O Charleys (CHUX) 10-Q 2005 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended October 2, 2005

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. Yesþ Noo

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesþ Noo

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

     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 November 8, 2005
Common Stock, no par value	22,369,744 shares

O’Charley’s Inc.

Form 10-Q
For the Quarter Ended October 2, 2005
Index

	Page No.
Part I — Financial Information
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of October 2, 2005 and December 26, 2004		3
Consolidated Statements of Operations for the 12 weeks ended October 2, 2005 and October 3, 2004		4
Consolidated Statements of Earnings for the 40 weeks ended October 2, 2005 and October 3, 2004		5
Consolidated Statements of Cash Flows for the 40 weeks ended October 2, 2005 and October 3, 2004		6
Notes to unaudited consolidated financial statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		34
Item 4. Controls and Procedures		34
Part II — Other Information
Item 1. Legal Proceedings		35
Item 6. Exhibits		36
Signatures		37
EX-31.1 SECTION 302 CEO CERTIFICATION
EX-31.2 SECTION 302 CFO CERTIFICATION
EX-32.1 SECTION 906 CEO CERTIFICATION
EX-32.2 SECTION 906 CFO CERTIFICATION

2

PART I — FINANCIAL INFORMATION

Item 1.Consolidated Financial Statements (Unaudited)

O’CHARLEY’S INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

	October 2,			December 26,
	2005			2004
ASSETS
Current Assets:
Cash and cash equivalents	$	5,439		$	10,772
Trade accounts receivable		11,902			8,783
Inventories		40,585			33,125
Deferred income taxes		9,005			6,716
Short-term notes receivable		—			120
Other current assets		6,590			4,882
Assets held for sale		2,495			—
Total current assets		76,016			64,398
Property and Equipment, net		463,996			451,808
Goodwill		93,074			93,074
Other Intangible Asset		25,921			25,921
Other Assets		20,234			22,310
Total Assets	$	679,241		$	657,511
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Trade accounts payable	$	24,547		$	14,259
Accrued payroll and related expenses		20,013			19,183
Accrued expenses		25,385			20,878
Deferred revenue		6,868			19,210
Federal, state and local taxes		10,519			9,184
Current portion of long-term debt and capitalized leases		10,875			12,670
Total current liabilities		98,207			95,384
Deferred Income Taxes		9,228			7,884
Other Liabilities		45,690			45,034
Long-Term Debt, less current portion		149,108			146,125
Capitalized Lease Obligations, less current portion		29,477			32,344
Total liabilities		331,710			326,771
Shareholders’ Equity:
Common stock — No par value; authorized, 50,000,000 shares; issued and outstanding, 22,921,670 in 2005 and 22,528,951 in 2004		185,179			178,262
Accumulated other comprehensive loss, net of tax		(82	)		(224	)
Unearned compensation		(4,325	)		(3,666	)
Retained earnings		166,759			156,368
Total shareholders’ equity		347,531			330,740
Total Liabilities and Shareholders’ Equity	$	679,241		$	657,511

See notes to unaudited consolidated financial statements

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O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
12 Weeks Ended October 2, 2005 and October 3, 2004
(In thousands, except per share data)
(Unaudited)

	2005			2004
				(restated)
Revenues:
Restaurant sales	$	209,278		$	198,694
Commissary sales		2,381			1,518
Franchise revenue		100			65
		211,759			200,277
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		63,991			60,859
Payroll and benefits		74,646			65,798
Restaurant operating costs		40,824			37,224
Cost of commissary sales		1,940			1,435
Advertising expenses		6,186			6,083
General and administrative expenses		9,539			8,595
Depreciation and amortization, property and equipment		10,192			9,401
Asset impairment and disposals		7,138			65
Pre-opening costs		2,188			1,739
		216,644			191,199
(Loss) Income from Operations		(4,885	)		9,078
Other Expense (Income):
Interest expense, net		3,580			3,159
Other, net		(1	)		—
		3,579			3,159
(Loss) Earnings Before Income Taxes		(8,464	)		5,919
Income Tax (Benefit) Expense		(3,775	)		1,812
Net (Loss) Earnings	$	(4,689	)	$	4,107
Basic (Loss) Earnings per Common Share:
Net (loss) earnings	$	(0.20	)	$	0.18
Weighted average common shares outstanding		22,909			22,347
Diluted (Loss) Earnings per Common Share:
Net (loss) earnings	$	(0.20	)	$	0.18
Weighted average common shares outstanding		22,909			22,636

See notes to unaudited consolidated financial statements

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O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF EARNINGS
40 Weeks Ended October 2, 2005 and October 3, 2004
(In thousands, except per share data)
(Unaudited)

	2005		2004
			(restated)
Revenues:
Restaurant sales	$	709,472	$	663,344
Commissary sales		6,737		5,766
Franchise revenue		290		65
		716,499		669,175
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		213,722		202,314
Payroll and benefits		245,347		222,937
Restaurant operating costs		131,021		120,522
Cost of commissary sales		5,819		5,446
Advertising expenses		20,049		20,312
General and administrative expenses		30,962		27,720
Depreciation and amortization, property and equipment		33,363		30,107
Asset impairment and disposals		7,195		16
Pre-opening costs		4,585		4,822
		692,063		634,196
Income from Operations		24,436		34,979
Other Expense (Income):
Interest expense, net		11,619		10,250
Other, net		42		(2	)
		11,661		10,248
Earnings Before Income Taxes		12,775		24,731
Income Taxes		2,384		7,954
Net Earnings	$	10,391	$	16,777
Basic Earnings per Common Share:
Net earnings	$	0.46	$	0.75
Weighted average common shares outstanding		22,797		22,246
Diluted Earnings per Common Share:
Net earnings	$	0.45	$	0.74
Weighted average common shares outstanding		23,109		22,618

See notes to unaudited consolidated financial statements

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O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
40 Weeks Ended October 2, 2005 and October 3, 2004
(In thousands)
(Unaudited)

	2005			2004
				(restated)
Cash Flows from Operating Activities:
Net earnings	$	10,391		$	16,777
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization, property and equipment		33,363			30,107
Amortization of debt issuance costs		1,060			1,111
Expense related to equity-based compensation		470			1,821
Provision (benefit) for deferred income taxes		(1,037	)		563
Loss on the sale of assets		393			174
Asset impairment and disposals		7,195			—
Changes in assets and liabilities:
Trade accounts receivable		(3,119	)		(1,631	)
Inventories		(7,460	)		(9,168	)
Other current assets		(709	)		(1,951	)
Trade accounts payable		10,288			5,662
Deferred revenue		(12,341	)		(9,646	)
Accrued payroll, accrued expenses, and federal, state and local taxes		5,674			13,350
Other long-term assets and liabilities		531			6,949
Other, net		340			81
Tax benefit derived from exercise of stock options		882			498
Net cash provided by operating activities		45,921			54,697
Cash Flows from Investing Activities:
Additions to property and equipment		(54,441	)		(50,590	)
Proceeds from the sale of assets		3,364			1,943
Other, net		1,106			(3,860	)
Net cash used in investing activities		(49,971	)		(52,507	)
Cash Flows from Financing Activities:
Payments on long-term debt and capitalized lease obligations		(6,189	)		(20,976	)
Proceeds from sale and leaseback transactions		—			12,091
Debt issuance costs		—			(830	)
Exercise of incentive stock options and issuances under stock purchase plan		4,906			2,853
Net cash used in financing activities		(1,283	)		(6,862	)
Decrease in Cash and Cash Equivalents		(5,333	)		(4,672	)
Cash and Cash Equivalents at Beginning of the Period		10,772			9,574
Cash and Cash Equivalents at End of the Period	$	5,439		$	4,902

See notes to unaudited consolidated financial statements

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O’CHARLEY’S INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12 and 40 Weeks Ended October 2, 2005 and October 3, 2004
(Unaudited)

A. BASIS OF PRESENTATION

     The accompanying unaudited 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 16 weeks and the remaining three quarters consisting of 12 weeks each. Both fiscal 2005 and 2004 consist of 52 weeks each.

     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 financial position and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

     These unaudited consolidated financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 26, 2004. Certain reclassifications have been made to the prior year information to conform to the current year presentation.

Restatement

     As discussed in Note 2 to the Company’s Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 26, 2004, the Company restated its financial statements for fiscal years 2003 and 2002 and the quarterly and comparative periods ended April 18, 2004, July 11, 2004 and October 3, 2004. The information contained herein reflects such restatement.

B. NET (LOSS) EARNINGS PER COMMON SHARE AND STOCK BASED COMPENSATION

     Basic (loss) earnings per common share have been computed on the basis of the weighted average number of common shares outstanding and diluted earnings per common share have been computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of stock options outstanding.

     Following is a reconciliation of the weighted average common shares used in the Company’s basic and diluted (loss) earnings per share calculation (in thousands).

	12 Weeks Ended				40 Weeks Ended
	October 2,		October 3,		October 2,		October 3,
	2005		2004		2005		2004
			(restated)				(restated)
Weighted average common shares outstanding		22,909		22,347		22,797		22,246
Incremental stock option shares outstanding		—		289		312		372
Weighted average diluted common shares outstanding		22,909		22,636		23,109		22,618

     Options for approximately 2.8 million and 1.8 million shares were excluded from the 2005 and 2004 12-week diluted weighted average share calculation, respectively, due to the shares being anti-dilutive. Options for approximately 1.3 million and 1.8 million shares were excluded from the 2005 and 2004 40-week diluted weighted average share calculation, respectively, due to these shares being anti-dilutive. According to SFAS No. 128, when in a net loss situation (as in the case for the quarter ended October 2, 2005), diluted loss per share is calculated using the same number of common shares outstanding as are used in the computation of the basic loss per share.

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     The Company has elected to continue to apply the intrinsic-value-based method of accounting pursuant to Accounting Principles Board Opinion 25, and has adopted only the disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of Financial Accounting Standards Board Statement No. 123”. The following table illustrates the effect on net (loss) earnings for the 12-week and 40-week periods ended October 2, 2005 and October 3, 2004 if the fair-value-based method had been applied to all outstanding awards:

	12 Weeks Ended						40 Weeks Ended
	October 2,			October 3,			October 2,			October 3,
	2005			2004			2005			2004
				(restated)						(restated)
				(In thousands, except per share data)
Net (loss) earnings, as reported	$	(4,689	)	$	4,107		$	10,391		$	16,777
Add stock-based employee compensation expense included in reported net (loss) earnings, net of tax		113			757			382			1,245
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		(607	)		(1,400	)		(2,788	)		(3,316	)
Pro forma net (loss) earnings	$	(5,183	)	$	3,464		$	7,984		$	14,706
(Loss) Earnings per share:
Basic—as reported	$	(0.20	)	$	0.18		$	0.46		$	0.75
Basic—pro forma	$	(0.23	)	$	0.16		$	0.35		$	0.66
Diluted—as reported	$	(0.20	)	$	0.18		$	0.45		$	0.74
Diluted—pro forma	$	(0.23	)	$	0.15		$	0.35		$	0.65

C. DERIVATIVE INSTRUMENTS

     At October 2, 2005, the Company’s derivative financial instruments consisted of interest rate swaps with a combined notional amount of $110 million, $10 million of which effectively converts an equal portion of the Company’s revolver debt from a floating rate to a fixed rate (cash flow hedges) and $100 million of which effectively converts an equal portion of the fixed-rate indebtedness related to the $125.0 million senior subordinated notes due 2013 into variable-rate obligations (fair value hedges). The terms and conditions of the swaps accounted for as cash flow and fair value hedges mirror the terms and conditions of the respective debt. The Company’s purpose for holding such instruments is to hedge its exposure to cash flow and fair value fluctuations due to changes in market interest rates as well as to maintain, in the Company’s opinion, an appropriate mix of fixed and floating rate debt.

