1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 1, 2000
Commission file number O-18629
O'Charley's Inc.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1192475
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3038 Sidco Drive, Nashville, Tennessee 37204
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(Address of principal executive offices) (Zip Code)
(615)256-8500
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class Outstanding as of November 10, 2000
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Common Stock, no par value 15,672,864 shares
2
O'Charley's Inc.
Form 10-Q
For Quarter Ended October 1, 2000
Index
Page No.
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Part I - Financial Statements
Item 1. Financial statements (unaudited):
Balance sheets as of October 1, 2000 and
December 26, 1999 3
Statements of earnings for the twelve weeks
ended October 1, 2000 and October 3, 1999 4
Statements of earnings for the forty weeks ended
October 1, 2000 and October 3, 1999 5
Statements of cash flows for the forty weeks ended October 1, 2000
and October 3, 1999 7
Notes to unaudited financial statements 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 11
Item 3. Quantitative and qualitative disclosures about market risk 18
Part II - Other Information
Item 6. Exhibits and reports on Form 8-K 19
Signatures 20
3
O'Charley's Inc.
Balance Sheets
(dollars in thousands)
October 1, December 26,
2000 1999
--------- ---------
Assets
Current Assets:
Cash and cash equivalents $ 1,017 $ 3,178
Accounts receivable 3,030 2,195
Inventories 13,627 8,776
Deferred income taxes 1,138 1,138
Other current assets 1,856 794
--------- ---------
Total current assets 20,668 16,081
Property and Equipment, net 261,372 219,749
Other Assets 15,431 4,350
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$ 297,471 $ 240,180
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 10,425 $ 9,318
Accrued payroll and related expenses 8,087 6,524
Accrued expenses 5,909 7,470
Federal, state and local taxes 6,588 5,167
Current portion of long-term debt and capitalized leases 7,047 7,013
--------- ---------
Total current liabilities 38,056 35,492
Deferred Income Taxes 6,262 6,243
Other Liabilities 2,677 2,298
Long-Term Debt 94,527 54,441
Capitalized Lease Obligations 18,372 19,017
Shareholders' Equity:
Common stock - No par value; authorized, 50,000,000 shares; issued and
outstanding, 15,653,747 in 2000
and 15,502,182 in 1999 66,375 65,732
Accumulated other comprehensive loss, net of tax (152) (186)
Retained earnings 71,354 57,143
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137,577 122,689
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$ 297,471 $ 240,180
========= =========
See notes to financial statements.
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O'Charley's Inc.
Statements of Earnings (unaudited)
Twelve Weeks Ended October 1, 2000 and October 3, 1999
2000 1999
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(in thousands, except
per share data)
Revenues:
Restaurant sales $88,296 $71,466
Commissary sales 849 682
------- -------
89,145 72,148
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 29,339 24,004
Payroll and benefits 27,150 21,532
Restaurant operating costs 12,301 10,345
Cost of commissary sales 797 643
Advertising, general and administrative expenses 5,736 4,459
Depreciation and amortization 4,418 3,361
Preopening costs 985 910
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80,726 65,254
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Income from Operations 8,419 6,894
Other (Income) Expense:
Interest expense, net 1,864 1,009
Other, net 6 6
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1,870 1,015
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Earnings Before Income Taxes 6,549 5,879
Income Taxes 2,292 2,058
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Net Earnings $ 4,257 $ 3,821
======= =======
Basic Earnings per Share
Earnings per Common Share $ 0.27 $ 0.25
======= =======
Weighted Average Common Shares Outstanding 15,633 15,432
======= =======
Diluted Earnings per Share:
Earnings per Common Share $ 0.26 $ 0.23
======= =======
Weighted Average Common Shares Outstanding 16,555 16,702
======= =======
See notes to financial statements.
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O'Charley's Inc.
Statements of Earnings (unaudited)
Forty Weeks Ended October 1, 2000 and October 3, 1999
2000 1999
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(in thousands, except
per share data)
Revenues:
Restaurant sales $278,032 $ 227,811
Commissary sales 2,823 2,411
-------- ---------
280,855 230,222
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 90,832 76,229
Payroll and benefits 85,568 69,202
Restaurant operating costs 39,031 32,436
Cost of commissary sales 2,642 2,274
Advertising, general and administrative expenses 18,410 14,686
Depreciation and amortization 13,421 10,458
Preopening costs 3,758 3,369
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253,662 208,654
-------- ---------
Income from Operations 27,193 21,568
Other (Income) Expense:
Interest expense, net 5,303 3,149
Other, net 27 81
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5,330 3,230
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Earnings Before Income Taxes and Cumulative 21,863 18,338
Effect of Change in Accounting Principle
Income Taxes 7,652 6,418
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Earnings Before Cumulative Effect of
Change in Accounting Principle 14,211 11,920
Cumulative Effect of Change in Accounting
Principle (net of tax benefit) -- (1,348)
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Net Earnings $ 14,211 $ 10,572
======== =========
See notes to financial statements.
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O'Charley's Inc.
