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 April 22, 2001
Commission file number O-18629
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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 May 31, 2001
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Common Stock, no par value 18,408,107 shares
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O'Charley's Inc.
Form 10-Q
For the Quarter Ended April 22, 2001
Index
Page No.
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Part I - Financial Statements
Item 1. Financial statements:
Balance sheets as of April 22, 2001 and
December 31, 2000 3
Statements of earnings for the sixteen weeks
ended April 22, 2001 and April 16, 2000 4
Statements of cash flows for the sixteen weeks
ended April 22, 2001 and April 16, 2000 5
Notes to unaudited financial statements 6
Item 2. Management's discussion and analysis of
financial condition and results of operations 8
Item 3. Quantitative and qualitative disclosures about market risk 15
Part II - Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and reports on Form 8-K 16
Signatures 17
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O'Charley's Inc.
Balance Sheets (Unaudited)
(dollars in thousands)
April 22, December 31,
2001 2000
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Assets
Current Assets:
Cash and cash equivalents $ 1,991 $ 2,552
Accounts receivable 4,242 3,636
Inventories 18,254 12,605
Deferred income taxes 1,292 1,292
Other current assets 2,379 1,393
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Total current assets 28,158 21,478
Property and Equipment, net 291,739 274,271
Other Assets 14,887 15,269
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$ 334,784 $ 311,018
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Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 12,014 $ 12,639
Accrued payroll and related expenses 8,725 7,780
Accrued expenses 7,616 9,552
Federal, state and local taxes 4,338 4,118
Current portion of long-term debt and capitalized leases 7,190 7,574
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Total current liabilities 39,883 41,663
Deferred Income Taxes 8,336 8,431
Other Liabilities 2,993 2,764
Long-Term Debt 68,363 92,306
Capitalized Lease Obligations 20,405 22,364
Shareholders' Equity:
Common stock - No par value; authorized, 50,000,000
shares; issued and outstanding, 18,352,154 in 2001
and 15,703,600 in 2000 111,962 67,207
Accumulated other comprehensive loss, net of tax (399) (220)
Retained earnings 83,241 76,503
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194,804 143,490
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$ 334,784 $ 311,018
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See notes to financial statements.
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O'Charley's Inc.
Statements of Earnings (unaudited)
Sixteen Weeks Ended April 22, 2001 and April 16, 2000
2001 2000
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(in thousands, except per share data)
Revenues:
Restaurant sales $ 128,916 $ 105,204
Commissary sales 1,168 1,094
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130,084 106,298
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 41,072 33,920
Payroll and benefits 40,642 32,281
Restaurant operating costs 17,949 14,875
Cost of commissary sales 1,095 1,022
Advertising, general and administrative expenses 8,135 7,085
Depreciation and amortization 6,303 4,955
Preopening costs 2,117 1,611
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117,313 95,749
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Income from Operations 12,771 10,549
Other (Income) Expense:
Interest expense, net 2,454 1,782
Other, net (9) 14
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2,445 1,796
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Earnings Before Income Taxes 10,326 8,753
Income Taxes 3,588 3,064
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Net Earnings $ 6,738 $ 5,689
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Basic Earnings per Share:
Earnings per Common Share $ 0.42 $ 0.37
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Weighted Average Common Shares Outstanding 16,117 15,496
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Diluted Earnings per Share:
Earnings per Common Share $ 0.39 $ 0.35
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Weighted Average Common Shares Outstanding 17,363 16,318
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See notes to financial statements.
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O'Charley's Inc.
