hiring Incentives to Restore Employment (HIRE) Act and increased current year employee bonuses.

Restaurant Operating Costs

During the third quarter of 2011, restaurant operating costs were $40.2 million, or 21.5 percent of restaurant sales, compared to $41.5 million, or 22.0 percent of restaurant sales, in the same prior-year period. Our restaurant operating costs performance on a quarter-over-quarter basis reflects reductions in utility costs of $0.6 million and supply costs of $0.5 million. During the first 40 weeks of 2011, restaurant operating costs were $132.6 million, or 20.6 percent of restaurant sales, compared to $134.6 million, or 20.8 percent of restaurant sales, in the same prior-year period. Our restaurant operating costs on a year-over-year basis reflect reductions in utility costs of $1.2 million and general liability expense of $1.1 million, partly offset by an increase in repairs and maintenance costs of $0.7 million.

Advertising and Marketing Expenses

During the third quarter of 2011, advertising and marketing expenses were $8.2 million, or 4.4 percent of revenue, as compared to $7.9 million, or 4.2 percent of revenue, in the same prior-year period.  The quarter-over-quarter increase in expenses is for planned spending increases primarily related to developing our new branding initiatives.  During the first 40 weeks of 2011, advertising and marketing expenses were $27.4 million, or 4.3 percent of revenue, as compared to $27.5 million, or 4.3 percent of revenue, in the same prior-year period.

General and Administrative Expenses

General and administrative expenses were $5.6 million, or 3.0 percent of revenue, in the third quarter of 2011, compared to $8.3 million, or 4.4 percent of revenue, in the same prior-year period. Our general and administrative expenses on a quarter-over-quarter basis reflect a $1.3 million reduction in net compensation, including salaries and bonuses, share-based compensation and severance and a $0.7 million decrease due to a loss in our deferred compensation plan as compared to a gain in the prior-year quarter. During the first 40 weeks of 2011, general and administrative expenses were $24.2 million, or 3.8 percent of revenue, compared to $29.4 million, or 4.5 percent of revenue, in the same prior-year period. Our general and administrative expenses on a year-over-year basis reflect a $4.1 million reduction in net compensation, including salaries and bonuses, share-based compensation and severance and a $0.4 million decrease due to a loss in our deferred compensation plan as compared to a gain in the prior-year 40 week period. Of the $4.1 million year-over-year reduction in net compensation, $1.4 million is attributed to a reduction in severance, recruiting and relocation expense.

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Depreciation and Amortization, Property and Equipment

During the third quarter of 2011, depreciation and amortization was $8.4 million, or 4.5 percent of revenue, as compared to $9.6 million, or 5.1 percent of revenue, in the same prior-year period. These reductions in expense are primarily due to lower carrying values of assets following restaurant closures and impairment charges recognized in prior fiscal years. During the first 40 weeks of 2011, depreciation and amortization was $28.6 million, or 4.4 percent of revenue, compared to $32.9 million, or 5.1 percent of revenue, in the same prior-year period.

Impairment and Disposal Charges, net

During the third quarter of 2011, there were lease obligation and exit and disposal costs of $0.2 million for previously closed locations, as compared to a $2.5 million charge related primarily to four O’Charley’s restaurants in the same prior-year period. During the 40 week period ended October 2, 2011, net reductions of previously closed locations’ future lease obligations of $0.6 million, partly offset by exit and disposal costs of $0.4 million, resulted in a net gain on impairment and disposal of $0.2 million, as compared to a $5.8 million charge in the same prior-year period.

Interest Expense, Net

Interest expense for the third quarter of 2011 was $3.2 million, or 1.7 percent of revenue, compared to $2.5 million, or 1.3 percent of revenue, in the same prior-year period. The increase in expense reflects changes in the value of deferred compensation balances, which as noted above reduced our general and administrative expenses. Interest expense for the first 40 weeks of 2011 was $9.1 million, or 1.4 percent of revenue, compared to $9.4 million, or 1.5 percent of revenue, in the same prior-year period. The reduction in expense reflects our lower debt levels as we repurchased approximately $9.8 million in principal amount of bonds in the first quarter of 2010, partly offset by a $0.4 million increase due to the current year loss in our deferred compensation plan balance. In addition, the first 40 weeks of fiscal 2010 included charges associated with the repurchase of our bonds for premiums and the write-off of previously unamortized financing costs. At the end of the third quarter of 2011, we had $115.2 million of Senior Notes, a cash balance of $30.8 million and no drawings on our revolving line of credit.