Statements of Earnings (unaudited)
Forty Weeks Ended October 1, 2000 and October 3, 1999
2000 1999
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(in thousands, except
per share data)
Basic Earnings per Share
Earnings per Common Share Before Cumulative
Effect of Change in Accounting Principle $ 0.91 $ 0.77
Cumulative Effect of Change in Accounting
Principle -- $ (0.09)
-------- ---------
Basic Earnings per Common Share $ 0.91 $ 0.68
======== =========
Weighted Average Common Shares Outstanding 15,560 15,415
======== =========
Diluted Earnings per Share:
Earnings per Common Share Before Cumulative
Effect of Change in Accounting Principle $ 0.86 $ 0.72
Cumulative Effect of Change in Accounting
Principle -- $ (0.08)
-------- ---------
Diluted Earnings per Common Share $ 0.86 $ 0.64
======== =========
Weighted Average Common Shares Outstanding 16,467 16,652
======== =========
See notes to financial statements.
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O'Charley's Inc.
Statements of Cash Flows
Forty Weeks Ended October 1, 2000 and October 3, 1999
2000 1999
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(in thousands)
Cash Flows from Operating Activities:
Net earnings $ 14,211 $ 10,572
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of accounting change, net of tax -- 1,348
Depreciation and amortization 13,421 10,458
Provision for deferred income taxes 19 (40)
Loss on the sale of assets 10 35
Changes in assets and liabilities:
Accounts receivable (835) (314)
Inventories (4,702) (2,191)
Other current assets (1,059) (562)
Accounts payable 1,107 1,223
Accrued payroll and other accrued expenses 1,431 3,254
-------- --------
Net cash provided by operating activities 23,603 23,783
Cash Flows from Investing Activities:
Additions to property and equipment (45,296) (41,443)
Acquisition of company, net of cash acquired (15,849) --
Proceeds from the sale of assets 291 --
Other, net (200) 91
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Net cash used by investing activities (61,054) (41,352)
Cash Flows from Financing Activities:
Proceeds from long-term debt 73,065 36,803
Payments on long-term debt and capitalized
lease obligations (38,418) (22,337)
Exercise of employee incentive stock options 1,227 729
Payments to acquire treasury stock (584) --
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Net cash provided by financing activities 35,290 15,195
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Decrease in Cash (2,161) (2,374)
Cash at Beginning of the Period 3,178 3,068
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Cash at End of the Period $ 1,017 $ 694
======== ========
Effects of acquisition:
Estimated fair value of assets acquired $ 5,170
Purchase price in excess of the net assets acquired (goodwill) 10,558
Non-compete agreement 119
Estimated fair value of liabilities assumed 8
--------
Cash Paid 15,855
Less cash acquired (6)
--------
Net cash paid for acquisition $ 15,849
========
See notes to financial statements.
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O'Charley's Inc.
Notes To Unaudited Financial Statements
Twelve Weeks Ended October 1, 2000 and October 3, 1999
A. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X. The Company's
fiscal year ends on the last Sunday in December with its first quarter
consisting of sixteen weeks and the remaining three quarters consisting of
twelve weeks each. Fiscal 2000 will consist of fifty-three weeks compared to
fifty-two weeks in 1999, with the fourth quarter consisting of 13 weeks compared
to twelve weeks in the fourth quarter of 1999.
In the opinion of management, the unaudited interim financial
statements contained in this report reflect all adjustments, consisting of only
normal recurring accruals, which are necessary for a fair presentation of the
financial position, and the results of operations for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year.
These financial statements, footnote disclosures and other information
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 26, 1999.
B. Earnings Per Common Share
Basic earnings per common share have been computed on the basis of the
weighted average number of common shares outstanding, and diluted earnings per
common share have been computed on the basis of the weighted average number of
common shares outstanding plus the dilutive effect of options outstanding.
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Following is a reconciliation of the Company's basic and diluted earnings per
share in accordance with FAS 128.
Twelve weeks ended Forty weeks ended
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(In thousands, October 1, October 3, October 1, October 3,
except per share data) 2000 1999 2000 1999
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Earnings Before Cumulative Effect of
Change in Accounting Principle $ 4,257 $ 3,821 $14,211 $ 11,920
Cumulative Effect of Change in
Accounting Principle (net of tax benefit) -- -- -- (1,348)
--------------------------------------------------
Net Earnings $ 4,257 $ 3,821 $14,211 $ 10,572
--------------------------------------------------
Basic Earnings Per Share:
Weighted average shares outstanding 15,633 15,432 15,560 15,415
--------------------------------------------------
Earnings per share before cumulative
effect of change in accounting principle $ 0.27 $ 0.25 $ 0.91 $ 0.77
Cumulative effect of accounting change -- -- -- (0.09)
--------------------------------------------------
Basic earnings per share $ 0.27 $ 0.25 $ 0.91 $ 0.68
==================================================
Diluted Earnings Per Share:
Weighted average shares outstanding 15,633 15,432 15,560 15,415
Incremental stock option shares outstanding 922 1,270 907 1,237
--------------------------------------------------
Weighted average diluted shares outstanding 16,555 16,702 16,467 16,652
==================================================
Earnings per share before cumulative
effect of change in accounting principle $ 0.26 $ 0.23 $ 0.86 $ 0.72
Cumulative effect of accounting change -- -- -- (0.08)
--------------------------------------------------
Diluted earnings per share $ 0.26 $ 0.23 $ 0.86 $ 0.64
==================================================
Options for approximately 1,047,000 anti-dilutive shares were excluded from the
2000 twelve-week diluted weighted average shares calculation. There were no
anti-dilutive shares for the twelve-week period ended October 3, 1999. Options
for approximately 1,047,000 and 810,000 shares were excluded from the 2000 and
1999 forty weeks diluted weighted average shares calculation, respectively, due
to these shares being anti-dilutive.