Statements of Cash Flows (Unaudited)
Sixteen Weeks Ended April 22, 2001 and April 16, 2000
2001 2000
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(in thousands)
Cash Flows from Operating Activities:
Net earnings $ 6,738 $ 5,689
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 6,303 4,955
Amortization of debt issuance costs 56 46
Provision for deferred income taxes (95) 95
Loss on the sale and write-down of assets 96 10
Changes in assets and liabilities:
Accounts receivable (606) (635)
Inventories (5,649) (7,087)
Other current assets (986) (420)
Accounts payable (625) (133)
Accrued payroll and other accrued expenses (771) 3,113
Tax benefit derived from exercise of stock options 742 --
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Net cash provided by operating activities 5,203 5,633
Cash Flows from Investing Activities:
Additions to property and equipment (24,228) (19,367)
Proceeds from the sale of assets 649 291
Other, net 88 (331)
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Net cash used by investing activities (23,491) (19,407)
Cash Flows from Financing Activities:
Proceeds from long-term debt 32,406 26,208
Payments on long-term debt and capitalized
lease obligations (58,692) (14,282)
Net proceeds from sale of common stock 41,744 --
Exercise of employee incentive stock options 2,269 665
Repurchase of common stock -- (584)
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Net cash provided by financing activities 17,727 12,007
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Decrease in Cash (561) (1,767)
Cash at Beginning of the Period 2,552 3,178
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Cash at End of the Period $ 1,991 $ 1,411
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Cash paid during the period for:
Interest $ 2,674 $ 2,178
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Income taxes $ 2,339 $ 1,484
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See notes to financial statements.
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O'Charley's Inc.
Notes To Unaudited Financial Statements
Sixteen Weeks Ended April 22, 2001 and April 16, 2000
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 2001 will consist of fifty-two weeks compared to
fifty-three weeks in 2000 with the fourth quarter consisting of twelve weeks
compared to thirteen weeks in the fourth quarter of 2000.
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 31, 2000.
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.
On April 11, 2001, the Company completed an offering of 2.3 million
shares of no par value common stock at $19.50 per share. The total net proceeds
were approximately $41.7 million and were used to reduce borrowings under the
Company's revolving credit facility.
Following is a reconciliation of the Company's basic and diluted
earnings per share in accordance with FAS 128.
Sixteen Sixteen
(In thousands, weeks ended weeks ended
except per share data) April 22, 2001 April 16, 2000
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Net Earnings $ 6,738 $ 5,689
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Basic Earnings Per Share:
Weighted average shares outstanding 16,117 15,496
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Basic earnings per share $ 0.42 $ 0.37
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Diluted Earnings Per Share:
Weighted average shares outstanding 16,117 15,496
Incremental stock option shares outstanding 1,246 822
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Weighted average diluted shares outstanding 17,363 16,318
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Diluted earnings per share $ 0.39 $ 0.35
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There were no options excluded from the 2001 sixteen week diluted weighted
average shares calculation. Options for approximately 1,286,000 shares were
excluded from the 2000 sixteen week diluted weighted average shares calculation
due to these shares being anti-dilutive.
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C. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
was later amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended,
requires recognition of the fair value of all derivative instruments, including
certain instruments embedded in other contracts (collectively referred to as
derivatives), on the balance sheet and establishes new accounting rules for
hedging activities. The Company was required to adopt FAS 133, as amended, on
January 1, 2001. At January 1, 2001, the Company held no derivative financial
instruments; thus, upon the initial adoption of the standard, there were no
transition amounts recorded.
At April 22, 2001, the Company's derivative financial instruments
consist of interest rate swaps with a combined notional amount of $70 million
that effectively convert an equal portion of its debt from a floating rate to a
fixed rate. The Company's purpose for holding such instruments is to hedge its
exposure to cash flow fluctuations due to changes in market interest rates. The
fair value of the Company's derivative financial instruments is a liability of
$437,000, which is included in other liabilities on the balance sheet. The fair
value adjustment resulted in the recognition of unrealized losses of $285,000,
net of related income taxes of $152,000 in accumulated other comprehensive loss.
D. Comprehensive Income
Comprehensive income (loss) consists of net earnings and other
comprehensive income attributable to unrealized gains and losses on derivative
financial instruments and unrealized gains and losses on available for sale
securities. Other comprehensive loss, net of tax, for the first quarter of 2001
was $179,000. The other comprehensive loss is comprised of unrealized loss on
derivative financial instruments of $285,000, net of tax, and a realized loss
from an other than temporary decline in fair value of investments available for
sale of $106,000, net of tax. Other comprehensive gain, net of tax, for the
first quarter of 2000 was $176,000.