Income Taxes

Our provision for income taxes for the first 40 weeks of 2011 was an expense of less than $0.1 million, versus a tax benefit of $0.7 million in the same prior-year period.  Under GAAP, we are required to apply our estimated full-year tax rate to our pre-tax income (loss) on a year-to-date basis in each interim period.   Under ASC 740-270-30-18, companies should not apply the estimated full-year tax rate to interim financial results if the estimated full-year tax rate is not reliably predictable. In this situation, the interim tax rate should be based on the actual year-to-date results. Based on our current projections, a small change in pre-tax earnings would result in a material change in the estimated annual effective tax rate, producing significant variations in the customary relationship between income tax expense and pre-tax accounting income in interim periods.  As such, we have recorded a tax expense for the third quarter of 2011 based on the actual year-to-date results, in accordance with ASC 740-270-30-18.  The change in the effective tax rate from fiscal 2010 to fiscal 2011 is the result of fluctuations in pre-tax net income (loss) and the related rate impacts of federal tax credits, as well as changes in the fiscal 2011 valuation allowance.  Additionally, there was no income tax benefit related to discontinued operations for the third quarter of 2011, compared to an income tax benefit of less than $0.1 million in the prior-year period.

Loss from Discontinued Operations, Net

During fiscal 2010, we closed nine restaurants that were treated as discontinued operations. During the 12 week period ended October 2, 2011, we recorded a $0.1 million loss from discontinued operations, net of taxes, which represents exit and disposal costs, partly offset by a net gain on the sale of the remaining assets from one Ninety Nine restaurant location. During the 12 week period ended October 3, 2010, we recorded a $0.4 million loss from discontinued operations, net of taxes, which represents net loss from operations. During the 40 week period ended October 2, 2011, we recorded a $0.3 million loss from discontinued operations, net of taxes, which represents $0.6 million of exit and disposal costs, partly offset by a $0.3 million gain on the sale of an O’Charley’s restaurant location as well as a minimal net gain on the sale of the remaining assets from two O’Charley’s restaurant locations and one Ninety Nine restaurant location. During the 40 week period ended October 3, 2010, the Company recorded a $3.4 million loss from discontinued operations, net of taxes, which represents $2.4 million in asset impairments and a $1.0 million net loss from operations.

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LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of capital have historically been cash provided by operations, borrowings under our credit facilities and capital leases. Our principal capital needs have historically arisen from property and equipment additions, acquisitions, and payments on long-term debt and capitalized lease obligations. In addition, we lease a substantial number of our restaurants under operating leases and have substantial operating lease obligations. Like many restaurant companies, our working capital has historically had current liabilities in excess of current assets due to collection of our sales being received in four days or less while our typical accounts payable turnover, excluding food invoices, is over a longer period of time.  We do not believe this indicates a lack of liquidity.

The following table presents a summary of our cash flows for the 40 week periods ended October 2, 2011 and October 3, 2010:

		October 2,			October 3,
		2011			2010
		(in thousands)
Net cash provided by operating activities	$	11,092		$	23,403
Net cash used in investing activities		(8,800	)		(9,744	)
Net cash used in financing activities		(1,212	)		(12,800	)
Net increase in cash and cash equivalents	$	1,080		$	859

Net cash provided by operating activities during the 40 week period ended October 2, 2011 was $11.1 million, a decrease of $12.3 million from the same prior-year period.  This reduction in net cash provided by operating activities is due to a $7.0 million decrease in net earnings, after adjusting for non-cash charges and a $5.3 million use of cash due to the net change in working capital and other long-term assets and liabilities over the same prior-year period. The $7.0 million decrease in net earnings, after adjusting for non-cash charges, is primarily due to an $8.8 million change in impairment and disposal charges, net, a $4.7 million change in depreciation and amortization and a $1.7 million change in share-based compensation partly offset by a $10.0 million change in net loss. Of the $8.8 million change in impairment and disposal charges, net, $6.0 million is related to continuing operations while the remaining $2.8 million is related to discontinued operations. The $5.3 million use of cash due to the net change in working capital and other long-term assets and liabilities is primarily due to the payment timing of accounts payable, a larger increase in credit card receivables and a smaller reduction in inventory balances as compared to the prior-year fiscal quarter.