C. New Accounting Pronouncements
Effective December 28, 1998, the Company adopted SOP 98-5, Reporting
the Costs of Start-up Activities, which requires costs incurred during a
start-up activity be expensed as incurred. As a result, the Company recognized
as a cumulative effect of the change in accounting principle a charge of $1.3
million, net of tax, or $0.08 per diluted share during the first quarter of
1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 established reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts. Under SFAS No. 133,
the Company would recognize all derivatives as either assets or liabilities,
measured at fair value, in the statement of financial position. In July 1999,
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of Effective Date of FASB No. 133, An Amendment of FASB Statement No.
133" was issued deferring the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. In June 2000, SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment of
FASB No. 133" was issued clarifying the accounting for derivatives under the new
standard. The Company is in the process of evaluating the impact these
pronouncements will have on its consolidated financial statements.
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In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 establishes specific criterion for revenue recognition. The
Company must adopt the provisions of SAB 101 no later than the fourth quarter of
its fiscal year ending December 31, 2000. The Company is in the process of
evaluating what impact, if any this SAB will have on the Company's revenue
recognition and presentation policies.
D. Comprehensive Income
Comprehensive income consists of net earnings and other comprehensive
income attributable to unrealized gains and losses on available for sale
securities. Other comprehensive loss, net of tax, for the third quarter of 2000
was $74,000. Other comprehensive gain, net of tax, for the forty weeks ended
October 1, 2000 was $34,000. Other comprehensive loss, net of tax, for the third
quarter and forty weeks of 1999 was $64,000 and $73,000, respectively.
E. Asset Purchase
On May 26, 2000, the Company purchased two existing Stoney River
Legendary Steaks restaurants and all associated trademarks and intellectual
property for approximately $14.0 million and the assumption of approximately
$1.8 million in debt. In addition, the transaction includes an earn-out
provision pursuant to which the owners may receive up to $1.25 million at the
end of 2002, $1.25 million at the end of 2003, and $2.5 million at the end of
2004. The potential earn-out is based on the Stoney River concept achieving
certain performance thresholds (income before taxes and preopening costs) for
such year. The transaction was accounted for using the purchase method of
accounting. The Stoney River concept is being operated as a wholly-owned
subsidiary of the Company. Goodwill resulting from the acquisition is being
amortized on a straight-line basis over twenty years. The allocation of the
purchase price to the acquired net assets is preliminary.
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Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Forty Weeks Ended October 1, 2000 and October 3, 1999
RESULTS OF OPERATIONS
GENERAL
At October 1, 2000, we owned and operated 135 O'Charley's and 2 Stoney River
Legendary Steaks restaurants in Alabama, Florida, Georgia, Illinois, Indiana,
Kentucky, Mississippi, North Carolina, Ohio, South Carolina, Tennessee and
Virginia. O'Charley's are full service, casual dining restaurants, which appeal
to traditional casual dining customers as well as value-oriented customers by
offering high quality food at moderate pricing with outstanding service.
O'Charley's growth strategy is to continue fully penetrating existing and new
targeted major metropolitan areas while opening new units in smaller secondary
markets in close proximity to our major markets. Stoney River Legendary Steaks
are full service, upscale steakhouses with a "mountain lodge" theme which appeal
to upper-end casual dining customers by offering hand-cut, premium mid-western
beef along with fresh seafood and poultry at reasonable prices with outstanding
service in a warm, friendly and relaxed environment. Stoney River's growth
strategy is to concentrate on major metropolitan markets in the Southeast and
Midwest with disciplined, controlled development with the potential to
accelerate development over the next several years.
We operate a commissary for the primary purpose of providing our restaurants
with consistent quality food products, which meet our specifications while
obtaining the best possible prices for those items. The majority of the food
products served in our restaurants are distributed to the stores by the
commissary. In addition to purchasing food and supply products, the commissary
manufactures certain proprietary products and ages and cuts red meat into steaks
in its USDA approved meat facility. All sales from the commissary to the
restaurants are eliminated in the consolidated financial statements.
During the first quarter of 1999, we adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities", which requires that preopening
and start-up costs be expensed as incurred rather than capitalized. Before the
accounting change, preopening costs were amortized over one year. The cumulative
effect of the accounting change totaled $2.1 million pre-tax and $1.3 million
net of tax, or $0.08 per diluted share. Net earnings for the first forty weeks
of 1999 were $10.6 million, or $0.64 per diluted share.
