O Charleys 10K 2005 Annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


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

For the fiscal year ended December 25, 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 incorporation or organization)		(I.R.S. Employer Identification No.)

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


Registrant’s telephone number, including area code:		(615) 256-8500

Securities registered pursuant to Section 12(b) of the Act:		None

Securities registered pursuant to Section 12(g) of the Act:		Common Stock, no par value
		Series A Junior Preferred Stock Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filero Accelerated filerþ Non-accelerated filero

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

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $389.2 million. For purposes of this calculation, shares held by non-affiliates excludes only those shares beneficially owned by officers, directors and shareholders beneficially owning 10% or more of the outstanding common stock.

The number of shares of common stock outstanding on March 7, 2006 was 22,914,003.

DOCUMENTS INCORPORATED BY REFERENCE


		Documents from which portions are
Part of Form 10-K		incorporated by reference
Part III		Proxy Statement relating to the registrant’s Annual Meeting of Shareholders to be held May 18, 2006

INDEX


PART I			3
Item 1. Business			3
Item 1A. Risk Factors			12
Item 1B. Unresolved Staff Comments			17
Item 2. Properties			17
Item 3. Legal Proceedings			17
Item 4. Submission of Matters to a Vote of Security Holders			18
PART II			19
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			19
Item 6. Selected Financial Data			19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			43
Item 8. Financial Statements and Supplementary Data			45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			86
Item 9A. Controls and Procedures			86
Item 9B. Other Information			89
PART III			89
Item 10. Directors and Executive Officers of the Registrant			89
Item 11. Executive Compensation			89
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			89
Item 13. Certain Relationships and Related Transactions			89
Item 14. Principal Accountant Fees and Services			89
PART IV			90
Item 15. Exhibits and Financial Statement Schedules			90
SIGNATURES			97
EX-10.15 AMENDED AND RESTATED SEVERANCE COMPENSATION AGREEMENT GREGORY L. BURNS
EX-10.57 SUMMARY OF DIRECTOR AND EXECUTIVE OFFICER COMPENSATION
EX-10.65 LETTER AGREEMENT
EX-10.66 NON-COMPETE/SEVERANCE LETTER AGREEMENT
EX-10.67 SEVERANCE COMPENSATION AGREEMENT
EX-10.68 RESTRICTED STOCK AGREEMENT
EX-10.69 LETTER AGREEMENT
EX-10.70 SEVERANCE COMPENSATION AGREEMENT
EX-10.71 RESTRICTED STOCK AGREEMENT
EX-21 SUBSIDIARIES OF THE COMPANY
EX-23 CONSENT OF KPMG LLP
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

O’CHARLEY’S INC.

PART I


Item 1.		Business.

We are a leading casual dining restaurant company headquartered in Nashville, Tennessee. We own and operate three restaurant concepts which operate under the “O’Charley’s,” “Ninety Nine Restaurant and Pub” and “Stoney River Legendary Steaks” trade names. As of December 25, 2005, we operated 225 O’Charley’s restaurants in 16 states in the Southeast and Midwest regions, 109 Ninety Nine restaurants in eight Northeastern states, and seven Stoney River restaurants in the Southeast and Midwest. As of December 25, 2005, we had four franchised O’Charley’s restaurants located in Michigan and two locations in Louisiana that are operated by a joint venture franchisee in which we have an ownership interest.

Our Restaurant Concepts

O’Charley’s

We acquired the original O’Charley’s restaurant in Nashville, Tennessee in May 1984. O’Charley’s is a casual dining restaurant concept whose strategy is to differentiate its restaurants by serving high-quality, freshly prepared food at moderate prices and with attentive guest service. O’Charley’s restaurants are intended to appeal to a broad spectrum of guests from a diverse income base, including mainstream casual dining guests, as well as upscale casual dining and value oriented guests. The O’Charley’s menu is mainstream, but innovative and distinctive in taste. The O’Charley’s menu features a variety of items including USDA Choice hand-cut and aged steaks, baby-back ribs basted with our own tangy BBQ sauce, fresh salmon, a variety of seafood, salads with special recipe salad dressings and O’Charley’s signature caramel pie. All entrees are cooked to order and feature a selection of side items in addition to our hot, freshly baked yeast rolls. We believe the large number of freshly prepared items on the O’Charley’s menu helps differentiate our O’Charley’s concept from other casual dining restaurants.

O’Charley’s restaurants are open seven days a week and serve lunch, dinner and Sunday brunch and offer full bar service. Specialty menu items include “limited time only” promotions, O’Charley’s Lunch Club, a special kids menu and a “kids eat free” program in selected markets. We are continually developing new menu items for our O’Charley’s restaurants to respond to changing guest tastes and preferences. Lunch entrees range in price from $5.99 to $9.99, with dinner entrees ranging from $6.99 to $17.99. The average check per guest, including beverages, was $11.52 in 2005, $11.52 in 2004, and $11.60 in 2003.

We seek to create a casual, neighborhood atmosphere in our O’Charley’s restaurants through an open layout and exposed kitchen and by tailoring the decor of our restaurants to the local community. The exterior typically features bright red and green neon borders, multi-colored awnings and attractive landscaping. The interior typically is open, casual and well lighted and features warm woods, exposed brick, color prints and hand-painted murals depicting local history, people, places and events. The prototypical O’Charley’s restaurant is a free-standing building ranging in size from approximately 4,900 to 6,800 square feet with seating for approximately 163 to 275 guests, including approximately 60 bar seats. We periodically update the interior and exterior of our restaurants to reflect refinements in the concept and respond to changes in guest tastes and preferences.

Historically, we have grown the O’Charley’s concept through opening new restaurants. As part of the strategic planning process and our focus on improving results in existing restaurants, we have decided to open fewer restaurants in 2006. We opened 13 new company-owned restaurants and closed nine company-owned restaurants in 2005. In 2006, we plan on developing between three and five new company-owned restaurants and five to seven new franchised or joint venture O’Charley’s restaurants.

On January 30, 2006, we announced the hiring of Jeff D. Warne as our new O’Charley’s Concept President. Mr. Warne will be responsible for leading the day-to-day operations at the O’Charley’s concept, including the implementation of programs such as “Project RevO’lution” that is designed to enhance profitability and long-term growth, as well as increase brand value, guest counts and sales. Mr. Warne has substantial experience in the

casual dining industry and is replacing Steven J. Hislop, who resigned as O’Charley’s Concept President and as a member of our Board of Directors.

Ninety Nine Restaurant and Pub

In January 2003, we acquired Ninety Nine Restaurant and Pub, (“Ninety Nine”) a Woburn, Massachusetts based casual dining concept that began in 1952 with its initial location at 99 State Street in downtown Boston. Ninety Nine restaurants are casual dining restaurants that we believe have earned a reputation as friendly, comfortable places to gather and enjoy great American food and drink at a terrific price. Ninety Nine restaurants are intended to appeal to mainstream casual dining and value oriented guests. The Ninety Nine menu features approximately 75 items, including a wide selection of appetizers, soups, salads, sandwiches, burgers, beef, chicken and seafood entrees and desserts. Ninety Nine restaurants offer full bar service, including a wide selection of imported and domestic beers, wines and specialty drinks.

Ninety Nine restaurants are open seven days a week and serve lunch and dinner. Lunch entrees range in price from $5.99 to $9.99, with dinner entrees ranging from $6.29 to $14.99. The average check per guest, including beverages, was $13.69 in 2005, $13.86 in 2004, and $13.78 in 2003.

Ninety Nine restaurants seek to provide a warm and friendly neighborhood pub atmosphere. Signature elements of the prototypical Ninety Nine restaurant include an open view kitchen, booth seating, walls decorated with local community memorabilia and a centrally located rectangular bar. The prototypical Ninety Nine restaurant is a free-standing building of approximately 5,800 square feet in size with seating for approximately 190 guests, including approximately 30 bar seats. Ninety Nine has grown through remodeling traditional and non-traditional restaurant locations as well as through developing new restaurants in the style of our prototype restaurant. During 2006, we plan to open between seven and ten new Ninety Nine restaurants.

Stoney River Legendary Steaks

We acquired Stoney River in May 2000. Stoney River restaurants are upscale steakhouses that are intended to appeal to both upscale casual dining and fine dining guests by offering the high-quality food and attentive guest service typical of high-end steakhouses at more moderate prices. Stoney River restaurants have an upscale “mountain lodge” design with a large stone fireplace, plush sofas and rich woods that is intended to make the interior of the restaurant inviting and comfortable. The Stoney River menu features several offerings of premium Midwestern beef, fresh seafood and a variety of other gourmet entrees. An extensive assortment of freshly prepared salads and side dishes are available a la carte. The menu also includes several specialty appetizers and desserts. Stoney River restaurants offer full bar service, including an extensive selection of wines. The price range of entrees is $16.95 to $32.95. The average check per guest, including beverages, was $40.56 in 2005, $39.53 in 2004 and $37.42 in 2003.

We have established a “managing partner program” for the general managers of our Stoney River restaurants pursuant to which each general manager had the opportunity to acquire a 6% interest in the limited liability company that owns the restaurant that the general manager manages in exchange for a capital contribution to that subsidiary. The general managers at four of the seven Stoney River restaurants each acquired a 6% interest in their restaurant for a capital contribution of $25,000. Upon the fifth anniversary of the managing partner’s capital contribution to the subsidiary, we have the option, but not the obligation, to purchase the managing partner’s 6% interest for fair market value. Under the terms of the agreements between us and each managing partner, fair market value would be determined by negotiations between the parties. If such negotiations did not result in an agreement on value, a third-party appraisal process would be used to determine fair market value. We expect to make changes to this program for future Stoney River restaurants. In 2006, we plan on opening two or three new Stoney River restaurants.

Support Operations

Commissary Operations.We operate an approximately 220,000 square foot commissary in Nashville, Tennessee through which we purchase and distribute a substantial majority of the food products and supplies for our O’Charley’s, Ninety Nine and Stoney River restaurants and manufacture certain

O’Charley’s brand food products for our O’Charley’s restaurants and, to a lesser extent, for sale to other customers, including retail grocery chains, mass merchandisers and wholesale clubs. In addition, our Nashville commissary operates a USDA-approved and inspected facility at which we cut beef for our O’Charley’s and Stoney River restaurants and a production facility at which we manufacture the signature yeast rolls and salad dressings served in our O’Charley’s restaurants. We believe our Nashville commissary has sufficient capacity to meet a substantial majority of the distribution needs of our existing and planned O’Charley’s and Stoney River restaurants for the next several years. We also operate a 20,000 square foot commissary operation located in Woburn, Massachusetts through which we distribute a portion of the food products and supplies for our Ninety Nine restaurants, primarily “center of the plate” items including red meat, poultry and seafood. Our Woburn commissary operates a USDA-approved and inspected facility at which we cut beef tips for our Ninety Nine restaurants and a production facility at which we prepare the soups, sauces and marinades served in our Ninety Nine restaurants. In October 2005, we opened a 78,000 square foot distribution facility in Bellingham, Massachusetts to supply our Ninety Nine concept. Our Bellingham commissary provides us additional storage capacity for our Ninety Nine restaurants, allowing us to further develop and enhance our vertically integrated supply chain. We are currently searching for a senior supply chain executive who will aggressively pursue cost savings opportunities, improve the quality of the products we deliver to our guests, and consider all alternatives for our commissary operations, including whether to retain the commissary as part of our supply chain.

Human Resources.We maintain a human resources department that supports restaurant operations, the restaurant support center, the financial services center and commissary through the design and implementation of policies, programs, procedures and benefits for our team members. The human resources department is responsible for the oversight of team member relations and enforces the alternative dispute resolution process. However, all team members are encouraged to first address any employment related issues or concerns through our open door policies or a toll free 800 number. This department also maintains our code of conduct and addresses possible compliance issues. The human resources area also administers the Team Member Survey and is responsible for identifying issues and developing action plans to resolve any issues that are identified. During 2005, we hired Randy Harris as our Chief Human Resources Officer. Mr. Harris is an experienced human resources executive and is involved in all areas of organizational design, operational effectiveness, compensation programs, recruiting and training. Effective January 1, 2006, all of our human resources functions for the entire company were consolidated under Mr. Harris.

Guest Relations.To better understand our guests’ expectations and experiences, we have implemented the Guest Satisfaction Index (GSI). GSI is a survey based tool that is intended to measure levels of guest satisfaction at each O’Charley’s and Ninety Nine restaurant and to provide immediate feedback at all levels of the organization. Guests are issued an invitation on a random basis through our point-of-sale system to take a telephone survey. Primary focus is placed on identification and improvement oftop boxpredictors of ahighlysatisfied guest experience. Our ability to continuously monitor service levels and satisfaction at the restaurant level, while providing guests with a convenient, brief, unbiased and user friendly way to share their comments, allows us to focus on converting satisfied guests to highly satisfied or truly loyal guests. During 2005, our focus on the primary satisfaction predictors resulted in a significant increase in O’Charley’s percentage of highly satisfied guests as measured by our GSI. Our Ninety Nine concept implemented GSI in April 2005. In addition to measuring and communicating guest satisfaction results, our guest relations team receives direct calls and written correspondence from our O’Charley’s and Ninety Nine guests, ensuring timely and accurate response to all communications.

Advertising and Marketing.We have an ongoing advertising and marketing plan for each of our restaurant concepts for the development of television, radio and newspaper advertising for our restaurants and also use point of purchase and local restaurant marketing. We focus our marketing efforts on building brand loyalty and emphasizing the distinctiveness of our restaurant atmosphere and menu offerings. We conduct annual studies of changes in guest tastes and preferences and are continually evaluating the quality of our menu offerings. In addition to advertising, we encourage restaurant level team members to become active in their communities through local charities and other organizations and sponsorships.

Restaurant Reporting.Our use of technology and management information systems is essential for the management oversight needed to produce strong operating results. During 2005, we began the implementation of a theoretical food cost system through which we expect to more closely monitor waste during the food preparation and execution stages of our operations. We maintain operational and financial controls in each restaurant, including management information systems that monitor sales, inventory, and labor and that provide reports and data to our restaurant support center. The management accounting system polls data from our restaurants and generates daily reports of sales, sales mix, guest counts, check average, cash, labor and food cost. Management utilizes this data to monitor the effectiveness of controls and to prepare periodic financial and management reports. We also utilize these systems for financial and budgetary analysis, including analysis of sales by restaurant, product mix and labor utilization. Our internal audit department audits a sample of our restaurants to measure compliance with our operational systems, procedures and controls. During November 2005, we opened a shared services center that we call the Financial Services Center (FSC) in Brentwood, Tennessee. The FSC has been designed to allow for the integration of the Ninety Nine back office accounting functions along with the current O’Charley’s and Stoney River infrastructure. Beginning in fiscal 2006, most of the Ninety Nine accounting functions will be performed at the FSC with the remaining functions to be transitioned during 2006. We believe that consolidating the accounting functions of our three concepts will provide a structure that creates consistency and provides more centralized control over our accounting and financial reporting functions while at the same time promoting continuous process improvement and savings on the overall cost of support functions.

Real Estate and Construction.We maintain an in-house real estate and construction department to assist in the site selection process, secure real estate, develop architectural and engineering plans, oversee new construction and to remodel existing restaurants. We maintain a broad database of possible sites which we analyze against our site criteria in order to target the best possible locations. Once a site is selected, our real estate department oversees the acquisition process, while our construction department obtains zoning and all other required governmental approvals, develops detailed building plans and specifications and constructs and equips the restaurants. During 2005, we consolidated all of the real estate development functions under James Quackenbush, Corporate Vice-President of Development, who was formerly the Executive Vice-President of Strategic Development for Ninety Nine.

Restaurant Locations

The following table sets forth the markets in which our company-owned O’Charley’s, Ninety Nine and Stoney River restaurants were located at December 25, 2005, including the number of restaurants in each market.

O’Charley’s Restaurants


Alabama (21)	Kentucky (20)	Ohio (19)
Birmingham (6)	Ashland	Cincinnati (7)
Decatur	Bowling Green	Cleveland
Dothan	Cold Spring	Columbus (7)
Florence	Danville	Dayton (3)
Guntersville	Elizabethtown	Harrison
Huntsville (2)	Florence
Mobile (4)	Frankfort	South Carolina (12)
Montgomery (2)	Hopkinsville	Aiken
Opelika	Lexington (4)	Anderson
Oxford	Louisville (5)	Charleston (2)
Tuscaloosa	Owensboro	Columbia (3)
	Paducah	Greenville
Arkansas (3)	Richmond	Greenwood
Fayetteville		Rock Hill
Jonesboro	Louisiana (1)	Simpsonville
Rogers	Monroe	Spartanburg


Florida (6)	Mississippi (8)	Tennessee (35)
Destin	Biloxi	Chattanooga (2)
Jacksonville (3)	Hattiesburg	Clarksville (2)
Panama City	Jackson	Cleveland
Pensacola	Meridian	Cookeville
	Olive Branch	Jackson
Georgia (26)	Pearl	Johnson City
Atlanta (17)	Southhaven	Kingsport
Augusta	Tupelo	Knoxville (5)
Canton		Memphis (3)
Columbus	Missouri (11)	Morristown
Dalton	Cape Girardeau	Murfreesboro (2)
Ft. Oglethorpe	Kansas City (3)	Nashville (13)
Gainesville	St. Louis (7)	Pigeon Forge
Griffin		Springfield
Macon (2)	North Carolina (24)
	Asheville	Virginia (12)
Illinois (5)	Burlington	Bristol
Champaign	Charlotte (8)	Fredericksburg
Marion	Durham	Harrisonburg
O’Fallon	Fayetteville	Lynchburg
Springfield (2)	Greensboro	Roanoke (2)
	Greenville	Richmond (6)
Indiana (20)	Hendersonville
Bloomington	Hickory	West Virginia (2)
Clarksville	Jacksonville	Charleston (2)
Corydon	Raleigh (3)
Evansville (2)	Wilmington (2)
Fort Wayne (2)	Winston-Salem (2)
Indianapolis (11)
Lafayette
Richmond

In addition to the above company-owned locations, as of December 25, 2005, we had four franchise locations in Michigan, and two locations in Louisiana that are operated by a joint venture in which we have a financial interest. The locations of these restaurants are set forth below.

O’Charley’s Franchised and Joint Venture Restaurants


Michigan (4)		Louisiana (2)
Grand Rapids		Lake Charles
Livonia		Lafayette
Chesterfield
Holland

Ninety Nine Restaurants


Connecticut (15)	New Hampshire (14)	Pennsylvania (1)
Enfield	Concord	Trevose (Bensalem)
Groton	Dover
Hartford (8)	Hooksett	Rhode Island (3)
Manchester	Keene	Cranston
New Haven (2)	Littleton	Newport
Norwich	Londonderry	Warwick
Torrington	Manchester
	Nashua	Vermont (2)
Maine (5)	North Conway	Rutland
Augusta	Portsmouth	Williston
Bangor	Salem
Portland (3)	Seabrook
	Tilton
	West Lebanon

Massachusetts (60)	New York (9)
Auburn	Albany (2)
Boston (37)	Clifton Park
Centerville	Kingston
Chicopee	Plattsburgh
Fairhaven	Queensbury
Fall River	Rotterdam
Fitchburg	Saratoga Springs
Holyoke	Utica
Mashpee
North Attleboro
North Dartmouth
Plymouth
Pittsfield
Seekonk
Springfield (4)
Tewksbury
West Yarmouth
Worchester (4)

Stoney River Restaurants


Georgia (2)	Kentucky (1)	Ohio (1)
Atlanta (2)	Louisville	Dublin

Illinois (2)	Tennessee (1)
Chicago (2)	Nashville

Franchising

We seek franchising relationships with successful restaurant operators for the development of O’Charley’s restaurants in areas that are outside of our current growth plans for company-owned restaurants. We have entered into and continue to look to enter into, exclusive multi-unit development agreements with third party franchisees and joint venture partners to open and operate O’Charley’s restaurants. Franchisees and joint venture partners are required to comply with our specifications as to restaurant space, design and décor, menu items, principal food ingredients, team member training and day-to-day operations. The following table illustrates the various agreements that we have executed with our joint venture partners and franchisees along with the contracted markets, the current number of restaurants operated by each joint venture and franchisee and the number of restaurants that they are contractually able to develop:

Total

Restaurants

Franchise / Joint Venture

Current

Contracted for

Program

Entity

Restaurants

Development

Markets

Joint Venture:

JFC Enterprises, LLC

Southern Louisiana and Beaumont, Texas

Wi-Tenn Restaurants, LLC

—

Wisconsin

Franchisee:

Four Star Restaurant Group, LLC

—

Iowa, Nebraska, Topeka, Kansas and Eastern South Dakota

O’Candall Group, Inc.

—

Tampa and Orlando Florida, Pittsburgh, Pennsylvania and Northern Ohio

OCM Development, LLC

Michigan

Service Marks

The name “O’Charley’s” and its logo, the name “Stoney River Legendary Steaks,” and the Ninety Nine Restaurant and Pub logo are registered service marks with the United States Patent and Trademark Office. We also have other service marks that are registered in the states in which we operate. We are aware of names and marks similar to our service marks used by third parties in certain limited geographical areas. Use of our service marks by third parties may prevent us from licensing the use of our service marks for restaurants in those areas. We intend to protect our service marks by appropriate legal action whenever necessary.

Government Regulation

We are subject to various federal, state and local laws affecting our business. Our commissaries are licensed and subject to regulation by the USDA. In addition, each of our restaurants is subject to licensing and regulation by a number of governmental authorities, which may include alcoholic beverage control, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Most municipalities in which our restaurants are located require local business licenses. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. We are also subject to federal and state environmental regulations, but those regulations have not had a material adverse effect on our operations to date.

Approximately 12% of restaurant sales in 2005 were attributable to the sale of alcoholic beverages. Each restaurant, where permitted by local law, has appropriate licenses from regulatory authorities allowing it to sell

liquor, beer and wine, and in some states or localities, to provide service for extended hours and on Sunday. Each restaurant has food service licenses from local health authorities. Similar licenses would be required for each new restaurant. The failure of a restaurant to obtain or retain liquor or food service licenses could adversely affect its operations or, in an extreme case, cause us to close the restaurant. We have established standardized procedures for our restaurants designed to assure compliance with applicable codes and regulations.

We are subject, in most states in which we operate restaurants, to “dram-shop” statutes or judicial interpretations, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.

Many of our markets are seeing changes in laws regarding smoking inside of buildings. These laws can negatively affect our bar business, with ancillary effects on our dining room business.

The federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We design our restaurants to be accessible to the disabled and believe that we are in substantial compliance with all current applicable regulations relating to restaurant accommodations for the disabled.

The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. Our restaurant operations are also subject to federal and state minimum wage laws and other laws governing matters such as working conditions, citizenship requirements, overtime and tip credits. In the event a proposal is adopted that materially increases the applicable minimum wage, the wage increase would likely result in an increase in payroll and benefits expense.

Team Members

As of December 25, 2005, we employed approximately 7,515 full-time and 14,725 part-time team members. None of our team members are covered by a collective bargaining agreement. We have an alternative dispute resolution program in which all team members are required to participate as a condition of employment. We consider our team member relations to be good.

Executive Officers of the Registrant

Our executive officers are elected by the board of directors and serve at the pleasure of the board of directors. The following table sets forth certain information regarding our executive officers.


Name	Age		Position
Gregory L. Burns		51	Chief Executive Officer and Chairman of the Board
Lawrence E. Hyatt		51	Chief Financial Officer, Secretary and Treasurer
Randall C. Harris		55	Chief Human Resources Officer
Jeff D. Warne		45	Concept President — O’Charley’s
Herman A. Moore, Jr.		54	President, Commissary Operations
John R. Grady		53	Concept President-Ninety Nine Restaurant and Pub
Anthony J. Halligan III		47	Concept President-Stoney River Legendary Steaks
R. Jeffrey Williams		39	Chief Accounting Officer and Corporate Controller
James K. Quackenbush		47	Corporate Vice-President of Development

The following is a brief summary of the business experience of each of our executive officers.

Gregory L. Burnshas served as Chief Executive Officer and Chairman of the Board since February 1994. Mr. Burns, a director since 1990, served as President from September 1996 to May 1999 and from May 1993 to February 1994, as Chief Financial Officer from October 1983 to September 1996, and as Executive Vice President and Secretary from October 1983 to May 1993.

Lawrence E. Hyatthas served as Chief Financial Officer, Secretary and Treasurer since November 2004. Prior to joining our company, he was Executive Vice President and Chief Financial Officer of Cole National Corporation from 2002 to 2004. Mr. Hyatt was with PSINet, Inc. as Chief Financial and Restructuring Officer

from 2000 to 2002; with HMS Host Corporation as Chief Financial Officer from 1999 to 2000; and with Sodexho Marriott Services, Inc. and its predecessor company as Chief Financial Officer from 1989 to 1999.