Net cash used in investing activities primarily consists of investments in property, plant and equipment net of any proceeds received from the sale of assets. During the 40 week period ended October 2, 2011, we sold a previously closed property and received proceeds of $1.0 million and sold assets related to five previously closed properties and received proceeds of $1.2 million. In 2011 and 2010, net cash flows used by investing activities included capital expenditures incurred principally for improvements to existing restaurants and technological improvements in our information systems. The Company financed certain technology equipment using capital leases during the 40 week period ended October 2, 2011. The Company did not finance any capital expenditures using capital leases during the 40 week period ended October 3, 2010. Capital expenditures for the 40 week periods ended October 2, 2011 and October 3, 2010 were as follows:

		October 2,		October 3,
		2011		2010
		(in thousands)
Remodel capital expenditures	$	3,344	$	3,740
Other capital expenditures		7,728		7,136
Total capital expenditures	$	11,072	$	10,876

For fiscal 2011 we are projecting capital expenditures of between $16.0 million and $18.0 million. For fiscal 2010, capital expenditures totaled $15.4 million.

Net cash used in financing activities was minimal during the 40 week period ended October 2, 2011 and was primarily capital lease payments. Net cash used in financing activities during the 40 week period ended October 3, 2010 included the repurchase of $9.8 million in face value of our Senior Notes.

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We believe that our various sources of capital, including cash flow from operating activities, and availability under our revolving credit facility, are adequate to fund our capital requirements for at least the next twelve months. As of the end of the third quarter of fiscal 2011, our remaining borrowing capacity under our revolving credit facility, net of $12.8 million of outstanding letters of credit, was $32.2 million. We were in compliance with all debt covenants under our revolving credit facility as of October 2, 2011. On October 17, 2011, we completed a sale-leaseback of 50 O’Charley’srestaurant properties, which produced gross proceeds of approximately $105 million.  During the fourth fiscal quarter, we will be using the net proceeds from the sale-leaseback of approximately $103.8 million and approximately $11.4 million of available cash to redeem at par the $115.2 million principal amount of the Senior Notes. The impact of the two transactions will be a decrease in annual interest expense associated with the Senior Notes of approximately $10.0 million, as well as approximately $2.5 million less in annual depreciation, which will be offset by approximately $8.9 million of incremental annual rent expense.  The incremental annual rent expense includes straight-line rent and the annual amortization of related deferred finance costs and the deferred gain on the sale of certain properties included in the sale-leaseback transaction. The full impact of these changes will be reflected in our 2012 results.

During the fourth fiscal quarter, we also entered into a Fourth Amended and Restated Credit Agreement with the existing banks under our revolving credit facility which reduced our revolving credit facility to $30 million from $45 million and extended the facility’s term to 2016.  While the facility’s terms are substantially consistent with the relevant terms of the prior facility, which was to mature in August 2013, we are permitted to make capital expenditures for restaurant remodels and expansion under the new facility of up to $5 million for 2011 and up to 35% of Earnings Before Interest Taxes Depreciation and Amortization or EBITDA (as defined therein) for 2012 and the years thereafter.

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Critical Accounting Policies

In our Annual Report on Form 10-K for the year ended December 26, 2010, we identified our critical accounting policies related to property and equipment, lease accounting, share-based compensation, trademarks, impairment of long-lived assets, and income taxes.  We consider an accounting policy to be critical if it is most important to the portrayal of our consolidated financial condition and results, and it requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. During the first 40 weeks of 2011, there have been no changes in our critical accounting policies.

Contractual Obligations and Commercial Commitments

There were no material changes in our contractual obligations and commercial commitments as of October 2, 2011 from those disclosed in our Annual Report on Form 10-K for the year ended December 26, 2010.  As of October 2, 2011 and December 26, 2010, we had no amounts outstanding on our revolving credit facility.

Outlook

For the fourth quarter of 2011, we are forecasting total revenue of between $177 million and $182 million, loss/income from operations of between a loss of $3 million and $6 million, and adjusted EBITDA of between $4 million and $7 million. Included in our fourth quarter outlook is the aforementioned impact from the sale-leaseback transaction completed on October 17, 2011. Adjusted EBITDA is a non-GAAP financial measure. A description of how we define adjusted EBITDA is included above. Our first quarter is a 16 week quarter, while our second through fourth quarters are each 12 weeks.  Based on historically seasonal financial patterns, average weekly sales per restaurant are typically higher in the first quarter than in subsequent quarters and we typically generate a disproportionate share of our income from operations and adjusted EBITDA in the first quarter.

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820)-Fair Value Measurement (“ASU 2011-04”), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. ASU 2011-04 is effective for the Company in its first quarter of fiscal 2012 and will be applied prospectively. The Company is currently evaluating the impact of adopting ASU 2011-04, but currently believes there will be no significant impact on its consolidated financial statements.