     The fair value of the Company’s cash flow hedges at October 2, 2005 is a liability of $48,000 compared to a liability of approximately $280,000 at December 26, 2004, which is included in other long-term liabilities on the unaudited consolidated balance sheets. The fair value adjustment resulted in the recognition of an unrealized gain, net of related income taxes, of $33,000 and $142,000 for the 12 and 40-week periods ended October 2, 2005, respectively. The unrealized loss for the cash flow hedges at October 2, 2005, recorded in accumulated other comprehensive loss within shareholders’ equity on the accompanying 2005 unaudited consolidated balance sheet, was $82,000.

D. COMPREHENSIVE (LOSS) INCOME

     Comprehensive (loss) income consists of net (loss) earnings and other comprehensive income items attributable to unrealized gains on derivative financial instruments designated as cash flow hedges. The components of total comprehensive (loss) income for all periods presented are as follows:

	12 Weeks Ended					40 Weeks Ended
	October 2,			October 3,		October 2,		October 3,
	2005			2004		2005		2004
				(restated)				(restated)
	(In thousands)
Net (loss) earnings	$	(4,689	)	$	4,107	$	10,391	$	16,777
Other comprehensive income, net of tax		33			45		142		222
Total comprehensive (loss) income	$	(4,656	)	$	4,152	$	10,533	$	16,999

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E. RESTRICTED STOCK GRANTS

     During the first quarter of 2003, the Company granted approximately 135,000 shares of restricted stock to certain executives and members of senior management. Compensation cost related to these restricted stock awards recognized by the Company during the 12-week periods ended October 2, 2005 and October 3, 2004 approximated $98,000 and $109,000, respectively. Compensation cost related to these awards recognized by the Company in each of the 40-week periods ended October 2, 2005 and October 3, 2004 approximated $328,000.

     During 2004, the Company changed its approach to equity-based compensation and discontinued issuing stock options, choosing to only issue restricted stock. This change impacted the Company’s earnings as the accounting for restricted stock differs from the accounting for stock options. The accounting for restricted stock is based on the vesting schedule for the shares. If the vesting schedule is based merely on the passage of time (time-based), the accounting treatment requires expensing from the grant date to the expected vesting date based on the number of shares granted and the stock price on the date of grant. If the vesting is based on performance criteria (performance-based) that could cause the awards to vest over varying periods of time, or to not vest at all, the accounting treatment requires expensing from the grant date to the expected vesting date with compensation expense recorded at the stock price based on the closing price on the quarterly and annual reporting dates. The accounting for time-based vesting only is referred to below as “fixed-plan accounting” and the accounting for performance-based vesting is referred to as “variable-plan accounting.” During 2004 and 2005, the Company granted restricted stock awards that involve both of these accounting treatments.

     During 2004, the Company granted approximately 344,000 shares of restricted stock to certain executives and members of senior management. Compensation cost related to these restricted stock awards recognized by the Company during the 12-week periods ended October 2, 2005 and October 3, 2004 approximated $126,000 and $359,000, respectively. Compensation cost (benefit) related to these awards recognized by the Company in the 40-week periods ended October 2, 2005 and October 3, 2004 approximated $(211,000) and $605,000, respectively. The net compensation benefit included reversals of approximately $644,000 for the 40 weeks ended October 2, 2005, due to a change in estimates of the Company’s projected future performance on the ultimate vesting of certain performance-based restricted awards.

     In 2005, the Company granted approximately 303,000 shares of restricted stock to certain executives, members of senior management and non-employee directors. The Company recognized a net compensation expense of approximately $123,000 related to these restricted stock awards during the 12-week period ended October 2, 2005. Compensation expense related to these awards recognized by the Company in the 40-week period ended October 2, 2005 approximated $273,000.

     The following table sets forth the restricted stock awards granted during the first 40 weeks of 2005.

			Value Charged
	Approximate		to
	Number of		Common Stock
	Shares		in
Grant Date	Granted		2005		Vesting Schedule
January 21, 2005 (1)		28,100	$	395,000	Ratably over periods of time ranging from date of grant to
					seven years (fixed-plan accounting)
January 21, 2005 (2)		187,000	$	0	Based upon cumulative growth in earnings per share over the
					next three years (variable-plan accounting)
May 12, 2005 (3)		57,000	$	949,000	Ratably over periods of time ranging from date of grant to five
					years (fixed-plan accounting)
August 1, 2005 (4)		5,600	$	107,000	Ratably over a three year period of time (fixed-plan accounting)
August 29, 2005 (5)		25,000	$	402,000	Ratably over periods of time ranging from date of grant to four
					years (fixed-plan accounting)

(1) In the event that either the employment of the individual by the Company is terminated for any reason or, for any reason, the individual ceases to remain employed by the Company in the same position the individual held on the date of grant (or a substantially equivalent or higher position), no further vesting of restricted stock shall occur. The grantees’ rights in these shares vest based upon the passage of time; therefore, the Company uses fixed plan accounting. Under fixed plan accounting for stock-based compensation, upon issuance of restricted stock awards, unearned compensation is charged to shareholders’ equity for the fair value of the restricted stock at the grant date, and recognized as compensation expense ratably over the respective vesting periods. Compensation cost related to these restricted stock awards recognized by the Company during the 12-week period ended

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	October 2, 2005 approximated $23,000. Compensation cost related to these awards recognized by the Company in the 40-week period ended October 2, 2005 approximated $95,000.
(2)	If the cumulative annual performance targets are achieved, up to 25.0% of the awards may vest in each of the first and second years and all unvested amounts may vest upon meeting the cumulative performance target in the third year. Any unvested amounts at the end of the third year will automatically be forfeited. In the event that either the employment of the individual by the Company is terminated for any reason or, for any reason, the individual ceases to remain employed by the Company in the same position the individual held on the date of grant (or a substantially equivalent or higher position), no further vesting of restricted stock shall occur. With respect to these awards, the Company uses variable-plan accounting which requires the Company to recognize the intrinsic value of the award measured at the end of each reporting period over the life of the award as it is earned. Since this award can only be settled in stock, common stock is credited as the award value is recognized in expense over the vesting period. There was not any compensation cost related to these awards recognized by the Company in the 12-week and 40-week periods ended October 2, 2005. As described above, the Company’s expected earnings were below the required vesting target for these awards.
(3)	In the event that either the employment of the individual by the Company is terminated for any reason or, for any reason, the individual ceases to remain employed by the Company in the same position the individual held on the date of grant (or a substantially equivalent or higher position), no further vesting of restricted stock shall occur. The grantees’ rights in these shares vest based upon the passage of time; therefore, the Company uses fixed plan accounting. Under fixed plan accounting for stock-based compensation, upon issuance of restricted stock awards, unearned compensation is charged to shareholders’ equity for the fair value of the restricted stock at the grant date, and recognized as compensation expense ratably over the respective vesting periods. Also, included in this award was the 2005 grant to non-employee directors; refer to footnote (4) below for specifics of non-employee director grants. Compensation cost related to these restricted stock awards recognized by the Company during the 12-week and 40-week periods ended October 2, 2005 approximated $46,000 and $124,000, respectively.
(4)	In the event that the service of the non-employee director terminates for any reason, no further vesting of restricted stock shall occur. The grantee’s rights in these shares vest based upon the passage of time; therefore, the Company uses fixed plan accounting. Under fixed plan accounting for stock-based compensation, upon issuance of restricted stock awards, unearned compensation is charged to shareholders’ equity for the fair value of the restricted stock at the grant date, and recognized as compensation expense ratably over the respective vesting periods. Compensation cost related to these restricted stock awards recognized by the Company during the 12-week and 40-week periods ended October 2, 2005 approximated $7,000.
(5)	In the event that either the employment of the individual by the Company is terminated for any reason or, for any reason, the individual ceases to remain employed by the Company in the same position the individual held on the date of grant (or a substantially equivalent or higher position), no further vesting of restricted stock shall occur. The grantees’ rights in these shares vest based upon the passage of time; therefore, the Company uses fixed plan accounting. Under fixed plan accounting for stock-based compensation, upon issuance of restricted stock awards, unearned compensation is charged to shareholders’ equity for the fair value of the restricted stock at the grant date, and recognized as compensation expense ratably over the respective vesting periods. Compensation cost related to these restricted stock awards recognized by the Company during the 12-week and 40-week periods ended October 2, 2005 approximated $47,000.

F. LEGAL PROCEEDINGS

     In September 2003, the Company became aware that customers and employees at one of its O’Charley’s restaurants located in Knoxville, Tennessee were exposed to the Hepatitis A virus, which resulted in a number of the Company’s employees and customers becoming infected. The Company worked closely with the Knox County Health Department and the Centers for Disease Control and Prevention when it became aware of this incident and cooperated fully with their directives and recommendations. The Company is aware of 81 individuals who have contracted the Hepatitis A virus, most of whom have been linked to its Knoxville restaurant during the time of the outbreak. As of the date of this filing, the Company is also aware of 56 lawsuits that have been filed against it, all but one of which have been filed in the Circuit Court for Knox County, Tennessee, that allege injuries or fear of injuries from the Hepatitis A incident. As of November 7, 2005, the Company and other defendants have entered into agreements to settle 51 of these cases. A number of the remaining suits seek substantial damages, including treble damages under Tennessee consumer protection laws and punitive damages. One of the lawsuits was filed by an individual who contracted Hepatitis A and died following the filing of his lawsuit. This suit has been amended to seek compensatory damages not to exceed $7.5 million and punitive damages not to exceed $10.0 million alleging wrongful death. Other plaintiffs have alleged significant health concerns, including ailments requiring hospitalization.

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     As the result of a joint investigation of the Knox County Health Department, the Tennessee Department of Health, the Centers for Disease Control and Prevention and the Food and Drug Administration, the outbreak of the Hepatitis A virus has been associated with eating green onions (scallions).

     While the Company intends to vigorously defend the litigation that has been filed against it, the Company is not able to predict the outcome of the litigation that has been filed against it relating to the Hepatitis A outbreak or the amounts that it may be required to pay to settle that litigation or to satisfy any adverse judgments that may be rendered against it. The Company has liability insurance which has covered the Company’s legal costs to date and the Company’s share of the 51 cases settled. The Company believes its liability insurance is in amounts sufficient to cover its liability in the remaining cases filed against it and that the ultimate resolution of these cases will not be material to its results of operations or financial condition. There can be no assurance, however, that the Company’s insurance will be sufficient to cover its share of the ultimate loss or liability. If the Company suffers losses or liabilities in excess of its insurance coverage, there could be a material adverse effect on its results of operations and financial condition. The Company also has insurance that provides coverage, subject to limitations, for lost income at its restaurants whose results of operations were adversely affected by the Hepatitis A incident. The Company has submitted a claim pursuant to its insurance coverage for this type of loss, but its carrier has disagreed with the Company’s claim. At this point, the Company cannot reasonably estimate the value of any potential settlement of this claim or the timing thereof.