Randall C. Harrishas served as Chief Human Resources Officer since October 2005. Prior to joining our company, he was Senior Vice President of Human Resources for Nextel Communications from 1999 to 2005. Mr. Harris was with Sodexho Marriott Services as Chief Human Resources Officer from 1997 to 1999. Mr. Harris’ earlier experience includes general management and human resource positions with Dun & Bradstreet, First Data Corporation, and American Express.

Jeff D. Warnejoined our company as Concept President-O’Charley’s in February 2006. Mr. Warne joins O’Charley’s after fifteen years with Carlson Companies, Inc. In his most recent assignment at Carlson, Mr. Warne was President and Chief Operating Officer of PickUp Stix from 2005 to 2006, where he was responsible for the overall management of the brand including restaurant operations, franchise operations, marketing, real estate development, commissary operations, finance, human resources and training. Previously, Mr. Warne served as Executive Vice President and Chief Operating Officer of TGI Friday’s International from 2002 to 2004, where he was responsible for the overall management of TGI Friday’s restaurant operations outside of the United States. Mr. Warne’s earlier experience at Carlson includes serving as Chief Financial Officer of Carlson Restaurants Worldwide from 1998 to 2002, Vice President of Business Planning from 1994 to 1998, and Director of Corporate Audit from 1990 to 1994.

Herman A. Moore, Jr.has served as President, Commissary Operations since December 2002. Mr. Moore served as Vice President, Commissary Operations from January 1996 to December 2002. Mr. Moore served as Director of Commissary Operations from 1988 to January 1996.

John R. Gradyhas served as Concept President-Ninety Nine Restaurant and Pub since April 2004. Mr. Grady joined Ninety Nine Restaurant and Pub in March 1975. Prior to being named President, Mr. Grady was Executive Vice President and has also served in various capacities in the Operations, Training and Real Estate Departments over the years.

Anthony J. Halligan IIIwas named Concept President — Stoney River Legendary Steaks in February 2006. Prior to being named President, Mr. Halligan served in the capacity of Vice-President from 2000 until 2006. Prior to his tenure with Stoney River, Mr. Halligan served in various capacities for companies in the restaurant and retail industries.

R. Jeffrey Williamshas served as Chief Accounting Officer since February 2006 and as Corporate Controller since February 2003. Mr. Williams served as Controller for the O’Charley’s Concept from July 2001 to February 2003. Mr. Williams served as Controller of The Krystal Company from July 2000 to July 2001. Mr. Williams served as Director of Financial Planning and Analysis for Cracker Barrel Old Country Store from July 1999 to July 2000 and as Accounting Manager for Cracker Barrel Old Country Store from November 1996 to July 1999. Mr. Williams is a certified public accountant.

James K. Quackenbushhas served as Corporate Vice-President of Development since December 2005. Mr. Quackenbush served as Executive Vice-President of Strategic Development for the Ninety Nine concept from May 2002 to November 2005. Prior to joining Ninety Nine he served in various management positions at McDonalds Corporation for over fifteen years.

Available Information

We file reports with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E.,, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an Internet site at http://www.sec.govthat contains the reports, proxy and information statements, and other information filed electronically. Our website address iswww.ocharleysinc.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge through our website the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on

our website is not part of this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report.

We have posted our Corporate Governance Guidelines, Code of Conduct and Business Ethics Policy for directors, officers and team members, and the charters of our Audit, Compensation and Human Resources and Nominating and Corporate Governance Committees of the board of directors on our website atwww.ocharleysinc.com. Copies of our corporate governance materials are available free of charge upon request by any shareholder to our Corporate Secretary, O’Charley’s Inc., 3038 Sidco Drive, Nashville, Tennessee 37204.


Item 1A.		Risk Factors.

Risk Factors

Some of the statements we make in this Annual Report on Form 10-K are forward-looking. Forward-looking statements are generally identifiable by the use of the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend,” “seek” or similar expressions. These forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief, plans or expectations including, but not limited to, the discussions of our operating and growth strategy, projections of revenue, income or loss, information regarding future restaurant openings and capital expenditures, potential increases in food and other operating costs, and our development, expansion, franchising and joint venture plans and future operations. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements. Those risks and uncertainties include, among others, the risks and uncertainties discussed below. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could prove to be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this Annual Report on Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We do not undertake any 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.

Changing consumer preferences and discretionary spending patterns could force us to modify our concepts and menus and could result in a reduction in our revenues.

Our O’Charley’s and Ninety Nine restaurants are casual dining restaurants that feature menus intended to appeal to a broad spectrum of guests. Our Stoney River restaurants are upscale steakhouses that feature steaks, fresh seafood and other gourmet entrees. Our continued success depends, in part, upon the popularity of these foods and these styles of dining. Shifts in consumer preferences away from this cuisine or dining style could materially adversely affect our future operating results. The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes and eating and purchasing habits. Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and eating and purchasing habits, as well as other factors affecting the restaurant industry, including new market entrants and demographic changes. We may be forced to make changes in our concepts and menus in order to respond to changes in consumer tastes or dining patterns. If we change a restaurant concept or menu, we may lose guests who do not prefer the new concept or menu, and may not be able to attract a sufficient new guest base to produce the revenue needed to make the restaurant profitable. In addition, consumer preferences could be affected by health concerns about the consumption of beef, the primary item on our Stoney River menu, or by specific events such as E. coli food poisoning or outbreaks of bovine spongiform encephalopathy (mad cow disease) or other diseases.

Our success is also dependent to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse

changes in these factors could reduce guest traffic or impose practical limits on pricing, either of which could harm our results of operations.

We may experience higher operating costs, which would adversely affect our operating results, if we cannot increase menu prices to cover them.

Our operating results are significantly dependent on our ability to anticipate and react to increases in food, labor, team member benefits, energy and other costs. Various factors beyond our control, including adverse weather conditions (including hurricanes), governmental regulation, production, availability, recalls of food products and seasonality may affect our food costs or cause a disruption in our supply chain. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results. In addition, because the pricing strategy at our O’Charley’s and Ninety Nine restaurants is intended to provide an attractive price-to-value relationship, we may not be able to pass along price increases to our guests.

We compete with other restaurants for experienced management personnel and hourly team members. Each of our concepts now offers medical benefits to hourly team members, which has increased our benefit costs. In addition, any increase in the federal minimum wage rate would likely cause an increase in our labor costs. We cannot assure you that we will be able to offset increased wage and benefit costs through our purchasing and hiring practices or menu price increases, particularly over the short term. As a result, increases in wages and benefits could have a material adverse effect on our business.

Our continued growth depends on our ability to open new restaurants and operate our new restaurants profitably, which in turn depends upon our continued access to capital.

A significant portion of our historical growth has been due to opening new restaurants. We opened 13 new company-owned O’Charley’s restaurants, ten new Ninety Nine restaurants and one new Stoney River restaurant in 2005. We currently plan to open between three and five new company-owned O’Charley’s restaurants, between seven and ten new Ninety Nine restaurants, and two or three new Stoney River restaurants in 2006. Our ability to open new restaurants will depend on a number of factors, such as:

	•		the selection and availability of quality restaurant sites;

	•		our ability to negotiate acceptable lease or purchase terms;

	•		our ability to hire, train and retain the skilled management and other personnel necessary to open, manage and operate new restaurants;

	•		our ability to secure the governmental permits and approvals required to open new restaurants;

	•		our ability to manage the amount of time and money required to build and open new restaurants, including the possibility that adverse weather conditions may delay construction and the opening of new restaurants; and

	•		the availability of adequate financing.

Many of these factors are beyond our control. In addition, we have historically generated insufficient cash flow from operations to fund our working capital and capital expenditures and, accordingly, our ability to open new restaurants and our ability to grow, as well as our ability to meet other anticipated capital needs, is dependent on our continued access to external financing, including borrowings under our credit facility and financing obtained in the capital markets. Our ability to make borrowings under our credit facility will require, among other things, that we comply with certain financial and other covenants, and we cannot assure you that we will be able

to do so. Accordingly, we cannot assure you that we will be successful in opening new restaurants in accordance with our current plans or otherwise. Furthermore, we cannot assure you that our new restaurants will generate revenues or profit margins consistent with those of our existing restaurants, or that the new restaurants will be operated profitably.

Our growth may strain our management and infrastructure, which could slow our development of new restaurants and adversely affect our ability to manage existing restaurants.

Our growth has placed significant demands upon our management. We also face the risk that our existing systems and procedures, restaurant management systems, financial controls and information systems will be inadequate to support our planned growth. We cannot predict whether we will be able to respond on a timely basis to all of the changing demands that our planned growth will impose on management and these systems and controls. In May 2000, we acquired Stoney River and, in January 2003, we acquired Ninety Nine. The development of the Stoney River concept and the integration and operation of the Ninety Nine concept will continue to place significant demands on our management. These demands on our management and systems could also adversely affect our ability to manage our existing restaurants. If our management is unable to meet these demands or if we fail to continue to improve our information systems and financial controls or to manage other factors necessary for us to achieve our growth objectives, our operating results or cash flows could be materially adversely affected.

Unanticipated expenses and market acceptance could affect the results of restaurants we open in new and existing markets.

As part of our growth plans, we may open new restaurants in areas in which we have little or no operating experience and in which potential guests may not be familiar with our restaurants. For example, in the fourth quarter of fiscal 2005, we expanded our Ninety Nine concept into the Philadelphia, Pennsylvania market. As a result, we have incurred and may continue to incur costs related to the opening, operation, supervision and promotion of those new restaurants that are substantially greater than those incurred in other areas. Even though we may incur substantial additional costs with these new restaurants, they may attract fewer guests than our more established restaurants in existing markets. As a result, the results of operations at new restaurants may be inferior to those of our existing restaurants. The new restaurants may even operate at a loss.

Another part of our growth plan is to open restaurants in markets in which we have existing restaurants. We may be unable to attract enough guests to the new restaurants for them to operate at a profit. Even if we are able to attract enough guests to the new restaurants to operate them at a profit, those guests may be former guests of one of our existing restaurants in that market and the opening of a new restaurant in the existing market could reduce the revenue of our existing restaurants in that market.

We could face labor shortages that could adversely affect our results of operations.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified team members, including restaurant managers, kitchen staff and servers, necessary to continue our operations and to keep pace with our growth. Qualified individuals of the requisite caliber and quantity needed to fill these positions are in short supply. Given the low unemployment rates in certain areas in which we operate, we may have difficulty hiring and retaining qualified management and other personnel. Any inability to recruit and retain sufficient qualified individuals may adversely affect operating results at existing restaurants and delay the planned openings of new restaurants. Any delays in opening new restaurants or any material increases in team member turnover rates in existing restaurants could have a material adverse effect on our business, financial condition, operating results or cash flows. Additionally, we have increased wages and benefits to attract a sufficient number of competent team members, resulting in higher labor costs.

Our restaurants are concentrated geographically; if any one of the regions in which our restaurants are located experiences an economic downturn, adverse weather or other material change, our business results may suffer.

Our O’Charley’s restaurants are located predominately in the Southeastern and Midwestern United States. Our Ninety Nine restaurants are located in the Northeastern United States. As of December 25, 2005, we operated 35 of our 225 O’Charley’s restaurants in Tennessee and 60 of our 109 Ninety Nine restaurants in Massachusetts. As a result, our business and our financial or operating results may be materially adversely affected by adverse economic, weather or business conditions in these markets, as well as in other geographic regions in which we locate restaurants.

Our restaurants may not be able to compete successfully with other restaurants, which could adversely affect our results of operations.

The restaurant industry is intensely competitive with respect to price, service, location, nutritional and dietary trends and food quality, and there are many well-established competitors with substantially greater financial and other resources than us, including a large number of national and regional restaurant chains. Some of our competitors have been in existence for a substantially longer period than us and may be better established in the markets where our restaurants are or may be located. If our restaurants are unable to compete successfully with other restaurants in new and existing markets, our results of operations will be adversely affected.

To the extent that we open restaurants in larger cities and metropolitan areas, we expect competition to be more intense in those markets. We also compete with other restaurants for experienced management personnel and hourly team members and with other restaurants and retail establishments for quality sites.

Any disruption in the operation of our commissaries could adversely affect our ability to operate our restaurants.

We operate a commissary in Nashville, Tennessee through which we purchase and distribute a substantial majority of the food products and supplies for our O’Charley’s and Stoney River restaurants. We also operate facilities in Woburn and Bellingham, Massachusetts, through which we purchase and distribute a portion of the food products and supplies for our Ninety Nine restaurants. If the operations of our commissaries are disrupted, we may not be able to deliver food and supplies to our restaurants. If our commissaries are unable to deliver the food products and supplies required to run our restaurants, we may not be able to find other sources of food or supplies, or, if alternative sources of food or supplies are located, our operating costs may increase. Accordingly, any disruption in the operation of our commissaries could adversely affect our ability to operate our restaurants and would adversely affect our results of operations.

We may incur costs or liabilities and lose revenue as the result of government regulation.

Our restaurants are subject to extensive federal, state and local government regulation, including regulations related to the preparation and sale of food (such as regulations regarding labeling, allergens content and other menu information regarding nutrition), the sale of alcoholic beverages, zoning and building codes and other health, sanitation and safety matters. All of these regulations impact not only our current restaurant operations but also our ability to open new restaurants. We will be required to comply with applicable state and local regulations in new locations into which we expand. Any difficulties, delays or failures in obtaining licenses, permits or approvals in such new locations could delay or prevent the opening of a restaurant in a particular area or reduce operations at an existing location, either of which would materially and adversely affect our growth and results of operations. In addition, our commissaries are licensed and subject to regulation by the United States Department of Agriculture and are subject to further regulation by state and local agencies. Our failure to obtain or retain federal, state or local licenses for our commissaries or to comply with applicable regulations could adversely affect our commissary operations and disrupt delivery of food and other products to our restaurants. If one or

more of our restaurants were unable to serve alcohol or food for even a short time period, we could experience a reduction in our overall revenue.

The costs of operating our restaurants may increase if there are changes in laws governing minimum hourly wages, workers’ compensation insurance rates, unemployment tax rates, sales taxes or other laws and regulations, such as the federal Americans with Disabilities Act, which governs access for the disabled. If any of the above costs increase, we cannot assure you that we will be able to offset the increase by increasing our menu prices or by other means, which would adversely affect our results of operations.

We may incur costs or liabilities as a result of litigation and publicity concerning food quality, health and other issues that can also cause guests to avoid our restaurants.

We are subject to complaints or litigation from time to time from guests alleging illness, injury or other food quality or health concerns. Litigation or adverse publicity resulting from these allegations may materially adversely affect us or our restaurants, regardless of whether the allegations are valid or whether we are liable. We were subject to numerous lawsuits arising out of the exposure in September 2003 of our guests and employees at one of our O’Charley’s restaurants located in Knoxville, Tennessee to the Hepatitis A virus. See “Item 3-Legal Proceedings.” In addition, we are subject to litigation under “dram shop’’ laws that allow a person to sue us based on any injury or death caused by an intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. While we maintain insurance for lawsuits under a dram shop law or alleging illness or injury from food, we have significant deductibles under such insurance and any such litigation may result in a verdict in excess of our liability insurance policy limits, which could result in substantial liability for us and may have a material adverse effect on our results of operations.

In addition, we are a defendant from time to time in various legal proceedings, including 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. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. We do not believe that any of the 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.

Compliance with and any failure to comply with current regulatory requirements will result in additional expenses and may adversely affect us.

Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, Securities and Exchange Commission regulations and NASDAQ Stock Market rules, has required an increased amount of management attention and external resources. We remain committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment has resulted in and we expect will continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

We are dependent upon our senior management team to execute our business strategy.

Our operations and our ability to execute our plans are highly dependent on the efforts of our senior management team. Many of the members of our senior management team do not have long tenures with us, including, in particular, our Chief Financial Officer who joined us in January 2005, our Chief Human Resources Officer who joined us in October 2005 and our Concept President-O’Charley’s who joined us in February 2006.

Although certain of the members of our senior management team have employment agreements with us, these agreements may not provide sufficient incentives for these officers to continue employment with us. The loss of one or more of the members of our senior management team could adversely affect our business. We do not maintain key man insurance on any of the members of our senior management team.


Item 1B.		Unresolved Staff Comments.

None.


Item 2.		Properties.

As of December 25, 2005, we operated 225 O’Charley’s restaurants, 109 Ninety Nine restaurants and seven Stoney River Legendary Steak restaurants. As of that date, we owned the land and building at 95 of our O’Charley’s restaurants, leased the land and building at 46 of our O’Charley’s restaurants and leased the land only at 84 of our O’Charley’s restaurants. We lease the land and building at 84 of our Ninety Nine restaurants and lease the land only at 25 of our Ninety Nine restaurants. We own the land and building at four of our Stoney River restaurants and lease the land only at our other three Stoney River restaurants. See “Item 1—Business—Restaurant Locations” above. Restaurant lease expirations range from 2006 to 2025, with the majority of the leases providing for an option to renew for additional terms ranging from five to 20 years. All of our restaurant leases provide for a specified annual rental, and some leases call for additional rental based on sales volume at the particular location over specified minimum levels. Generally, our restaurant leases are net leases, which require us to pay the cost of insurance and taxes.

Our primary commissary is located in Nashville, Tennessee in approximately 290,000 square feet of office and warehouse space. We own this facility. We also have administrative offices in Woburn, Massachusetts and a commissary located in approximately 20,000 square feet of space. We lease these facilities. We also lease a distribution facility with approximately 78,000 square feet of space in Bellingham, Massachusetts for our Ninety Nine concept. We opened this distribution facility in October 2005. During 2005, we entered into a five-year lease for approximately 16,000 square feet in Brentwood, Tennessee to be used as the Financial Services Center (FSC). We opened the FSC in November 2005.


Item 3.		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. A total of 56 lawsuits were filed against us, all but one of which were filed in the Circuit Court for Knox County, Tennessee, that alleged injuries or fear of injuries from the Hepatitis A incident. As of the date of this filing, all of these cases have been settled and dismissed. We have liability insurance which covered our legal costs and substantially all of our share of the cases settled.

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 policy for this type of loss, but our carrier has disagreed with our claim. On July 11, 2005, certain underwriters at Lloyd’s, our insurance carrier, filed suit against us in the Circuit Court for Knox County, Tennessee seeking declaration by the court regarding certain limits in this policy which would effectively limit our recovery under the policy to $100,000. We have filed an answer and counterclaim requesting that the court declare that our coverage is not limited as asserted by the carrier. At this point, we cannot reasonably estimate the value of any potential resolution of this claim or the timing thereof.

We are also involved in an arbitration in the matter of Ballantyne Village, LLC v. O��Charley’s Inc. filed in April 2005. Ballantyne Village, LLC has alleged that we breached a lease on a retail center for a proposed Stoney River Legendary Steaks restaurant in Charlotte, North Carolina. We believe we terminated this lease

prior to the commencement of our tenancy in accordance with its terms and that the counterparty’s claims are without merit. We intend to defend the allegations against us in this matter vigorously.

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 the 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.


Item 4.		Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of shareholders during the fourth quarter ended December 25, 2005.

PART II


Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock trades on the NASDAQ National Market under the symbol “CHUX.” As of March 7, 2006, there were approximately 3,450 shareholders of record of our common stock. The following table shows quarterly high and low bid prices for our common stock for the periods indicated, as reported by the NASDAQ National Market.


	High		Low
Fiscal 2005
First Quarter	$	22.89	$	17.62
Second Quarter		22.56		16.32
Third Quarter		19.70		13.97
Fourth Quarter		15.77		12.69

Fiscal 2004
First Quarter	$	20.88	$	16.55
Second Quarter		20.34		16.40
Third Quarter		18.08		14.58
Fourth Quarter		19.41		14.27

We have never paid a cash dividend on our common stock. Our credit facility limits the payment of cash dividends on our common stock without the consent of the participating banks.

On January 27, 2003, we issued 941,176 shares of common stock to the former owners of Ninety Nine as part of the purchase price of the acquisition of Ninety Nine Restaurant and Pub. We issued an additional 390,586 shares in January 2004, 407,843 shares in January 2005 and 407,843 shares in January 2006 and are required to issue an additional 94,118 shares on each of the fourth and fifth anniversaries of the closing. The issuance of the shares to the former owners of Ninety Nine was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933.

In connection with his employment, on October 3, 2005, we granted Randall C. Harris, our Chief Human Resources Officer, an aggregate of 20,000 shares of restricted stock that will vest ratably over three years. These restricted stock awards constitute inducement awards under NASDAQ Marketplace Rule 4350. The issuance of the shares of restricted stock to Mr. Harris was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933.


Item 6.		Selected Financial Data.

The selected financial data presented below under the captions “Statement of Operations Data” and “Balance Sheet Data” for, and as of the end of, each of the fiscal years in the five-year period ended December 25, 2005, were derived from the consolidated financial statements of O’Charley’s Inc. and subsidiaries. The selected data should be read in conjunction with the consolidated financial statements as of December 25, 2005 and December 26, 2004 and for each of the years in the three-year period ended December 25, 2005, and the related notes thereto appearing in this Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

When you read this financial data, it is important that you also read the consolidated financial statements and related notes included in this Form 10-K, as well as the section of this report entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations. Historical results are not necessarily indicative of future results.


	Fiscal Years
	2005			2004			2003(1)			2002			2001
	(In thousands, except per share data)
Statement of Operations Data:
Revenues:
Restaurant sales	$	921,329		$	864,259		$	753,740		$	495,112		$	440,875
Commissary sales		8,498			7,035			5,271			4,800			4,056
Franchise revenue		361			92			—			—			—

		930,188			871,386			759,011			499,912			444,931

Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		277,788			261,013			221,206			140,638			129,576
Payroll and benefits		318,524			290,514			252,415			154,311			138,009
Restaurant operating costs		172,160			157,491			139,205			86,006			76,575
Cost of commissary sales		7,710			6,631			4,970			4,488			3,808
Advertising expenses,		25,468			25,621			24,300			16,973			13,255
General and administrative expenses		41,945			38,237			28,016			20,725			16,682
Depreciation and amortization, property and equipment		43,806			39,798			36,360			25,527			22,135
Asset impairment and disposals(2)		7,320			16			(180	)		(139	)		5,666
Pre-opening costs		6,271			5,908			6,900			5,629			6,126

		900,992			825,229			713,192			454,158			411,832

Income from Operations		29,196			46,157			45,819			45,754			33,099
Other Expense:
Interest expense, net		15,124			13,476			14,153			5,556			6,610
Debt extinguishment charge		—			—			1,800			—			—
Other, net		42			—			(584	)		—			363

		15,166			13,476			15,369			5,556			6,973

Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle		14,030			32,681			30,450			40,198			26,126
Income Taxes		2,001			9,362			9,261			13,942			9,072

Earnings Before Cumulative Effect of Change in Accounting Principle		12,029			23,319			21,189			26,256			17,054
Cumulative Effect of Change in Accounting Principle, net of tax(3)		(151	)		—			—			(6,123	)		—

Net Earnings	$	11,878		$	23,319		$	21,189		$	20,133		$	17,054

Basic Earnings Per Common Share Before Cumulative Effect of Change in Accounting Principle	$	0.53		$	1.05		$	0.98		$	1.41		$	0.96
Cumulative effect of Change in Accounting Principle, net of tax(3)		(0.01	)		—			—			(0.33	)		—

Basic Earnings Per Common Share	$	0.52		$	1.05		$	0.98		$	1.08		$	0.96

Diluted Earnings Per Common Share Before Cumulative Effect of Change in Accounting Principle	$	0.52		$	1.03		$	0.96		$	1.33		$	0.90
Cumulative Effect of Change in Accounting Principle, net of tax(3)		(0.01	)		—			—			(0.31	)		—

Diluted Earnings Per Common Share	$	0.51		$	1.03		$	0.96		$	1.02		$	0.90

Balance Sheet Data (at end of period):
Working capital (deficit)	$	(24,336	)	$	(30,986	)	$	(30,284	)	$	(21,388	)	$	(15,552	)
Total assets		687,610			657,511			620,673			428,400			383,100
Current portion of long-term debt and capitalized lease obligations		10,975			12,670			10,031			8,015			7,924
Long-term debt and capitalized lease obligations, including current portion		185,682			191,139			209,629			132,102			121,929
Total shareholders’ equity		349,588			330,740			300,187			227,560			201,872


(1)		On January 27, 2003, we acquired Ninety Nine Restaurant and Pub, a casual dining restaurant company based in Woburn, Massachusetts. Our fiscal 2003 earnings include the earnings of Ninety Nine for the period from January 27, 2003 through December 28, 2003.


(2)		During 2005, we took an impairment charge on two O’Charley’s restaurants that remain open and decided to close six O’Charley’s restaurants and sell a company aircraft. As a result, we recorded a non-cash impairment charge of $7.1 million to reflect the difference between the fair value and net book value of the underlying assets. During the third quarter of fiscal 2001, we decided to close certain restaurant locations. As a result, we recorded a non-cash impairment charge of $5.0 million to reflect the differences between the fair value and net book value of the underlying assets and a charge of $800,000 for exit costs associated with the closure of such locations.