E. Litigation
In November 2000, the Company was sued by Two Mile Partners in the
circuit court for Montgomery County, Tennessee. Two Mile Partners is a Tennessee
general partnership whose partners are David K. Wachtel, Jr., who owns 75% and
is the managing partner of the partnership and is a former director and officer
and a principal shareholder of the Company, and Gregory L. Burns, who owns 25%
of the partnership and is the Company's Chairman of the Board and Chief
Executive Officer. In the complaint, Two Mile Partners is seeking $1.5 million
in damages, plus interest, attorneys' fees and costs as a result of the
Company's alleged breach of a lease entered into in 1985 for a restaurant
property owned by the partnership and located in Clarksville, Tennessee. Two
Mile Partners alleges that the Company breached a continuous operation provision
in the lease by vacating the property in July 2000 and opening another
O'Charley's restaurant in Clarksville, Tennessee. On May 24, 2001, the court
granted a motion for summary judgment filed by Two Mile Partners seeking to
invalidate an amendment to the lease which granted the Company the right to
terminate the lease. The court held that the amendment to the lease was executed
by the parties without consideration and that the amendment is void and
unenforceable. The Company believes the amendment to the lease is enforceable
and that it terminated the lease in accordance with its terms and intends to
seek an interlocutory appeal from the court's order. The right to seek an
interlocutory appeal is discretionary on the trial court and the court of
appeals. In the event either court determines not to grant the Company the right
to seek the appeal or in the event the right to appeal is granted but the
Company does not prevail, the parties will proceed to a trial to determine the
amount of damages owed by the Company. After any such trial, the Company will
have the right to appeal any issues determined on summary judgment or at the
trial. The Company intends to continue to defend this case vigorously and cannot
predict its outcome.
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Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
Sixteen Weeks Ended April 22, 2001 and April 16, 2000
RESULTS OF OPERATIONS
GENERAL
At April 22, 2001, we operated 147 O'Charley's restaurants in Alabama, Florida,
Georgia, Illinois, Indiana, Kentucky, Mississippi, Missouri, North Carolina,
Ohio, South Carolina, Tennessee and Virginia and two Stoney River restaurants in
suburban Atlanta. O'Charley's are casual dining restaurants that are intended to
appeal to mainstream casual dining customers as well as upscale casual dining
and value-oriented customers by offering high quality, freshly prepared food at
moderate prices with friendly and attentive customer service. Stoney River
restaurants are upscale steakhouses that are intended to appeal to both upscale
casual dining and fine dining customers by offering hand-cut, premium
mid-western beef along with fresh seafood and other gourmet entrees with
attentive service in a warm, friendly and relaxed environment.
We operate a commissary for the primary purpose of providing our restaurants
with consistent quality food products that meet our specifications while
obtaining lower prices for those items through volume purchasing. A substantial
majority of the food products served in our restaurants are distributed to the
restaurants by the commissary. In addition to purchasing food and other non-food
products, the commissary manufactures certain proprietary products and ages and
cuts red meat into steaks in its USDA-approved and inspected facility. The
commissary's profits resulting from sales to company restaurants are
consolidated into the cost of food, beverage and supplies line item in our
financial statements.
The following table reflects changes in the number of O'Charley's restaurants we
operated during the first quarter of 2001 and 2000.
Restaurants 2001 2000
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In operation, beginning of period 138 117
Restaurants opened 9 8
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In operation, end of period 147 125
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On May 26, 2000, we purchased two existing Stoney River restaurants and all
associated trademarks and intellectual property for approximately $15.8 million
in a cash transaction accounted for as a purchase. Accordingly, the results of
operations of the two Stoney River restaurants have been included in our
consolidated results of operations since the date of acquisition. The
transaction includes an earn-out provision pursuant to which we may be required
to pay the former owners 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 Legendary Steaks concept achieving certain
performance thresholds (income before taxes and preopening costs) for the year
in question. Our interest expense increased as a result of the indebtedness
incurred to finance the acquisition. Our depreciation and amortization increased
as a result of the $10.6 million of goodwill associated with the acquisition
that is being amortized over 20 years and will increase to the extent we are
required to make payments to the former owners pursuant to the earn-out
provision.