     In addition, the Company is a defendant from time to time in various other legal proceedings arising in the ordinary course of 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 and employment matters, discrimination and similar matters; claims resulting from “slip and fall” accidents; claims with respect to insurance recoveries; and claims from customers or employees alleging illness, injury or other food quality, health or operational concerns. The Company does not believe that any of these 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 or accrue expenses relating to legal proceedings, however, which may adversely affect its results of operations in a particular period.

G. FRANCHISE AND JOINT VENTURE ARRANGEMENTS

     In connection with the Company’s franchising initiative, the Company may from time to time enter into joint venture and franchise arrangements to develop and operate O’Charley’s restaurants. For any franchisee in which the Company has an ownership interest, the Company may make loans to the joint venture entity and/or guarantee certain of the joint venture’s debt and obligations. The Company has a 50% equity interest in the joint venture JFC Enterprises, LLC, which owns and operates two O’Charley’s restaurants in Louisiana. As of October 2, 2005, the Company had a loan of approximately $2.0 million due from this joint venture entity. In addition, the Company has provided this joint venture entity a debt service guarantee and as of October 2, 2005 there were no loans outstanding under this arrangement. Since the Company bears a disproportionate share of the financial risk associated with JFC Enterprises, LLC, it consolidates the joint venture in its consolidated financial statements in accordance with FASB Interpretation 46(R).

     On March 28, 2005, the Company entered into a Development Agreement with Four Star Restaurant Group, LLC and Michael R. Johnson. Under the terms of the agreement, Four Star Restaurant Group, LLC has the right to develop and operate up to 10 new O’Charley’s restaurants over the next six years in certain markets in the states of Iowa, Nebraska, and parts of Kansas and South Dakota.

     On May 18, 2005, the Company entered into a Development Agreement with O’Candall Group, Inc. and Sam Covelli. Under the terms of the agreement, O’Candall Group, Inc. and/or certain of its affiliates have the right to develop and operate up to 50 new O’Charley’s restaurants over the next eight years, with a minimum of eight O’Charley’s restaurants expected to open by the end of 2007. The initial development plans are expected to focus on the Tampa, Florida, Orlando, Florida, Pittsburgh, Pennsylvania and Northern Ohio markets.

11

H. ASSETS HELD FOR SALE

     The amount shown in Assets held for sale as of October 2, 2005 on the consolidated balance sheet relates to a corporate aircraft and certain other non-operating assets. The Company decided to sell the corporate aircraft based on a cost/benefit analysis to the Company. The Company estimates that it can sell the aircraft for approximately $1.9 million net of broker fees. The net book value of the aircraft was approximately $3.0 million and the Company has therefore recognized a $1.1 million impairment charge for this asset. The Company has ceased recognizing depreciation expense for this asset while it is being held for sale.

     The Company also decided to sell certain other non-operating assets with a net book value of approximately $0.6 million. The Company estimates that the net realizable value of these assets exceeds their net book value and has therefore concluded that these assets are not impaired. The Company has ceased recognizing depreciation expense for these assets while they are being held for sale.

I. RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS 123(R) is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123(R) is effective at the beginning of the first annual period beginning after June 15, 2005. In accordance with SFAS 123(R), the Company will recognize compensation expense in its financial statements based on the fair value of all share-based payments to employees beginning in the first quarter of 2006. The Company is continuing to evaluate the impact of this standard on its consolidated financial statements.

     In August 2005, the FASB issued FASB Staff Position FSP FAS 123R-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123R.”In this FSP, the FASB decided to defer the requirements in FASB Statement No. 123 (Revised 2004),Share-Based Payment,that make a freestanding financial instrument subject to the recognition and measurement requirements of other GAAP when the rights conveyed by the instrument are no longer dependent on the holder being an employee. The guidance in this FSP should be applied upon initial adoption of Statement SFAS 123(R). As discussed above the Company is continuing to evaluate the impact of SFAS 123(R) on its consolidated financial statements and will begin accounting for compensation expense in accordance with SFAS 123(R) in the first quarter of 2006.

     In October 2005, the FASB has issued FASB Staff Position (FSP) FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” The FASB concludes in this FSP that rental costs associated with ground or building operating leases that are incurred during a construction period should be expensed. FASB Technical Bulletin (FTB) No. 88-1,Issues Relating to Accounting for Leases, requires that rental costs associated with operating leases be allocated on a straight-line basis in accordance with FASB Statement No. 13,Accounting for Leases,and FTB 85-3,Accounting for Operating Leases with Scheduled Rent Increases,starting with the beginning of the lease term. The FASB believes there is no distinction between the right to use a leased asset during the construction period and the right to use that asset after the construction period. As discussed in Note 2 to the Company’s Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 26, 2004 the Company has already adopted this accounting guidance based on the letter issued by the Office of the Chief Accountant of the SEC to the American Institute of Certified Public Accountants in February 2005.

J. IMPAIRMENT OF AND DISPOSAL OF LONG-LIVED ASSETS

     In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the Company reviews its long-lived assets related to each restaurant to be held and used in the business, including any other assets or allocated intangible assets subject to amortization, quarterly for impairment, or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. Based on the best information available, the Company writes down an impaired asset to its estimated fair market value, which becomes its new cost basis. The Company measures estimated fair market value by discounting estimated future cash flows. In addition, when the Company decides to close a restaurant it is reviewed for impairment and depreciable lives are adjusted based on the expected disposal date. The impairment evaluation is based on the estimated cash flows from continuing use through the expected disposal date plus the expected terminal value.

     Costs associated with closing a store are generally expensed as incurred unless the store is considered as discontinued operations in accordance with SFAS No. 144. Additionally, at the date the Company ceases using a property under an operating lease, it records a liability for the net present value of any remaining lease obligations, net of estimated sublease income, if any. To the extent the

12

Company sells assets, primarily land, associated with a closed store, any gain or loss upon that sale is recorded in asset impairment and disposals.

     In October 2005, the Board of Directors approved management’s plan to close six O’Charley’s stores at various dates during the fourth quarter of 2005. In addition, the Company took an impairment charge on a corporate aircraft and two O’Charley’s stores. The impairment charge taken for the aircraft was based on the Company’s third quarter decision to sell the aircraft. The impairment charge taken on the two O’Charley’s stores was based on its normal quarterly review for asset impairment. These decisions followed a review of historical and projected cash flows of the Company’s stores in view of the economic environment in which the Company is operating and the Company’s current strategic plans. As a result of these actions, the Company recognized a charge during the third quarter for asset impairment and disposals totaling $7.1 million. This amount includes an asset impairment charge of approximately $4.9 million related to the six planned O’Charley’s store closures, $0.9 million relating to two O’Charley’s stores that are impaired but are not expected to be closed, and $1.1 million relating to the impairment of a corporate aircraft. The remaining expense is due to a $0.3 million charge for the business insurance deductible covering the loss of the O’Charley’s store location in Biloxi, Mississippi that was destroyed by Hurricane Katrina, partly offset by other gains on asset sales. With respect to the asset impairment charges, fair value was determined by projected future cash flows for each location, which is the lowest level of identifiable cash flows largely independent of the cash flows of other groups of assets, over each location’s remaining operating period, including the estimated proceeds from the disposition of such assets.

K. SUPPLEMENTARY CONSOLIDATING FINANCIAL INFORMATION OF SUBSIDIARY GUARANTORS

     In the fourth quarter of 2003, the Company issued $125 million aggregate principal amount of 9% senior subordinated notes due 2013. The obligations of the Company under the senior subordinated notes are guaranteed by all of the Company’s subsidiaries, with the exception of certain minor subsidiaries. The guarantees are made on a joint and several basis. The claims of creditors of the non-guarantor subsidiaries have priority over the rights of the Company to receive dividends or distributions from such subsidiaries. Presented below is supplementary consolidating financial information for the Company and the subsidiary guarantors as of October 2, 2005 and December 26, 2004 and for the 12 and 40 weeks ended October 2, 2005 and October 3, 2004.

13

Consolidating Balance Sheet
As of October 2, 2005
(Unaudited)

							Minor
							Subsidiaries and
				Subsidiary			Consolidating
	Parent Company			Guarantors			Adjustments			Consolidated
	(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	3,297		$	1,958		$	184		$	5,439
Trade accounts receivable		6,437			5,436			29			11,902
Intercompany receivable (payable)		(146,509	)		153,959			(7,450	)		—
Inventories		3,285			37,250			50			40,585
Deferred income taxes		8,621			384			—			9,005
Other current assets		2,995			3,570			25			6,590
Assets held for sale		325			2,170			—			2,495
Total current assets		(121,549	)		204,727			(7,162	)		76,016
Property and Equipment, net		348,102			111,477			4,417			463,996
Goodwill		—			93,074			—			93,074
Other Intangible Asset		—			25,921			—			25,921
Other Assets		217,251			27,429			(224,446	)		20,234
Total Assets (Liabilities)	$	443,804		$	462,628		$	(227,191	)	$	679,241
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable	$	12,581		$	17,538		$	(5,572	)	$	24,547
Accrued payroll and related expenses		13,150			7,641			(778	)		20,013
Accrued expenses		15,185			10,020			180			25,385
Deferred revenue		3,152			3,706			10			6,868
Federal, state and local taxes		(7,618	)		18,094			43			10,519
Current portion of long-term debt and capitalized lease obligations		10,506			369			—			10,875
Total current liabilities		46,956			57,368			(6,117	)		98,207
Deferred Income Taxes		10,012			(784	)		—			9,228
Other Liabilities		29,380			15,284			1,026			45,690
Long-Term Debt, less current portion		165,848			—			(16,740	)		149,108
Capitalized Lease Obligations, less current portion		28,131			1,346			—			29,477
Total Liabilities (Assets)		280,327			73,214			(21,831	)		331,710
Shareholders’ Equity (Deficit):
Common stock		184,727			203,101			(202,649	)		185,179
Accumulated other comprehensive loss, net of tax		(82	)		—			—			(82	)
Unearned compensation		(4,251	)		—			(74	)		(4,325	)
Retained earnings (deficit)		(16,917	)		186,313			(2,637	)		166,759
Total shareholders’ equity (deficit)		163,477			389,414			(205,360	)		347,531
Total Liabilities and Shareholders’ Equity (Deficit)	$	443,804		$	462,628		$	(227,191	)	$	679,241

14

Consolidating Balance Sheet
As of December 26, 2004
(Unaudited)