(3)		In 2005, we incurred an after-tax charge of $0.2 million, or $0.01 per diluted share, which was recorded as a cumulative effect of a change in accounting principle for 2005 associated with the adoption of FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of Statement of Financial Accounting Standards No. 143.” In 2002, we incurred an after-tax charge of $6.1 million, or $0.31 per diluted share, which was recorded as a cumulative effect of a change in accounting principle as of the beginning of fiscal 2002 associated with the adoption of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”. The charge was related to the impairment of goodwill associated with the Stoney River acquisition in May 2000.


Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Fiscal years end on the last Sunday of the calendar year. Fiscal 2005, 2004 and 2003 each consisted of 52 weeks. Fiscal 2006 will be a 53 week year. We have one reportable segment.

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

Revenuesconsist of restaurant sales and, to a lesser extent, commissary sales and franchise revenue. 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. Our development fees for franchisees in which we do not have an ownership interest are generally $50,000 for the first two restaurants and $25,000 for each additional restaurant opened by the franchisee. The development fees are recognized during the reporting period in which the developed restaurant 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 19% to 21% and 8% to 10%, respectively, of our overall cost of food and beverage. Generally, temporary increases in these costs are not passed on to guests; however, in the past, we have adjusted menu prices to compensate for increased costs of a more permanent nature.

Payroll and Benefitsinclude payroll and related costs and expenses directly relating to restaurant level activities including restaurant management salaries and bonuses, hourly wages for restaurant level team members, 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.

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 the costs of restaurant support center 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 we have waived any contingencies regarding use of the leased property and the date on which the restaurant opens. The amount of pre-opening costs incurred in any one period includes costs incurred during the period for restaurants opened and under development. Our pre-opening costs may vary significantly from period to period primarily due to the timing of restaurant openings.

Results of Operations

The following information should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere herein. The following table reflects our operating results for fiscal years 2005, 2004, and 2003 as a percentage of total revenues unless otherwise indicated. All fiscal years presented were comprised of 52 weeks.


	2005			2004			2003
Revenues:
Restaurant sales		99.0	%		99.2	%		99.3	%
Commissary sales		0.9			0.8			0.7
Franchise revenue		0.1			0.0			0.0

		100.0	%		100.0	%		100.0	%

Costs and Expenses:
Cost of restaurant sales:(1)
Cost of food and beverage		30.2	%		30.2	%		29.3	%
Payroll and benefits		34.6			33.6			33.5
Restaurant operating costs		18.7			18.2			18.5
Cost of commissary sales(2)		0.8			0.8			0.7
Advertising expenses		2.7			2.9			3.2
General and administrative expenses		4.5			4.4			3.7
Depreciation and amortization, property and equipment		4.7			4.6			4.8
Asset impairment and disposals		0.8			—			—
Pre-opening costs		0.7			0.7			0.9
Income from Operations		3.1			5.3			6.1
Interest expense, net		1.6			1.5			1.9
Debt extinguishment charge		—			—			0.2
Other, net		—			—			—

Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle		1.5			3.8			4.0
Income Taxes		0.2			1.1			1.2

Earnings Before Cumulative Effect of Change in Accounting Principle		1.3			2.7			2.8
Cumulative Effect of Change in Accounting Principle, net of tax		—			—			—

Net Earnings		1.3	%		2.7	%		2.8	%


(1)		As a percentage of restaurant sales.

(2)		Cost of commissary sales as a percentage of commissary sales was 90.7%, 94.3%, and 94.3% for fiscal years 2005, 2004, and 2003, respectively.

The following information should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere herein. The following table reflects the margin performance of each of our concepts for fiscal years 2005, 2004, and 2003 as a percentage of restaurant sales for each respective concept. All fiscal years presented were comprised of 52 weeks.


	2005			2004			2003
	($ in millions)
O’Charley’s Concept:
Restaurant Sales:	$	614.2		$	588.9		$	526.4

Cost and expenses
Cost of food and beverage		30.0	%		30.2	%		29.2	%
Payroll and benefits		34.8	%		33.8	%		33.3	%
Restaurant operating costs		18.4	%		18.2	%		18.6	%

Ninety Nine Concept:
Restaurant Sales:	$	282.2		$	251.9		$	205.5

Cost and expenses
Cost of food and beverage		29.7	%		29.6	%		28.8	%
Payroll and benefits		34.9	%		33.9	%		34.2	%
Restaurant operating costs		18.9	%		18.0	%		17.4	%

Stoney River Concept:
Restaurant Sales:	$	24.9		$	23.5		$	21.9

Cost and expenses
Cost of food and beverage		39.0	%		35.6	%		37.1	%
Payroll and benefits		24.6	%		25.2	%		28.2	%
Restaurant operating costs		23.0	%		21.6	%		22.4	%

The following tables set forth certain unaudited financial and other restaurant data relating to company-owned restaurants, unless otherwise specified:


	2005			2004			2003
Number of Restaurants:
O’Charley’s Restaurants:
In operation, beginning of year		221			206			182
Restaurants opened		13			15			26
Restaurants closed		(9	)		—			(2	)

In operation, end of year		225			221			206

Ninety Nine Restaurants:
In operation, beginning of year		99			87			78
Restaurants opened		10			12			10
Restaurants closed		—			—			(1	)

In operation, end of year		109			99			87

Stoney River Restaurants:
In operation, beginning of year		6			6			6
Restaurants opened		1			—			—

In operation, end of year		7			6			6

Franchise / Joint Venture Restaurants (O’Charley’s):
In operation, beginning of year		2			—
Restaurants opened		4			2

In operation, end of year		6			2


Average Weekly Sales per Restaurant:
O’Charley’s	$	52,254		$	52,703		$	51,467
Ninety Nine		52,619			52,777			52,033
Stoney River		77,283			75,267			70,277

Change in Same Restaurant Sales(1):
O’Charley’s		0.0	%		3.1	%		(2.5	)%
Ninety Nine		0.7	%		1.3	%		1.1	%
Stoney River		3.7	%		6.4	%		1.6	%

Change in Same Restaurant Guest Visits(1):
O’Charley’s		0.1	%		3.9	%		(2.3	)%
Ninety Nine (2)		1.4	%		(1.7	)%		—
Stoney River		1.1	%		1.1	%		—

Average Check per Guest(3):
O’Charley’s	$	11.52		$	11.52		$	11.60
Ninety Nine		13.69			13.86			13.78
Stoney River		40.56			39.53			37.42


(1)		When computing same restaurant sales and guest visits, restaurants open for at least 78 weeks are compared from period to period. The calculation of change in same restaurant sales and guest visits for 2005 excludes the prior year sales and guest visits for O’Charley’s restaurants closed during or after Hurricane Katrina, for the days they were closed.

(2)		Change in same restaurant guest visits is not available for Ninety Nine prior to 2004 as the O’Charley’s methodology of counting guest visits was adopted subsequent to the completion of the acquisition and we are unable to recast 2003 visits using that same methodology.


(3)		The average check per guest is computed using all restaurants open at the end of the year.

Fiscal Year 2005 Compared with Fiscal Year 2004

Revenues

During 2005, total revenues increased $58.8 million, or 6.7%, to $930.2 million from $871.4 million in 2004. In 2005, we averaged 337 restaurants in operation per quarter as compared to 317 restaurants in operation per quarter in 2004.

O’Charley’s restaurant sales increased $25.3 million, or 4.3%, to $614.2 million during 2005, as a result of the net addition of four new restaurants during 2005. Same restaurant sales were flat for the year.

Ninety Nine restaurant sales increased $30.3 million, or 12.0%, to $282.2 million during 2005. The year-over-year sales increase was primarily related to a same restaurant sales increase of 0.7% and the addition of ten new restaurants during 2005. The same restaurant sales increase was comprised of a 1.4% increase in guest counts offset by a decrease in check average of 0.7%.

Stoney River restaurant sales increased $1.4 million, or 6.0%, to $24.9 million during 2005, as a result of same restaurant sales increases of 3.7%. The 3.7% same restaurant sales increase was comprised of a 2.6% improvement in the average check and a 1.1% increase in guest counts.

Cost of Food and Beverage

While our cost of food and beverage in 2005 was flat with 2004 as a percentage of sales it was higher than we anticipated, due in part to our traffic-building promotions, higher distribution costs and higher costs associated with the opening of the Bellingham distribution center. Reductions in poultry costs were offset by increases in produce costs resulting from weather related crop damage, and increased seafood costs. We continue to benefit from our practice of buying ahead on volatile commodities to take advantage of predictable seasonal price fluctuations.

Payroll and Benefits

During 2005, payroll and benefits increased 100 basis points as a percentage of restaurant sales compared to the same prior-year period. Higher average wage and benefit rates and declines in productivity contributed to the increase as well as an increase in the hourly health care plans in 2005 as compared to 2004.

Restaurant Operating Costs

Restaurant operating costs as a percentage of restaurant sales increased 50 basis points during 2005. Increases in packaging costs, higher energy costs and repairs and maintenance costs resulted in the year-over-year increase. The higher packaging costs were the result of an increase in packaging material costs combined with increases in our to-go sales. The increase in energy costs were primarily associated with natural gas price increases.

Advertising Expenses

During 2005, our advertising costs decreased $0.1 million to $25.5 million, or 2.7% of total revenues, compared with $25.6 million, or 2.9% of total revenues, in 2004. 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 years.

General and Administrative Expenses

During 2005, our general and administrative costs increased $3.7 million to $41.9 million, or 4.5% of total revenues, compared with $38.2 million, or 4.4% of total revenues, in 2004. General and administrative expenses increased in 2005 as compared to 2004 primarily because of $1.5 million in severance and consulting expenses associated with the financial system conversion project. We also incurred approximately $0.8 million in severance and recruiting expenses in 2005 associated with previously announced management changes. In 2004, we incurred severance and related costs of approximately $1.2 million associated with the organizational changes that were implemented during the third and fourth quarter of 2004.

Depreciation and Amortization

During 2005, our depreciation and amortization costs increased $4.0 million to $43.8 million, or 4.7% of total revenues, compared with $39.8 million, or 4.6% of total revenues, in 2004. The 10.1% increase is primarily attributable to additions of long-lived assets of $68.8 million during 2005.

Asset Impairment and Disposals

During 2005, we recorded impairment and disposal charges of $7.3 million. The impairment and disposal charges consisted of a $4.9 million charge related to the planned closure of six under-performing O’Charley’s restaurants, $0.9 million for two O’Charley’s restaurants that remain open, $0.3 million 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 intend to sell, to reflect the difference between its current book value and the estimated net sale proceeds. These charges also include net losses of approximately $0.1 million on asset sales. We expect that the sale of the aircraft will reduce future annual general and administrative expenses by approximately $1.0 million per year.

Pre-opening Costs

During 2005, our pre-opening costs increased $0.4 million to $6.3 million, or 0.7% of total revenues, compared with $5.9 million, or 0.7% of total revenues, in 2004. The 6.1% increase is due to timing of restaurant openings and the increased costs incurred for opening the first Stoney River restaurant since 2002. 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

During 2005, our interest costs increased $1.6 million to $15.1 million, or 1.6% of total revenues, compared with $13.5 million, or 1.5% of total revenues, in 2004. The 12.2% increase is due to higher short-term interest rates on our variable rate debt. Interest expense during 2005 reflects $125.0 million of senior subordinated notes at a fixed rate of 9.0%; approximately $15.7 million weighted average debt outstanding on our $125.0 million revolving credit facility 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

During 2005, our income tax expense decreased $7.4 million to $2.0 million, or 0.2% of total revenues, compared with $9.4 million, or 1.1% of total revenues, in 2004. Our effective tax rate of 28.6% in 2004 dropped to 14.3% in 2005. This decrease was primarily attributable to higher 2005 tax credits and lower 2005 pre-tax earnings.

Fiscal Year 2004 Compared with Fiscal Year 2003

Revenues

During 2004, total revenues increased $112.4 million, or 14.8%, to $871.4 million from $759.0 million in 2003. Total revenues for 2004 included 16 weeks of sales from the operations of Ninety Nine restaurants in the first fiscal quarter of 2004 compared to 12 weeks of Ninety Nine results in the first fiscal quarter of 2003 (we acquired Ninety Nine on January 27, 2003).

O’Charley’s restaurant sales increased $62.5 million, or 11.9%, to $588.9 million during 2004 as a result of same restaurant sales increases of 3.1% and the addition of 15 restaurants during 2004. The 3.1% same restaurant sales increase was comprised of a 3.9% increase in the number of guest visits partially offset by a 0.7% decrease in our average check.

Ninety Nine restaurant sales increased $46.4 million, or 22.6%, during 2004. The year-over-year sales increase was primarily related to same restaurant sales increases of 1.3% in 2004 and the addition of 12 new restaurants during 2004. The same restaurant sales increase was comprised of a 3.0% check average increase partially offset by a 1.7% decline in guest visits.

Stoney River restaurant sales increased $1.6 million, or 7.3%, during 2004 due primarily to same restaurant sales increases of 6.4%. The 6.4% same restaurant sales increase was comprised of a 5.3% improvement in the average check coupled with a 1.1% increase in guest counts.

Cost of Food and Beverage

During 2004, we continued to experience higher food costs, a trend that began during the second quarter of 2003. We estimate that food cost inflation, as compared to the same prior-year period, was approximately 4% in 2004, consisting primarily of higher poultry, pork and cheese costs. Commodity cost increases resulted in an increase in the cost of food and beverage of 0.8% of restaurant sales compared to fiscal 2003. We estimate that commodity cost inflation adversely affected our diluted earnings per share by approximately $0.21 in 2004 as compared to the prior year.

During 2003 and 2004, poultry represented, on average, approximately 10% to 12% of our cost of food and beverage. During 2004, our price of purchasing poultry was approximately 16% higher compared to the prior year. Historically, we have not entered into contracts to fix poultry prices and, accordingly, we were subject to weekly market price fluctuations during fiscal 2004 and 2003.

Payroll and Benefits

During 2004, payroll and benefits increased 10 basis points as a percentage of restaurant sales compared to the same prior-year period. Higher restaurant-level bonus expense, payroll taxes and worker’s compensation expenses were partially offset by lower hourly health insurance costs. The higher restaurant-level bonus expenses, and the resulting increase in payroll taxes, were related to the improving sales trends and margins at our O’Charley’s restaurants. The increase in worker’s compensation expenses related to more favorable cost trends late in 2003. The lower hourly insurance costs were related to better than expected claims experience compared to 2003.

Restaurant Operating Costs

Restaurant operating costs during 2004 decreased as a percentage of restaurant sales as compared to 2003 primarily due to decreased supervisory expenses partially offset by increased rent expense from sale and leaseback transactions. During the fourth quarter of 2003 and the first quarter of 2004, we completed sale and leaseback transactions pursuant to which we sold 34 O’Charley’s restaurant properties for aggregate gross proceeds of approximately $71.2 million. The leases that we have entered into in connection with the $71.2 million sale and leaseback transactions will require us to expense on a straight-line basis approximately $4.9 million annually, including the amortization of the $21.4 million deferred gain over the 20-year lease term.

The reduction in supervisory expenses as a percentage of restaurant sales was due to a reduction in the number of operational supervisory positions during the first quarter of 2004.

Advertising Expenses

During 2004, advertising expenditures increased 5.4% to $25.6 million from $24.3 million in 2003 and, as a percentage of total revenues, declined to 2.9% from 3.2% in the prior year. The decrease in advertising expenditures as a percentage of total revenues was primarily due to economies of scale by having a higher concentration of restaurants in existing markets.

General and Administrative Expenses

General and administrative expenses increased 36.4% to $38.2 million in 2004 from $28.0 million in 2003, and as a percentage of total revenues, increased to 4.4% from 3.7% in the prior year. The increase in general and administrative expenses, as a percentage of total revenues, was due primarily to increased incentive compensation expense. During 2004, we shifted the emphasis of our equity-based compensation plans from stock options to restricted stock. During 2004, the expense associated with these equity-based compensation plans reduced earnings by $0.05 per diluted share compared to $0.01 per diluted share during fiscal 2003.

Depreciation and Amortization

During 2004, depreciation and amortization of property and equipment decreased as a percentage of total revenues. The decrease was primarily attributable to approximately $1.4 million of depreciation that was eliminated as a result of the sale and leaseback transactions completed during the fourth quarter of 2003 and the first quarter of 2004.

Pre-opening Costs

During 2004, pre-opening costs declined as a percentage of total revenues due primarily to fewer restaurant openings compared to the same prior-year period.

Interest Expense

Interest expense decreased during 2004 compared to the prior year as a result of the reduction of amounts outstanding under our revolving credit facility with $71.2 million of aggregate gross proceeds from the sale and leaseback of 34 O’Charley’s restaurant properties. Interest expense during 2004 reflected $125.0 million of senior subordinated notes at a fixed rate of 9.0%; approximately $21.0 million outstanding on our $125.0 million bank revolver accruing interest at one-month LIBOR plus 1.75%; and other debt including capitalized lease obligations and prepaid financing costs that accounted for approximately $4.5 million in interest expense during 2004. 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 using the six-month LIBOR rate in arrears plus 3.9%.

Income Taxes

Our effective income tax rate in fiscal 2004 was 28.6% compared to 30.4% in 2003. The reduction resulted primarily from an increase in the net benefit from the FICA tip and other credits from $2.8 million in 2003 to $3.6 million in 2004.

Outlook

Our management was disappointed with our financial performance in 2005, and is taking steps that we believe will improve performance in 2006 and beyond. Management expects to focus our efforts in 2006 in the following areas:

Strengthen the organization with a new core of talent and build a winning team.During the first quarter of 2006, we hired a new President for the O’Charley’s concept. In the third quarter of 2005, we hired a new Chief Human Resources Officer and real estate development activities were consolidated. Our Chief Financial Officer, who joined our company at the beginning of 2005, was given additional responsibilities for information systems and strategic planning. We formed a team within the O’Charley’s concept which will focus on underperforming restaurants, and on new retrofit restaurant design. We are also currently searching for a senior supply chain executive to lead our commissaries, and consider all alternatives for our commissary operations.

Enhance guest satisfaction and intent to return by instilling “A Passion to Serve” at all levels of the organization.In 2005, we adopted a vision statement: “A Passion to Serve”. This statement describes our commitment to our guests, each other, our stakeholders and our communities. Our vision is to be the best of class in food and service in our segments of the restaurant industry. We are making operational changes to improve the guest experience from the moment they walk through the door, until the moment they leave as a satisfied guest. We are improving the screening, training, and development of team members at all levels of the organization, focusing first on those who come in contact with our guests. We are measuring guest satisfaction and rewarding our restaurant managers on the achievement of specific targets.

Improve the execution of product and labor cost management.In April 2005, we completed the roll out of our theoretical food cost system to our restaurants. This system allows us to track and monitor food and prep waste inefficiencies at the restaurants by calculating and comparing theoretical food cost to actual food cost. In addition, we are addressing the labor management issues with a back to basics approach and intend to implement a new labor scheduling system that we believe will result in increased productivity.

Focus the organization on our commitment to greater profitability, with incentives for success and consequences for failing to meet our targets.We are introducing an incentive compensation plan more closely tied to financial performance and guest satisfaction. If store level targets are not met, we will not compensate our restaurant managers with store level bonuses. We have reduced new restaurant development in 2006 in order to focus on improving profitability, productivity and guest experience for all of our concepts.

Increase same restaurant sales through new product offerings, new marketing, and a more analytical approach to menu pricing.We believe that we will be able to drive sales with a new marketing campaign in 2006 along with new products and menus that will be introduced at O’Charley’s and Ninety Nine. In addition, we believe that there are significant opportunities to increase check average at both O’Charley’s and Ninety Nine. Those pricing decisions will be based upon a more analytical approach which analyzes the price sensitivity of demand of each menu item. We expect this approach to result in a greater pass-through of price increases to average check.

We expect to report net earnings per diluted share of between $0.25 and $0.30 for the 16-week period ending April 16, 2006, and net earnings per diluted share of between $0.90 and $1.00 for the fiscal year ending December 31, 2006. The 2006 fiscal year is a 53-week year. Our guidance for the full year reflects an estimated positive earnings impact from the 53^rd week of between $0.08 and $0.10 per diluted share. Projected results for the full year are based upon anticipated same restaurant sales increases of between 1% and 3% for the O’Charley’s and Ninety Nine concepts, with same restaurant sales increases expected to be higher in the second half of the year than in the first half. We expect improvement in our income from operations as a percentage of sales during 2006. The operating margin for the first quarter of 2006 is expected to be below the prior year quarter, while the operating margin for subsequent quarters is expected to show improvement compared with the prior year quarters. We project an effective tax rate of approximately 29% for the full fiscal year, compared with

14.3% in 2005, and interest expense of between $16.0 million and $17.0 million for the year, compared with $15.1 million in the 2005 fiscal year. Our guidance does not reflect any impact for restructuring or other charges relating to decisions that we may make during fiscal 2006 as part of our turnaround efforts.

We expect to open between three and five company-owned O’Charley’s restaurants, between seven and ten Ninety Nine restaurants, and two or three Stoney River restaurants in fiscal 2006. We expect capital expenditures in 2006 to be in the range of $45.0 million to $50.0 million dollars.

We continue to follow our practice of buying ahead of volatile commodities to take advantage of predictable seasonal fluctuations. As of December 25, 2005, we have locked in our pricing for approximately 70% of our estimated beef requirements and approximately 30% of our estimated requirements for poultry and pork.

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. We opened 13 O’Charley’s and ten Ninety Nine restaurants during 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.

The bank credit facility consists of a revolving credit facility with a maximum principal amount of $125.0 million. At December 25, 2005, the outstanding balance on the revolving credit facility was $22.0 million, which excludes approximately $6.1 million in letters of credit which reduces the 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 2005, 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 December 25, 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 December 25, 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 expired in January 2006 and were accounted for as cash flow hedges at

December 25, 2005. 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. Our weighted average interest rate for the years ended December 25, 2005 and December 26, 2004 was 8.2% and 6.9%, 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.

In 2005, net cash flows used by 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 restaurant support center. For the year ended December 25, 2005, new equipment financed through capitalized lease obligations was $4.5 million. New restaurant equipment financed through capitalized lease obligations was $10.8 million for 2004. Capital expenditures for the years ended December 25, 2005 and December 26, 2004, excluding new restaurant equipment financed through capitalized lease obligations, were as follows:


	December 25,		December 26,
	2005		2004
	(in thousands)
New restaurant capital expenditures	$	46,889	$	37,439
Other capital expenditures		21,889		23,052

Total capital expenditures	$	68,778	$	60,491

We expect capital expenditures in 2006 to be between $45.0 million and $50.0 million. As part of our focus on improving results in our existing restaurants, we plan to develop and open fewer restaurants in 2006 than we opened in 2005. We expect to open between three and five new company-owned O’Charley’s restaurants, between seven and ten new Ninety Nine restaurants, and two or three new Stoney River restaurants in 2006.

The following tables set forth our capital structure and certain financial ratios and financial data at and for the fiscal years ended December 25, 2005 and December 26, 2004:


	At December 25,					At December 26,
	2005					2004
	$		%			$		%
	($ in thousands)
Revolving credit facility	$	22,000		4.1	%	$	21,000		4.0	%
Secured mortgage note payable		125		0.0			146		0.0
GE capital financing arrangement		1,197		0.2			—		0.0
Capitalized lease obligations		37,360		7.0			44,993		8.6


Total senior debt		60,682		11.3			66,139		12.7
Senior subordinated notes		125,000		23.4			125,000		24.0


Total debt(1)(2)		185,682		34.7			191,139		36.6

Shareholders’ equity		349,588		65.3			330,740		63.4


Total capitalization	$	535,270		100.0	%	$	521,879		100.0	%


Adjusted total debt(1)(3)	$	432,554				$	430,299
Adjusted total capitalization(1)(3)	$	782,142				$	761,039


	As of			As of
	December 25,			December 26,
	2005			2004
	($ in thousands)
EBITDA(1)(4)	$	80,032		$	85,971
Ratio of total debt to EBITDA		2.3	x		2.2	x
Ratio of EBITDA to interest expense, net		5.3	x		6.4	x
Ratio of total debt to total capitalization		35	%		37	%
Ratio of adjusted total debt to adjusted total capitalization		55	%		57	%


(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 (GAAP). 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 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:


	Fiscal Years
	2005		2004
	(in thousands)
Current portion of long-term debt and capitalized lease obligations	$	10,975	$	12,670
Add:
Long-term debt, excluding current portion		148,299		146,125
Capitalized lease obligations, excluding current portion		26,408		32,344

Total debt	$	185,682	$	191,139


(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 December 25, 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 December 25, 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:


	Fiscal Years
	2005		2004
	(in thousands)
Current portion of long-term debt and capitalized leases	$	10,975	$	12,670
Add:
Long-term debt, excluding current portion		148,299		146,125
Capitalized lease obligations, less current portion		26,408		32,344

Total debt		185,682		191,139
Add eight times:
Rent expense		246,872		239,160

Adjusted total debt		432,554		430,299
Add:
Shareholders’ equity		349,588		330,740

Adjusted total capitalization	$	782,142	$	761,039


(4)		EBITDA represents earnings before interest expense, income taxes, and depreciation and amortization and non-operating charges, as defined in our credit agreement. The following tables reconcile 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:


	Fiscal Years
	2005		2004
	(in thousands)
Net earnings	$	11,878	$	23,319
Add:
Income tax expense		1,904		9,362
Interest expense, net		15,124		13,476
Asset impairment and disposals		7,320		16
Depreciation and amortization		43,806		39,798

EBITDA	$	80,032	$	85,971


	Fiscal Years
	2005			2004
	(in thousands)
Cash flows provided by operating activities	$	62,732		$	70,498
Adjustment for items included in cash provided by operating activities but excluded from the calculation of EBITDA:
Deferred income taxes		3,653			464
Expense related to equity-based compensation		(485	)		(2,171	)
Amortization of deferred gain on sale leasebacks		1,056			1,055
Loss on sale and involuntary conversion of assets		(233	)		(215	)
Donation of stock		—			(137	)
Changes in operating assets and liabilities, net of Ninety Nine acquisition		1,312			358
Changes in long-term assets and liabilities		(2,931	)		(4,046	)
Tax benefit derived from exercise of stock options		(674	)		(1,224	)
Income tax expense		1,904			9,362
Interest expense		13,698			12,027

EBITDA	$	80,032		$	85,971

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.