We are conducting a feasibility study on franchising our O'Charley's restaurant
concept and expect to have the preliminary results of that study later this
year. We could incur substantial additional expenses if we elect to establish
franchising operations. As it is unlikely that we would receive any significant
revenues from franchising during the start-up phase of those operations, the
establishment of franchising operations could have a material adverse effect on
our operating results until such time, if ever, as those operations begin to
generate revenues in excess of their related expenses.
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REVENUES consist of restaurant sales and to a lesser extent commissary sales.
Restaurant sales include food and beverage sales and are net of applicable state
and local sales taxes. 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.
COST OF FOOD, BEVERAGE AND SUPPLIES primarily consists of the costs of beef,
poultry, seafood, produce and alcoholic and non-alcoholic beverages. We believe
our menu offers a broad selection of menu items and as a result there is not a
high concentration of our food costs in any one product category. Various
factors beyond our control, including adverse weather, cause periodic
fluctuations in food and other costs. Generally, temporary increases in these
costs are not passed on to customers; however, we have in the past generally
adjusted menu prices to compensate for increased costs of a more permanent
nature.
PAYROLL AND BENEFITS includes 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
restaurant management for achieving and exceeding certain restaurant level
financial targets and performance goals. We typically pay our employees more
than minimum wage and do not expect an immediate adverse effect on our financial
performance from any further increase in the federal minimum wage rate. However,
as in prior years, we do expect that overall wage inflation will be higher for
several years following any minimum wage increase. As Congress has raised the
federal minimum wage rate in recent years, the base wage rate for our tipped
employees has remained at $2.13. Any increase to the base wage rate for our
tipped employees would increase payroll costs.
RESTAURANT OPERATING COSTS includes occupancy and other expenses at the
restaurant level, except property and equipment depreciation and amortization.
Rent, supervisory salaries, bonuses, 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. In October 2000, we entered into agreements providing
for a five-year synthetic lease facility pursuant to which the lessor has agreed
to acquire and finance construction of up to $25.0 million of properties and
lease the properties to us. We are also evaluating a possible sale and leaseback
facility pursuant to which the lessor would acquire certain of our restaurant
properties and then lease those properties to us. To the extent that proceeds
from any sale and leaseback transaction are used to repay indebtedness under our
revolving credit facility, this would reduce our interest expense. We would
incur additional rent expense, however, which would increase our restaurant
operating costs and decrease our restaurant operating income.
RESTAURANT OPERATING INCOME 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 primarily includes depreciation on property and
equipment calculated on a straight-line basis over an estimated useful life.
Depreciation and amortization also includes amortization of goodwill, which
relates primarily to the acquisition of the Stoney River concept. Our
depreciation and amortization increased as a result of the $10.6 million of
goodwill incurred in connection with our May 2000 acquisition of the Stoney
River Legendary Steaks concept. Depreciation and amortization for goodwill
associated with the acquisition will increase to the extent we are required to
make payments pursuant to the earn-out provision discussed above.
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PREOPENING COSTS includes operating costs and expenses incurred prior to a new
restaurant opening. The amount of preopening costs incurred in any one period
includes costs incurred during the period for restaurants opened and under
development. Our preopening costs may vary significantly from quarter to quarter
primarily due to the timing of restaurant openings. We typically incur average
preopening costs of approximately $220,000 for each new O'Charley's restaurant.
We anticipate higher average preopening costs for each Stoney River restaurant
we open.
The following section should be read in conjunction with our financial
statements and the related notes thereto included elsewhere herein. The
following table highlights the operating results for first quarter of 2001 and
2000 as a percentage of total revenues unless otherwise indicated. The first
quarter of 2001 and 2000 were each comprised of 16 weeks.