The following table reflects changes in the number of O'Charley's restaurants
for the first three quarters of 2000 and 1999.
Restaurants 2000 1999
---------------------------------------------------------------
In operation, beginning of period 117 99
Restaurants opened first quarter 8 7
Restaurants opened second quarter 6 5
Restaurants opened third quarter 4 3
------------------
In operation, end of period 135 114
==================
Revenues consist almost entirely of restaurant sales. Restaurant sales include
food and beverage sales and are net of applicable state and local sales taxes.
Revenues also include commissary sales, which represent sales to outside parties
consisting primarily of sales of O'Charley's label food items, primarily salad
dressings, to retail grocery chains, mass merchandisers and wholesale clubs.
Liquor sales as a percentage of restaurant sales have declined in each of the
last three fiscal years.
We have historically maintained a "kids eat free" program where we provide meals
without charge from a selected menu to kids 10 years old and under. In select
markets, we are currently offering a value-oriented kid's program where we
provide a meal from a kid's menu, which includes a beverage and a dessert, for a
set price. The results indicate that there are no material differences in
profitability at restaurants that implement the value-oriented kid's program.
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Cost of food, beverage and supplies primarily consists of the costs of beef,
poultry, seafood, produce and alcoholic and non-alcoholic beverages. Various
factors beyond our control, including adverse weather, cause periodic
fluctuations in food costs. Generally, temporary increases are absorbed and are
not passed on to customers, however, we typically adjust menu prices to
compensate for increased costs of a more permanent nature.
Payroll and benefits include payroll and related costs and expenses directly
relating to restaurant level activities including restaurant management salaries
and bonuses, hourly wages for store level employees, payroll taxes, workers'
compensation, various health, life and dental insurance programs, vacation
expense and sick pay. We have an incentive bonus plan that compensates store
management for achieving and exceeding certain store level financial targets and
performance goals. Currently, Congress is contemplating an increase in the
federal minimum wage rate. We typically pay our employees more than minimum
wage; thus, we do not expect an immediate adverse effect on our financial
performance from such an increase. However, as in prior years, we do expect that
overall wage inflation will be higher for several years following any minimum
wage increase that may affect payroll costs in the future. As Congress has
raised the federal minimum wage rate in recent years, the base wage rate for
tipped employees has remained at $2.13. Any increase to that amount would have
an effect on payroll and benefits. Currently, we do not expect an increase to
the base wage rate.
Restaurant operating costs includes occupancy and other expenses at the
restaurant level, except property and equipment depreciation and amortization.
Rent, supervisory salaries, bonuses and expenses, management training salaries,
property insurance, property taxes, utilities, repairs and maintenance, outside
services and credit card fees account for the major expenses in this category.
Restaurant operating margin is defined as restaurant sales less cost of
restaurant sales. Cost of restaurant sales, for purposes of this discussion,
consists of cost of food, beverage and supplies, payroll and benefits and
restaurant operating costs.
Advertising, general and administrative expenses includes all advertising and
home office administrative functions that support the existing restaurant base
and provide the infrastructure for future growth. Advertising, executive
management and support staff salaries, bonuses and related expenses, data
processing, legal and accounting expenses and office expenses account for the
major expenses in this category.
Depreciation and amortization includes depreciation on property and equipment
calculated on a straight-line basis over an estimated useful life, and
amortization of goodwill, primarily related to the purchase of the Stoney River
concept, on a straight-line basis over twenty years. Depreciation and
amortization as a percentage of total revenues may increase as the number of new
store openings increases.
Preopening costs includes operating costs and expenses incurred prior to a new
restaurant opening. Beginning in the first quarter of 1999, preopening costs are
expensed as incurred in accordance with SOP 98-5 rather than capitalized and
amortized over one year as was the practice prior to the implementation of this
new accounting pronouncement. This new accounting method affects when preopening
costs are expensed and may impact earnings relative to the previous method on a
quarter to quarter and year to year basis depending on when these costs are
incurred. Preopening costs are now reflected on a separate line item labeled
"preopening costs" on the statement of earnings. The amount of preopening costs
incurred in any one period may include costs associated with stores expected to
open subsequent to that period. We typically incur average preopening costs of
approximately $208,000 for each new store.
RECENT ACQUISITION
On May 26, 2000, we purchased two existing Stoney River Legendary Steaks
restaurants and all associated trademarks and intellectual property for
approximately $14.0 million and the assumption of approximately $1.8 million in
debt. In addition, the transaction includes an earn-out provision pursuant to
which the owners may receive up to $1.25 million at the end of 2002, $1.25
million at the end of 2003, and $2.5 million at the end of 2004. The earn-out
provision is based on the Stoney River concept achieving certain performance
thresholds (income before taxes and preopening costs) for such year. The
transaction was accounted for using the purchase method of accounting. The
Stoney River concept is being operated as a wholly-owned subsidiary of the
Company.