							Minor
							Subsidiaries and
				Subsidiary			Consolidating
	Parent Company			Guarantors			Adjustments			Consolidated
				(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	2,491		$	7,733		$	548		$	10,772
Trade accounts receivable		2,640			6,130			13			8,783
Intercompany receivable (payable)		(123,459	)		129,076			(5,617	)		—
Inventories		3,310			29,792			23			33,125
Deferred income taxes		6,332			384			—			6,716
Short-term notes receivable		120			—			—			120
Other current assets		507			4,365			10			4,882
Total current assets		(108,059	)		177,480			(5,023	)		64,398
Property and Equipment, net		349,719			100,121			1,968			451,808
Goodwill		—			93,074			—			93,074
Other Intangible Asset		—			25,921			—			25,921
Other Assets		217,351			26,217			(221,258	)		22,310
Total Assets (Liabilities)	$	459,011		$	422,813		$	(224,313	)	$	657,511
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable	$	6,596		$	11,339		$	(3,676	)	$	14,259
Accrued payroll and related expenses		12,694			6,470			19			19,183
Accrued expenses		11,705			9,475			(302	)		20,878
Deferred revenue		8,444			10,754			12			19,210
Federal, state and local taxes		(6,540	)		15,707			17			9,184
Current portion of long-term debt and capitalized lease obligations		12,315			355			—			12,670
Total current liabilities		45,214			54,100			(3,930	)		95,384
Deferred Income Taxes		8,299			(415	)		—			7,884
Other Liabilities		32,097			11,963			974			45,034
Long-Term Debt, less current portion		162,865			—			(16,740	)		146,125
Capitalized Lease Obligations, less current portion		30,689			1,655			—			32,344
Total Liabilities (Assets)		279,164			67,303			(19,696	)		326,771
Shareholders’ Equity (Deficit):
Common stock		177,811			168,474			(168,023	)		178,262
Accumulated other comprehensive loss, net of tax		(224	)		—			—			(224	)
Unearned compensation		(3,593	)		—			(73	)		(3,666	)
Retained earnings (deficit)		5,853			187,036			(36,521	)		156,368
Total shareholders’ equity (deficit)		179,847			355,510			(204,617	)		330,740
Total Liabilities and Shareholders’ Equity (Deficit)	$	459,011		$	422,813		$	(224,313	)	$	657,511

15

Consolidating Statement of Operations
12 Weeks Ended October 2, 2005
(Unaudited)

							Minor
							Subsidiaries and
				Subsidiary			Consolidating
	Parent Company			Guarantors			Adjustments			Consolidated
				(In thousands)
Revenues:
Restaurant sales	$	122,754		$	81,870		$	4,654		$	209,278
Commissary sales		—			56,495			(54,114	)		2,381
Franchise revenue		132			—			(32	)		100
		122,886			138,365			(49,492	)		211,759
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		40,103			25,013			(1,125	)		63,991
Payroll and benefits		46,052			27,514			1,080			74,646
Restaurant operating costs		23,615			16,163			1,046			40,824
Cost of commissary sales		—			52,911			(50,971	)		1,940
Advertising expenses		—			6,190			(4	)		6,186
General and administrative expenses		1,163			8,301			75			9,539
Depreciation and amortization, property and equipment		7,159			2,981			52			10,192
Asset impairment and disposals		6,038			1,100			—			7,138
Pre-opening costs		1,005			1,065			118			2,188
		125,135			141,238			(49,729	)		216,644
(Loss) Income from Operations		(2,249	)		(2,873	)		237			(4,885	)
Other Expense (Income):
Interest expense, net		3,336			187			57			3,580
Other, net		12,116			(12,117	)		—			(1	)
		15,452			(11,930	)		57			3,579
(Loss) Earnings Before Income Taxes		(17,701	)		9,057			180			(8,464	)
Income Tax (Benefit) Expense		(2,130	)		(1,682	)		37			(3,775	)
Net (Loss) Earnings	$	(15,571	)	$	10,739		$	143		$	(4,689	)

16

Consolidating Statement of Earnings
12 Weeks Ended October 3, 2004
(Unaudited)
Restated

							Minor
							Subsidiaries
				Subsidiary			and Consolidating
	Parent Company			Guarantors			Adjustments			Consolidated
	(In thousands)
Revenues:
Restaurant sales	$	120,968		$	73,939		$	3,787		$	198,694
Commissary sales		—			43,906			(42,388	)		1,518
Franchise revenue		65			—			—			65
		121,033			117,845			(38,601	)		200,277
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		38,572			23,038			(751	)		60,859
Payroll and benefits		41,617			23,480			701			65,798
Restaurant operating costs		21,936			14,340			948			37,224
Cost of commissary sales		—			41,491			(40,056	)		1,435
Advertising expenses		—			6,083			—			6,083
General and administrative expenses		625			7,970			—			8,595
Depreciation and amortization, property and equipment		6,986			2,414			1			9,401
Asset impairment and disposals		—			65			—			65
Pre-opening costs		897			768			74			1,739
		110,633			119,649			(39,083	)		191,199
Income (Loss) from Operations		10,400			(1,804	)		482			9,078
Other Expense (Income):
Interest expense, net		2,952			207			—			3,159
Other, net		12,080			(12,080	)		—			—
		15,032			(11,873	)		—			3,159
(Loss) Earnings Before Income Taxes		(4,632	)		10,069			482			5,919
Income Tax (Benefit) Expense		(1,450	)		2,884			378			1,812
Net (Loss) Earnings	$	(3,182	)	$	7,185		$	104		$	4,107

17

Consolidating Statement of Earnings
40 Weeks Ended October 2, 2005
(Unaudited)

							Minor
							Subsidiaries
				Subsidiary			and Consolidating
	Parent Company			Guarantors			Adjustments			Consolidated
	(In thousands)
Revenues:
Restaurant sales	$	424,846		$	269,402		$	15,224		$	709,472
Commissary sales		—			187,627			(180,890	)		6,737
Franchise revenues		365			—			(75	)		290
		425,211			457,029			(165,741	)		716,499
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		137,171			82,193			(5,642	)		213,722
Payroll and benefits		153,127			88,982			3,238			245,347
Restaurant operating costs		74,789			52,690			3,542			131,021
Cost of commissary sales		—			174,460			(168,641	)		5,819
Advertising expenses		—			20,049			—			20,049
General and administrative expenses		3,307			27,490			165			30,962
Depreciation and amortization, property and equipment		23,782			9,451			130			33,363
Asset impairment and disposals		6,095			1,100			—			7,195
Pre-opening costs		2,744			1,690			151			4,585
		401,015			458,105			(167,057	)		692,063
Income (loss) from Operations		24,196			(1,076	)		1,316			24,436
Other Expense (Income):
Interest expense, net		10,891			587			141			11,619
Other, net		42,347			(42,305	)		—			42
		53,238			(41,718	)		141			11,661
(Loss) Earnings Before Income Taxes		(29,042	)		40,642			1,175			12,775
Income Tax (Benefit) Expense		(5,419	)		7,584			219			2,384
Net (Loss) Earnings	$	(23,623	)	$	33,058		$	956		$	10,391

18

Consolidating Statement of Earnings
40 Weeks Ended October 3, 2004
(Unaudited)
Restated

							Minor
							Subsidiaries
				Subsidiary			and Consolidating
	Parent Company			Guarantors			Adjustments			Consolidated
	(In thousands)
Revenues:
Restaurant sales	$	405,888		$	244,382		$	13,074		$	663,344
Commissary sales		—			147,232			(141,466	)		5,766
Franchise revenue		65			—			—			65
		405,953			391,614			(128,392	)		669,175
Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		128,482			76,255			(2,423	)		202,314
Payroll and benefits		142,050			78,528			2,359			222,937
Restaurant operating costs		70,161			47,079			3,282			120,522
Cost of commissary sales		—			139,054			(133,608	)		5,446
Advertising expenses		—			20,312			—			20,312
General and administrative expenses		2,495			25,225			—			27,720
Depreciation and amortization, property and equipment		22,358			7,749			—			30,107
Asset impairment and disposals		—			16			—			16
Pre-opening costs		3,540			1,207			75			4,822
		369,086			395,425			(130,315	)		634,196
Income (Loss) from Operations		36,867			(3,811	)		1,923			34,979
Other Expense (Income):
Interest expense, net		9,535			715			—			10,250
Other, net		40,349			(40,351	)		—			(2	)
		49,884			(39,636	)		—			10,248
(Loss) Earnings Before Income Taxes		(13,017	)		35,825			1,923			24,731
Income Tax (Benefit) Expense		(4,244	)		11,452			746			7,954
Net (Loss) Earnings	$	(8,773	)	$	24,373		$	1,177		$	16,777

19

Consolidating Statement of Cash Flows
40 Weeks Ended October 2, 2005
(Unaudited)

							Minor
							Subsidiaries
				Subsidiary			and Consolidating
	Parent Company			Guarantors			Adjustments			Consolidated
	(In thousands)
Cash flows from Operating Activities:
Net (loss) earnings	$	(23,623	)	$	33,058		$	956		$	10,391
Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities:
Depreciation and amortization, property and equipment		23,782			9,451			130			33,363
Amortization of debt issuance costs		1,060			—			—			1,060
Expense related to equity–based compensation		470			—			—			470
Provision for deferred income taxes		(1,037	)		—			—			(1,037	)
Loss on the sale of assets		378			15			—			393
Asset impairment and disposals		7,195			—			—			7,195
Changes in assets and liabilities:
Trade accounts receivable		(3,797	)		693			(15	)		(3,119	)
Inventories		34			(7,458	)		(36	)		(7,460	)
Other current assets		(2,428	)		795			924			(709	)
Trade accounts payable		5,984			6,199			(1,895	)		10,288
Deferred revenue		(5,291	)		(7,048	)		(2	)		(12,341	)
Accrued payroll, other accrued expenses and federal, state, and local taxes		4,165			1,909			(400	)		5,674
Other long-term assets and liabilities		2,940			2,109			(4,518	)		531
Other, net		340			—			—			340
Tax benefit derived from exercise of stock options		882			—			—			882
Net cash provided by (used in) operating activities		11,054			39,723			(4,856	)		45,921
Cash flows from Investing Activities:
Additions to property and equipment		(28,976	)		(20,821	)		(4,644	)		(54,441	)
Proceeds from the sale of assets		3,364			—			—			3,364
Other, net		16,647			(24,677	)		9,136			1,106
Net cash (used in) provided by investing activities		(8,965	)		(45,498	)		4,492			(49,971	)
Cash flows from Financing Activities:
Payments on long-term debt and capitalized lease obligations		(6,189	)		—			—			(6,189	)
Exercise of employee incentive stock options and issuances under stock purchase plan		4,906			—			—			4,906
Net cash used in financing activities		(1,283	)		—			—			(1,283	)
Increase (decrease) in Cash and Cash Equivalents		806			(5,775	)		(364	)		(5,333	)
Cash and Cash Equivalents at Beginning of the Period		2,491			7,733			548			10,772
Cash and Cash Equivalents at End of the Period	$	3,297		$	1,958		$	184		$	5,439

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Consolidating Statement of Cash Flows
40 Weeks Ended October 3, 2004
(Unaudited)
Restated