Impact of Inflation

The impact of inflation on the cost of food, labor, equipment, land, construction, and fuel/energy could adversely affect our operations. A majority of our employees are paid hourly rates related to federal and state minimum wage laws. The federal government and several states have instituted or are considering changes to their minimum wage and/or benefit related laws which, if and when enacted, could have an adverse impact on our payroll and benefit costs. In addition, most of our leases require us to pay taxes, insurance, maintenance, repairs and utility costs, and these costs are subject to inflationary pressures. Commodity inflation can have a significant impact on our operating costs. We attempt to offset the effect of inflation through periodic menu price increases, economies of scale in purchasing and cost controls and efficiencies at our restaurants.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management activities and fluctuations in commodity prices. Our fixed-rate debt consists primarily of capitalized lease obligations and the Senior Notes. A significant portion of our debt is at a fixed-rate; therefore a one percent fluctuation in interest rates is not expected to have a material impact on our results of operations.

We purchase certain commodities such as beef, pork, poultry, seafood, produce, and dairy. These commodities are generally purchased based upon market prices established with vendors. These purchase arrangements may contain contractual features that fix the price paid for certain commodities. We do not use financial instruments to hedge commodity prices because these purchase arrangements help control the ultimate cost paid and any commodity price aberrations are generally short-term in nature. We have locked in substantially all of our requirements for poultry and approximately half of our beef and seafood requirements for the remainder of 2011.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based on that evaluation, the principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during our fiscal quarter ended October 2, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     The Company is a defendant from time to time in various legal proceedings arising in the ordinary course of its business, including claims relating to injury or wrongful death under “dram shop” laws that allow a person to sue us based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants; claims relating to workplace, workers’ compensation and employment matters, discrimination and similar matters; claims resulting from “slip and fall” accidents; claims relating to lease and contractual obligations; claims  relating to our franchising initiatives; and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns.

The Company does not believe that any of the legal proceedings pending against it as of the date of this report will have a material adverse effect on its liquidity or financial condition. The Company may incur liabilities, settle disputes, sustain judgments, or accrue expenses relating to legal proceedings in a particular fiscal quarter which may adversely affect our consolidated results of operations, or on occasion, receive settlements that favorably affect our consolidated results of operations.

Item 1A. Risk Factors

Various risks and uncertainties could affect our business. These risks are described elsewhere in this report and our other filings with the Commission, including our Annual Report on Form 10-K for the year ended December 26, 2010. The risks identified in the Annual Report on Form 10-K for the year ended December 26, 2010 have not changed in any material respect during the first 40 weeks of 2011.

 Item 2. Issuer Purchases of Equity Securities

The following table sets forth information with respect to purchases of shares of the Company’s common stock made during the quarter ended October 2, 2011, by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b-18 of the Exchange Act:

O’Charley’s Accounting Periods	Total Number of Shares Purchased (1)		Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
07/11/2011-08/07/2011	—			—	—
08/08/2011-09/04/2011	626	$	5.33	—	—
09/05/2011-10/2/2011	—			—	—
Total	626	$	5.33	—	—

(1) Represents shares withheld to cover tax-withholding requirements relating to the vesting of restricted stock issued to employees pursuant to the Company's shareholder-approved stock incentive plans.

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Item 6. Exhibits

No.	Description
10.1	Amended and Restated Executive Employment Agreement dated August 10, 2011, by and between O’Charley’s Inc. and R. Jeffrey Williams (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on August 11, 2011)                            (File No. 0-18629)
10.2	Severance Agreement and General Release dated August 22, 2011, by and between O’Charley’s Inc. and Wilson Craft (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on August 22, 2011) (File No. 0-18629)
31.1	Certification of David W. Head, President and Chief Executive Officer of O’Charley’s Inc.,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of R. Jeffrey Williams, Chief Financial Officer of O’Charley’s Inc.,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of David W. Head, President and Chief Executive Officer of O’Charley’s Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of R. Jeffrey Williams, Chief Financial Officer of O’Charley’s Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Schema Document
101.CAL	XBRL Calculation Linkbase Document
101.DEF	XBRL Definition Linkbase Document
101.LAB	XBRL Label Linkbase Document
101.PRE	XBRL Presentation Linkbase Document

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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.
Date: November 3, 2011	By:	/s/ DAVID W. HEAD
		David W. Head
		President and Chief Executive Officer

By:	/s/ R. JEFFREY WILLIAMS
	R. Jeffrey Williams
	Chief Financial Officer and Treasurer