First Quarter
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2001 2000
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REVENUES:
Restaurant sales 99.1% 99.0%
Commissary sales 0.9% 1.0%
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100.0% 100.0%
COSTS AND EXPENSES:
Cost of restaurant sales:(1)
Cost of food, beverage and supplies 31.9% 32.3%
Payroll and benefits 31.5% 30.7%
Restaurant operating costs 13.9% 14.1%
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77.3% 77.1%
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Restaurant operating margin(2) 22.7% 22.9%
Cost of commissary sales(3) 93.8% 93.4%
Advertising, general and administrative expenses 6.3% 6.7%
Depreciation and amortization 4.8% 4.7%
Preopening costs 1.6% 1.5%
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INCOME FROM OPERATIONS 9.8% 9.9%
OTHER (INCOME) EXPENSE:
Interest expense, net 1.9% 1.7%
Other, net 0.0% 0.0%
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EARNINGS BEFORE INCOME TAXES 7.9% 8.2%
INCOME TAXES 2.8% 2.9%
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NET EARNINGS 5.2% 5.4%
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(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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FIRST QUARTER 2001 VERSUS FIRST QUARTER 2000
TOTAL REVENUES in 2001 increased $23.8 million, or 22.4%, to $130.1 million from
$106.3 million in 2000 primarily as a result of an increase in restaurant sales
of $23.7 million, or 22.5%. The increase in restaurant sales was attributable to
22 new restaurants, an increase in same store sales of 2.5% and the inclusion of
Stoney River restaurant sales. In January 2001, we increased menu prices by
approximately 2.0%. While same store sales during the first quarter increased by
2.5%, same store sales during the last three weeks of the first quarter and in
the second quarter have been affected by the slowing United States economy and
the uncertainty created by recent consumer confidence and employment statistics.
COST OF FOOD, BEVERAGE AND SUPPLIES in 2001 increased $7.2 million, or 21.1%, to
$41.1 million from $33.9 million in 2000. As a percentage of restaurant sales,
cost of food, beverage and supplies decreased to 31.9% in 2001 from 32.3% in
2000. We attribute this lower food cost percentage primarily to three factors: a
menu price increase in January 2001, which increased the average check; a
decrease in the cost of several food items; and improved purchasing and
operating efficiencies in our restaurants and commissary. These improvements
were partially offset by an increase in red meat and poultry costs and the
inclusion of Stoney River restaurants, which we acquired in May 2000 and have a
higher cost of food, beverage and supplies as a percentage of sales. We
anticipate increases in red meat costs for the remainder of 2001 as well as an
increase in baby back rib costs for the second quarter of 2001 due to a
temporary ban on the importing of Danish baby back ribs, which was lifted in May
2001. There can be no assurance that events outside our control will not result
in increased food costs.
PAYROLL AND BENEFITS increased $8.3 million, or 25.9%, to $40.6 million in 2001
from $32.3 million in 2000. Payroll and benefits as a percentage of restaurant
sales increased to 31.5% in 2001 from 30.7% in 2000. The increase was
attributable to increasing employee benefit costs including health insurance and
workers compensation insurance and increasing wage rates and salaries for
restaurant support staff and management in 2001. Our markets generally have low
unemployment rates and we compete with other restaurants for employees. We
anticipate continued wage rate increases and higher employee benefit costs for
the remainder of 2001.
RESTAURANT OPERATING COSTS in 2001 increased $3.1 million, or 20.7%, to $17.9
million from $14.9 million in 2000. Restaurant operating costs, as a percentage
of sales, decreased to 13.9% in 2001 from 14.1% in 2000. The decrease was
attributable to a reduction in supervisory expenses, primarily bonus expense,
and improvements in certain store level operating costs as a percentage of
sales. These improvements were offset by higher utility costs, primarily natural
gas, resulting from an increase in natural gas prices. We anticipate continued
increases in utility costs for the remainder of 2001.
RESTAURANT OPERATING INCOME increased $5.1 million, or 21.2%, to $29.3 million
in 2001 from $24.1 million in 2000. Restaurant operating margin, which reflects
restaurant operating income expressed as a percentage of restaurant sales,
decreased to 22.7% in 2001 from 22.9% in 2000.
ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES increased $1.1 million, or
14.8%, to $8.1 million in 2001 from $7.1 million in 2000. As a percentage of
total revenue, advertising, general and administrative expenses decreased to
6.3% in 2001 from 6.7% in 2000. Advertising expenditures increased 22.1% to $3.5
million in 2001 from $2.8 million in 2000 and, as a percentage of total
restaurant sales, remained at 2.7% in 2001. We introduced a new media campaign
in May 2001, and anticipate that we may experience higher advertising
expenditures, as a percentage of restaurant sales, during the remainder of 2001.