							Minor
							Subsidiaries
				Subsidiary			and Consolidating
	Parent Company			Guarantors			Adjustments			Consolidated
	(In thousands)
Cash flows from Operating Activities:
Net (loss) earnings	$	(8,773	)	$	24,373		$	1,177		$	16,777
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization — property and equipment		22,358			7,749			—			30,107
Amortization of debt issuance costs		1,111			—			—			1,111
Expense related to equity–based compensation		1,821			—			—			1,821
Provision for deferred income taxes		563			—			—			563
Loss (gain) on the sale of assets		175			(1	)		—			174
Changes in assets and liabilities:
Trade accounts receivable		(1,249	)		(382	)		—			(1,631	)
Inventories		109			(9,276	)		(1	)		(9,168	)
Other current assets		(569	)		(1,258	)		(124	)		(1,951	)
Trade accounts payable		6,275			(573	)		(40	)		5,662
Deferred revenue		(4,326	)		(5,321	)		1			(9,646	)
Accrued payroll, other accrued expenses and federal, state, and local taxes		6,359			6,966			25			13,350
Other long-term assets and liabilities		5,656			821			472			6,949
Other, net		81			—			—			81
Tax benefit derived from exercise of stock options		498			—			—			498
Net cash provided by operating activities		30,089			23,098			1,510			54,697
Cash flows from Investing Activities:
Additions to property and equipment		(32,417	)		(18,173	)		—			(50,590	)
Proceeds from the sale of assets		1,928			15			—			1,943
Other, net		7,468			(10,268	)		(1,060	)		(3,860	)
Net cash (used in) investing activities		(23,021	)		(28,426	)		(1,060	)		(52,507	)
Cash flows from Financing Activities:
Payments on long-term debt and capitalized lease obligations		(20,976	)		—			—			(20,976	)
Proceeds from sale and lease-back transactions		12,091			—			—			12,091
Debt issuance costs		(830	)		—			—			(830	)
Exercise of employee incentive stock options and issuances under stock purchase plan		2,853			—			—			2,853
Net cash used in financing activities		(6,862	)		—			—			(6,862	)
Increase (decrease) in Cash and Cash Equivalents		206			(5,328	)		450			(4,672	)
Cash and Cash Equivalents at Beginning of the Period		2,946			6,628			—			9,574
Cash and Cash Equivalents at End of the Period	$	3,152		$	1,300		$	450		$	4,902

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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 future profitability, operating and growth strategy, and financing plans. These forward-looking statements may be affected by certain risks and uncertainties, including, but not limited to, our ability to increase operating margins and increase same restaurant sales at our restaurants; the effect that increases in food, labor, energy, interest costs and other expenses have on our results of operations; our ability to sell closed restaurants and other surplus assets; the possible adverse effect on our sales of any decrease in consumer spending; the effect of increased competition; the impact on our results of operations of restarting development of our Stoney River concept; and the other risks described in our Annual Report on Form 10-K for the fiscal year ended December 26, 2004 under the caption “Risk Factors” and in our other filings with the Securities and Exchange 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 leading casual dining restaurant company operating 228 O’Charley’s restaurants in 16 states in the Southeast and Midwest, 107 Ninety Nine restaurants in seven Northeastern states, and six Stoney River restaurants in the Southeast and Midwest as of October 2, 2005. We also have four O’Charley’s restaurants in Michigan operated by a franchisee and two O’Charley’s restaurants located in Louisiana operated by a joint venture franchisee in which we have a financial interest.

     During the third quarter, we recorded asset impairment and disposal charges of $7.1 million, or $0.20 per diluted share, relating to the closure of six underperforming O’Charley’s restaurants, two O’Charley’s restaurants that will remain open, one O’Charley’s restaurant that was destroyed by Hurricane Katrina and a decision to sell a corporate aircraft.

     Our fiscal years end on the last Sunday of the calendar year. We have one reportable segment.

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

     Revenuesconsist of restaurant sales and, to a lesser extent, commissary sales and franchise revenues. Restaurant sales include food and beverage sales and are net of applicable state and local sales taxes and discounts. Commissary sales represent sales to outside parties consisting primarily of sales of O’Charley’s branded food items, primarily salad dressings, to retail grocery chains, mass merchandisers, wholesale clubs and franchisees. Franchise revenue consists of development fees and royalties on sales of franchised units. The development fees are recognized during the reporting period in which the developed store begins operation. The royalties are recognized in revenue in the period corresponding to the franchisees’ sales.

     Cost of Food and Beverageprimarily consists of the costs of beef, poultry, seafood, produce and alcoholic and non-alcoholic beverages. The two most significant commodities that may affect our cost of food and beverage are beef and poultry, which account for approximately 20% to 22% and 9% to 11%, respectively, of our overall cost of food and beverage. Generally, temporary increases in these costs are not passed on to customers; however, in the past, we have adjusted menu prices to compensate for increased costs of a more permanent nature.

     Payroll and Benefitsinclude payroll and related costs and expenses directly relating to restaurant level activities including restaurant management salaries and bonuses, hourly wages for restaurant level employees, payroll taxes, workers’ compensation, various health, life and dental insurance programs, vacation expense and sick pay. We have various incentive bonus plans that compensate restaurant management for achieving certain restaurant level financial targets and performance goals.

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     Restaurant Operating Costsinclude occupancy and other expenses at the restaurant level, except property and equipment depreciation and amortization. Supplies, rent, supervisory salaries, bonuses and related expenses, management training salaries, general liability and property insurance, property taxes, utilities, repairs and maintenance, outside services and credit card fees account for the major expenses in this category.

     Advertising Expensesinclude all advertising-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. Prior to 2005, we presented advertising expenses combined with general and administrative expenses.

     General and Administrative Expensesinclude home office administrative functions that support the existing restaurant base and provide the infrastructure for future growth. Executive management and support staff salaries, bonuses, stock-based compensation and related expenses, data processing, legal and accounting expenses, and office expenses account for the major expenses in this category. This category also includes all severance-related expenses.

     Depreciation and Amortization, Property and Equipmentprimarily includes depreciation on property and equipment calculated on a straight-line basis over the estimated useful lives of the respective assets or the lease term plus one renewal term for leasehold improvements, if shorter.

     Asset Impairment and Disposalsincludes costs associated with the impairment of 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. Disposal costs include the costs incurred to prepare the asset or assets for sale including the following: repair and maintenance, clean up costs, broker commissions, independent appraisals, and insurance deductibles. Gains and/or losses associated with the sale of assets are also included in this financial statement category.

     Pre-opening Costsrepresent costs associated with opening a new restaurant and are expensed as incurred. These costs also include straight-line rent related to leased properties from the period of time between when the leased property is physically employed 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 restaurants opened and under development. Our pre-opening costs may vary significantly from period to period primarily due to the timing of restaurant openings.

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     The following section should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto included elsewhere herein. The following table highlights the operating results for the 12 and 40-week periods ended October 2, 2005 and October 3, 2004 as a percentage of total revenues unless specified otherwise. Certain reclassifications have been made to the prior year information to conform to the current year presentation. Also, we restated our historical financial statements for fiscal years 2003 and 2002 and the first three fiscal quarters of 2004. The information contained herein reflects such restatement. See Note A to the notes to unaudited consolidated financial statements.

	12 Weeks Ended						40 Weeks Ended
	October 2,			October 3,			October 2,			October 3,
	2005			2004			2005			2004
				(restated)						(restated)
Revenues:
Restaurant sales		98.8	%		99.2	%		99.1	%		99.1	%
Commissary sales		1.2			0.8			0.9			0.9
		100.0	%		100.0	%		100.0	%		100.0	%
Costs and Expenses:
Cost of restaurant sales: (1)
Cost of food and beverage		30.6			30.6			30.1			30.5
Payroll and benefits		35.7			33.1			34.6			33.6
Restaurant operating costs		19.5			18.7			18.5			18.2
Cost of commissary sales (2)		0.9			0.7			0.8			0.8
Advertising expenses		2.9			3.0			2.8			3.0
General and administrative expenses		4.5			4.3			4.3			4.1
Depreciation and amortization		4.8			4.7			4.7			4.5
Asset impairment and disposals		3.4			0.0			1.0			0.0
Pre-opening costs		1.0			0.9			0.6			0.7
(Loss) Income from Operations		(2.3	)		4.5			3.4			5.2
Other Expense:
Interest expense, net		1.7			1.6			1.6			1.5
Other, net		0.0			0.0			0.0			0.0
(Loss) Earnings before Income Taxes		(4.0	)		3.0			1.8			3.7
Income Tax (Benefit) Expense		(1.8	)		0.9			0.3			1.2
Net (Loss) Earnings		(2.2	)%		2.1	%		1.5	%		2.5	%

(1)	Shown as a percentage of restaurant sales.
(2)	Cost of commissary sales as a percentage of commissary sales was 81.5% and 94.5% for the 12 weeks ended October 2, 2005 and October 3, 2004, respectively. Cost of commissary sales as a percentage of commissary sales was 86.4% and 94.5% for the 40 weeks ended October 2, 2005 and October 3, 2004, respectively.

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The following table sets forth certain financial and other restaurant data for the third quarters ended October 2, 2005 and October 3, 2004 relating to our owned and operated restaurants:

	October 2,			October 3,
	2005			2004
Number of Restaurants:
O’Charley’s Restaurants:
In operation, beginning of quarter		226			216
Restaurants opened		3			3
Restaurant closed		(1	)		—
In operation, end of quarter		228			219
Ninety Nine Restaurants:
In operation, beginning of quarter		102			91
Restaurants opened		5			4
Restaurants closed		—			—
In operation, end of quarter		107			95
Stoney River Restaurants:
In operation, beginning of quarter		6			6
Restaurants opened		—		��	—
Restaurants closed		—			—
In operation, end of quarter		6			6
Franchised / Joint Venture Restaurants (O’Charley’s)
In operation, beginning of quarter		4			0
Restaurants opened		2			1
Restaurants closed		—			—
In operation, end of quarter		6			1
Average Weekly Sales per Restaurant:
O’Charley’s	$	50,307		$	51,666
Ninety Nine		52,724			53,098
Stoney River		72,677			71,584
Change in Same Restaurant Sales(1):
O’Charley’s		(1.5	%)		2.8	%
Ninety Nine		0.0	%		0.9	%
Stoney River		1.5	%		4.8	%
Change in Same Restaurant Customer Visits(1):
O’Charley’s		(0.9	%)		2.4	%
Ninety Nine		1.9	%		(2.8	%)
Stoney River		(1.0	%)		(2.3	%)
Average Check per Customer(2):
O’Charley’s	$	11.36		$	11.41
Ninety Nine		13.65			14.03
Stoney River		40.18			39.16

(1)	When computing same restaurant sales and customer visits, restaurants open for at least 78 weeks are compared from period to period. The calculation of change in same restaurant sales and customer visits for the third quarter of 2005 excludes the prior year sales and customer visits for O’Charley’s restaurants closed during or after Hurricane Katrina for the days they were closed.
(2)	The average check per customer is computed using all stores open at the end of the quarter.