Contractual Obligations and Commercial Commitments

The following tables set forth our contractual obligations and commercial commitments at December 25, 2005.


			Payments Due by Period
			Less						More
			than						than
	Total		1 Yr		1-3 Yrs		3-5 Yrs		5 Years
Contractual Obligation	(in thousands)
Long-term debt	$	148,322	$	23	$	22,053	$	49	$	126,197
Capitalized lease obligations(1)		40,501		11,082		18,720		8,652		2,047
Operating leases		448,784		30,353		61,220		59,979		297,232
Unconditional purchase obligations(2)		49,339		45,663		3,676		—		—

Total contractual obligations	$	686,946	$	87,121	$	105,669	$	68,680	$	425,476


			Amount of Commitment Expiration per Period

			Less						More
	Total		than						than
	Committed		1 Yr		1-3 Yrs		3-5 Yrs		5 Years
Other Commercial Commitments	(in thousands)
Line of credit(3)	$	125,000		—	$	125,000		—		—
Guarantee of joint-venture financing(4)	$	15,000		—	$	15,000		—		—


(1)		Capitalized lease obligations include the $3.1 million interest component.

(2)		These purchase obligations are primarily fixed volume, fixed price food and beverage contracts. In situations where the price is based on market prices, we use the existing market prices at December 25, 2005 to determine the amount of the obligation. Of the total unconditional purchase obligations shown, $1.4 million are based on variable pricing.

(3)		This pertains to our revolving line of credit of which $22.0 million is included in long-term debt shown above. In addition, we have $6.1 million in letters of credit outstanding which reduces our remaining borrowing capacity under this line of credit to $96.9 million.

(4)		This pertains to the financing arrangement with GE Capital Franchise Finance Corporation and represents our maximum obligation. As of December 25, 2005, there were $1.2 million of loans outstanding under this financing arrangement.

Joint Ventures and Franchise Arrangements

In connection with our franchising initiative, we may from time to time enter into joint venture arrangements to develop and operate O’Charley’s restaurants. For any franchisee in which we have an ownership interest, we may make loans to the joint venture entity and/or guarantee certain of its debt and obligations.

On November 11, 2004, we entered into a Program Agreement with GE Capital Franchise Finance Corporation. Under the terms of the Program Agreement, GE Capital Franchise Finance Corporation will provide financing to certain qualified franchisees of our O’Charley’s restaurants (typically those in which we have an ownership interest). The program is for a maximum aggregate amount of $75,000,000. Such financing may be used to fund the acquisition, construction and installation of the land, building and equipment for new O’Charley’s restaurants opened by such franchisees or to fund a franchisee’s acquisition from us of the land, building and equipment for existing O’Charley’s restaurants. Under the program, financing will be provided in the maximum amount of $2.5 million per location or 80% of the total acquisition and construction costs relating to each restaurant, whichever is less.

In consideration of the lender’s agreement to make financing available under the program to certain of our franchisees, we have agreed, subject to limitations, to guarantee payment to the lender of any ultimate net losses

it may suffer in connection with loans under the program. Our maximum liability under such ultimate net loss guarantee is equal to the lesser of 20% of the sum of the original funded principal balances of all loans under the program and $15 million. In addition to the ultimate net loss guarantee, we have agreed to purchase any such loans that have been declared in default by the lender if the sum of the original funded principal balances of all loans under the program is less than $10 million. Subject to certain exceptions, our guarantee of loans under the program shall remain in effect for as long as the loans are outstanding.

To date, we have invested in two joint ventures for the development of O’Charley’s restaurants. On August 20, 2004, we invested in a joint venture for the development of ten O’Charley’s restaurants in certain markets in Southern Louisiana and Beaumont, Texas. Under the terms of the Limited Liability Company Agreement for the Louisiana joint venture, ownership of the joint venture entity is shared equally between us and our joint venture partner. The joint venture entity is managed by a Board of Managers composed of two individuals designated by the joint venture partner and two individuals designated by us. The joint venture partner was required to make capital contributions in the aggregate amount of $500,000 to the joint venture entity and we agreed to make initial loans to the joint venture entity in the maximum principal amount of $750,000. The loans are secured by substantially all of the assets of the joint venture entity and are partially guaranteed by the joint venture partner.

In order to assist this first joint venture (JFC Enterprises, LLC) to open its restaurants, we decided to make additional loans to the joint venture, and as of December 25, 2005, we had advanced a total of $5.6 million to the joint venture. In addition, the joint venture has been given access to a $1.2 million note through the above mentioned GE Capital financing arrangement. These loans funded most of the investment in the building and equipment, and the start-up and operating losses incurred in the joint venture’s restaurants. Although we are not obligated to do so, we are likely to fund future operating losses. Our second joint venture (Wi-Tenn Restaurants, LLC) is in the process of developing its first restaurant in Wisconsin.

Under FIN 46(R), both joint ventures are variable interest entities, as we do not anticipate them having sufficient equity to fund their operations. Since we bear a disproportionate share of the financial risk associated with the joint ventures, we are deemed to be the primary beneficiary of the joint ventures, and in accordance with FIN 46(R), we consolidate the joint ventures in our consolidated financial statements.

On March 28, 2005, we 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 ten new O’Charley’s restaurants over the next six years in certain markets in Iowa, Nebraska, and parts of Topeka, Kansas and Eastern South Dakota.

The franchising arrangement requires us to provide access to certain contractual arrangements that we have with our vendors in order for the franchisee to benefit from those contracts. The development fees for the franchisee are $50,000 each for the first two restaurants and $25,000 each for the remaining eight restaurants. The franchisee is also required to pay a franchise fee and marketing fund fee that are based on a percentage of sales. Pursuant to the arrangement, the franchisee was required to pay $100,000 as development fees at the closing of the agreement, which represents a portion of the fees associated with the ten restaurants agreed upon. The franchisee is required to pay the remaining amount of the development fees to us as each new restaurant opens. The development fees paid have been deferred and will be recognized in income as each restaurant opens.

On May 18, 2005, we 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.

franchisee are $50,000 each for the first two restaurants and $25,000 each for the remaining restaurants in each of its four granted areas. The franchisee is also required to pay a franchise fee and marketing fund fee that are based on a percentage of sales. Pursuant to the arrangement, the franchisee was required to pay $500,000 as development fees at the closing of the agreement, which represents a portion of the fees associated with the 50 restaurants agreed upon. The franchisee is required to pay the remaining amount of the development fees to us as each new restaurant opens. The development fees paid have been deferred and will be recognized in income as each restaurant opens.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period (see Note 1 to our consolidated financial statements). Actual results could differ from those estimates. Critical accounting policies are those that management believes are both most important to the portrayal of our financial condition and operating results, and require 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. We base our estimates on historical experience, outside advice from parties believed to be experts in such matters, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Our critical accounting policies are as follows:

	•		Lease accounting

	•		Equity-based compensation

	•		Property and equipment

	•		Goodwill and trademarks

	•		Impairment of long-lived assets

	•		Tax provision and related financial statement items

Lease Accounting

On February 7, 2005, the Office of the Chief Accountant of the SEC issued a letter to the American Institute of Certified Public Accountants expressing its views regarding certain accounting principles relating to three aspects of lease accounting: the period of time used for the amortization of leasehold improvements; the recognition of rent expense when the lease term in an operating lease contains a period of free or reduced rents commonly referred to as a “rent holiday”; and accounting for landlord improvement incentives to tenants. In October 2005, the FASB 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.

Our policy for lease accounting involves recognizing rent on a straight-line basis from the time we are committed to a leased property, which is when all contingencies associated with the delivery of the property by the landlord are taken care of, to the end of the lease term, inclusive of one renewal period. The lease term, for purposes of straight-line rent calculations and the useful life over which leasehold improvements are depreciated, is the shorter of the estimated useful life of the leased property or the base lease term, inclusive of one renewal period. We also recognize tenant allowances as a deferred rent liability and amortize them over the lease term, inclusive of one renewal period.

Equity-Based Compensation

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised), “Share-Based Payment.” This standard requires expensing of stock options and other share-based payments beginning in 2006, and supersedes FASB’s earlier rule (the original SFAS 123) that had allowed companies to choose between expensing stock options or showing pro forma disclosure only. We have evaluated the impact of this new standard on our earnings and currently expect that the impact on fiscal 2006 earnings of adopting this new standard in 2006 will be $0.02 per diluted share. The $0.02 per diluted share impact consists of $0.01 per diluted share for expensing of stock options and $0.01 per diluted share for expensing of the discount given to employees in our employee stock purchase plan. Furthermore, during our evaluation of this new standard on our financial statements, management made a decision that was later approved by the board of directors to accelerate the vesting of certain unvested “out-of-the-money” stock options previously awarded under our 1990 Employee Stock Plan and 2000 Stock Incentive Plan. The acceleration of these stock options was done to minimize future compensation expense under SFAS No. 123 (revised). As a result of the acceleration, 1,124,329 stock options with a range of exercise prices between $15.25 and $24.19 per share, of which approximately 12% are held by named executive officers and one director, became exercisable on November 15, 2005. Aside from the acceleration of the vesting date, the terms and conditions of the stock option agreements governing the underlying stock options remain unchanged. The accelerated options represent approximately 40% of the total of all outstanding options to purchase our common stock. As a result of the acceleration, we expect to reduce the pretax stock option expense we otherwise would be required to record in connection with the accelerated options by approximately $9.2 million over the original option vesting period, including $2.9 million in our 2006 fiscal year.

In addition to our stock option plans, we grant restricted stock and restricted stock units as part of our equity-based compensation arrangements. Many of these restricted stock plans have performance-based vesting features, where the number of shares that vest each year depends upon our achievement of certain financial targets. In some plans, the shares that do not vest in any year are forfeited, while in other plans, the shares that do not vest in any year are available to vest in future years depending upon our cumulative achievement of multi-year financial targets. The accounting for these compensation arrangements is complicated and requires significant judgment on the part of management related to the ultimate number of shares that will vest, as well as overall impact of both on the basic and diluted weighted average share calculation. The performance-based awards require variable accounting under APB No. 25 and FASB Financial Interpretation (FIN) 28.

We believe that our accounting policy for equity-based compensation provides for a reasonable and systematic means of recognizing the expense over the period of time that we derive the benefits of the team member’s service. During 2005, the expense associated with our equity-based compensation plans reduced earnings by approximately $0.02 per diluted share. We anticipate the reduction of earnings in 2006 associated with the expense of equity-based awards to be $0.09 to $0.11 per diluted share.

Property and Equipment

As discussed in Note 1 to the consolidated financial statements, our property and equipment are stated at cost and depreciated on a straight-line basis over the following estimated useful lives: building and improvements—30 years; furniture, fixtures and equipment—3 to 10 years. Leasehold improvements are amortized over the lesser of the asset’s estimated useful life or the expected lease term, inclusive of one renewal period. Equipment under capital leases is amortized to its expected value at the end of the lease term. Gains or losses are recognized upon the disposal of property and equipment, and the asset and related accumulated depreciation and amortization are removed from the accounts. Maintenance, repairs and betterments that do not enhance the value of or increase the life of the assets are expensed as incurred.

Inherent in the policies regarding property and equipment are certain significant management judgments and estimates, including useful life, residual value to which the asset is depreciated, the expected value at the end of the lease term for equipment under capital leases, and the determination as to what constitutes enhancing the value of or increasing the life of assets. These significant estimates and judgments, coupled with the fact that the ultimate useful life and economic value at the end of a lease are typically not known until after the passage of

time, through proper maintenance of the asset, or through continued development and maintenance of a given market in which a restaurant operates can, under certain circumstances, produce distorted or inaccurate depreciation and amortization or, in some cases result in a write down of the value of the assets under SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. See Critical Accounting Policy “Impairment of Long-Lived Assets” below.

We believe that our accounting policy for property and equipment provides a reasonably accurate means by which the costs associated with an asset are recognized in expense as the cash flows associated with the asset’s use are realized.

Goodwill and Trademarks

As discussed in Note 1 to the consolidated financial statements, goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144.

At December 25, 2005, we have $93.1 million in goodwill and $25.9 million in indefinite life intangible assets shown on our consolidated balance sheets related to the acquisition of Ninety Nine Restaurant and Pub. The determination of the estimated useful lives and whether these assets are impaired involves significant judgments based upon short and long-term projections of future performance. Certain of these forecasts reflect assumptions regarding our ability to successfully integrate the Ninety Nine concept and to maintain the financial performance that this concept has experienced over its recent history. We have relied on the judgments of outside valuation experts in evaluating the carrying value of our goodwill and other intangible assets to the extent that the comparative information contained in our report is appropriate information to use in assessing whether these assets are impaired. Changes in strategy, new accounting pronouncements and/or market conditions may result in adjustments to recorded asset balances.

On January 27, 2003, we acquired Ninety Nine Restaurant and Pub for $116 million in cash and approximately 2.34 million shares of our common stock. We completed a valuation of the assets and liabilities of Ninety Nine and allocated the purchase price to the acquired tangible and intangible assets and liabilities, including $25.9 million related to trademarks, with the remaining amount of $93.1 million being allocated to goodwill. We selected the first day of each new fiscal year as the date on which we will test the goodwill and trademarks for impairment. We completed a valuation of the goodwill pursuant to SFAS No. 142 as of December 26, 2005, the first day of fiscal 2006 and our valuation showed that the fair value of the reporting unit exceeded its net book value and no impairment charge was needed.

Impairment of Long-Lived Assets

As discussed in Note 1 to the consolidated financial statements, SFAS No. 144, requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

The judgments made related to the ultimate expected useful life and our ability to realize undiscounted cash flows in excess of the carrying value of an asset are affected by such issues as ongoing maintenance of the asset, continued development of a given market within which a restaurant operates, including the presence of traffic generating businesses in the area, and our ability to operate the restaurant efficiently and effectively. We assess the projected cash flows and carrying values at the restaurant level, which is the level where identifiable cash flows are largely independent of the cash flows of other groups of assets, whenever events or changes in circumstances indicate that the long-lived assets associated with a restaurant may not be recoverable.

We believe that our accounting policy for impairment of long-lived assets provides reasonable assurance that any assets that are impaired are written down to their fair value and a charge is taken in earnings on a timely basis. During 2005, we took an impairment charge of $7.1 million for eight O’Charley’s restaurants and a corporate aircraft. Six of those restaurants were closed in the fourth quarter and two of those restaurants remain open as of December 25, 2005.

Tax Provision and Related Financial Statement Items

We must make estimates of certain items that comprise our income tax provision and the related current and deferred tax liabilities. These estimates include employer tax credits for items such as FICA taxes paid on employee tip income, Work Opportunity and Welfare to Work credits, as well as estimates related to certain depreciation and capitalization policies. These estimates are made based on the best available information at the time of the provision and historical experience. We file our income tax returns many months after our year end. These returns are subject to audit by various federal, state and local governments several years after the returns are filed and could be subject to differing interpretations of the tax laws. We then must assess the likelihood of successful legal proceedings or reach a settlement, either of which could result in material adjustments to our consolidated financial statements.

As part of the computation of the income tax provision, we identify and measure deferred tax assets and liabilities. We weigh available evidence in determining the realization of deferred tax assets. Available evidence includes historical, current and future financial positions of the Company. We also consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. If we determine it is more likely than not that some portion or all of the deferred tax asset will not be recognized, the deferred tax asset will be reduced by a valuation allowance.

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised). 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 our financial statements based on the fair value of all share-based payments to employees/team members beginning in the first quarter of 2006. We believe that the estimated impact in fiscal 2006 will be approximately $0.02 per diluted share. The $0.02 per diluted share impact consists of $0.01 per diluted share for expensing of stock options and $0.01 per diluted share for expensing of the discount given to employees in our employee stock purchase plan.

In March 2005, FASB Interpretation (FIN) No. 47,Accounting for Conditional Asset Retirement Obligations — An Interpretation of FASB Statement No. 143,was issued. The FASB issued FIN 47 to address diverse accounting practices that developed with respect to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and (or) method of settlement of the obligation are conditional on a future event. For example, some entities recognize the fair value of the obligation prior to the retirement of the asset with the uncertainty about the timing and (or) method of settlement incorporated into the fair value of the liability. Other entities recognize the fair value of the obligation only when it is probable the asset will be retired as of a specified date using a specified method or when the asset is actually retired. FIN 47 concludes that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. Originally, the FASB proposed guidance in FASB Staff Position (FSP) FAS 143, “Application of FASB Statement No. 143,Accounting for Asset Retirement Obligations, to Legislative Requirements on Property Owners to Remove and Dispose of Asbestos or Asbestos-Containing Materials,” but the FASB ultimately concluded there were additional issues that required the FASB’s attention. Accordingly, the FASB withdrew the proposed FSP and issued an Exposure Draft,Accounting for Conditional Asset Retirement Obligations,which is the basis for FIN

47. As of December 25, 2005, we have adopted FIN 47 and the impact resulted in a charge to 2005 earnings of approximately $249,000, which we recognized as a cumulative effect of a change in accounting principle net of income tax of approximately $151,000.

In May 2005, the FASB issued FASB Statement No. 154,Accounting Changes and Error Corrections. This new standard replaces APB Opinion No. 20,Accounting Changes,and FASB Statement No. 3,Reporting Accounting Changes in Interim Financial Statements. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. We do not expect adoption of SFAS No. 154 to have a material impact on our 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 SFAS 123(R). As discussed above, we will begin accounting for compensation expense in accordance with SFAS 123(R) in the first quarter of 2006.

In October 2005, the FASB 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 1 to the consolidated financial statements herein, we already apply this accounting guidance.

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 team members 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 team members. 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.


Item 7A.		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 floating 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 December 25, 2005 and December 26, 2004, we 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.

Also at December 25, 2005 and December 26, 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 was $10.0 million and was based on one month LIBOR plus a specified margin ranging from 1.25% to 2.25%. The interest terms of these swaps mirrored the interest terms on the debt. These swap agreements expired in January 2006.

Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
O’CHARLEY’S INC.


	Page
Report of Independent Registered Public Accounting Firm		46
Consolidated Balance Sheets at December 25, 2005 and December 26, 2004		47
Consolidated Statements of Earnings for the Years Ended December 25, 2005, December 26, 2004, and December 28, 2003		48
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Years Ended December 25, 2005, December 26, 2004, and December 28, 2003		49
Consolidated Statements of Cash Flows for the Years Ended December 25, 2005, December 26, 2004, and December 28, 2003		50
Notes to the Consolidated Financial Statements		51

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
O’Charley’s Inc.

We have audited the consolidated balance sheets of O’Charley’s Inc. and subsidiaries (the Company) as of December 25, 2005 and December 26, 2004, and the related consolidated statements of earnings, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 25, 2005. In connection with our audits of the consolidated financial statements, we have also audited financial statement schedule II, Valuation and Qualifying Accounts. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of O’Charley’s Inc. and subsidiaries as of December 25, 2005 and December 26, 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 25, 2005, in conformity with U. S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in note 1, the Company changed its method of accounting for certain asset retirement obligations in 2005.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 25, 2005, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Nashville, Tennessee
March 9, 2006

CONSOLIDATED BALANCE SHEETS


	December 25,			December 26,
	2005			2004
	(dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	5,699		$	10,772
Trade accounts receivable, less allowance for doubtful accounts of $107 in 2005 and $135 in 2004		12,057			8,783
Inventories		45,131			33,125
Deferred income taxes		9,838			6,716
Short-term notes receivable		—			120
Other current assets		5,505			4,882
Assets held for sale		5,708			—

Total current assets		83,938			64,398
Property and Equipment, net		464,545			451,808
Goodwill		93,074			93,074
Intangible Asset		25,921			25,921
Other Assets		20,132			22,310

Total Assets	$	687,610		$	657,511


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Trade accounts payable	$	21,874		$	14,259
Accrued payroll and related expenses		19,580			19,183
Accrued expenses		23,739			20,878
Deferred revenue		21,393			19,210
Federal, state and local taxes		10,713			9,184
Current portion of long-term debt and capitalized lease obligations		10,975			12,670

Total current liabilities		108,274			95,384
Long-Term Debt, less current portion		148,299			146,125
Capitalized Lease Obligations, less current portion		26,408			32,344
Deferred Income Taxes		7,407			7,884
Other Liabilities		47,634			45,034

Total Liabilities		338,022			326,771

Shareholders’ Equity:
Common stock—No par value; authorized, 50,000,000 shares; issued and outstanding, 22,988,401 in 2005 and 22,528,951 in 2004		185,374			178,262
Accumulated other comprehensive loss, net of tax		(5	)		(224	)
Unearned compensation		(4,027	)		(3,666	)
Retained earnings		168,246			156,368

Total shareholders’ equity		349,588			330,740

Total Liabilities and Shareholders’ Equity	$	687,610		$	657,511

See accompanying notes to the consolidated financial statements

CONSOLIDATED STATEMENTS OF EARNINGS


	Year Ended
	December 25,			December 26,		December 28,
	2005			2004		2003
	(in thousands, except per share data)
Revenues:
Restaurant sales	$	921,329		$	864,259	$	753,740
Commissary sales		8,498			7,035		5,271
Franchise revenue		361			92		—

		930,188			871,386		759,011

Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		277,788			261,013		221,206
Payroll and benefits		318,524			290,514		252,415
Restaurant operating costs		172,160			157,491		139,205
Cost of commissary sales		7,710			6,631		4,970
Advertising expenses		25,468			25,621		24,300
General and administrative expenses		41,945			38,237		28,016
Depreciation and amortization, property and equipment		43,806			39,798		36,360
Asset impairment and disposals		7,320			16		(180	)
Pre-opening costs		6,271			5,908		6,900

		900,992			825,229		713,192

Income from Operations		29,196			46,157		45,819
Other Expense:
Interest expense, net		15,124			13,476		14,153
Debt extinguishment charge		—			—		1,800
Other, net		42			—		(584	)

		15,166			13,476		15,369


Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle		14,030			32,681		30,450
Income Taxes		2,001			9,362		9,261

Earnings Before Cumulative Effect of Change in Accounting Principle		12,029			23,319		21,189
Cumulative Effect of Change in Accounting Principle, net of tax		(151	)		—		—

Net Earnings	$	11,878		$	23,319	$	21,189

Basic Earnings Per Common Share Before Cumulative Effect of Change in Accounting Principle	$	0.53		$	1.05	$	0.98
Cumulative Effect of Change in Accounting Principle, net of tax		(0.01	)		—		—

Basic Earnings Per Common Share	$	0.52		$	1.05	$	0.98

Diluted Earnings Per Common Share Before Cumulative Effect of Change in Accounting Principle	$	0.52		$	1.03	$	0.96
Cumulative Effect of Change in Accounting Principle, net of tax		(0.01	)		—		—

Diluted Earnings Per Common Share	$	0.51		$	1.03	$	0.96

See accompanying notes to the consolidated financial statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME


									Accumulated
									Other
	Common Stock					Unearned			Comprehensive			Retained
	Shares		Amount			Compensation			Loss, net			Earnings		Total
	(in thousands)
Balance, December 29, 2002		18,839	$	116,631		$	—		$	(931	)	$	111,860	$	227,560

Comprehensive income:
Net earnings		—		—			—			—			21,189		21,189
Unrealized change in market value of derivatives, net of tax		—		—			—			412			—		412

Total comprehensive income															21,601

Exercise of employee stock options including tax benefits (net of shares tendered)		811		8,021			—			—			—		8,021
Shares issued under CHUX Ownership Plan		112		1,682			—			—			—		1,682
Restricted share issuances		21		2,821			(2,821	)		—			—		—
Compensation expense		—		—			470			—			—		470
Shares issued or issuable for acquisition		2,335		40,853			—			—			—		40,853