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We expect the Stoney River transaction to have a negative impact on earnings of
$0.05 for 2000 and $0.08 for 2001 due principally to the investment costs and
costs associated with the integration and expansion of the concept. The areas
significantly affected will be depreciation and amortization, due principally to
the amortization of $10.6 million of goodwill, and interest expense, due to the
increased borrowings under our revolving credit facility for the purchase of the
concept. The goodwill recognized will be amortized on a straight-line basis over
twenty years. The cost of food, beverage and supplies will also be affected, as
a percentage of restaurant sales, due to the product mix of the Stoney River
restaurants. Other expense categories will increase, but not necessarily as a
percentage of increased revenues.
FINANCIAL HIGHLIGHTS
The following table highlights the operating results for the third quarter and
the first three quarters of 2000 and 1999 as a percentage of total revenues
unless otherwise indicated. Each of the third quarters are comprised of 12
weeks. The first three quarters results are comprised of the first forty weeks
of the fiscal year.
Third Quarter First Forty Weeks
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
Revenues:
Restaurant sales 99.0% 99.1% 99.0% 99.0%
Commissary sales 1.0% 0.9% 1.0% 1.0%
------------------------------------------
100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of restaurant sales:(1)
Cost of food, beverage and supplies 33.2% 33.6% 32.7% 33.5%
Payroll and benefits 30.8% 30.1% 30.8% 30.4%
Restaurant operating costs 13.9% 14.5% 14.0% 14.2%
------------------------------------------
77.9% 78.2% 77.5% 78.1%
------------------------------------------
Restaurant operating margin (2) 22.1% 21.8% 22.5% 21.9%
Cost of commissary sales(3) 93.9% 94.3% 93.6% 94.3%
Advertising, general and administrative expenses 6.4% 6.2% 6.6% 6.4%
Depreciation and amortization 5.0% 4.7% 4.8% 4.5%
Preopening costs 1.1% 1.3% 1.3% 1.5%
------------------------------------------
Income from Operations 9.4% 9.6% 9.7% 9.4%
Other (Income) Expense:
Interest expense, net 2.1% 1.4% 1.9% 1.4%
Other, net 0.0% 0.0% 0.0% 0.0%
------------------------------------------
Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 7.3% 8.1% 7.8% 8.0%
Income Taxes 2.5% 2.9% 2.7% 2.8%
------------------------------------------
Earnings Before Cumulative Effect of Change in
Accounting Principle 4.8% 5.3% 5.1% 5.2%
Cumulative Effect of Change in Accounting
Principle -- -- -- (0.6%)
------------------------------------------
Net Earnings 4.8% 5.3% 5.1% 4.6%
==========================================
(1) As a percentage of restaurant sales.
(2) Reflects restaurant sales less cost of restaurant sales,
expressed as a percentage of restaurant sales.
(3) As a percentage of commissary sales.
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THIRD QUARTER AND FIRST FORTY WEEKS OF 2000 VERSUS THIRD QUARTER AND FIRST FORTY
WEEKS OF 1999
TOTAL REVENUES in the third quarter of 2000 increased $17.0 million, or 23.6%,
to $89.1 million from $72.1 million in the third quarter of 1999. O'Charley's
restaurant sales increased $14.8 million, or 20.7%, in the third quarter of
2000. The inclusion of Stoney River sales provided an additional $2.0 million in
the third quarter compared to 1999. Same store sales increased in the third
quarter by 2.3%.
For the first forty weeks of 2000, total revenues increased $50.6 million, or
22.0%, to $280.9 million from $230.2 million in 1999. For the first forty weeks
of 2000, O'Charley's restaurant sales increased $47.1 million, or 20.7%, over
1999. The inclusion of Stoney River sales provided an additional $3.1 million in
the first forty weeks of 2000 compared to 1999. Same store sales increased in
the first forty weeks by 3.0%.
The increase in O'Charley's restaurant sales was attributable to additional
units in operation in 2000 and increases in same store sales. We operated 19
additional units in the first quarter, 20 additional units in the second quarter
and 21 additional units in the third quarter of 2000 compared to the same
periods in 1999. In 2000, we opened eight new units in the first quarter, six
new units in the second quarter and four new units in the third quarter. The
increase in same store sales resulted from an increase in both our customer
counts and our average check. In March 2000, we increased menu prices by
approximately 2%, which increased our average check. At October 1, 2000,
approximately 40% of our stores offered the Kids Value Meal program compared to
approximately 30% at October 3, 1999. Our remaining stores offer a Kids Eat Free
program. The average check is approximately 2.5% higher in stores offering the
Kids Value Meal program compared to stores offering the Kids Eat Free program.
COST OF FOOD, BEVERAGE AND SUPPLIES in the third quarter of 2000 increased $5.3
million, or 22.2%, to $29.3 million from $24.0 million in the third quarter of
1999. As a percentage of restaurant sales, cost of food, beverage and supplies
decreased to 33.2% in the third quarter of 2000 from 33.6% in the third quarter
of 1999.
For the first forty weeks of 2000, cost of food, beverage and supplies increased
$14.6 million, or 19.2%, to $90.8 million from $76.2 million in the same period
of 1999. As a percentage of restaurant sales, these costs decreased to 32.7% in
the first forty weeks of 2000 from 33.5% in the first forty weeks of 1999.