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Third Fiscal Quarter and First 40 Weeks of 2005 Versus Third Fiscal Quarter and First 40 Weeks of 2004

     On October 27, 2005 we issued a press release announcing our results for the third quarter of 2005, and held a conference call with investors. As stated in the press release and discussed in the conference call, we are disappointed with our financial performance in the third quarter. That performance was impacted by a number of factors beyond our control, including the disruptions caused by Hurricane Katrina and the impact of higher interest rates and gasoline prices on consumers. The impact on the results of operations for the third quarter of 2005 from Hurricane Katrina resulted in a charge of $0.02 per diluted share. Our third quarter performance was also negatively impacted by factors that are within our control, including the management of food and beverage costs, and the management of labor and benefit costs. We announced a number of steps to address our recent performance, including the closing of six underperforming O’Charley’s restaurants, the sale of an aircraft, a “back to basics” approach to cost management, and a reduction of new restaurant development in 2006 in order to focus upon improving results in our existing restaurants.

Revenues

     During the 12 weeks ended October 2, 2005, total revenues increased $11.5 million, or 5.7%, to $211.8 million from $200.3 million for the 12 weeks ended October 3, 2004. Total revenues for the first 40 weeks of 2005 increased $47.3 million, or 7.1%, to $716.5 million from $669.2 million in the same prior-year period.

     Restaurant sales forO’Charley’sincreased $2.9 million, or 2.2%, to $137.8 million during the third quarter of 2005 reflecting the net addition of nine new company-operated and two joint-venture restaurants since the third quarter of 2004. Same restaurant sales decreased by 1.5% which was comprised of a 0.9% decline in customer counts and a 0.6% decrease in average check to $11.36. Three new company-operatedO’Charley’srestaurants opened during the third quarter and one store was completely destroyed by Hurricane Katrina, bringing the total number of company-operatedO’Charley’srestaurants to 228 at the end of the quarter. Total restaurant sales for O’Charley’s restaurants in the third quarter were impacted by the 13 locations in the Gulf Coast that were closed during or after Hurricane Katrina. All but one of these restaurants reopened within three weeks of the storm, while the restaurant in Biloxi, Mississippi was totally destroyed. We opened one new franchised restaurant and one new joint venture restaurant in the quarter, bringing the total number of franchised and joint venture restaurants to six at the end of the quarter.O’Charley’srestaurant sales for the first 40 weeks of 2005 increased $21.7 million, or 4.8%, to $475.4 million from $453.7 million in the same prior-year period as a result of a same restaurant sales increase of 0.3% and the net addition of nine new restaurants over the last twelve months. Subsequent to the end of the third quarter we decided to close six underperformingO’Charley’srestaurants. Through the first three quarters of fiscal 2005, the total sales from these six stores were $7.7 million. Restaurant sales in our Midwestern markets were particularly soft during the quarter and year-to-date, which had a negative impact onO’Charley’soverall same restaurant sales, while same restaurant sales at our Gulf CoastO’Charley’srestaurants increased, due to post-Hurricane Katrina activity.

     Restaurant sales forNinety Nineincreased $7.6 million, or 13.0%, to $66.2 million in the third quarter, reflecting the addition of 12 new restaurants since the third quarter of 2004. Same restaurant sales were flat in the quarter consisting of a 1.9% increase in customer counts offset by a 1.9% decrease in average check to $13.65. The average check declined for a number of reasons, including a continued decline in alcoholic beverage mix, the elimination of higher-priced promotions from the prior year, and the popularity of new, lower-priced items onNinety-Nine’snew menu. Five newNinety Ninerestaurants opened during the third quarter bringing the total number of Ninety Nine restaurants to 107 at the end of the quarter. Ninety Nine restaurant sales for the first 40 weeks of 2005 increased $24.0 million, or 12.5%, to $215.8 million from $191.8 million in the same prior-year period as a result of same restaurant sales increases of 0.3% and the addition of 12 new restaurants since the third quarter of 2004.

     Restaurant sales forStoney River Legendary Steaksincreased 1.5% to $5.2 million in the third quarter consisting of a 1.0% decrease in customer counts and a 2.5% increase in average check to $40.18. Restaurant sales for the first 40 weeks of 2005 increased $0.5 million, or 2.7%, to $18.3 million from $17.8 million in the same prior-year period as a result of same restaurant sales increase of 2.7%. All six restaurants in operation are included in the same store sales base for the 12 and 40-week periods. We believe that the Stoney River concept has established a unique position in the upscale steakhouse segment.

Cost of Food and Beverage

     During the third quarter of 2005, our cost of food and beverage was $64.0 million, or 30.6% of restaurant sales, compared with $60.9 million, or 30.6% of restaurant sales in the third quarter of 2004. While our cost of food and beverage was flat as a percentage of restaurant sales as compared to the prior year period, it was higher than we anticipated, due in part to higher fuel costs at the commissary and higher costs associated with the opening of the New England distribution center. During the first 40 weeks of 2005, cost of food and beverage was $213.7 million, or 30.1% of restaurant sales, compared to $202.3 million, or 30.5% of restaurant sales,

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in the same prior year period. We continue to benefit from our practice of buying ahead on volatile commodities to take advantage of predictable seasonal price fluctuations. We have committed pricing for approximately 90% of our estimated beef requirements, approximately 75% of our estimated poultry requirements and approximately 75% of our estimated pork requirements for the remainder of the 2005 fiscal year. We have also started to purchase forward for next year, and have already locked in our pricing for approximately 70% of our beef requirements for 2006.

Payroll and Benefits

     During the third quarter of 2005, payroll and benefits were $74.6 million, or 35.7% of restaurant sales, compared to $65.8 million, or 33.1% of restaurant sales, in the same prior-year period. During the first 40 weeks of 2005, payroll and benefits were $245.3 million, or 34.6% of restaurant sales, compared to $222.9 million, or 33.6% of restaurant sales, in the same prior year period. Higher average wage and benefit rates and declines in productivity contributed to the year-over-year increase. The cost of our hourly health care plans was approximately 100 basis points higher as a percent of restaurant sales in the third quarter of 2005 than in the third quarter of 2004. Sixty basis points of this increase relates to our hourly health care plan at the O’Charley’s concept and is the result of the timing of the expense recognition in 2004, and higher plan utilization.

Restaurant Operating Costs

     During the third quarter of 2005, restaurant operating costs were $40.8 million, or 19.5% of restaurant sales, compared to $37.2 million, or 18.7% of restaurant sales, in the same prior year period. During the first 40 weeks of 2005, restaurant operating costs were $131.0 million, or 18.5% of restaurant sales, compared to $120.5 million, or 18.2% of restaurant sales, in the same prior year period. The increase in restaurant operating costs as a percentage of restaurant sales in the third quarter and first 40 weeks over the same prior year periods was primarily attributable to increases in the costs of supplies and packaging, utility costs and repairs and maintenance. To-go sales at our O’Charley’s and Ninety Nine concepts were 5.4% and 9.4% of restaurant sales, respectively, in the third quarter of 2005, compared with 5.1% and 9.1% of restaurant sales, respectively, in 2004. This increase in to-go sales along with increases in material costs have caused our packaging costs to be higher in the third quarter of 2005 as compared to the prior year period.

Advertising Expenses

     During the third quarter of 2005, advertising expenditures increased $0.1 million, or 1.7%, to $6.2 million from $6.1 million in the third quarter of 2004 and, as a percentage of total revenues, declined to 2.9% from 3.0% in the same prior-year period. For the first 40 weeks of 2005, advertising expenditures decreased $0.2 million, or 1.3%, to $20.1 million from $20.3 million in the same prior year period. The decrease in advertising expenditures as a percentage of total revenues is primarily due to the use of the same promotional calendar on a year-over-year basis, enabling us to utilize some print and television media which were produced in the prior year.

General and Administrative Expenses

     General and administrative expenses increased 11.0% to $9.5 million in the third quarter of 2005 from $8.6 million in the third quarter of 2004, and as a percentage of total revenues, increased to 4.5% from 4.3% in the same prior-year period. General and administrative expenses in the first 40 weeks of 2005 increased $3.2 million, or 11.7%, to $31.0 million from $27.7 million during the same prior year period and increased as a percentage of total revenues to 4.3% from 4.1% in the prior year. The increase in general and administrative expenses includes the impact of $0.02 per diluted share for severance and project-related expenses associated with the previously announced financial systems conversion project.

Asset Impairment and Disposals

     During the third quarter of 2005, we recorded impairment and disposal charges of $7.1 million. The impairment charges consisted of a $4.9 million charge related to the planned closure of six underperforming O’Charley’s restaurants, a $0.9 million charge for two O’Charley’s restaurants that will remain open, a $0.3 million charge for losses relating to the O’Charley’s store in Biloxi, Mississippi that was destroyed by Hurricane Katrina, and a $1.1 million impairment charge to write down the value of a corporate aircraft which we are selling to reflect the difference between its current book value and the estimated net sale proceeds. These charges are partly offset by gains on asset sales. We expect that the sale of the aircraft will reduce future annual general and administrative expenses by approximately $1.0 million. See Note J to the notes to the consolidated financial statements for additional information on the charge taken for asset impairment and disposals.

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     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. Identifiable cash flows are measured at the lowest level for which they are largely independent of the cash flows of other groups of assets and liabilities, generally at the restaurant level. If these assets are determined to be impaired, the amount of impairment recognized is the amount by which the carrying amount of the assets exceeds their fair value. Fair value is generally determined by appraisals or sales prices of comparable assets. Restaurant sites and certain other assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Restaurant sites and certain other assets to be disposed of are included in assets held for sale when certain criteria are met. These criteria include the requirement that the likelihood of disposing of these assets within one year is probable. Assets whose disposal is not probable within one year remain in “Property and Equipment, net” until their disposal is probable within one year. The judgments we make related to the expected useful lives of long-lived assets and our ability to realize undiscounted cash flows in excess of the carrying amounts of these assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions and changes in usage or operating performance. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, significant adverse changes in these factors could cause us to recognize future impairment charges.

Depreciation and Amortization, Property and Equipment

     During the third quarter and first 40 weeks of 2005, depreciation and amortization increased as a percentage of total revenues. The increase was primarily attributable to the increase in stores being operated by the O’Charley’s and the Ninety Nine concepts.

Pre-opening Costs

     During the third quarter of 2005, pre-opening costs increased $0.5 million to $2.2 million from $1.7 million in the third quarter of 2004, reflecting eight restaurant openings compared to seven restaurants opened in the prior year quarter and pre-opening costs associated with our new Stoney River restaurant in Dublin, Ohio, which opened after the end of the third quarter. This is the first Stoney River restaurant opened since the fourth quarter of 2002. For the 40 weeks ended October 2, 2005, pre-opening costs declined by $0.2 million to $4.6 million from $4.8 million for the same prior year period. This decrease is due to three fewer O’Charley’s restaurant openings in the comparable periods but was offset by pre-opening costs incurred for the new Stoney River location and higher building costs as compared to the prior year. We estimate average pre-opening costs of approximately $230,000 for each new O’Charley’s restaurant, approximately $275,000 for each new Stoney River restaurant and approximately $200,000 for each new Ninety Nine restaurant.