Balance, December 28, 2003		22,118		170,008			(2,351	)		(519	)		133,049		300,187

Comprehensive income:
Net earnings		—		—			—			—			23,319		23,319
Unrealized change in market value of derivatives, net of tax		—		—			—			295			—		295

Total comprehensive income															23,614

Exercise of employee stock options including tax benefits (net of shares tendered)		248		2,495			—			—			—		2,495
Shares issued under CHUX Ownership Plan		147		2,136			—			—			—		2,136
Restricted share issuances		8		2,249			(2,249	)		—			—		—
Compensation expense		—		1,237			934			—			—		2,171
Donation of stock		8		137			—			—			—		137

Balance, December 26, 2004		22,529		178,262			(3,666	)		(224	)		156,368		330,740

Comprehensive income:
Net earnings		—		—			—			—			11,878		11,878
Unrealized change in market value of derivatives, net of tax		—		—			—			219			—		219

Total comprehensive income															12,097

Exercise of employee stock options including tax benefits (net of shares tendered)		286		4,135			—			—			—		4,135
Shares issued under CHUX Ownership Plan		146		2,131						—			—		2,131
Restricted share issuances		27		1,490			(1,490	)		—			—		—
Compensation expense		—		(644	)		1,129			—			—		485

Balance, December 25, 2005		22,988	$	185,374		$	(4,027	)	$	(5	)	$	168,246	$	349,588

See accompanying notes to the consolidated financial statements

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Year Ended
	December 25,			December 26,			December 28,
	2005			2004			2003
	(in thousands)
Cash Flows from Operating Activities:
Net earnings	$	11,878		$	23,319		$	21,189
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization, property and equipment		43,806			39,798			36,360
Debt extinguishment charge		—			—			1,800
Amortization of debt issuance costs		1,426			1,449			1,184
Deferred income taxes excluding effect of Ninety Nine acquisition		(3,653	)		(464	)		184
Expenses related to equity-based compensation		485			2,171			470
Amortization of deferred gain on sale-leasebacks		(1,056	)		(1,055	)		(163	)
Loss (gain) on the sale and involuntary conversion of assets		233			215			(423	)
Asset impairment and disposals		7,320			16			(180	)
Donation of stock		—			137			—
Changes in assets and liabilities, excluding the effects of the Ninety Nine acquisition:
Trade accounts receivable		(3,274	)		(734	)		(1,961	)
Inventories		(12,006	)		(11,612	)		(548	)
Other current assets		377			(1,078	)		526
Trade accounts payable		7,615			(1,128	)		(381	)
Deferred revenue		2,183			3,768			3,035
Accrued payroll and other accrued expenses, and federal, state and local taxes		3,793			10,426			372
Other long-term assets and liabilities		2,931			4,046			2,164
Tax benefit derived from exercise of stock options		674			1,224			4,692

Net cash provided by operating activities		62,732			70,498			68,320


Cash Flows from Investing Activities:
Additions to property and equipment		(68,778	)		(60,491	)		(67,598	)
Acquisition of company, net of cash acquired		—			—			(114,287	)
Proceeds from the sale of assets		3,364			1,943			3,724
Other, net		1,987			3,246			412

Net cash used in investing activities		(63,427	)		(55,302	)		(177,749	)


Cash Flows from Financing Activities:
Proceeds from long-term debt		5,885			4,454			265,121
Payments on long-term debt and capitalized lease obligations		(15,855	)		(33,799	)		(207,639	)
Proceeds from sale and lease-back transactions		—			12,090			59,097
Minority interest in joint ventures		—			750			—
Debt issuance costs		—			(900	)		(10,898	)
Exercise of employee incentive stock options and issuances under stock purchase plan		5,592			3,407			5,011

Net cash (used in) provided by financing activities		(4,378	)		(13,998	)		110,692


(Decrease) increase in cash and cash equivalents		(5,073	)		1,198			1,263
Cash and cash equivalents at beginning of the year		10,772			9,574			8,311

Cash and cash equivalents at end of the year	$	5,699		$	10,772		$	9,574

See accompanying notes to the consolidated financial statements

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

O’Charley’s Inc.(the “Company”) owns and operates 225 (at December 25, 2005) full-service restaurant facilities in 16 Southeastern and Midwestern states under the trade name of “O’Charley’s”, 109 full-service restaurant facilities in eight Northeastern states under the trade name “Ninety Nine Restaurant and Pub”, and seven full-service restaurant facilities under the trade name of “Stoney River Legendary Steaks.” As of December 25, 2005, the Company had four franchised O’Charley’s restaurants located in Michigan and two locations in Louisiana that are operated by a joint venture franchisee in which the Company has an ownership interest. The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and its joint venture franchisee accounts. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company’s fiscal year ends on the last Sunday in December. All fiscal years presented were comprised of 52 weeks. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

Cash Equivalents. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. The Company had cash equivalents of $3.4 million and $10.2 million at December 25, 2005 and December 26, 2004, respectively. These cash equivalents consist entirely of overnight repurchase agreements of government securities.

Inventoriesare stated at the lower of cost (first-in, first-out method) or market and consist primarily of food, beverages and supplies.

Operating leases- The Company has ground leases and office space leases that are recorded as operating leases. Most of the leases have rent escalation clauses and some have rent holiday and contingent rent provisions. In accordance with FASB Technical Bulletin (“FTB”) No. 85-3, “Accounting for Operating Leases with Scheduled Rent Increases,” the liabilities under these leases are recognized on the straight-line basis. The Company uses a lease life or expected lease term that generally is inclusive of one renewal period and begins on the date that the Company becomes legally obligated under the lease, including the pre-opening period during construction, when in many cases the Company is not making rent payments.

Certain leases provide for rent holidays, which are included in the lease life used for the straight-line rent calculation in accordance with FTB No. 88-1, “Issues Relating to Accounting for Leases.” Rent expense and an accrued rent liability are recorded during the rent holiday periods, during which the Company has possession of and access to the property, but is not required or obligated to, and normally does not, make rent payments.

Certain leases provide for contingent rent, which is determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability and corresponding rent expense when sales have been achieved in amounts in excess of the specified levels.

The same lease life is used for reporting future minimum lease commitments as is used for the straight-line rent calculation.

Principles of consolidation- The consolidated financial statements include the accounts of the Company and all of its subsidiaries plus the accounts of the joint ventures (See note below regarding “Investment in Joint Ventures”). All significant intercompany transactions and balances have been eliminated.

Pre-opening Costsrepresent costs incurred prior to a restaurant opening and are expensed as incurred. These costs also include straight-line rent related to leased properties from the period of time between when we have waived any contingencies regarding use of the leased property and the date on which the restaurant opens.

Investments. Investments in marketable securities are classified as available for sale securities and are carried at fair value, with the unrealized gains and losses recorded in a separate component of shareholders’ equity, net of tax unless there is a decline in value which is considered to be other than temporary, in which case the cost of such security is written down to fair value and the amount of the write down is reflected in earnings. The Company did not own any marketable securities at the balance sheet dates of December 25, 2005 or December 26, 2004.

Investment in Affiliated Company. The Company has an 8% ownership interest in a joint venture to operate a restaurant concept in Chicago, Illinois. The Company is not the primary beneficiary as defined by FASB Interpretation (FIN) No. 46R,Consolidation of Variable Interest Entities, and accounts for its investment using the equity method.

Investment in Joint Ventures.The Company has a 50% interest in two joint ventures to operate O’Charley’s restaurants. Under FIN No. 46R, the joint ventures (JFC Enterprises, LLC and Wi-Tenn Restaurants, LLC) are considered variable interest entities, as we do not anticipate them having sufficient equity to fund their operations. The joint venture partners have neither the obligation nor the ability to contribute their proportionate share of expected future losses. Such losses will require additional financial support from the Company. Since the Company bears a disproportionate share of the financial risk associated with the joint ventures, it has been deemed to be the primary beneficiary of the joint ventures and, in accordance with FIN 46(R), the Company consolidates the joint venture in its consolidated financial statements.

Property and Equipmentare stated at cost and depreciated on the straight-line method over the following estimated useful lives: buildings and improvements—30 years; furniture, fixtures and equipment—3 to 10 years. Leasehold improvements are amortized over the lesser of the asset’s estimated useful life or the expected lease term, inclusive of one renewal period. Equipment under capitalized leases is amortized to its expected residual value to the Company at the end of the lease term. Gains or losses are recognized upon the disposal of property and equipment, and the asset and related accumulated depreciation and amortization are removed from the accounts. Maintenance, repairs and betterments that do not enhance the value of or increase the life of the assets are expensed as incurred.

Managing Partner Program for Stoney River. The Company has established a “managing partner program” for the general managers of its Stoney River restaurants pursuant to which each general manager had the opportunity to acquire a 6% interest in the limited liability company that owns the restaurant that the general manager manages in exchange for a capital contribution to that subsidiary. The general managers at four of the seven Stoney River restaurants each acquired a 6% interest in their restaurant for a capital contribution of $25,000. Upon the fifth anniversary of the managing partner’s capital contribution to the subsidiary, the Company has the option, but not the obligation, to purchase the managing partner’s 6% interest for fair market value. Under the terms of the agreements between the Company and each managing partner, fair market value would be determined by negotiations between the parties. If such negotiations did not result in an agreement on value, a third-party appraisal process would be used to determine fair market value.

On a quarterly basis, the managing partner receives an allocation and distribution of 6% of the operating profit of his or her restaurant. Upon termination, a managing partner’s interest would be repurchased by the Company at the value of the managing partner’s capital account under the terms of the agreement between the Company and each managing partner, which is generally based on the managing partner’s capital contributions plus respective allocations of the operating profit or losses of his or her restaurant as described above less distributions to the respective managing partner. Otherwise, the managing partners may not withdraw or receive a return of contributions.

The managing partner’s minority interest, which totals $100,000 for the four managing partners, is recorded on the Company’s consolidated balance sheet as other long-term liabilities. The quarterly profit distributions to the managing partners are recorded on the Company’s consolidated statement of earnings as a minority interest in

earnings, which is included in general and administrative expense. To date, the Company has not purchased any interest from a managing partner. In the event the Company chooses to do so, the Company would account for the transaction using the purchase method as proscribed for the repurchase of minority interests by paragraphs 14 and A5 of Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”.

Goodwillrepresents the excess of costs over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimated useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets.

On January 27, 2003, the Company acquired Ninety Nine Restaurant and Pub (Ninety Nine) for $116 million in cash and approximately 2.34 million shares of the Company’s common stock. The Company completed a valuation of the assets and liabilities of Ninety Nine and allocated the purchase price to the acquired tangible and intangible assets and liabilities with the remaining amount being allocated to goodwill.

Impairment of Long-Lived Assets. Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are separately presented in the consolidated balance sheet and reported at the lower of carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet. During 2005, the Company took an impairment charge of $7.1 million related to eight O’Charley’s restaurants and a Company airplane. Six of those restaurants were closed in the fourth quarter and two of those restaurants remain open as of December 25, 2005.

Goodwill and indefinite life intangible assets are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the assets might be impaired. An impairment loss is recognized to the extent that the carrying amount of goodwill and indefinite life intangible assets exceeds their implied fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141,Business Combinations. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

The Company has selected the first day of each new fiscal year as the date on which it will test the goodwill for impairment. The Company completed a valuation of the goodwill as of December 26, 2005, and the valuation showed that the fair value of the goodwill exceeded the carrying value and no impairment charge was needed. Also, as a part of this valuation, the Company reviewed the carrying value of the trademarks, an indefinite life intangible asset, and found that no impairment charge was needed.

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. Restaurant sales are recognized upon delivery of services. Proceeds from the sale of gift cards and certificates are deferred and recognized as revenue as they are redeemed. 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 and wholesale clubs and franchises. Commissary sales are recognized when delivery occurs, the revenue amount is determinable and when collection is reasonably assured. Franchise revenues consist of development fees and royalties on sales of franchised units. The Company’s development fees are $50,000 for the first two restaurants and $25,000 for each additional restaurant opened by the franchisee.

The development fees are recognized during the reporting period in which the developed restaurant begins operation. The royalties are recognized in revenue in the period in which they were earned.

Advertising Costs.The Company expenses advertising costs as incurred, except for certain advertising production costs that are initially capitalized and subsequently expensed the first time the advertising takes place.

Income Taxesare accounted for in accordance with the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statement of earnings in the period that includes the enactment date.

Stock Option Plan. The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees,and related interpretations including FASB Interpretation No. 44,Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25,to account for its stock compensation plans. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123,Accounting for Stock-Based Compensationand SFAS No. 148,Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended. The following table illustrates the effect on net earnings if the fair-value-based method had been applied to all outstanding and unvested awards in each period.


	2005			2004			2003
	(in thousands)
Net earnings, as reported	$	11,878		$	23,319		$	21,189
Add stock-based employee compensation expense included in reported net earnings, net of tax		416			1,550			327
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		(11,619	)		(4,509	)		(3,115	)

Pro forma net earnings	$	675		$	20,360		$	18,401


Earnings per share:
Basic—as reported	$	0.52		$	1.05		$	0.98
Basic—pro forma	$	0.03		$	0.91		$	0.85
Diluted—as reported	$	0.51		$	1.03		$	0.96
Diluted—pro forma	$	0.03		$	0.90		$	0.83

On December 16, 2004, the FASB issued SFAS No. 123 (revised), “Share-Based Payment.” This standard requires expensing of stock options and other share-based payments beginning in 2006, and supersedes the FASB’s earlier rule (the original SFAS No. 123) that had allowed companies to choose between accounting for share-based compensation using the estimated fair values of the options in the consolidated statement of earnings or providing pro forma footnote disclosures only. The Company has evaluated the impact of this new standard on its earnings and currently expects that the impact on fiscal 2006 earnings of adopting this new standard in 2006 will be $0.02 per diluted share. The $0.02 per diluted share impact consists of $0.01 per diluted share for expensing of stock options and $0.01 per diluted share for expensing of the discount given to employees in our employee stock purchase plan. Furthermore, during the Company’s evaluation of this new standard on its financial statements, management made a decision that was approved by the Board of Directors to accelerate the vesting of certain unvested “out-of-the-money” stock options previously awarded under its 1990 Employee Stock Plan and 2000 Stock Incentive Plan. The acceleration of these stock options was done to minimize future

compensation expense under SFAS No. 123 (revised). As a result of the acceleration, 1,124,329 stock options with a range of exercise prices between $15.25 and $24.19 per share, of which approximately 12% are held by named executive officers and one director, became exercisable on November 15, 2005. Aside from the acceleration of the vesting date, the terms and conditions of the stock option agreements governing the underlying stock options remain unchanged. The accelerated options represent approximately 40% of the total of all outstanding stock options. As a result of the acceleration, the Company expects to reduce the pretax stock option expense it otherwise would be required to record in connection with the accelerated options by approximately $9.2 million over the original option vesting period, including $2.9 million in the Company’s 2006 fiscal year. The table above reflects a deduction of $11.6 million for stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax which included the $9.2 million from the acceleration of certain stock options.

Per Share Data. Basic earnings per common share have been computed by dividing net earnings by the weighted average number of common shares outstanding during each year presented. Diluted earnings per common share have been computed by dividing net earnings by the weighted average number of common shares outstanding plus the dilutive effect of options and restricted shares outstanding during the applicable periods. Basic and diluted earnings per share also include the dilutive effect of shares issuable to the prior owners of Ninety Nine due to the fact that the timing of issuance is related solely to the passage of time.

Stock Repurchase. Under Tennessee law, when a corporation purchases its common stock in the open market, such repurchased shares become authorized but unissued. The Company reflects the purchase price of any such repurchased shares as a reduction of common stock.

Fair Value of Financial Instruments. SFAS No. 107,Disclosures about Fair Value of Financial Instruments,requires disclosure of the fair values of most on- and off-balance sheet financial instruments for which it is practicable to estimate that value. The scope of SFAS No. 107 excludes certain financial instruments such as trade receivables and payables when the carrying value approximates the fair value, employee benefit obligations, lease contracts, and all nonfinancial instruments such as land, buildings, and equipment. The fair values of the financial instruments are estimates based upon current market conditions and quoted market prices for the same or similar instruments as of December 25, 2005 and December 26, 2004. Book value approximates fair value for substantially all of the Company’s assets and liabilities that fall under the scope of SFAS No. 107.

Derivative Instruments and Hedging Activities. All derivatives are recognized on the consolidated balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as either a hedge of the variability of cash flows to be paid related to a recognized liability or as a hedge of the fair value of a recognized liability. For all hedging relationships, the Company formally documents the hedging relationship and its risk-management objective and strategy for undertaking the hedge, the hedging instrument, the item, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedge risk will be assessed, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives that are designated as fair-value and cash-flow hedges to specific liabilities on the balance sheet. The Company assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair value of the hedged items. The Company also determines how ineffectiveness will be measured. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability in cash flows of the designated hedged item. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged liability, are recorded in earnings. The terms and conditions of the Company’s fair value hedges mirror the interest terms and conditions on its 9.0% senior subordinated notes due 2013. Therefore, the Company is not required to test the effectiveness of these derivatives. If it is determined that a derivative is ineffective as a hedge, the Company discontinues hedge accounting prospectively.

When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, the Company continues to carry the derivative on the balance sheet at its fair value and no longer adjusts the hedged liability for changes in fair value. The adjustment of the carrying amount of the hedged liability is accounted for in the same manner as other components of the carrying amount of that liability.

In all other situations in which hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the consolidated balance sheet and recognizes any subsequent changes in its fair value in earnings.

Comprehensive Income. SFAS No. 130,Reporting Comprehensive Income,establishes rules for the reporting of comprehensive income and its components. Comprehensive income, presented in the consolidated statement of shareholders’ equity and comprehensive income, consists of net earnings and unrealized gains (losses) on derivatives, net of tax. Other comprehensive income, net of tax, for 2005 was $219,000. The accumulated other comprehensive loss at December 25, 2005 is comprised of an unrealized loss on derivative financial instruments of $5,000, net of tax.

Operating Segments. Due to similar economic characteristics, as well as a single type of product, production process, distribution system and type of guest, the Company reports the operations of its three concepts on an aggregated basis and does not separately report segment information. Revenues from external customers are derived principally from food and beverage sales. The Company does not rely on any major customers as a source of revenue. As a result, separate segment information is not disclosed.

Use of Estimates. Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Significant items subject to such estimates and assumptions include the carrying amount of plant and equipment, intangibles and goodwill; valuation allowances for receivables, gift card breakage, inventories and deferred income tax assets; workers’ compensation and general liability insurance liabilities; valuation of derivative instruments; and obligations related to employee benefits. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements. In December 2004, the 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 has evaluated the effect of adoption on its consolidated financial statements and believes that the estimated impact in fiscal 2006 will be approximately $0.02 per diluted share. The $0.02 per diluted share impact consists of $0.01 per diluted share for expensing of stock options and $0.01 per diluted share for expensing of the discount given to employees in the Company’s employee stock purchase plan.

In March 2005, FASB Interpretation (FIN) No. 47,Accounting for Conditional Asset Retirement Obligations — An Interpretation of FASB Statement No. 143,was issued. The FASB issued FIN 47 to address diverse accounting practices that developed with respect to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and (or) method of settlement of the obligation are conditional on a future event. For example, some entities recognize the fair value of the obligation prior to the retirement of the asset with the uncertainty about the timing and (or) method of settlement incorporated into the fair value of the liability. Other entities recognize the fair value of the obligation only when it is probable the asset will be retired as of a specified date using a specified method or when the asset is actually retired. FIN 47 concludes that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. Originally, the FASB proposed guidance in FASB Staff Position (FSP) FAS 143, “Application of FASB Statement No. 143, Accounting for Asset Retirement Obligations, to Legislative Requirements on Property Owners to Remove and Dispose of Asbestos or Asbestos-Containing Materials,” but the FASB ultimately concluded there were additional issues that required the FASB’s attention. Accordingly, the FASB withdrew the proposed FSP and issued an Exposure Draft,Accounting for Conditional Asset Retirement Obligations,which is the basis for FIN 47. As of December 25,

2005, the Company adopted FIN 47 and its impact resulted in a charge to 2005 earnings of $151,000 net of tax or $0.01 per diluted share.

In May 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections.This new standard replaces APB Opinion No. 20,Accounting Changes,and FASB Statement No. 3,Reporting Accounting Changes in Interim Financial Statements. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement.” The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. The Company does not expect adoption of SFAS No. 154 to have a material impact 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 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. The Company has already adopted this accounting guidance.

2. Acquisition

On January 27, 2003, the Company acquired Ninety Nine Restaurant and Pub (“Ninety Nine”), a casual dining chain based in Woburn, Massachusetts, primarily to continue expanding its portfolio of quality restaurant concepts in becoming a multi-concept restaurant operation. The Company acquired Ninety Nine Restaurant and Pub for $116 million in cash (which excludes approximately $5.5 million in cash acquired and approximately $3.8 million in transaction costs) and approximately 2.34 million shares of common stock, plus the assumption of certain liabilities. In addition to the purchase price, the Company agreed to pay a total of $1.0 million per year, plus accrued interest, on each of January 1, 2004, 2005, 2006 and 2007, to certain key team members of Ninety Nine who continue to be employed at the time of such payments. Of the stock portion of the purchase price, the Company delivered 941,176 shares at closing, 390,586 shares in January 2004, 407,843 in January 2005, 407,843 in January 2006 and will deliver 94,118 shares on each of the fourth and fifth anniversaries of the closing.

The transaction was accounted for using the purchase method of accounting and, accordingly, the results of operations of Ninety Nine are included in the Company’s consolidated financial statements from the date of acquisition. The Ninety Nine concept is being operated through indirect wholly-owned subsidiaries of the

Company. The Company attributes the goodwill shown below to the long-term historical financial performance and the anticipated future performance of Ninety Nine. The allocation of the purchase price to the acquired net assets is as follows (in thousands).


Fair value of assets acquired	$	41,865
Purchase price in excess of the net assets acquired (goodwill)		93,074
Intangible Asset (tradename)		25,921
Favorable leases		575
Fair value of liabilities assumed		(770	)

Cash and stock paid		160,665
Less stock issued or issuable for acquisition		(40,853	)
Less cash acquired		(5,520	)

Net cash paid for acquisition	$	114,292

The following unaudited pro forma condensed results of operations give effect to the acquisition of Ninety Nine as if such transaction had occurred at the beginning of fiscal 2003:

Fiscal Year ended December 28, 2003


	2003
	(in thousands)
Pro Forma Earnings:
Total revenues	$	775,194
Earnings before income taxes and cumulative effect of change in accounting principle		30,830
Earnings before cumulative effect of change in accounting principle		21,436
Cumulative effect of change in accounting principle		—

Net earnings	$	21,436


Basic earnings per share
Earnings before cumulative effect of change in accounting principle	$	0.97
Cumulative effect of change in accounting principle		—

Net earnings	$	0.97

Basic weighted average common shares outstanding		22,148


Diluted earnings per share
Earnings before cumulative effect of change in accounting principle	$	0.94
Cumulative effect of change in accounting principle		—

Net earnings	$	0.94

Diluted weighted average common shares outstanding		22,758

The foregoing pro forma amounts are based upon certain assumptions and estimates, including, but not limited to the recognition of interest expense on debt incurred to finance the acquisition. The pro forma amounts do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.

3.Impairment of and Disposal of Long-Lived Assets

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 undiscounting 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 restaurant are generally expensed as incurred unless the restaurant is considered as discontinued operations. 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. If the Company decides to sell the underlying assets of a restaurant, such assets are no longer depreciated and are classified as assets held for sale on the consolidated balance sheet at the lower of their cost or estimated fair market value. To the extent the Company sells such assets, primarily land, associated with a closed restaurant, any gain or loss upon that sale is recorded in asset impairment and disposals.

During 2005, the Board of Directors approved management’s plan to close six O’Charley’s restaurants 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 restaurants which remain open. The impairment charge taken for the aircraft was based on the Company’s decision to sell the aircraft. The impairment charge taken on the two O’Charley’s restaurants that remain open was based on its normal review for asset impairment. These decisions followed a review of historical and projected cash flows of the Company’s restaurants 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 2005 for asset impairment and disposals totaling $7.3 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 restaurants that are impaired but are not expected to be closed, $1.1 million relating to the impairment of a corporate aircraft, $0.3 million charge for a property insurance deductible on the loss of an O’Charley’s restaurant location in Biloxi, Mississippi that was destroyed by Hurricane Katrina and $0.1 million for net losses on assets that were disposed of in 2005. 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.

4. Exit and Disposal Costs

The Company recorded exit and disposal costs related to the closure of six O’Charley’s restaurants in the fourth quarter of 2005. The Company recorded a liability at the “cease use” date for $4.1 million for the six restaurants that were closed. This liability was offset by estimated sublease income of $4.0 million as of December 25, 2005. The net expense of $0.1 million is recorded as part of income from operations in the consolidated statement of earnings as a component of asset impairment and disposals. The Company did not incur any one-time termination benefits or other associated costs as of a result of exit and disposal activities.