We attribute these lower food cost percentages primarily to three factors: we
increased menu prices in March 2000 which increased the average check, the cost
of several food items decreased, and we improved our purchasing and operating
efficiencies in our stores and in our commissary. The above improvements were
partially offset by the inclusion of the Stoney River restaurants, which have a
higher cost of food, beverage and supplies, as a percentage of restaurant sales,
and an increase in poultry, red meat, and baby back rib costs. The increase in
poultry costs resulted in an increase of 0.5% in the cost of food, beverage and
supplies as a percentage of restaurant sales for the third quarter. We
anticipate increases in red meat, poultry and baby back rib costs for the
remainder of 2000 and 2001, and expect to experience the normal seasonal
fluctuations for certain other items.
PAYROLL AND BENEFITS in the third quarter of 2000 increased $5.6 million, or
26.1%, to $27.2 million from $21.5 million in the third quarter of 1999. As a
percentage of restaurant sales, payroll and benefits increased to 30.8% from
30.1% in the third quarter of 1999.
For the first forty weeks of 2000, payroll and benefits increased $16.4 million,
or 23.7%, to $85.6 million from $69.2 million in the same period of 1999. As a
percentage of restaurant sales, payroll and benefits increased to 30.8% for the
first forty weeks of 2000 from 30.4% for the first forty weeks of 1999.
The increase was attributable to increasing wage rates and salaries for
restaurant support staff and management along with higher workers compensation
and health insurance costs in 2000. Those higher costs were partially offset by
economies achieved from higher average unit sales volumes. Our markets generally
have low unemployment rates and, as a result, we anticipate continued wage rate
increases for the remainder of 2000 and 2001.
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RESTAURANT OPERATING COSTS in the third quarter of 2000 increased $2.0 million,
or 18.9%, to $12.3 million from $10.3 million in the third quarter of 1999.
Restaurant operating costs, as a percentage of restaurant sales, decreased to
13.9% in the third quarter of 2000 from 14.5% in the third quarter of 1999.
For the first forty weeks of 2000, restaurant operating costs increased $6.6
million, or 20.3%, to $39.0 million from $32.4 million in 1999. Restaurant
operating costs, as a percentage of restaurant sales, decreased to 14.0% from
14.2% in the first forty weeks of 1999.
The decrease in restaurant operating costs for the third quarter resulted from a
decrease in supervisory bonus and management training expenses. For the first
forty weeks, these decreases were offset by slightly higher store level
operating costs.
RESTAURANT OPERATING MARGIN in the third quarter of 2000 increased $3.9 million,
or 25.2%, to $19.5 million from $15.6 million in the third quarter of 1999. As a
percentage of restaurant sales, restaurant operating margin increased to 22.1%
in the third quarter of 2000 from 21.8% in the third quarter of 1999. The
inclusion of Stoney River had a negative effect of 0.4% on our restaurant
operating margin as a percentage of restaurant sales in the third quarter.
For the first forty weeks of 2000, restaurant operating margin increased $12.7
million, or 25.3%, to $62.6 million from $49.9 million in the same period of
1999. As a percentage of restaurant sales, restaurant operating margin increased
to 22.5% in the first forty weeks from 21.9% for the same period in 1999. The
inclusion of Stoney River had a negative effect of 0.2% on our restaurant
operating margin as a percentage of restaurant sales for the first forty weeks.
ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES in the third quarter of 2000
increased $1.3 million, or 28.6%, to $5.7 million from $4.5 million in the third
quarter of 1999. As a percentage of total revenue, advertising, general and
administrative expenses increased to 6.4% from 6.2% in the third quarter of
1999. Advertising expenditures were $2.2 million in the third quarter of 2000,
an increase of 13.9% from the $1.9 million expended in the third quarter of
1999. As a percentage of restaurant sales, advertising decreased to 2.5% in the
third quarter of 2000 from 2.7% in the third quarter of 1999. General and
administrative expenses increased 39.9% to $3.5 million in the third quarter of
2000 from $2.5 million in the third quarter of 1999.
For the first forty weeks of 2000, advertising, general and administrative
expenses increased $3.7 million, or 25.4%, to $18.4 million from $14.7 million
in the same period in 1999. As a percentage of revenue, advertising, general and
administrative expenses increased to 6.6% in the first forty weeks of 2000 from
6.4% for the same period in 1999. Advertising expenditures in the first forty
weeks of 2000 increased $910,000, or 14.5%, to $7.2 million from $6.3 million in
the same period in 1999. As a percentage of revenue, advertising decreased to
2.6% in the first forty weeks of 2000 from 2.7% in the same period in 1999.
General and administrative expenses increased 33.4% to $11.2 million in the
first forty weeks of 2000 from $8.4 million in the first forty weeks of 1999.
The increase in general and administrative expenses for the third quarter and
for the first forty weeks resulted from the inclusion of Stoney River and
increased legal expenses.
DEPRECIATION AND AMORTIZATION in the third quarter of 2000 increased $1.1
million, or 31.5%, to $4.4 million from $3.4 million in the third quarter of
1999. As a percentage of total revenue, depreciation and amortization increased
to 5.0% in the third quarter of 2000 from 4.7% in the same period in 1999.