Interest Expense, Net

     Interest expense, net during the third quarter and first 40 weeks of 2005 increased compared to the same prior-year periods as a result of the impact of higher short-term interest rates on our variable rate debt. Interest expense during the first three quarters of 2005 reflects $125.0 million of senior subordinated notes at a fixed rate of 9.0%; approximately $18.8 million weighted average debt outstanding on our $125.0 million bank revolver accruing interest at one-month LIBOR plus 1.25%; and other debt including capitalized lease obligations and prepaid financing costs. Approximately $100.0 million of the 9.0% senior subordinated notes have been effectively converted through interest rate swap agreements into a variable interest rate obligation based on the six-month LIBOR rate in arrears plus 3.9%.

Income Taxes

     Our effective tax rate applied to the pretax loss in the third quarter of 2005 was 44.6%, compared with a tax rate of 30.6% in the prior-year period. Our effective rate for the first 40 weeks ended October 2, 2005 was 18.7% as compared to 32.2% for the same prior year period. Since this rate is lower than the estimated tax rate applied to the first and second quarters, the income tax provision for the third quarter includes a change in estimate of $1.1 million, or $0.05 per diluted share, to adjust the year-to-date amount. The effective tax rate reduction is due to the lower results of operations in the third quarter and the asset impairment charges that were recognized, and because of higher income tax credits, primarily FICA tip credits, relative to the lower year-over-year results of 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, capital leases and sales of common stock. 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 the fact that most of our sales are received as cash or credit card charges, and we have reinvested our cash in new restaurant development. We do not believe this indicates a lack of liquidity. There were ten O’Charley’s and eight Ninety Nine restaurants opened during the 40 weeks ended October 2, 2005. Unlike most restaurant companies, we have a vertically integrated supply chain in which our commissary provides distribution services to all restaurants and manufactures certain items. As we continue to increase the amount of investment we are making in food inventory in our commissary we expect to see a reduction in the negative working capital.

     Our bank credit facility consists of a revolving credit facility with a maximum principal amount of $125.0 million. At October 2, 2005, the outstanding balance on the revolving credit facility was $24.0 million, which excludes approximately $6.1 million in letters of credit which also reduces our capacity on the credit facility. The facility has a four-year term maturing in 2007, and bears interest, at our option, at either LIBOR plus a specified margin ranging from 1.25% to 2.25% based on certain financial ratios or the base rate, which is the higher of the lender’s prime rate and the federal funds rate plus 0.5%, plus a specified margin from 0.0% to 1.0% based on certain financial ratios. As of the end of the third quarter, our LIBOR loans were priced using a margin of 1.25%. The credit facility imposes restrictions on us with respect to the incurrence of additional indebtedness, sales of assets, mergers, acquisitions, joint ventures, investments, repurchases of stock and the payment of dividends. In addition, the credit facility requires us to comply with certain specified financial covenants, including covenants and ratios relating to our senior secured leverage, maximum adjusted leverage, minimum fixed charge coverage, minimum asset coverage and maximum capital expenditures. We were in compliance with such covenants at October 2, 2005. The credit facility contains certain events of default, including an event of default resulting from certain changes in control. All amounts owing under the facility are secured by 100% of our equity interests in each of our existing subsidiaries and substantially all of our subsidiaries’ tangible and intangible assets, other than real property acquired after the date of the credit facility and equipment. The lenders may, under certain circumstances, also require that we pledge such real estate and equipment as collateral.

     From time to time, we have entered into interest rate swap agreements with certain financial institutions. These swap agreements may effectively convert some of our obligations that bear interest at variable rates into fixed-rate obligations and may effectively convert some of our obligations that bear interest at fixed rates into variable-rate obligations. As of October 2, 2005, we had interest rate swap agreements with commercial banks, which effectively fixed the interest rate on $10.0 million of our outstanding variable-rate debt at a weighted-average interest rate of approximately 5.6%. The corresponding floating rates of interest received on those notional amounts are based on one month LIBOR rates and are typically reset on a monthly basis, which is intended to coincide with the pricing adjustments on our credit facility. The swap agreements relating to the $10.0 million of our indebtedness expire in January 2006 and are accounted for as a cash flow hedges. During the first quarter of 2004, we entered into additional interest rate swap agreements with a financial institution that effectively convert a portion of the fixed-rate indebtedness related to the $125 million aggregate principal amount of senior subordinated notes due 2013 into variable-rate obligations. The total notional amount of these swaps was $100.0 million and is based on the six-month LIBOR rate in arrears plus a specified margin, the average of which is 3.9%. The terms and conditions of these swaps mirror the interest terms and conditions on our 9.0% senior subordinated notes due 2013 and are accounted for as fair value hedges. These swap agreements expire in November 2013. The Company’s weighted average interest rate for the third quarter of 2005 and 2004 was 8.5% and 7.1%, respectively.

     In October 2003, we announced an authorization to repurchase up to $25.0 million of our common stock. Any repurchases will be made from time to time in open market transactions or privately negotiated transactions at our discretion. To date, we have not repurchased any shares of our common stock under this authorization. Any repurchases will be funded by cash provided by operations or proceeds from short-term borrowings under our credit facility.

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     In 2005, net cash flows used in investing activities included capital expenditures incurred principally for building new restaurants, improvements to existing restaurants, new equipment and improvements at our commissary, and technological improvements at our home office. During the 40 weeks ended October 2, 2005, new equipment financed through capitalized lease obligations was $4.5 million. New restaurant equipment financed through capitalized lease obligations was $4.9 million for the 40 weeks ended October 3, 2004. Capital expenditures for the 40 weeks ended October 2, 2005 and October 3, 2004, excluding new restaurant equipment financed through capitalized lease obligations, were as follows:

	October 2,		October 3,
	2005		2004
	(In thousands)
New store capital expenditures	$	40,019	$	20,094
Other capital expenditures		14,422		30,496
Total capital expenditures	$	54,441	$	50,590

     We expect the full year 2005 capital expenditures to be below or at the low end of a range of $70.0 million to $80.0 million. As part of our strategic planning process and our focus on improving results in our existing restaurants, we plan to develop and open fewer restaurants in 2006 than we will open in 2005. We expect to have opened 12 or 13 new company-operated O’Charley’s restaurants, 9 or 10 new Ninety Nine restaurants, and one new Stoney River restaurant in 2005.

     The following table sets forth our capital structure and certain financial data as of and for the 40 weeks ended October 2, 2005 and as of and for the year ended December 26, 2004:

	October 2,					December 26,
	2005					2004
	$		%			$		%
	(Dollars in thousands)
Revolving credit facility	$	24,000		4.5	%	$	21,000		4.0	%
Secured mortgage note payable		130		0.0			146		0.0
Capitalized lease obligations		40,330		7.5			44,993		8.7
Total senior debt		64,460		12.0			66,139		12.7
Senior subordinated notes		125,000		23.3			125,000		24.0
Total debt(1)(2)		189,460		35.3			191,139		36.7
Shareholders’ equity		347,531		64.7			330,740		63.3
Total capitalization	$	536,991		100.0	%	$	521,879		100.0	%
Adjusted total debt(1)(3)	$	432,501				$	430,299
Adjusted total capitalization(1)(3)	$	780,032				$	761,039
EBITDA(1)(4)	$	57,757				$	85,955

(1)

We believe EBITDA, total debt, adjusted total debt and adjusted total capitalization are useful measurements to investors because they are commonly used as analytical indicators to evaluate performance, measure leverage capacity and debt service ability. These measures should not be considered as measures of financial performance or liquidity under U.S. generally accepted accounting principles. EBITDA, total debt, adjusted total debt and adjusted total capitalization should not be considered in isolation or as alternatives to financial statement data presented in our consolidated financial statements as an indicator of financial performance or liquidity. EBITDA, total debt, adjusted total debt and adjusted total capitalization, as presented, may not be comparable to similarly titled measures of other companies.

(2)

Total debt represents the sum of long-term debt and capitalized lease obligations, in each case including current portion. The following table reconciles total debt, as described above, to the long-term debt and capitalized lease obligations, in each case including current portion, as reflected in our consolidated balance sheets:

	October 2,		December 26,
	2005		2004
	(In thousands)
Current portion of long-term debt and capitalized leases	$	10,875	$	12,670
Add:
Long-term debt, excluding current portion		149,108		146,125
Capitalized lease obligations, less current portion		29,477		32,344
Total debt	$	189,460	$	191,139

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(3) Adjusted total debt represents the sum of long-term debt and capitalized lease obligations, in each case including current portion, plus the product of (a) rent expense for the 52 weeks ended October 2, 2005 and December 26, 2004, respectively, multiplied by (b) eight. Adjusted total capitalization represents the sum of long-term debt and capitalized lease obligations, in each case including current portion, shareholders’ equity, plus the product of (a) rent expense for the 52 weeks ended October 2, 2005 and December 26, 2004, respectively, multiplied by (b) eight. The following table reconciles adjusted total debt and adjusted total capitalization, as described above, to the long-term debt and capitalized lease obligations, in each case including current portion, shareholders’ equity and rent expense as reflected in our consolidated financial statements and the notes to the consolidated financial statements:

	October 2,		December 26,
	2005		2004
	(In thousands)
Current portion of long-term debt and capitalized leases	$	10,875	$	12,670
Add:
Long-term debt, excluding current portion		149,108		146,125
Capitalized lease obligations, less current portion		29,477		32,344
Total debt		189,460		191,139
Add eight times rent expense:		243,041		239,160
Adjusted total debt		432,501		430,299
Add:
Shareholders’ equity		347,531		330,740
Adjusted total capitalization	$	780,032	$	761,039

(4) EBITDA represents earnings before interest expense, income taxes, and depreciation and amortization. The following table reconciles EBITDA, as described above, to net earnings and to cash flows provided by operating activities as reflected in our consolidated statements of earnings and cash flows:

	40 Weeks		Fiscal Year
	Ended		Ended
	October 2,		December 26,
	2005		2004
	(In thousands)
Net earnings	$	10,391	$	23,319
Add:
Income tax expense		2,384		9,362
Interest expense, net		11,619		13,476
Depreciation and amortization, property and equipment		33,363		39,798
EBITDA	$	57,757	$	85,955

	40 Weeks			Fiscal Year
	Ended			Ended
	October 2,			December 26,
	2005			2004
	(In thousands)
Cash flows provided by operating activities	$	45,921		$	70,498
Adjustment for items included in cash provided by operating activities but excluded from the calculation of EBITDA:
Expense related to equity-based compensation		(470	)		(2,171	)
Deferred income taxes		1,037			464
Loss on sale of assets		(393	)		(215	)
Donation of stock		—			(137	)
Changes in operating assets and liabilities		132			1,413
Changes in long-term assets and liabilities		(531	)		(4,062	)
Tax benefit derived from exercise of stock options		(882	)		(1,224	)
Income tax expense		2,384			9,362
Interest and other expense		10,559			12,027
EBITDA	$	57,757		$	85,955

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     Based upon the current level of operations and anticipated growth, we believe that available cash flow from operations, combined with the available borrowings under our bank credit facility and capitalized lease arrangements, will be adequate to meet the anticipated future requirements for working capital and capital expenditures through at least the next 12 months. We have historically produced insufficient cash flow from operations to fund our working capital and capital expenditures and, accordingly, our ability to meet our anticipated capital needs is dependent on our ability to continue to access external financing, particularly borrowings under our credit facility. In addition, our growth strategy includes possible acquisitions or strategic joint ventures. Any acquisitions, joint ventures or other growth opportunities may require additional external financing. There can be no assurances that such sources of financing will be available to us or that any such financing would not negatively impact our earnings.