5. Asset Retirement Obligations

The Company recorded an asset retirement obligation as of December 25, 2005, based on its adoption of recently issued FASB Interpretation No.47 which clarifies the term conditional asset retirement obligation as used in SFAS No. 143,Accounting for Asset Retirement Obligations. The Company has determined that it has potential obligations for certain of its restaurant-level assets. Specifically, the Company has the obligation to

remove certain assets from its restaurants at the end of the lease term. The following is a breakdown of the retirement obligation for the year ended December 25, 2005 and a proforma disclosure as if the interpretation had been applied to the year ended December 26, 2004.


	(in thousands)
Asset Retirement Obligation as of December 28, 2003	$	462
Plus:
Accretion expense on the present valued liability		44
Plus:
Fixed Asset Additions Requiring Recognitions of a Liability		16

Asset Retirement Obligation as of December 26, 2004	$	522
Plus:
Accretion expense on the present valued liability		55
Plus:
Fixed Asset Additions Requiring Recognitions of a Liability		18

Asset Retirement Obligation as of December 25, 2005	$	595

In calculating the present value of the asset retirement obligation, the Company used the 10-year treasury yield plus the margin that the Company pays above LIBOR in its revolving credit facility. The 10-year treasury yield was 4.4% and the spread over LIBOR was 1.3%.

6. Property and Equipment

Property and equipment consist of the following:


	December 25,			December 26,
	2005			2004
	(in thousands)
Land and improvements	$	79,559		$	77,588
Buildings and improvements		144,631			148,060
Furniture, fixtures and equipment		188,621			170,736
Leasehold improvements		186,948			159,296
Equipment under capitalized leases		74,549			73,828
Property leased to others		1,888			1,888

		676,196			631,396
Less accumulated depreciation and amortization		(211,651	)		(179,588	)

	$	464,545		$	451,808

Depreciation and amortization of property and equipment was $43.8 million, $39.8 million and $36.4 million for the years ended December 25, 2005, December 26, 2004 and December 28, 2003, respectively.

7. Assets Held for Sale

Assets held for sale consist of the following:


	December 25,
	2005
	(in thousands)
Land	$	2,047
Buildings and improvements		6,501
Other assets		3,585
Less accumulated depreciation and amortization		(6,425	)

	$	5,708

The amount shown in assets held for sale as of December 25, 2005 on the consolidated balance sheet consists of assets related to six Company-owned O’Charley’s restaurants that were closed during the fourth quarter of 2005, a corporate aircraft and certain other non-operating assets. The Company decided to close six under-performing restaurants as part of a plan to improve existing restaurants. 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 also decided to sell certain other non-operating assets with a net book value of approximately $0.3 million. The Company estimates that the fair 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 all of these assets while they are being held for sale.

8. Other Assets

Other assets consist of the following:


	December 25,		December 26,
	2005		2004
	(in thousands)
Supplemental executive retirement plan asset	$	8,404	$	7,189
Liquor licenses		2,351		2,392
Deferred compensation		1,000		2,000
Prepaid interest and finance costs		6,302		7,678
Notes receivable		160		993
Other assets		1,915		2,058

	$	20,132	$	22,310

The increase in the supplemental executive retirement plan asset shown above is primarily related to salary and bonus deferrals combined with the Company match and earnings on the accounts of the participants during 2005.

The deferred compensation shown above represents the amount yet to be recognized in expense under the payment plan to certain team members of Ninety Nine Restaurant and Pub. The amounts are payable each January 1 in each of the next two years. The Company recognized compensation expense of $1.0 million plus accrued interest during 2005 and 2004 related to this payment plan.

9. Accrued Expenses

Accrued expenses consist of the following:


	December 25,		December 26,
	2005		2004
	(in thousands)
Accrued insurance expenses	$	11,206	$	8,164
Accrued employee benefits		3,457		4,592
Accrued interest		1,904		1,565
Accrued vacation		1,411		1,909
Other accrued expenses		5,761		4,648

	$	23,739	$	20,878

The amount for accrued insurance expenses shown above includes primarily liabilities for workers’ compensation and general liability claims for amounts that fall under the Company’s deductibles on each of the respective insurance policies. The amount also includes liabilities associated with the Company’s self-insured health insurance programs. The total of the accrued self-insured health insurance liabilities at December 25, 2005 was approximately $2.1 million.

10. Long-Term Debt

Long-term debt consists of the following:


	December 25,			December 26,
	2005			2004
	(in thousands)
Revolving line of credit	$	22,000		$	21,000
9% senior subordinated notes due 2013		125,000			125,000
Financing arrangement		1,197			—
Secured mortgage note payable		125			146

	$	148,322			146,146
Less current portion of long-term debt		(23	)		(21	)

Long-term debt, less current portion	$	148,299		$	146,125

The bank credit facility consists of a revolving credit facility with a maximum principal amount of $125.0 million. At December 25, 2005, the outstanding balance on the revolving credit facility was $22.0 million, which excludes approximately $6.1 million in letters of credit which reduces the capacity on the credit facility. The facility has a four-year term maturing in 2007, and bears interest, at the Company’s 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 2005, the Company’s LIBOR loans were priced using a margin of 1.25%. The credit facility imposes restrictions on the Company 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 the Company to comply with certain specified financial covenants, including covenants and ratios relating to the Company’s senior secured leverage, maximum adjusted leverage, minimum fixed charge coverage, minimum asset coverage and maximum capital expenditures. The Company was in compliance with such covenants at December 25, 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 the Company’s equity interests in each of the Company’s existing subsidiaries and substantially all of the Company’s 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 the Company pledge such real estate and equipment as collateral.

At December 25, 2005, the amount available under the revolving credit facility, after consideration of the Company’s outstanding letters of credit, was approximately $97.0 million.

In the fourth quarter of 2003, the Company amended and restated its credit facility and issued $125 million aggregate principal amount of notes. The proceeds from the notes were used to pay off a term loan and to repay a portion of the revolving credit loan under the Company’s bank credit facility. Interest on the notes accrues at the stated rate and is payable semi-annually on May 1 and November 1 of each year commencing May 1, 2004. The notes mature on November 1, 2013. The notes are unsecured, senior subordinated obligations and rank junior in right of payment to all of the Company’s existing and future senior debt (as defined in the indenture governing the notes). At any time before November 1, 2006, the Company may redeem up to 35% of the original aggregate principal amount of the notes at a redemption price equal to 109% of the principal amount of the notes, plus accrued and unpaid interest, with the cash proceeds of certain equity offerings. The Company may also redeem all or a portion of the notes on or after November 1, 2008 at the redemption prices set forth in the indenture governing the notes. The notes are guaranteed on an unsecured, senior subordinated basis by certain of the Company’s subsidiaries.

The indenture governing the notes contains certain customary covenants that, subject to certain exceptions and qualifications, limit the Company’s ability to, among other things: incur additional debt or issue preferred stock; pay dividends or make other distributions on, redeem or repurchase capital stock; make investments or other restricted payments; engage in sale and leaseback transactions; create or permit to exist certain liens; consolidate, merge or transfer all or substantially all of its assets; and enter into transactions with affiliates. In addition, if the Company sells certain assets (and generally does not use the proceeds of such sales for certain specified purposes) or experiences specific kinds of changes in control, the Company must offer to repurchase all or a portion of the notes. The notes are also subject to certain cross-default provisions with the terms of the Company’s other indebtedness.

On November 11, 2004, the Company entered into an agreement with GE Capital Franchise Finance Corporation. Under the terms of the Program Agreement, GE Capital will provide financing to certain qualified franchisees of the Company’s O’Charley’s restaurants (typically those in which the Company has an ownership interest) in a maximum aggregate amount of $75,000,000. Such financing may be used to fund the acquisition, construction and installation of the land, building and equipment for new O’Charley’s restaurants opened by such franchisees or to fund a franchisee’s acquisition from the Company of the land, building and equipment for existing O’Charley’s restaurants. Under the agreement, financing will be provided in the maximum amount of $2.5 million per location or 80% of the total acquisition and construction costs relating to each restaurant, whichever is less.

In consideration of GE Capital’s agreement to make financing available under the program to certain of the Company’s franchisees and joint venture partners, the Company has agreed, subject to limitations, to guarantee payment to GE Capital for any ultimate net losses it may suffer in connection with loans under the program. The Company’s maximum liability under such ultimate net loss guarantee is equal to the lesser of 20% of the sum of the original funded principal balances of all loans under the program or $15 million. In addition to the ultimate net loss guarantee, the Company has agreed to purchase any such loans that have been declared in default by GE Capital if the sum of the original funded principal balances of all loans under the program is less than $10 million. Subject to certain exceptions, the Company’s guarantee of loans under the program shall remain in effect for as long as the loans are outstanding. As of December 25, 2005, $1.2 million in loans have been provided to an O’Charley’s joint venture under this financing arrangement. The 15 year loan requires monthly payments with an annual interest rate of 8.3%. Furthermore, the Company has decided to assist this joint venture in opening its restaurants and has made additional loans from the Company to the joint venture. Under FIN 46(R), the joint venture is a variable interest entity, as the Company does not anticipate it having sufficient equity to fund its operations. Since the Company bears a disproportionate share of the financial risk associated with the joint venture, it has deemed itself to be the primary beneficiary of the joint venture, and in accordance with FIN 46(R) must consolidate the joint venture in its consolidated financial statements. As a result, this obligation of the joint venture partner with GE Capital has been consolidated on the Company’s consolidated financial statements.

The secured mortgage note payable at December 25, 2005 bears interest at 10.5% and is payable in monthly installments, including interest, through June 2010. This debt is collateralized by land and buildings having a depreciated cost of approximately $814,000 at December 25, 2005.

The annual maturities of long-term debt as of December 25, 2005 were: $23,000-2006; $22.0 million-2007; $28,000-2008; $31,000-2009; $17,000-2010; and $126.2 million thereafter.

11. Other Liabilities

Other liabilities consist of the following:


	December 25,		December 26,
	2005		2004
	(in thousands)
Deferred gain on sale leaseback transactions	$	18,916	$	20,484
Deferred rent		13,976		11,981
Supplemental executive retirement plan liability		10,454		8,747
Deferred compensation liability		1,071		2,000
Other long-term liabilities		3,217		1,822

	$	47,634	$	45,034

12. Lease Commitments

The Company has various leases for certain restaurant land and buildings under operating lease agreements. These leases generally contain renewal options ranging from five to 15 years and require the Company to pay all executory costs such as taxes, insurance and maintenance costs in addition to the lease payments. Certain leases also provide for additional contingent rentals based on a percentage of sales in excess of a minimum rent. The Company leases certain equipment and fixtures under capital lease agreements having lease terms from five to seven years. The Company expects to exercise its options under these agreements to purchase the equipment in accordance with the provisions of the lease agreements.

As of December 25, 2005 and December 26, 2004, approximately $41.9 million and $57.7 million, respectively, net book value of the Company’s property and equipment is under capitalized lease obligations. Interest rates on capitalized lease obligations range from 3.8% to 7.3%.

Future minimum lease payments at December 25, 2005 are as follows:


	Capitalized
	Equipment			Operating
	Leases			Leases
	(in thousands)
2006	$	11,082		$	30,353
2007		9,319			30,621
2008		9,401			30,599
2009		6,894			30,139
2010		1,758			29,840
Thereafter		2,047			297,232

Total minimum lease payments		40,501		$	448,784

Less amount representing interest		(3,141	)

Net minimum lease payments		37,360
Less current portion		(10,952	)

Capitalized lease obligations, net of current portion	$	26,408

Rent expense for 2005, 2004 and 2003 for operating leases is as follows:


	2005		2004		2003
	(in thousands)
Minimum rentals	$	30,438	$	29,485	$	22,252
Contingent rentals		421		410		423

	$	30,859	$	29,895	$	22,675

During the fourth quarter of 2003, the Company completed two sale and leaseback transactions. The first transaction, completed on October 17, 2003, involved the sale of 23 of its O’Charley’s restaurant properties for aggregate gross proceeds of approximately $50.0 million. The second transaction, completed on November 7, 2003, involved the sale of five of its O’Charley’s restaurants for aggregate gross proceeds of approximately $9.1 million. During the first quarter of 2004, the Company entered into a third sale and leaseback transaction. This transaction, completed on December 30, 2003, involved the sale of six of its O’Charley’s restaurant properties for aggregate gross proceeds of approximately $12.1 million.

All of these sales were made to an unrelated entity who then leased the properties back to the Company. The leases that the Company entered into in connection with these transactions require the Company to make additional future minimum lease payments aggregating approximately $119.4 million over the 20-year term of the leases, or an average of approximately $6.0 million annually. The leases also provide for the payment of additional rent beginning in the sixth year of the lease term based on increases in the Consumer Price Index. The net proceeds from these transactions were used to pay down indebtedness under the Company’s existing bank credit facility.

The Company recognized a gain of approximately $16.9 million on the sale and leaseback transactions completed during 2003 and a $4.5 million gain on the transaction completed in the first quarter of 2004. These gains are being deferred and amortized over the 20-year term of the leases that were entered into in conjunction with the transactions. The gain is reflected in other liabilities in the accompanying consolidated balance sheets. None of the gain amortization is reflected in the future minimum operating lease amounts shown above.

13. Derivative Instruments and Hedging Activities.

The Company has interest-rate-related derivative instruments to manage its exposure on its debt instruments. The Company does not enter into derivative instruments for any purpose other than cash-flow-hedging and fair-value-hedging purposes. That is, the Company does not speculate using derivative instruments.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The Company minimizes the credit risk in derivative instruments by entering into transactions with established counterparties.

Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The Company uses variable-rate debt to help finance its operations. The debt obligations expose the Company to variability in interest payments due to changes in interest rates. Management believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management periodically enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed-rate cash flows. Under the terms of the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt. The swaps have been designated as cash flow hedges.

Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable-rate, long-term debt obligations are reported in accumulated other comprehensive loss, net of tax. These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged debt obligation in the same period in which the related interest affects earnings.

The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate cash flow risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting

hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash flows.

The Company also uses fixed-rate debt to finance its operations. The debt obligations expose the Company to variability in the fair value of the fixed-rate debt due to changes in interest rates. Management believes that it is prudent to limit the variability of the debt’s fair value. To meet this objective, management enters into interest rate swap agreements to manage fluctuations in fair value resulting from changes in interest rates. These swaps change the fixed-rate cash flow on the debt obligations to variable cash flows. Under the terms of interest rate swaps, the Company receives fixed interest rate payments and makes variable interest rate payments, thereby creating the equivalent of variable rate debt.

Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of fair value associated with fixed rate, long-term debt obligations, along with the loss or gain on the hedged liability, are recorded in earnings.

At December 25, 2005 and December 26, 2004, the Company had interest rate swap agreements with a financial institution that effectively converted a portion of the fixed-rate indebtedness related to its $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.

Also at December 25, 2005 and December 26, 2004, the Company 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 expired in January 2006. As of December 25, 2005, $5,000 of deferred losses, net of tax, on the swaps were included in accumulated other comprehensive income and at December 25, 2005 and December 26, 2004, the total fair value of all swap agreements was a liability of $8,631 and $614,000, respectively, which is included as a component of other long-term liabilities. As of December 25, 2005 and December 26, 2004, $5,000 and $224,000, respectively, of deferred losses on derivative instruments accumulated in other comprehensive income are expected to be reclassified to earnings during the next 12 months. Transactions and events expected to occur over the next twelve months that will necessitate reclassifying these derivatives losses to earnings include the repricing of variable-rate debt.

14. Income Taxes

The total income tax expense (benefit) for each respective year is as follows:


	2005			2004			2003
	(in thousands)
Income taxes attributable to:
Earnings before cumulative effect of change in accounting principle	$	2,001		$	9,362		$	9,261
Tax effect of cumulative effect of accounting change		(97	)		—			—
Shareholders’ equity, tax change in market value of derivative instruments		53			189			251
Shareholders’ equity, tax benefit derived from non-statutory stock options exercised		(674	)		(1,224	)		(4,692	)

	$	1,283		$	8,327		$	4,820

Income tax expense (benefit) related to earnings before income taxes and cumulative effect of a change in accounting principle for each respective year is as follows:


	2005			2004			2003
	(in thousands)
Current	$	5,654		$	9,606		$	9,100
Deferred		(3,653	)		(244	)		161

	$	2,001		$	9,362		$	9,261

Income tax expense (benefit) attributable to earnings before income taxes and cumulative effect of a change in accounting principle differs from the amounts computed by applying the applicable U.S. federal income tax rate to pretax earnings from operations as a result of the following:


	2005			2004			2003
Federal statutory rate		35.0	%		35.0	%		35.0	%
Increase (decrease) in taxes due to:
State income taxes, net of federal tax benefit		8.6			4.9			4.3
Tax credits, primarily FICA tip credits		(28.5	)		(11.0	)		(9.2	)
Other		(0.8	)		(0.3	)		0.3

		14.3	%		28.6	%		30.4	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at each of the respective year ends are as follows:


	December 25,			December 26,
	2005			2004
	(in thousands)
Deferred tax assets:
Inventories, principally due to uniform capitalization	$	856		$	707
Accrued expenses, principally due to accruals for workers’ compensation, employee health and retirement benefits		7,538			7,922
Asset impairment and exit cost		2,292			308
Unearned gift card income		1,079			1,082
Tax credits, primarily FICA tip credits		4,836			1,807
State net operating loss carry forwards		2,993			1,775
Deferred rent		1,778			2,174
Other		0			106

Total gross deferred tax assets		21,372			15,881
Deferred tax asset valuation allowance		(2,961	)		(1,775	)

Total net deferred tax assets		18,411			14,106
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation and capital lease amortization		9,643			11,180
Goodwill		6,278			4,094
Other		59			0

Total gross deferred tax liabilities		15,980			15,274

Net deferred tax (asset) liability	$	(2,431	)	$	1,168

The net deferred tax (asset) liability is as follows:


	2005			2004
	(in thousands)
Deferred income taxes, long-term liability	$	7,407		$	7,884
Deferred income taxes, current asset		(9,838	)		(6,716	)

	$	(2,431	)	$	1,168

The Company has gross state net operating loss carry-forwards of $70 million to reduce future tax liabilities, which begin to expire at various times starting in 2008 and federal general business tax credits of $4,836,000 which begin to expire at various times starting in 2025.

The Company has established a valuation allowance of $2,961,000 and $1,775,000 as of December 25, 2005 and December 26, 2004, respectively, for state net operating loss carry-forwards. The change in the deferred tax valuation allowance was $1,186,000 and $1,258,000 in 2005 and 2004, respectively. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance.

15. Shareholders’ Equity

In October 2003, the Company announced an authorization to repurchase up to $25.0 million of the Company’s common stock. Any repurchases will be made from time to time in open market transactions or privately negotiated transactions at the Company’s discretion. To date, the Company has not repurchased any shares of common stock under this authorization. Any repurchases will be funded with borrowings under the Company’s bank credit facility or through cash flow generated through operations.

The Company’s charter authorizes 100,000 shares of preferred stock which the Board of Directors may, without shareholder approval, issue with voting or conversion rights upon the occurrence of certain events. At December 25, 2005, no preferred shares had been issued.

16. Earnings Per Share

The following is a reconciliation of the weighted average shares used in the calculation of basic and diluted earnings per share.


	2005		2004		2003
			(in thousands)
Weighted average shares outstanding—basic		22,837		22,290		21,560
Incremental stock option shares outstanding		259		357		610

Weighted average shares outstanding—diluted		23,096		22,647		22,170

For fiscal years 2005, 2004, and 2003, the number of anti-dilutive common stock equivalents excluded from the diluted weighted average shares calculation were approximately 2,200,374, 1,741,000, and 1,375,000, respectively.

17. Stock Compensation and Purchase Plans

The Company has various incentive stock option plans that provide for the grant of both statutory and nonstatutory stock options to officers, key team members, nonemployee directors and consultants of the Company. The Company reserved 4,183,523 shares of common stock for issuance pursuant to these plans. Options are granted at 100% of the fair market value of common stock on the date of the grant, expire ten years from the date of the grant and are exercisable at various times as previously determined by the Board of Directors. The Company adopted the O’Charley’s 2000 Stock Incentive Plan (the “2000 Plan”) in May 2000. The Company has reserved 3,000,000 shares of common stock for issuance pursuant to the 2000 Plan. At December 25, 2005, options to purchase 1,796,801 shares of common stock were outstanding under the 2000 Plan. Following adoption of the 2000 Plan, no additional options may be granted pursuant to previously adopted stock option plans. At December 25, 2005, options to purchase 992,519 shares of common stock were outstanding under those previously adopted plans. At December 25, 2005, the Company has 378,945 shares available for issuance under the 2000 Plan. The Company applies APB Opinion No. 25 in accounting for its stock option plans; and, accordingly, no compensation cost has been recognized because no options have been granted at an exercise price less than the fair value of the stock on the date of the grant.

A summary of stock option activity during the past three years is as follows:


				Weighted-
	Number of			Average
	Options			Exercise Price
Balance at December 29, 2002		3,523,324		$	12.43
Granted		1,261,722			18.60
Exercised		(969,511	)		6.45
Forfeited		(101,031	)		18.86

Balance at December 28, 2003		3,714,504		$	16.54
Granted		—			—
Exercised		(352,767	)		9.05
Forfeited		(138,388	)		19.33

Balance at December 26, 2004		3,223,349		$	17.23
Granted		—			—
Exercised		(294,861	)	$	10.93
Forfeited		(139,168	)		12.52

Balance at December 25, 2005		2,789,320		$	14.12

At the end of 2005, 2004, and 2003, the number of options exercisable was approximately 2,641,958, 1,620,000, and 1,690,000 respectively, and the weighted average exercise price of those options was $17.87, $15.47, and $13.47, respectively.

The following table summarizes information about stock options outstanding at December 25, 2005.


Options Outstanding											Options Exercisable
							Weighted-
							Avg.		Weighted-				Weighted-
							Remaining		Average				Average
							Contractual		Exercise				Exercise
Exercise Price					Number		Life		Price		Number		Price
	$	7.26	to	9.77		49,380		1.0	$	9.13		43,170	$	9.10
	$	9.77	to	12.10		322,975		2.4		11.76		260,946		11.74
	$	12.10	to	14.51		198,967		3.4		13.63		160,218		13.72
	$	14.51	to	16.93		615,047		3.5		15.39		592,297		15.39
	$	16.93	to	19.35		351,845		5.6		18.09		351,845		18.09
	$	19.35	to	21.77		990,382		6.6		20.77		990,382		20.77
	$	21.78	to	24.19		260,724		6.7		22.69		243,100		22.69

	$	7.26	to	24.19		2,789,320		5.5	$	14.12		2,641,958	$	17.87

The Company has established the CHUX Ownership Plan for the purpose of providing an opportunity for eligible team members of the Company to become shareholders in the Company. The Company has reserved 1,350,000 common shares for this plan. The CHUX Ownership Plan is intended to be an employee stock purchase plan, which qualifies for favorable tax treatment under Section 423 of the Internal Revenue Code. The Plan allows participants to purchase common shares at 85% of the lower of 1) the closing market price per share of the Company’s Common Stock on the last trading date of the plan period or 2) the average of the closing market price of the Company’s Common Stock on the first and the last trading day of the plan period. Contributions of up to 15% of base salary are made by each participant through payroll deductions. As of December 25, 2005, 745,855 shares have been issued under this plan.

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 awards recognized by the Company in fiscal 2005, 2004 and 2003 approximated $27,000, $426,000 and $470,000, respectively.

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 latter of which is discussed above. 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, 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. 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. If the vesting is based on performance criteria that could cause the awards to vest over varying period of time, or to not vest at all, the accounting treatment requires expensing from the grant date to the expected vesting date with the stock price based on the closing price on the quarterly and annual reporting dates. 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. 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, members of senior management and non-employee directors. Compensation (benefit) cost related to these restricted stock awards recognized by the Company during fiscal years 2005 and 2004 approximated $(35,000) and $1,031,000, respectively. The net compensation benefit included reversals of approximately $644,000 for

changes 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 330,129 shares of restricted stock to certain executives, members of senior management and non-employee directors. The Company recognized a net compensation expense of approximately $409,000 related to these restricted stock awards during 2005.

The following table provides information regarding each grant made in 2005, including the number of awards, the amount charged to equity and expense, and a description of the vesting schedule.


	Approximate		Amount
	Number of		Recorded to
	Shares		Common Stock
Grant Date	Granted		in 2005		Vesting Schedule
January 21, 2005 (1)		26,878	$	485,417	Ratably over periods of time ranging from date of grant to seven years (fixed-plan accounting)
January 21, 2005 (2)		190,089		0	Based upon cumulative growth in earnings per share over the next three years (variable-plan accounting)
May 12, 2005 (3)		24,000		398,880	Ratably over a three year period of time (fixed-plan accounting)
May 12, 2005 (4)		24,307		425,373	Ratably over periods of time ranging from date of grant to five years (fixed-plan accounting)
August 29, 2005 (5)		24,830		401,998	Ratably over periods of time ranging from date of grant to five years (fixed-plan accounting)
October 3, 2005 (6)		20,000		283,400	Ratably over a three year period of time (fixed-plan accounting)
December 8, 2005 (7)		20,025		298,973	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. Compensation cost related to these restricted stock awards recognized by the Company during fiscal 2005 approximated $110,000.