On a year-to-date basis, depreciation expense increased $3.0 million, or 28.3%,
to $13.4 million from $10.5 million in 1999. As a percentage of revenue,
depreciation and amortization increased to 4.8% in 2000 from 4.5% in 1999. The
increase in depreciation and amortization expense is primarily attributable to
the growth in the number of new stores, additional capital expenditures for the
remodeling of certain existing stores and the amortization of goodwill
associated with the Stoney River acquisition.
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PREOPENING COSTS in the third quarter of 2000 increased $74,000, or 8.2%, to
$985,000 from $910,000 in the third quarter of 1999. As a percentage of total
revenues preopening costs decreased to 1.1% in the third quarter of 2000 from
1.3% in 1999. For the first forty weeks, preopening costs, excluding the
one-time cumulative adjustment for the change in accounting principle as
measured under SOP 98-5, increased 11.5% in 2000 to $3.8 million from $3.4
million in 1999. As a percentage of total revenue, preopening costs decreased to
1.3% in the first forty weeks of 2000 from 1.5% in the same period in 1999.
INCOME FROM OPERATIONS in the third quarter of 2000 increased $1.5 million, or
22.1%, to $8.4 million from $6.9 million in 1999. For the first forty weeks of
2000, income from operations increased $5.6 million, or 26.1%, to $27.2 million
from $21.6 million in 1999.
INTEREST EXPENSE, NET in the third quarter of 2000 increased $854,000, or 84.6%,
to $1.9 million from $1.0 million in 1999. For the first forty weeks, interest
expense increased $2.2 million, or 68.4%, to $5.3 million from $3.1 million in
1999. This increase is primarily related to the increased borrowings under our
revolving line of credit.
THE CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE, recorded in the
first quarter of 1999, represented the write-off of unamortized preopening costs
in accordance with SOP 98-5. The $2.1 million of unamortized preopening costs
remaining on our balance sheet at December 28, 1998 was written off in this
one-time adjustment. After adjusting for the tax benefit, the net cumulative
adjustment was $1.3 million.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of capital have historically been cash provided by
operations, borrowings under our revolving credit facility and capitalized lease
obligations. Our principal capital needs arise primarily from the purchase and
development of new restaurants, equipment replacement and improvements to
existing restaurants.
Cash provided by operations was $23.6 million for the first forty weeks in 2000,
compared to $23.8 million for the same period in 1999. Our working capital has
historically reflected current liabilities in excess of current assets due to
cash reinvestments in long-term assets, mostly property and equipment additions.
At October 1, 2000, the working capital deficiency and the current ratio were
$17.4 million and 0.5 to 1, respectively. The total net decrease in cash was
$2.2 million in the first forty weeks of 2000.
Net borrowings under our revolving credit agreement (the "Revolver") for the
first forty weeks were $40.2 million increasing the amount outstanding under the
Revolver from $54.0 million at December 26, 1999 to $94.2 million as of October
1, 2000. The average interest rate on the outstanding amounts was 7.5%. The
Revolver provides for a maximum borrowing capacity of $135 million; however, the
maximum borrowing capacity under the Revolver is reduced by amounts outstanding
pursuant to the synthetic lease facility described below. The Revolver matures
on May 31, 2003; provided, that the maturity date may be extended annually by
one year, at the participating banks' option, beginning on each anniversary of
the Revolver. The Revolver imposes restrictions on us with respect to the
maintenance of certain financial ratios, the incurrence of indebtedness, sale of
assets, mergers and the payment of dividends.
On October 10, 2000, we entered into agreements providing for a five-year
synthetic lease facility pursuant to which the lessor, at our request, and upon
satisfaction of certain conditions, will acquire and finance construction for up
to $25.0 million of properties and lease the properties to us. Any amounts
outstanding under the synthetic lease facility reduce the maximum borrowing
capacity under the Revolver. On October 10, 2000, the lessor acquired our home
office and commissary land and building facilities and leased them back to us.
The lease facility provides for residual value guarantees and purchase options
at the end of the lease term. Currently, we have been allocated $6.0 million
under the synthetic lease facility.
Through the first forty weeks we repaid $5.4 million in principal on our
capitalized lease obligations. Additionally, we financed $4.8 million in
restaurant equipment through capitalized lease obligations.
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On September 2, 1998, the Board of Directors of the Company approved the
repurchase of up to 5.0% of our outstanding common stock. As of October 1, 2000,
approximately 301,000 shares, or 2% of our outstanding stock, had been
repurchased. We continually evaluate the best uses of our capital and may
repurchase additional shares in the future.
Property and equipment expenditures, excluding the Stoney River acquisition
discussed below, were $45.2 million in the first forty weeks of 2000. These
expenditures were made primarily for 18 new stores opened during the year,
stores under construction at October 1, 2000 and for improvements to existing
restaurants.