Critical Accounting Policies

     In our Annual Report on Form 10-K for the year ended December 26, 2004, we identified our critical accounting policies related to property and equipment, lease accounting, equity-based compensation, excess of cost over fair value of net assets acquired (goodwill), and impairment of long-lived assets. We consider an accounting policy to be critical if it is most important to the portrayal of our 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 2005, there have been no material changes in our critical accounting policies.

Contractual Obligations and Commercial Commitments

     The tables and discussion below set forth certain of our contractual obligations and commercial commitments at October 2, 2005. Other than the items listed and discussed below, no other material changes have occurred in the contractual obligations and commercial commitments disclosed in our Annual Report on Form 10-K for the year ended December 26, 2004.

			Payments Due by Period
			Less						More
			than						than
Contractual Obligations	Total		1 Yr		1-3 Yrs		3-5 Yrs		5 Years
	(in thousands)
Long-term debt	$	149,130	$	22	$	24,052	$	56	$	125,000
Capitalized lease obligations(1)		44,310		12,705		18,422		10,845		2,338

			Amount of Commitment Expiration
			per Period
			Less				More
	Total		than				than
Other Commercial Commitments	Committed		1 Yr	1-3 Yrs		3-5 Yrs	5 Years
	(in thousands)
Revolving credit facility(2)	$	125,000	—	$	125,000	—	—
Guarantee of joint-venture financing(3)	$	15,000	—	$	15,000	—	—

(1)	Capitalized lease obligations include the $4.0 million interest component.
(2)	This pertains to our revolving credit facility of which $24.0 million is included in long-term debt shown above. We have $6.1 million of outstanding letters of credit as of October 2, 2005 which reduces the capacity of the revolving credit facility but is not funded debt. As of October 2, 2005, we have $94.9 million remaining borrowing capacity under our revolving credit facility.
(3)	This pertains to the financing arrangement for franchisees with GE Capital Franchise Finance Corporation and represents our maximum obligation. As of October 2, 2005, there were no loans outstanding under this financing arrangement.

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Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment.” SFAS 123(R) is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. SFAS 123(R) is effective at the beginning of the first annual period beginning after June 15, 2005. In accordance with SFAS 123(R), we will recognize compensation expense in its financial statements based on the fair value of all share-based payments to employees beginning in the first quarter of 2006. We are continuing to evaluate the impact of this standard on its consolidated financial statements.

     In August 2005, the FASB issued FASB Staff Position FSP FAS 123R-1, “Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123R.”In this FSP, the FASB decided to defer the requirements in FASB Statement No. 123 (Revised 2004),Share-Based Payment,that make a freestanding financial instrument subject to the recognition and measurement requirements of other GAAP when the rights conveyed by the instrument are no longer dependent on the holder being an employee. The guidance in this FSP should be applied upon initial adoption of Statement SFAS 123(R). As discussed above we are continuing to evaluate the impact of SFAS 123(R) on our consolidated financial statements and will begin accounting for compensation expense in accordance with SFAS 123(R) in the first quarter of 2006.

     In October 2005, the FASB has issued FASB Staff Position (FSP) FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” The FASB concludes in this FSP that rental costs associated with ground or building operating leases that are incurred during a construction period should be expensed. FASB Technical Bulletin (FTB) No. 88-1,Issues Relating to Accounting for Leases, requires that rental costs associated with operating leases be allocated on a straight-line basis in accordance with FASB Statement No. 13,Accounting for Leases,and FTB 85-3,Accounting for Operating Leases with Scheduled Rent Increases,starting with the beginning of the lease term. The FASB believes there is no distinction between the right to use a leased asset during the construction period and the right to use that asset after the construction period. As discussed in Note 2 of our Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 26, 2004 we have already adopted this accounting guidance based on the letter issued by the Office of the Chief Accountant of the SEC to the American Institute of Certified Public Accountants in February 2005.

IMPACT OF INFLATION

     The impact of inflation on the cost of food, labor, equipment, land construction costs, and fuel/energy costs could adversely affect our operations. A majority of our employees are paid hourly rates related to federal and state minimum wage laws. As a result of increased competition and the low unemployment rates in the markets in which our restaurants are located, we have continued to increase wages and benefits in order to attract and retain management personnel and hourly employees. 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 has had a significant impact on our operating costs. We also believe that increased fuel costs over the past 12 months have had a negative impact on consumer behavior and have increased the cost of operating our commissary. 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.

Outlook

     On October 27, 2005 we announced that we expect to report net earnings per diluted share of between $0.02 and $0.07 for the 12 weeks ending December 25, 2005, and net earnings per diluted share of between $0.47 and $0.52 for the full fiscal year ending December 25, 2005. Projected results for the fourth quarter are based upon anticipated same restaurant sales declines of between 0% and 2% for the O’Charley’s concept, an increase in same restaurant sales for the Ninety Nine concept of between 0% and 2%, and continued pressure on operating margins. We anticipate an effective tax rate of 18.7% for the full fiscal year, compared with 28.6% in 2004, and interest expense between $15.0 million and $16.0 million for the year, compared with $13.5 million in the 2004 fiscal year. Our fourth quarter guidance does not reflect any impact for restructuring or other charges relating to decisions that we may make in the fourth quarter as part of our turnaround efforts. Our 2005 guidance does not reflect any impact from expensing stock awards. We expect to begin expensing stock awards in fiscal 2006 upon adopting SFAS123(R).

     As part of our strategic planning process and our focus on improving results in our existing restaurants, we plan to develop and open fewer restaurants in 2006 than we will open in 2005. We currently plan to open between 2 and 5 new company-operated O’Charley’s restaurants, between 7 and 10 new Ninety Nine restaurants, and 2 or 3 new Stoney River restaurants in 2006. In comparison,

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we expect to have opened 12 or 13 new company-operated O’Charley’s restaurants, 9 or 10 new Ninety Nine restaurants, and one new Stoney River restaurant in 2005.

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. We utilize a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage our exposures to changes in interest rates. Our fixed-rate debt consists primarily of capitalized lease obligations and senior subordinated notes and our variable-rate debt consists primarily of our revolving credit facility.

     As an additional method of managing our interest rate exposure on our credit facility, at certain times we enter into interest rate swap agreements whereby we agree to pay over the life of the swaps a fixed interest rate payment on a notional amount and in exchange we receive a variable-rate payment calculated on the same amount over the same time period. The fixed interest rates are dependent upon market levels at the time the swaps are consummated. The floating interest rates are generally based on the monthly LIBOR rate and rates are typically reset on a monthly basis, which is intended to coincide with the pricing adjustments on our revolving credit facility. At October 2, 2005 and October 3, 2004, we had interest rate swap agreements with a financial institution that effectively converted a portion of the variable-rate revolving line of credit into a fixed-rate obligation. The notional amount of these swaps is $10.0 million and is based on one month LIBOR plus a specified margin ranging from 1.25% to 2.25%. The interest terms of these swaps mirror the interest terms on the debt. These swap agreements expire in January 2006.

     At October 2, 2005 and October 3, 2004, we also had interest rate swap agreements with a financial institution that effectively converted a portion of the fixed-rate indebtedness related to our $125.0 million senior subordinated notes due 2013 into variable-rate obligations. The total notional amount of these swaps is $100.0 million and is based on six-month LIBOR rates in arrears plus a specified margin, the average of which is 3.9%. The terms and conditions of these swaps mirror the interest terms and conditions on the notes. These swap agreements expire in November 2013.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness 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 Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures effectively and timely provide them with material information relating to us and our consolidated subsidiaries required to be disclosed in the reports we file or submit under the Exchange Act.

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, 2005 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

     In September 2003, we became aware that customers and employees at one of our O’Charley’s restaurants located in Knoxville, Tennessee were exposed to the Hepatitis A virus, which resulted in a number of our employees and customers becoming infected. We worked closely with the Knox County Health Department and the Centers for Disease Control and Prevention when we became aware of this incident and cooperated fully with their directives and recommendations. We are aware of 81 individuals who have contracted the Hepatitis A virus, most of whom have been linked to our Knoxville restaurant during the time of the outbreak. As of the date of this filing, we are also aware of 56 lawsuits that have been filed against us, all but one of which have been filed in the Circuit Court for Knox County, Tennessee, that allege injuries or fear of injuries from the Hepatitis A incident. As of November 7, 2005, we and other defendants have entered into agreements to settle 51 of these cases. A number of the remaining suits seek substantial damages, including treble damages under Tennessee consumer protection laws and punitive damages. One of the lawsuits was filed by an individual who contracted Hepatitis A and died following the filing of his lawsuit. This suit has been amended to seek compensatory damages not to exceed $7.5 million and punitive damages not to exceed $10.0 million alleging wrongful death. Other plaintiffs have alleged significant health concerns, including ailments requiring hospitalization.

     As the result of a joint investigation of the Knox County Health Department, the Tennessee Department of Health, the Centers for Disease Control and Prevention and the Food and Drug Administration, the outbreak of the Hepatitis A virus has been associated with eating green onions (scallions).

     While we intend to vigorously defend the litigation that has been filed against us, we are not able to predict the outcome of the litigation that has been filed against us relating to the Hepatitis A outbreak or the amounts that we may be required to pay to settle that litigation or to satisfy any adverse judgments that may be rendered against us. We have liability insurance which has covered our legal costs to date and our share of the 51 cases settled. We believe our liability insurance is in amounts sufficient to cover our liability in the remaining cases filed against us and that the ultimate resolution of these cases will not be material to our results of operations or financial condition. There can be no assurance, however, that our insurance will be sufficient to cover our share of the ultimate loss or liability. If we suffer losses or liabilities in excess of our insurance coverage, there could be a material adverse effect on our results of operations and financial condition. We also have insurance that provides coverage, subject to limitations, for lost income at our restaurants whose results of operations were adversely affected by the Hepatitis A incident. We have submitted a claim pursuant to our insurance coverage for this type of loss, but our carrier has disagreed with our claim. At this point, we cannot reasonably estimate the value of any potential settlement of this claim or the timing thereof.

     In addition, we are a defendant from time to time in various other legal proceedings arising in the ordinary course of 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 and employment matters, discrimination and similar matters; claims resulting from “slip and fall” accidents; claims with respect to insurance recoveries; and claims from customers or employees alleging illness, injury or other food quality, health or operational concerns. We do not believe that any of these legal proceedings pending against us as of the date of this report will have a material adverse effect on our liquidity or financial condition. We may incur or accrue expenses relating to legal proceedings, however, which may adversely affect our results of operations in a particular period.

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Item 6.Exhibits

No.	Description
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Gregory L. Burns, 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 Lawrence E. Hyatt, 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.

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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.
(Registrant)        

Date: November 14, 2005	By:	/s/ Gregory L. Burns
	Gregory L. Burns
	Chairman and Chief Executive Officer
Date: November 14, 2005	By:	/s/ Lawrence E. Hyatt
	Lawrence E. Hyatt
	Chief Financial Officer, Secretary and Treasurer

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