(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. There was not any compensation cost related to these awards recognized by the Company in fiscal 2005. As described above, the Company’s expected earnings target was below the required vesting target for these awards.

(3)		In the event that the service of the non-employee director terminates for any reason, 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. Compensation cost related to these restricted stock awards recognized by the Company during 2005 approximated $83,000.

(4)		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. Compensation cost related to these restricted stock awards recognized by the Company during fiscal 2005 approximated $93,000.

(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. Compensation cost related to these restricted stock awards recognized by the Company during the fiscal 2005 approximated $68,000.

(6)		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 be employed by the Company in the same position the individual held on the date of the grant (or a substantially equivalent or higher position), 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 as described above. Compensation cost related to this restricted stock award recognized by the Company during 2005 was approximately $22,000.

(7)		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. Compensation cost related to these restricted stock awards recognized by the Company fiscal 2005 approximated $33,000.

For purposes of providing the SFAS No. 123 and SFAS No. 148 disclosures in Note 1, the fair value of each unvested option grant is estimated on the date of grant using the Black-Scholes option pricing model. The Company did not issue stock options during 2005 and 2004, therefore, Black-Scholes assumptions are not shown for 2005 and 2004 below. The weighted average assumptions used for the Black-Scholes option pricing model for grants in 2003 are as follows:


	2003
Risk-free investment interest		4.0	%
Expected life in years		5.3
Expected volatility		46.7	%
Fair value of options granted (per share)	$	9.68

18. Team Member Benefit Plans

The Company has a 401(k) salary reduction and profit-sharing plan called the CHUX Savings Plan (the “Plan”). Under the Plan, team members can make contributions up to 15% of their annual compensation. The Company contributes annually to the Plan an amount equal to 50% of team member contributions, subject to certain limitations. Additional contributions are made at the discretion of the Board of Directors. Company contributions vest at the rate of 20% each year beginning after the team member’s initial year of employment. Company contributions were approximately $1,126,886 in 2005, $942,000 in 2004 and $500,000 in 2003.

The Company maintains a supplemental executive retirement plan for a select group of management team members to provide supplemental retirement income benefits through deferrals of salary and bonus. Participants in this plan can contribute, on a pre-tax basis, up to 50% of their base pay and 100% of their bonuses. The Company contributes annually to this plan an amount equal to a matching formula of each participant’s deferrals. Company contributions were approximately $340,000 in 2005, $280,000 in 2004 and $230,000 in 2003. The amount of the supplemental executive retirement plan liability payable to the participants at December 25, 2005 and December 26, 2004 was $10,454,000 and $8,747,000, respectively, and is recorded in other liabilities on the consolidated balance sheets.

19. Consolidated Statements of Cash Flows

Supplemental disclosure of cash flow information is as follows:


	2005		2004		2003
			(in thousands)
Cash paid for interest	$	13,660	$	12,782	$	11,589
Additions to capitalized lease obligations		4,510		10,810		20,046
Income taxes paid (net of refunds)		5,161		9,693		7,980

Other non cash transactions:
Transfer of assets to held-for-sale	$	5,708		—		—

20. Litigation and Contingencies

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 its employees and customers becoming infected. A total of 56 lawsuits were filed against the Company, all but one of which were filed in the Circuit Court for Knox County, Tennessee, that alleged injuries or fear of injuries from the Hepatitis A incident. As of the date of this filing, all of these cases have been settled and dismissed. The Company has liability insurance which covered its legal costs and substantially all of its share of the cases settled.

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 policy for this type of loss, but its carrier has disagreed with the Company’s claim. On July 11, 2005, certain underwriters at Lloyd’s, the Company’s insurance carrier, filed suit against the Company in the Circuit Court for Knox County, Tennessee seeking declaration by the court regarding certain limits in this policy which would effectively limit the Company’s recovery under the policy to $100,000. The Company has filed an answer and counterclaim requesting that the court declare that its coverage is not limited as asserted by the carrier. At this point, the Company cannot reasonably estimate the value of any potential resolution of this claim or the timing thereof.

The Company is also involved in an arbitration in the matter of Ballantyne Village, LLC v. O’Charley’s Inc. filed in April 2005. Ballantyne Village, LLC has alleged that the Company breached a lease on a retail center for a proposed Stoney River Legendary Steaks restaurant in Charlotte, North Carolina. The Company believes it terminated this lease prior to the commencement of its tenancy in accordance with its terms, that the counterparty’s claims are without merit. The Company intends to defend the allegations against it in this matter vigorously.

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 the legal proceedings pending against it as of the date of this report will have a material adverse effect on its liquidity or financial condition. The Company may incur or accrue expenses relating to legal proceedings, however, which may adversely affect its results of operations in a particular period.

21. Guarantees

The Company has agreed, subject to limitations, to guarantee payment to GE Capital of any ultimate net losses it may suffer in connection with loans under the program. The Company’s maximum liability under the guarantee is equal to the lesser of 20% of the sum of the original funded principal balances of all loans under the program or $15 million. In addition to the ultimate net loss guarantee, the Company has agreed to purchase any such loans that have been declared in default by GE Capital if the sum of the original funded principal balances of all loans under the program is less than $10 million. Subject to certain exceptions, the Company’s guarantee of loans under the program shall remain in effect for as long as the loans are outstanding. As of December 25, 2005, $1.2 million in loans have been provided to O’Charley’s franchisees under this financing arrangement.

22. Franchising Arrangements

On December 30, 2003, the Company entered into a multi-unit franchise agreement with a franchisee, OCM Development, LLC to develop and operate O’Charley’s restaurants in Michigan. The agreement specifies the franchisee will develop 15 new O’Charley’s restaurants.

The franchising arrangement requires the Company to provide access to certain contractual arrangements that the Company has with its vendors in order for the franchisee to benefit from those contracts. The development fees for the franchisee are $50,000 each for the first two restaurants and $25,000 each for the remaining 13 restaurants. The franchisee is also required to pay a franchise fee and marketing fund fee that are based on a percentage of sales. Pursuant to the arrangement, the franchisee was required to pay $212,500 as development fees at the closing of the agreement, which represents half of the fees associated with the 15 restaurants agreed upon. The franchisee is required to pay the other half of the development fee to the Company as each new restaurant opens. The Company recognized in income $100,000 and $50,000 in development fees in fiscal 2005 and 2004 related to the opening of franchised restaurants. The remaining development fees paid have been deferred and will be recognized in income as each restaurant opens.

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 ten new O’Charley’s restaurants over the next six years in certain markets in the states of Iowa, Nebraska, Topeka, Kansas and Eastern South Dakota.

The franchising arrangement requires the Company to provide access to certain contractual arrangements that the Company has with its vendors in order for the franchisee to benefit from those contracts. The development fees for the franchisee are $50,000 each for the first two restaurants and $25,000 each for the remaining eight restaurants. The franchisee is also required to pay a franchise fee and marketing fund fee that are based on a percentage of sales. Pursuant to the arrangement, the franchisee was required to pay $100,000 as development fees at the closing of the agreement, which represents a portion of the fees associated with the ten restaurants agreed upon. The franchisee is required to pay the remaining amount of the development fee to the Company as each new restaurant opens. The development fees paid have been deferred and will be recognized in income as each restaurant opens.

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.

The franchising arrangement requires the Company to provide access to certain contractual arrangements that the Company has with its vendors in order for the franchisee to benefit from those contracts. The development fees for the franchisee are $50,000 each for the first two restaurants and $25,000 each for the remaining restaurant in each of its four granted areas. The franchisee is also required to pay a franchise fee and marketing fund fee that are based on a percentage of sales. Pursuant to the arrangement, the franchisee was required to pay $500,000 as development fees at the closing of the agreement, which represents a portion of the fees associated with the 50 restaurants agreed upon. The franchisee is required to pay the remaining amount of the development fee to the Company as each new restaurant opens. The development fees paid have been deferred and will be recognized in income as each restaurant opens.

23. Quarterly Financial and Restaurant Operating Data (Unaudited)

The following is a summary of certain quarterly results of operations data for each of the last two fiscal years. For accounting purposes, the first quarter consists of 16 weeks and the second, third and fourth quarters each consist of 12 weeks. As a result, some of the variations reflected in the following table are attributable to the different lengths of the fiscal quarters.


	First		Second		Third			Fourth
	Quarter		Quarter		Quarter			Quarter
	(dollars in thousands, except per share data)
2005
Revenues	$	290,491	$	214,249	$	211,759		$	213,689
Income (Loss) from operations	$	18,793	$	10,528	$	(4,885	)	$	4,760
Earnings before cumulative effect of change in accounting principle	$	10,114	$	4,966	$	(4,689	)	$	1,638
Net earnings (loss)(1)	$	10,114	$	4,966	$	(4,689	)	$	1,487
Basic earnings per common share(1)	$	0.45	$	0.22	$	(0.20	)	$	0.06
Diluted earnings per common share(1)	$	0.44	$	0.21	$	(0.20	)	$	0.06
Company-owned restaurants in operation, end of quarter		331		334		341			341

2004
Revenues	$	267,743	$	201,155	$	200,277		$	202,211
Income from operations	$	15,325	$	10,576	$	9,078		$	11,178
Net earnings	$	7,554	$	5,116	$	4,107		$	6,542
Basic earnings per common share	$	0.34	$	0.23	$	0.18		$	0.29
Diluted earnings per common share	$	0.33	$	0.23	$	0.18		$	0.29
Company-owned restaurants in operation, end of quarter		307		313		320			326


(1)		Represents net earnings and basic and diluted earnings per share after the cumulative effect of a change in accounting principle.

24. Commitments

The Company has minimum purchase commitments with various vendors through 2008. Outstanding commitments as of December 25, 2005 were approximately $49.3 million and consist primarily of minimum purchase commitments for beef, pork, poultry and other food products related to normal business operations.

25. Supplementary Condensed 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 condensed consolidating financial information for the Company and the subsidiary guarantors as of December 25, 2005 and December 26, 2004 and for each of the three years in the period ended December 25, 2005

Consolidating Balance Sheet
December 25, 2005


							Minor
							Subsidiaries and
	Parent			Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
				( in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	2,611		$	3,072		$	16		$	5,699
Trade accounts receivable		4,473			7,542			42			12,057
Intercompany (payable) receivables		(132,552	)		141,466			(8,914	)		—
Inventories		3,923			41,169			39			45,131
Deferred income taxes		9,454			384			—			9,838
Other current assets		3,297			3,233			(1,025	)		5,505
Assets held for sale		3,541			2,167			—			5,708

Total current assets		(105,253	)		199,033			(9,842	)		83,938
Property and Equipment, net		323,827			134,622			6,096			464,545
Goodwill		—			93,074			—			93,074
Intangible Asset		—			25,921			—			25,921
Other Assets		217,397			28,558			(225,823	)		20,132

Total Assets	$	435,971		$	481,208		$	(229,569	)	$	687,610


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Trade accounts payable	$	12,412		$	16,515		$	(7,053	)	$	21,874
Accrued payroll and related expenses		12,880			7,738			(1,038	)		19,580
Accrued expenses		13,543			10,671			(475	)		23,739
Deferred revenue		9,466			11,881			46			21,393
Federal, state and local taxes		(6,020	)		16,669			64			10,713
Current portion of long-term debt and capitalized lease obligations		10,559			372			44			10,975

Total current liabilities		52,840			63,846			(8,412	)		108,274
Long-Term Debt, less current portion		164,827			—			(16,528	)		148,299
Capitalized Lease Obligations, less current portion		25,126			1,283			(1	)		26,408
Deferred Income Taxes		8,191			(784	)		—			7,407
Other Liabilities		30,249			16,266			1,119			47,634

Total Liabilities		281,233			80,611			(23,822	)		338,022
Shareholders’ equity (deficit):
Common stock		184,995			203,101			(202,722	)		185,374
Accumulated other comprehensive loss, net of tax		(5	)		—			—			(5	)
Unearned compensation		(4,027	)		—			—			(4,027	)
Retained (deficit) earnings		(26,225	)		197,496			(3,025	)		168,246

Total shareholders’ equity (deficit)		154,738			400,597			(205,747	)		349,588

Total Liabilities and Shareholders’ Equity (Deficit)	$	435,971		$	481,208		$	(229,569	)	$	687,610

Consolidating Balance Sheet

December 26, 2004


							Minor
							Subsidiaries and
	Parent			Subsidiary			Consolidating
	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 (payable) receivables		(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
Intangible Asset		—			25,921			—			25,921
Other Assets		217,351			26,217			(221,258	)		22,310

Total Assets	$	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
Long-Term Debt, less current portion		162,865			—			(16,740	)		146,125
Capitalized Lease Obligations, less current portion		30,689			1,655			—			32,344
Deferred Income Taxes		8,299			(415	)		—			7,884
Other Liabilities		32,097			11,963			974			45,034

Total Liabilities		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

Consolidating Statement of Operations
For the Year Ended December 25, 2005


							Minor
							Subsidiaries
							and
	Parent			Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
				(in thousands)
Revenues:
Restaurant sales	$	547,326		$	353,088		$	20,915		$	921,329
Commissary sales		—			253,994			(245,496	)		8,498
Franchise revenue		482			—			(121	)		361

		547,808			607,082			(224,702	)		930,188

Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		177,032			107,828			(7,072	)		277,788
Payroll and benefits		196,870			117,161			4,493			318,524
Restaurant operating costs		97,842			69,405			4,913			172,160
Cost of commissary sales		—			237,315			(229,605	)		7,710
Advertising expenses		—			25,468			—			25,468
General and administrative expenses		4,728			36,997			220			41,945
Depreciation and amortization, property and equipment		31,038			12,573			195			43,806
Asset impairment and disposals		6,220			1,100			—			7,320
Pre-opening costs		3,531			2,432			308			6,271

		517,261			610,279			(226,548	)		900,992


Income (Loss) from Operations		30,547			(3,197	)		1,846			29,196
Other Expense (Income):
Interest expense, net		14,142			753			229			15,124
Other, net		54,530			(54,488	)		—			42

		68,672			(53,735	)		229			15,166


(Loss) Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle		(38,125	)		50,538			1,617			14,030
Income Tax (Benefit) Expense		(5,437	)		7,207			231			2,001

(Loss) Earnings Before Cumulative Effect of Change in Accounting Principle		(32,688	)		43,331			1,386			12,029
Cumulative Effect of Change in Accounting Principle, net of tax		(151	)		—			—			(151	)

Net (Loss) Earnings	$	(32,839	)	$	43,331		$	1,386		$	11,878

Consolidating Statement of Operations
For the Year Ended December 26, 2004


							Minor
							Subsidiaries
							and
	Parent			Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
				(in thousands)
Revenues:
Restaurant sales	$	526,485		$	320,114		$	17,660		$	864,259
Commissary sales		—			189,429			(182,394	)		7,035
Franchise revenue		109			—			(17	)		92

		526,594			509,543			(164,751	)		871,386

Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		165,034			99,169			(3,190	)		261,013
Payroll and benefits		184,312			102,935			3,267			290,514
Restaurant operating costs		91,268			61,952			4,271			157,491
Cost of commissary sales		—			178,555			(171,924	)		6,631
Advertising expenses		—			25,621			—			25,621
General and administrative expenses		3,334			34,872			31			38,237
Depreciation and amortization, property and equipment		29,358			10,419			21			39,798
Asset impairment and disposals		—			16			—			16
Pre-opening costs		4,165			1,504			239			5,908

		477,471			515,043			(167,285	)		825,229

Income (Loss) from Operations		49,123			(5,500	)		2,534			46,157
Other Expense (Income):
Interest expense, net		12,564			894			18			13,476
Other, net		52,474			(52,474	)		—			—

		65,038			(51,580	)		18			13,476


(Loss) Earnings Before Income Taxes		(15,915	)		46,080			2,516			32,681
Income Tax (Benefit) Expense		(4,051	)		12,718			695			9,362

Net (Loss) Earnings	$	(11,864	)	$	33,362		$	1,821		$	23,319

Consolidating Statement of Operations
For the Year Ended December 28, 2003


							Minor
							Subsidiaries
							and
	Parent			Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
				(in thousands)
Revenues:
Restaurant sales	$	467,141		$	264,673		$	21,926		$	753,740
Commissary sales		—			161,537			(156,266	)		5,271

		467,141			426,210			(134,340	)		759,011

Costs and Expenses:
Cost of restaurant sales:
Cost of food and beverage		141,545			79,474			187			221,206
Payroll and benefits		160,768			86,801			4,846			252,415
Restaurant operating costs		82,618			50,853			5,734			139,205
Cost of commissary sales		—			152,293			(147,323	)		4,970
Advertising expenses		—			24,300			—			24,300
General and administrative		2,658			25,358			—			28,016
Depreciation and amortization, property and equipment		26,965			9,395			—			36,360
Asset impairment and disposals		—			(180	)		—			(180	)
Pre-opening costs		5,493			1,407			—			6,900

		420,047			429,701			(136,556	)		713,192

Income (Loss) from Operations		47,094			(3,491	)		2,216			45,819
Other Expense (Income):
Interest expense, net		13,289			864			—			14,153
Debt extinguishment charge		1,800			—			—			1,800
Other, net		46,450			(47,034	)		—			(584	)

		61,539			(46,170	)		—			15,369

(Loss) Earnings Before Income Taxes		(14,445	)		42,679			2,216			30,450
Income Tax (Benefit) Expense		(5,187	)		13,735			713			9,261

Net (Loss) Earnings	$	(9,258	)	$	28,944		$	1,503		$	21,189

Consolidating Statement of Cash Flows
For the Year Ended December 25, 2005


							Minor
							Subsidiaries
							and
	Parent			Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
				(in thousands)
Cash Flows from Operating Activities:
Net (loss) earnings	$	(32,839	)	$	43,331		$	1,386		$	11,878
Adjustments to reconcile net (loss) earnings to net cash provided by (used in) operating activities:
Depreciation and amortization, property and equipment		31,038			12,573			195			43,806
Amortization of debt issuance costs		1,426			—			—			1,426
Deferred income taxes		(3,653	)		—			—			(3,653	)
Expenses related to equity based compensation		485			—			—			485
Amortization of deferred gain on sale leaseback		(1,056	)		—			—			(1,056	)
Loss on the sale and involuntary conversion of assets		218			15			—			233
Asset impairment and disposals		6,220			1,100			—			7,320
Changes in assets and liabilities:
Trade accounts receivable		(1,833	)		(1,413	)		(28	)		(3,274	)
Inventories		(604	)		(11,377	)		(25	)		(12,006	)
Other current assets		(2,790	)		1,132			2,035			377
Trade accounts payable		5,816			5,176			(3,377	)		7,615
Deferred revenue		1,022			1,127			34			2,183
Accrued payroll and other accrued expenses, and federal, state and local taxes		3,851			1,232			(1,290	)		3,793
Other long-term assets and liabilities		3,790			1,963			(2,822	)		2,931
Tax benefit derived from exercise of stock options		674			—			—			674

Net cash provided by (used in) operating activities		11,765			54,859			(3,892	)		62,732

Cash Flows from Investing Activities:
Additions to property and equipment		(14,805	)		(47,088	)		(6,885	)		(68,778	)
Proceeds from the sale of assets		3,364			—			—			3,364
Other, net		3,204			(11,332	)		10,115			1,987

Net cash (used in) provided by investing activities		(8,237	)		(58,420	)		3,230			(63,427	)

Cash Flows from Financing Activities:
Proceeds from long-term debt		5,885			—			—			5,885
Payments on long-term debt and capitalized lease obligations		(15,855	)		—			—			(15,855	)
Exercise of employee incentive stock options and issuances under stock purchase plan		5,592			—			—			5,592

Net cash used in financing activities		(4,378	)		—			—			(4,378	)


Increase (decrease) in cash and cash equivalents		(850	)		(3,561	)		(662	)		(5,073	)
Cash and cash equivalents at beginning of the year		2,491			7,733			548			10,772

Cash and cash equivalents at end of the year	$	1,641		$	4,172		$	(114	)	$	5,699

Consolidating Statement of Cash Flows
For the Year Ended December 26, 2004


							Minor
							Subsidiaries
							and
	Parent			Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
				(in thousands)
Cash Flows from operating activities:
Net (loss) earnings	$	(11,864	)	$	33,362		$	1,821		$	23,319
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization, property and equipment		29,358			10,419			21			39,798
Amortization of debt issuance costs		1,449			—			—			1,449
Deferred income taxes		(464	)		—			—			(464	)
Compensation expense related to restricted stock plans		2,171			—			—			2,171
Amortization of deferred gain on sale and leaseback		(1,055	)		—			—			(1,055	)
Loss on the sale and involuntary conversion of assets		207			8			—			215
Asset impairment and disposals		—			16			—			16
Donation of stock		137			—			—			137
Changes in assets and liabilities:
Trade accounts receivable		550			(1,271	)		(13	)		(734	)
Inventories		(317	)		(11,272	)		(23	)		(11,612	)
Other current assets		1,264			(2,449	)		107			(1,078	)
Trade accounts payable		(245	)		(967	)		84			(1,128	)
Deferred revenue		1,165			2,589			14			3,768
Accrued payroll and other accrued expenses, and federal state and local taxes		4,084			6,588			(246	)		10,426
Other long-term assets and liabilities		2,627			(152	)		1,571			4,046
Tax benefit derived from exercise of stock options		1,224			—			—			1,224

Net cash provided by operating activities		30,291			36,871			3,336			70,498

Cash Flows from Investing Activities:
Additions to property and equipment		(34,507	)		(23,999	)		(1,985	)		(60,491	)
Proceeds from the sale of assets		1,928			15			—			1,943
Other, net		15,893			(11,843	)		(804	)		3,246

Net cash used in investing activities		(16,686	)		(35,827	)		(2,789	)		(55,302	)

Cash Flows from financing activities:
Proceeds from long-term debt		4,454			—			—			4,454
Payments on long-term debt and capitalized lease obligations		(33,799	)		—			—			(33,799	)
Proceeds from sale and lease-back transactions		12,090			—			—			12,090
Minority interest in joint ventures		750			—			—			750
Debt issuance costs		(900	)		—			—			(900	)
Exercise of employee incentive stock options and issuances under stock purchase plan		3,407			—			—			3,407

Net cash used in financing activities		(13,998	)		—			—			(13,998	)


(Decrease) increase in cash and cash equivalents		(393	)		1,044			547			1,198
Cash and cash equivalents at beginning of the year		2,946			6,628			—			9,574

Cash and cash equivalents at end of the year	$	2,553		$	7,672		$	547		$	10,772

Consolidating Statement of Cash Flows
For the Year Ended December 28, 2003


							Minor
							Subsidiaries
							and
	Parent			Subsidiary			Consolidating
	Company			Guarantors			Adjustments			Consolidated
				(in thousands)
Cash Flows from Operating Activities:
Net (loss) earnings	$	(9,258	)	$	28,944		$	1,503		$	21,189
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
Depreciation and amortization, property and equipment		26,965			9,395			—			36,360
Debt extinguishment charge		1,800			—			—			1,800
Amortization of debt issuance costs		1,184			—			—			1,184
Deferred income taxes, excluding effect of Ninety Nine acquisition		184			—			—			184
Compensation expense related to restricted stock plans		470			—			—			470
Amortization of deferred gain on sale-leaseback		(163	)		—			—			(163	)
Gain on the sale and involuntary conversion of assets		(415	)		(8	)		—			(423	)
Asset impairment and disposals		—			(180	)		—			(180	)
Changes in assets and liabilities, excluding effect of Ninety Nine acquisition:
Trade accounts receivable		(302	)		(1,659	)		—			(1,961	)
Inventories		(446	)		(102	)		—			(548	)
Other current assets		438			205			(117	)		526
Trade accounts payable		(7,732	)		3,995			3,356			(381	)
Deferred revenue		64			2,971			—			3,035
Accrued payroll and other accrued expenses, and federal state and local taxes		30,080			(25,905	)		(3,803	)		372
Other long-term assets and liabilities		1,038			(478	)		1,604			2,164
Tax benefit derived from exercise of stock options		4,692			—			—			4,692

Net cash provided by operating activities		48,599			17,178			2,543			68,320

Cash Flows from Investing Activities:
Additions to property and equipment		(50,905	)		(17,256	)		563			(67,598	)
Acquisition of company, net of cash acquired		(114,286	)		(1	)		—			(114,287	)
Proceeds from the sale and involuntary conversion of assets		3,704			20			—			3,724
Other, net		1,850			1,668			(3,106	)		412

Net cash used in investing activities		(159,637	)		(15,569	)		(2,543	)		(177,749	)

Cash Flows from Financing Activities:
Proceeds from long-term debt		265,121			—			—			265,121
Payments on long-term debt and capitalized lease obligations		(207,639	)		—			—			(207,639	)
Proceeds from sale and lease-back transactions		59,097			—			—			59,097
Debt issuance costs		(10,898	)		—			—			(10,898	)
Exercise of employee incentive stock options and issuances under stock purchase plan		5,011			—			—			5,011

Net cash provided by financing activities		110,692			—			—			110,692


(Decrease) increase in cash and cash equivalents		(346	)		1,609			—			1,263
Cash and cash equivalents at beginning of the year		3,292			5,019			—			8,311

Cash and cash equivalents at end of the year	$	2,946		$	6,628		$	—		$	9,574

Schedule II Valuation and Qualifying Accounts


			Additions
	Balance at		charged to		Charged to				Balance
	beginning		costs and		other				at end
Description	of period		expenses		accounts		Deductions		of period
			(Dollars in thousands)
Valuation allowance for state net operating loss carry-forwards
Year ended December 25, 2005	$	1,775	$	1,234	$	—	$	48	$	2,961
Year ended December 26, 2004		517		1,258		—		—		1,775
Year ended December 28, 2003		—		517		—		—		517

See accompanying report of the independent registered public accounting firm.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. 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 annual 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.