On May 26, 2000, we purchased two existing Stoney River Legendary Steaks
restaurants and all associated trademarks and intellectual property for
approximately $14.0 million. We also assumed approximately $1.8 million in debt
related to the buildings and equipment of the existing restaurants. In addition,
the transaction includes an earn-out provision pursuant to which the owners may
receive up to $1.25 million at the end of 2002, $1.25 million at the end of
2003, and $2.5 million at the end of 2004. The potential earn-out is based on
the Stoney River concept achieving certain performance thresholds (income before
taxes and preopening costs) for such year.
We believe we will incur additional capital expenditures of approximately $15
million for the remainder of 2000 for the planned three new O'Charley's
restaurants and for improvements to existing units. We are currently
anticipating capital expenditures for 2001 to be between $65 and $70 million for
O'Charley's restaurants. We are currently planning on opening approximately 24
to 26 new restaurants in 2001. As of October 1, 2000, we had ten restaurants
under construction, three of which are expected to open during the fourth
quarter of 2000. We currently anticipate additional capital expenditures to be
between $1.0 and $2.0 million in the fourth quarter of 2000 for expansion of the
Stoney River concept. Additionally, we anticipate expenditures of approximately
$5.0 million for one to two new Stoney River restaurants in 2001. We expect to
finance these capital additions with operating cash flows, borrowings under our
Revolver and lease obligations. Actual capital expenditures for the remainder of
2000 and 2001 may vary from the above estimate based on a number of factors,
including the timing of additional purchases of future restaurant sites. We
intend to continue financing the furniture, fixtures and equipment for our new
stores with capitalized lease obligations.
We believe that available cash, cash generated from operations and borrowings
under the Revolver and lease obligations will be sufficient to finance our
operations and expected capital outlays for the next twelve months. Our growth
strategy includes the consideration of acquisitions or strategic joint ventures.
Any such acquisitions, joint ventures or other growth opportunities may require
additional external financing, and the Company may from time to time seek to
obtain additional funds from public or private issuances of equity or debt
securities. There can be no assurances that such sources of financing will be
available to us.
YEAR 2000
We have not experienced any significant disruptions to our financial or
operating activities caused by the failure of our computerized systems, or those
of our suppliers, resulting from Year 2000 conversion issues. We do not expect
Year 2000 conversion issues to have a material adverse effect on our operations
or financial results in 2000.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could adversely affect the Company's operations. A majority
of the Company's employees are paid hourly rates related to federal and state
minimum wage laws. As a result of increased competition and the low unemployment
rates in the markets in which the Company's restaurants are located, the Company
has continued to increase wages and benefits in order to attract and retain
management personnel and hourly coworkers. In addition, most of the Company's
leases require the Company to pay taxes, insurance, maintenance, repairs and
utility costs, and these costs are subject to inflationary pressures. The
Company may attempt to offset the effect of inflation through periodic menu
price increases, economies of scale in purchasing and cost controls and
efficiencies at existing restaurants.
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NOTE REGARDING FORWARD LOOKING INFORMATION
This report contains certain forward-looking statements within the meaning of
the federal securities laws, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
all statements regarding our intent, belief and expectations such as statements
concerning our future profitability, operating growth strategy, and financing
plans. Investors are cautioned that all forward-looking statements involve risks
and uncertainties including, without limitation, those set forth under the
caption "Forward-Looking Statements/Risk Factors" in our Annual Report on Form
10-K for the fiscal year ended December 26, 1999. Although we believe that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate and, therefore, there can
be no assurance that the forward-looking statements included in this report will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that the
objectives and plans of the Company will be achieved. We undertake no obligation
to publicly release any revisions to any forward-looking statements contained
herein to reflect events and circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK
Disclosure About Interest Rate Risk. The Company is subject to market
risk from exposure to changes in interest rates based on its financing,
investing, and cash management activities. The Company utilizes a balanced mix
of debt maturities along with both fixed-rate, primarily capitalized leases, and
variable-rate, primarily the Revolver, debt to manage its exposures to changes
in interest rates. The outstanding debt under the Revolver at October 1, 2000
was $94.2 million. The current interest rate environment is uncertain and
overall interest rates have been increasing in 2000. At October 1, 2000, the
amounts borrowed under the Revolver are subject to interest rate fluctuations,
based primarily on short-term LIBOR rates. See Notes 5 and 6 to the Financial
Statements in our Annual Report on Form 10-K for the fiscal year ended December
26, 1999. The Company does not expect changes in interest rates to have a
material effect on income or cash flows in fiscal 2000, although there can be no
assurances that interest rates will not significantly change.
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 - Fourth Amendment to O'Charley's, Inc. 1990 Employee
Stock Plan.
10.2 - O'Charley's, Inc. 1991 Stock Option Plan for Outside
Directors, As Amended.
10.3 - Severance Compensation Agreement, dated August 30,
2000, by and between O'Charley's, Inc. and William E.
Hall, Jr.
27.1 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the twelve
weeks ended October 1, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
O'Charley's Inc.
(Registrant)
Date: 11/15/00 By: /s/ Gregory L. Burns
----------------------- -----------------------------
Gregory L. Burns
Chief Executive Officer
Date: 11/15/00 By: /s/ A. Chad Fitzhugh
----------------------- -----------------------------
A. Chad Fitzhugh
Chief Financial Officer
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