Management’s Annual Report On Internal Control Over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

	(i)		pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

	(ii)		provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

	(iii)		provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 25, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on management’s assessment and those criteria, management believes that, as of December 25, 2005, the Company’s internal control over financial reporting was effective.

The Company’s independent registered public accounting firm, KPMG LLP, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. That report begins below.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during our fiscal quarter ended December 25, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
O’Charley’s Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting (Item 9A), that O’Charley’s Inc. (the Company) maintained effective internal control over financial reporting as of December 25, 2005, based on criteria established inInternal Control—Integrated Framework,issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that O’Charley’s Inc. maintained effective internal control over financial reporting as of December 25, 2005, is fairly stated, in all material respects, based on criteria established inInternal Control—Integrated Framework,issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, O’Charley’s Inc. maintained, in all material respects, effective internal control over financial reporting as of December 25, 2005, based on criteria established inInternal Control—Integrated Framework,issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of O’Charley’s Inc. and subsidiaries as of December 25, 2005 and December 26, 2004 and the related consolidated statements of earnings, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 25, 2005, and our report dated March 9, 2006 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Nashville, Tennessee
March 9, 2006

Item 9B. Other Information.

On December 8, 2005, the Compensation and Human Resources Committee of our Board of Directors approved the Fiscal 2006 base salaries for our Chief Executive Officer and four most highly compensated executive officers. On such date, the Committee also approved the annual cash incentive bonus program for senior management (including the named executive officers) for Fiscal 2006 performance. Information relating to the base salaries and bonus program for the named executive officers is included in Exhibit 10.57 to this Annual Report on Form 10-K and is incorporated herein by reference.

On February 24, 2006, the Committee adopted the 2006-2007 Special Incentive Plan for Extraordinary Performance. Information relating to such plan with respect to the named executive officers is included in Exhibit 10.57 to this Annual Report on Form 10-K and is incorporated herein by reference.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The Proxy Statement issued in connection with the shareholders meeting to be held on May 18, 2006, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the captions “Corporate Governance,” “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” information required by Item 10 of Form 10-K and is incorporated herein by reference. Pursuant to General Instruction G(3), certain information concerning executive officers of the Company is included in Part I of this Form 10-K, under the caption “Executive Officers of the Registrant.”

Item 11. Executive Compensation.

The Proxy Statement issued in connection with the shareholders meeting to be held on May 18, 2006, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the captions “Director Compensation” and “Executive Compensation” information required by Item 11 of Form 10-K and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The Proxy Statement issued in connection with the shareholders meeting to be held on May 18, 2006, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the captions “Security Ownership of Certain Beneficial Owners,” “Election of Directors” and “Equity Compensation Plans” information required by Item 12 of Form 10-K and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

Item 14. Principal Accountant Fees and Services.

The Proxy Statement issued in connection with the shareholders meeting to be held on May 18, 2006, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the caption “Fees Billed to the Company by KPMG LLP During 2005 and 2004” information required by Item 14 of Form 10-K and is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) 1. Financial Statements: See Item 8

2. Financial Statement Schedules: See Item 8

3. Management Contracts and Compensatory Plans and Arrangements

	•		O’Charley’s Inc. 1985 Stock Option Plan (included as Exhibit 10.6)

	•		O’Charley’s Inc. 1990 Employee Stock Plan (included as Exhibit 10.7)

	•		First Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (included as Exhibit 10.8)

	•		Second Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (included as Exhibit 10.9)

	•		Third Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (included as Exhibit 10.10)

	•		Fourth Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (included as Exhibit 10.11)

	•		O’Charley’s 1991 Stock Option Plan for Outside Directors, as amended (included as Exhibit 10.12)

	•		CHUX Ownership Plan, as amended (included as Exhibit 10.13)

	•		O’Charley’s 2000 Stock Incentive Plan (included as Exhibit 10.14)

	•		Amended Restated Severance Compensation Agreement, dated February 22, 2006, by and between O’Charley’s Inc. and Gregory L. Burns (included as Exhibit 10.15)

	•		Severance Agreement and General Release dated June 24, 2004 between William E. Hall, Jr. and O’Charley’s Inc. (included as Exhibit 10.34)

	•		Severance Agreement and General Release, dated October 29, 2004, by and between A. Chad Fitzhugh and O’Charley’s Inc. (included as Exhibit 10.35)

	•		Form of Incentive Stock Option Agreement (included as Exhibit 10.36)

	•		Form of Non-Qualified Stock Option Agreement (included as Exhibit 10.37)

	•		Form of Restricted Stock Agreement for Employees (Time-Based Vesting) (included as Exhibit 10.38)

	•		Form of Restricted Stock Agreement for Employees (Performance-Based Vesting) (included as Exhibit 10.39)

	•		Form of Restricted Stock Agreement for Directors (included as Exhibit 10.40)

	•		Letter Agreement, dated November 11, 2004, between O’Charley’s Inc. and Lawrence E. Hyatt (included as Exhibit 10.50)

	•		Non-Compete/Severance Letter Agreement, dated November 11, 2004, between Lawrence E. Hyatt and O’Charley’s Inc. (included as Exhibit 10.51)

	•		Severance Compensation Agreement, dated as of November 15, 2004, between O’Charley’s Inc. and Lawrence E. Hyatt (included as Exhibit 10.52)

	•		Restricted Stock Agreement, dated as of November 15, 2004, between O’Charley’s Inc. and Lawrence E. Hyatt (included as Exhibit 10.53)

	•		Restricted Stock Agreement, dated as of November 15, 2004, between O’Charley’s Inc. and Lawrence E. Hyatt (included as Exhibit 10.54)

	•		Restricted Stock Agreement, dated as of November 15, 2004, between O’Charley’s Inc. and Lawrence E. Hyatt (included as Exhibit 10.55)

	•		Summary of Director and Executive Officer Compensation (included as Exhibit 10.57)

	•		O’Charley’s Inc. 2005 Executive Officers’ Cash Incentive Plan (included as Exhibit 10.58)

	•		O’Charley’s Inc. Deferred Compensation Plan (as amended) (included as Exhibit 10.59)

	•		Amendment to CHUX Ownership Plan (included as Exhibit 10.62)

	•		Severance Agreement and General Release, dated January 1, 2006, by and between Steven J. Hislop and O’Charley’s Inc. (included as Exhibit 10.63)

	•		Severance Agreement and General Release, dated January 1, 2006, by and between Richard D. May and O’Charley’s Inc. (included as Exhibit 10.64)

	•		Letter Agreement, dated August 25, 2005, between O’Charley’s Inc. and Randall C. Harris (included as Exhibit 10.65)

	•		Non-Compete/Severance Letter Agreement, dated October 3, 2005, between Randall C. Harris and O’Charley’s Inc. (included as Exhibit 10.66)

	•		Severance Compensation Agreement, dated as of October 3, 2005, between O’Charley’s Inc. and Randall C. Harris (included as Exhibit 10.67)

	•		Restricted Stock Agreement, dated as of October 3, 2005, between O’Charley’s Inc. and Randall C. Harris (included as Exhibit 10.68)

	•		Letter Agreement, dated January 22, 2006, between O’Charley’s Inc. and Jeffrey D. Warne (included as Exhibit 10.69)

	•		Severance Compensation Agreement, dated as of January 22, 2006, between O’Charley’s Inc. and Jeffrey D. Warne (included as Exhibit 10.70)

	•		Restricted Stock Agreement, dated as of February 13, 2006, between O’Charley’s Inc. and Jeffrey D. Warne (included as Exhibit 10.71)

4. Exhibits:


Exhibit
Number		Description
2.1	—	Asset Purchase Agreement by and among O’Charley’s Inc., 99 Boston, Inc., 99 Boston of Vermont, Inc., Doe Family II LLC, and each of William A. Doe, III, Dana G. Doe and Charles F. Doe, Jr. (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to this agreement are omitted, but will be provided supplementally to the Commission upon request.) (incorporated herein by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 1, 2002)

2.2	—	Merger Agreement by and among O’Charley’s Inc., Volunteer Acquisition Corporation, 99 West, Inc., and each of William A. Doe, III, Dana G. Doe and Charles F. Doe, Jr. (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to this agreement are omitted, but will be provided supplementally to the Commission upon request.) (incorporated herein by reference to Exhibit 2.2 of the Company’s Current Report on Form 8-K filed with the Commission on November 1, 2002)

2.3	—	Settlement Agreement, dated as of December 11, 2003 (incorporated by reference to Exhibit 2.3 of the Company’s Annual Report on Form 10-K for the year ended December 28, 2003)

3.1	—	Restated Charter of the Company (restated electronically for SEC filing purposes only and incorporated by reference to Exhibit 3 of the Company’s Current Report on Form 8-K filed with the Commission on December 27, 2000)

3.2	—	Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 22, 2001)

4.1	—	Form of Certificate for the Common Stock (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-1, Registration No. 33-35170)

4.2	—	Rights Agreement, dated December 8, 2000, between the Company and First Union National Bank, as Rights Agent (incorporated by reference to Exhibit 4 of the Company’s Current Report on Form 8-K filed with the Commission on December 27, 2000)

10.1	—	Participation Agreement, dated as of October 10, 2000, among O’Charley’s Inc., as Lessee, First American Business Capital, Inc., as Lessor, AmSouth Bank, as Agent, Bank of America, Firstar Bank, N.A., First Union National Bank and SunTrust Bank (incorporated by reference to Exhibit 10.13 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000)

10.2	—	First Amendment to Participation Agreement, dated July 9, 2001, among O’Charley’s Inc., as lessee, First American Business Capital, Inc., as lessor, AmSouth Bank, as agent, Bank of America, N.A., Firstar Bank, N.A., First Union National Bank and SunTrust Bank (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 15, 2001)

10.3	—	Lease, dated as of October 10, 2000, by and between First American Business Capital, Inc., as Lessor, and O’Charley’s Inc., as Lessee (incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000)

10.4	—	Lease, dated October 10, 2000, by and between First American Business Capital, Inc., as Lessor, and O’Charley’s Inc., as Lessee (incorporated by reference to Exhibit 10.15 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2000)

10.5	—	First Amendment to Lease, dated July 9, 2001, by and between First American Business Capital, Inc., as lessor, and O’Charley’s Inc., as lessee (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 15, 2001)


Exhibit
Number		Description
10.6	—	O’Charley’s Inc. 1985 Stock Option Plan (incorporated by reference to Exhibit 10.27 of the Company’s Registration Statement on Form S-1, Registration No. 33-35170)

10.7	—	O’Charley’s Inc. 1990 Employee Stock Plan (incorporated by reference to Exhibit 10.26 of the Company’s Registration Statement on Form S-1, Registration No. 33-35170)

10.8	—	First Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (incorporated by reference to Exhibit 10.24 of the Company’s Annual Report on Form 10-K for the year ended December 29, 1991)

10.9	—	Second Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (incorporated by reference to Exhibit 10.23 of the Company’s Annual Report on Form 10-K for the year ended December 26, 1993)

10.10	—	Third Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (incorporated by reference to Exhibit 10.14 of the Company’s Annual Report on Form 10-K for the year ended December 27, 1998)

10.11	—	Fourth Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2000)

10.12	—	O’Charley’s Inc. 1991 Stock Option Plan for Outside Directors, as amended (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2000)

10.13	—	CHUX Ownership Plan, as amended (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 9, 2000)

10.14	—	O’Charley’s 2000 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 9, 2000)

10.15	—	Amended and Restated Severance Compensation Agreement, dated February 22, 2006, by and between O’Charley’s Inc. and Gregory L. Burns

10.16	—	Master Lease, dated December 4, 2001, by and between Double 9 Property I LLC and Doe Family II LLC (incorporated by reference to Exhibit 10.33 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2002)

10.17	—	Assignment and Assumption of Lease and Acknowledgement of Master Lease Assignment and Subordination, Nondisturbance and Attornment Agreement, dated January 27, 2003, by and among Doe Family II LLC, 99 West, Inc., Double 9 Property I LLC, 99 Remainder I LLC and GE Capital Franchise Finance Corporation (incorporated by reference to Exhibit 10.34 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2002)

10.18	—	Master Lease, dated December 4, 2001, by and between Double 9 Property II LLC and Doe Family II LLC (incorporated by reference to Exhibit 10.35 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2002)

10.19	—	First Amendment to Master Lease, dated February 1, 2002, by and between Double 9 Property II LLC and Doe Family II LLC (incorporated by reference to Exhibit 10.36 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2002)

10.20	—	Assignment and Assumption of Lease and Acknowledgement of Master Lease Assignment and Subordination, Nondisturbance and Attornment Agreement, dated January 27, 2003, by and among Doe Family II LLC, 99 West, Inc., Double 9 Property II LLC, 99 Remainder II LLC and GE Capital Franchise Finance Corporation (incorporated by reference to Exhibit 10.37 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2002)

10.21	—	Master Lease, dated December 4, 2001, by and between Double 9 Property III LLC and Doe Family II LLC (incorporated by reference to Exhibit 10.38 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2002)


Exhibit
Number		Description
10.22	—	Assignment and Assumption of Lease and Acknowledgement of Master Lease Assignment and Subordination, Nondisturbance and Attornment Agreement, dated January 27, 2003, by and among Doe Family II LLC, 99 West, Inc., Double 9 Property III LLC, 99 Remainder III LLC and GE Capital Franchise Finance Corporation (incorporated by reference to Exhibit 10.39 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2002)

10.23	—	Master Lease, dated December 4, 2001, by and between Double 9 Property IV LLC and Doe Family II LLC (incorporated by reference to Exhibit 10.40 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2002)

10.24	—	First Amendment to Master Lease, dated February 1, 2002, by and between Double 9 Property IV LLC and Doe Family II LLC (incorporated by reference to Exhibit 10.41 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2002)

10.25	—	Assignment and Assumption of Lease and Acknowledgement of Master Lease Assignment and Subordination, Nondisturbance and Attornment Agreement, dated January 27, 2003, by and among Doe Family II LLC, 99 West, Inc., Double 9 Property IV LLC, 99 Remainder IV LLC and GE Capital Franchise Finance Corporation (incorporated by reference to Exhibit 10.42 of the Company’s Annual Report on Form 10-K for the year ended December 29, 2002)

10.26	—	Purchase Agreement, dated as of October 30, 2003, by and among O’Charley’s Inc., various direct and indirect subsidiaries of O’Charley’s Inc., Wachovia Capital Markets, LLC and Morgan Joseph & Co. Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 5, 2003)

10.27	—	Registration Rights Agreement, dated as of November 4, 2003, by and among O’Charley’s Inc., various direct and indirect subsidiaries of O’Charley’s Inc., Wachovia Capital Markets, LLC and Morgan Joseph & Co. Inc. (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 5, 2003)

10.28	—	Indenture, dated as of November 4, 2003, by and among O’Charley’s Inc., various direct and indirect subsidiaries of O’Charley’s Inc. and The Bank of New York (including Form of 144A Global Note and Form of Regulation S Temporary Global Note). (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 5, 2003)

10.29	—	Amended and Restated Credit Agreement, dated as of November 4, 2003, by and among O’Charley’s Inc., as Borrower, the Lenders referred to therein, Wachovia Bank, National Association, as Administrative Agent, Bank of America, N.A. and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank International”, New York Branch, as Co-Syndication Agents, and AmSouth Bank and SunTrust Bank, as Co-Documentation Agents. (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 5, 2003)

10.30	—	Form of Amended and Restated Revolving Credit Note. (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 5, 2003)

10.31	—	Form of Amended and Restated Swingline Note. (incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 5, 2003)

10.32	—	Form of Lease Agreement by and between CNL Funding 2001-A, LP, as landlord, and O’Charley’s Inc., as tenant. In accordance with Rule 12b-31 under the Exchange Act, copies of other lease agreements, which are substantially identical to Exhibit 10.1 in all material respects, except as to the landlord, the tenant, the property involved and the rent due thereunder, are omitted. (incorporated by reference to Exhibit 10.39 of the Company’s Registration Statement on Form S-4, Registration No. 333-112429-03)


Exhibit
Number		Description
10.33	—	Development Agreement, dated December 22, 2003, by and among O’Charley’s Inc., OCM Development Company, LLC and Meritage Hospitality Group Inc. (incorporated by reference to Exhibit 10.44 of the Company’s Annual Report on Form 10-K for the year ended December 28, 2003)

10.34	—	Severance Agreement and General Release dated June 24, 2004 between William E. Hall, Jr. and O’Charley’s Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended July 11, 2004)

10.35	—	Severance Agreement and General Release, dated October 29, 2004, by and between A. Chad Fitzhugh and O’Charley’s Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 4, 2004)

10.36	—	Form of Incentive Stock Option Agreement. (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.37	—	Form of Non-Qualified Stock Option Agreement. (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.38	—	Form of Restricted Stock Agreement for Employees (Time-Based Vesting). (incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.39	—	Form of Restricted Stock Agreement for Employees (Performance-Based Vesting). (incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.40	—	Form of Restricted Stock Agreement for Directors. (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.41	—	Development Agreement, dated as of August 20, 2004, by and among O’Charley’s Inc., JFC Enterprises, LLC and Kurt Strang. (incorporated by reference to Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.42	—	Limited Liability Company Agreement of JFC Enterprises, LLC, dated as of August 20, 2004, by and among O’Charley’s Inc. and Kurt Strang. (incorporated by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.43	—	Revolving Loan Agreement, dated as of August 20, 2004, by and between JFC Enterprises, LLC and O’Charley’s Inc. (incorporated by reference to Exhibit 10.8 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.44	—	Master Secured Demand Promissory Note, dated as of August 20, 2004, made by JFC Enterprises, LLC. (incorporated by reference to Exhibit 10.9 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.45	—	Development Agreement, dated as of November 8, 2004, by and among O’Charley’s Inc., Wi-Tenn Restaurants, LLC, Wi-Tenn Investors, LLC, Richard K. Arras and Steven J. Pahl. (incorporated by reference to Exhibit 10.10 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.46	—	Limited Liability Company Agreement of Wi-Tenn Restaurants, LLC, dated as of November 8, 2004, by and among O’Charley’s Inc. and Wi-Tenn Investors, LLC. (incorporated by reference to Exhibit 10.11 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.47	—	Revolving Loan Agreement, dated as of November 8, 2004, by and between Wi-Tenn Restaurants, LLC and O’Charley’s Inc. (incorporated by reference to Exhibit 10.12 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.48	—	Master Secured Promissory Note, dated as of November 8, 2004, made by Wi-Tenn Restaurants, LLC. (incorporated by reference to Exhibit 10.13 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)


Exhibit
Number		Description
10.49	—	Program Agreement, dated as of November 11, 2004, by and between GE Capital Franchise Finance Corporation and O’Charley’s Inc. (incorporated by reference to Exhibit 10.14 of the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2004)

10.50	—	Letter Agreement, dated November 11, 2004, between O’Charley’s Inc. and Lawrence E. Hyatt. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on November 16, 2004)

10.51	—	Non-Compete/Severance Letter Agreement, dated November 11, 2004, between Lawrence E. Hyatt and O’Charley’s Inc. (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on November 16, 2004)

10.52	—	Severance Compensation Agreement, dated as of November 15, 2004, between O’Charley’s Inc. and Lawrence E. Hyatt. (incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Commission on November 16, 2004)

10.53	—	Restricted Stock Agreement, dated as of November 15, 2004, between O’Charley’s Inc. and Lawrence E. Hyatt. (incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Commission on November 16, 2004)

10.54	—	Restricted Stock Agreement, dated as of November 15, 2004, between O’Charley’s Inc. and Lawrence E. Hyatt. (incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the Commission on November 16, 2004)

10.55	—	Restricted Stock Agreement, dated as of November 15, 2004, between O’Charley’s Inc. and Lawrence E. Hyatt. (incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed with the Commission on November 16, 2004)

10.56	—	Lease, dated as of December 17, 2004, between Bellingham Mechanic, LLC and 99 Commissary, LLC and related Guaranty. (incorporated by reference to Exhibit 10.63 of the Company’s Annual Report on Form 10-K for the year ended December 26, 2004)

10.57	—	Summary of Director and Executive Officer Compensation.

10.58	—	O’Charley’s Inc. 2005 Executive Officers’ Cash Incentive Plan. (incorporated by reference to Exhibit 10.65 of the Company’s Annual Report on Form 10-K for the year ended December 26, 2004)

10.59	—	O’Charley’s Inc. Deferred Compensation Plan (as amended) (incorporated by reference to Exhibit 10.66 of the Company’s Annual Report on Form 10-K for the year ended December 26, 2004)

10.60	—	Development Agreement, dated as of March 28, 2005, by and among O’Charley’s Inc., Four Star Restaurant Group, LLC and Michael R. Johnson. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on April 1, 2005)

10.61	—	Development Agreement, dated as of May 18, 2005, by and among O’Charley’s Inc., O’Candall Group, Inc. and Sam Covelli. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on May 24, 2005)

10.62	—	Amendment to CHUX Ownership Plan. (incorporated by reference to Exhibit 10.2 of the Company’s Registration Statement on Form S-8, Registration No. 333-126221)

10.63	—	Severance Agreement and General Release, dated January 1, 2006, by and between Steven J. Hislop and O’Charley’s Inc. (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on February 1, 2006)


Exhibit
Number		Description
10.64	—	Severance Agreement and General Release, dated January 1, 2006, by and between Richard D. May and O’Charley’s Inc. (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Commission on February 1, 2006)

10.65	—	Letter Agreement, dated August 25, 2005, between O’Charley’s Inc. and Randall C. Harris

10.66	—	Non-Compete/Severance Letter Agreement, dated October 3, 2005, between Randall C. Harris and O’Charley’s Inc.

10.67	—	Severance Compensation Agreement, dated as of October 3, 2005, between O’Charley’s Inc. and Randall C. Harris

10.68	—	Restricted Stock Agreement, dated as of October 3, 2005, between O’Charley’s Inc. and Randall C. Harris

10.69	—	Letter Agreement, dated January 22, 2006, between O’Charley’s Inc. and Jeffrey D. Warne

10.70	—	Severance Compensation Agreement, dated as of January 22, 2006, between O’Charley’s Inc. and Jeffrey D. Warne

10.71	—	Restricted Stock Agreement, dated as of February 13, 2006, between O’Charley’s Inc. and Jeffrey D. Warne

14	—	O’Charley’s Inc. Code of Conduct and Business Ethics Policy (incorporated by reference to Exhibit 14 of the Company’s Annual Report on Form 10-K for the year ended December 28, 2003)

21	—	Subsidiaries of the Company

23	—	Consent of KPMG LLP.

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.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	O’Charley’s Inc.

Date: March 10, 2006	By:	/s/ GregoryL.Burns

		Gregory L. Burns
		Chief Executive Officer and Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date
/s/Gregory L. Burns Gregory L. Burns	Chief Executive Officer and Chairman of the Board (Principal Executive Officer)	March 10, 2006

/s/Lawrence E. Hyatt Lawrence E. Hyatt	Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer)	March 10, 2006

/s/R. Jeffrey Williams R. Jeffrey Williams	Chief Accounting Officer and Corporate Controller (Principal Accounting Officer)	March 10, 2006

/s/Richard Reiss, Jr. Richard Reiss, Jr.	Director	March 10, 2006

/s/G. Nicholas Spiva G. Nicholas Spiva	Director	March 10, 2006

/s/H. Steve Tidwell H. Steve Tidwell	Director	March 10, 2006

/s/Shirley A. Zeitlin Shirley A. Zeitlin	Director	March 10, 2006

/s/Robert J. Walker Robert J. Walker	Director	March 10, 2006

/s/Dale W. Polley Dale W. Polley	Director	March 10, 2006

/s/William F. Andrews William F. Andrews	Director	March 10, 2006

/s/John E. Stokely John E. Stokely	Director	March 10, 2006

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Legalese
Litigious
Readability	H.S. freshman Avg

O Charleys (CHUX) Inactive 10-K2005 FY Annual report

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