General and administrative expenses increased 10.0% to $4.7 million in 2001 from
$4.2 million in 2000, and as a percentage of total sales, decreased to 3.6% in
2001 from 4.0% in 2000. The decrease in general and administrative resulted
primarily from decreases in bonus and legal expenses.
DEPRECIATION AND AMORTIZATION in 2001 increased $1.3 million, or 27.2%, to $6.3
million from $5.0 million in 2000. As a percentage of total revenue,
depreciation and amortization increased to 4.8% in 2001 from 4.7% in 2000. The
increase in depreciation expense is primarily attributable to the growth in the
number of new restaurants, capital expenditures for improvements to existing
restaurants and the amortization of goodwill associated with the acquisition of
the Stoney River Legendary Steaks concept.
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PREOPENING COSTS increased 31.4% in 2001 to $2.1 million from $1.6 million in
2000. As a percentage of total revenue, preopening costs increased to 1.6% in
2001 from 1.5% in 2000.
INCOME FROM OPERATIONS increased $2.2 million, or 21.1%, to $12.8 million in
2001 from $10.5 million in 2000.
INTEREST EXPENSE, net increased $672,000 in 2001 to $2.5 million from $1.8
million in 2000. The increase is primarily related to the increased borrowings
under our revolving line of credit due to the addition of new restaurants and
the acquisition of the Stoney River Legendary Steaks concept. The increase in
borrowings was partially offset by a decrease in interest rates. On April 11,
2001, we completed an offering of 2.3 million shares of our common stock. The
total net proceeds were approximately $41.7 million and were used to reduce
borrowings under our revolver. As a result, we anticipate a reduction in
interest expense in comparison to 2000 for the remainder of 2001.
EARNINGS before income taxes for 2001 increased $1.6 million, or 18.0%, to $10.3
million from $8.8 million in 2000.
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 $5.1 million in the first quarter 2001, compared
to $5.6 million in the first quarter 2000. Our working capital historically has
had current liabilities in excess of current assets due to cash reinvestments in
long-term assets, mostly property and equipment additions. At April 22, 2001,
the working capital deficiency was $11.7 million and the current ratio, which we
define as current assets divided by current liabilities, was 0.7 to 1. The total
net decrease in cash was $561,000 in the first quarter 2001.
On April 11, 2001, we completed an offering of 2.3 million shares of our common
stock at $19.50 per share. The total net proceeds were approximately $41.7
million and were used to reduce borrowings under our revolving credit facility.
Net payments under our revolving credit facility in the first quarter of 2001
were $23.9 million which reduced the amount outstanding under our revolving
credit facility from $92.0 million at December 31, 2000 to $68.1 million at
April 22, 2001. The average interest rate on amounts outstanding under the
revolver at April 22, 2001 was 5.8%. Our revolving credit facility provides for
a maximum borrowing capacity of $135.0 million; however, the maximum borrowing
capacity under our revolving credit facility is reduced by amounts financed
under our synthetic lease facility described below. Our revolving credit
facility matures on May 31, 2003. Our revolving credit facility imposes
restrictions on us with respect to the maintenance of certain financial ratios,
the incurrence of indebtedness, sales of assets, mergers and the payment of
dividends.
As of April 22, 2001, we had interest rate swap agreements with commercial
banks, which effectively fixed the interest rate on $70.0 million of our
outstanding debt at a weighted-average interest rate of 4.98%. 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 revolving credit facility. The
swap agreements expire as follows: $50.0 million in December 2001, $10.0 million
in January 2004 and $10.0 million in January 2006.
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On October 10, 2000, we entered into agreements providing for a five-year
synthetic lease facility pursuant to which the lessor has agreed to acquire or
construct up to $25.0 million of properties and lease the properties to us. The
terms of the facility provide for a separate operating lease agreement to be
entered into for each property upon completion of acquisition or construction,
each with a lease term ending October 10, 2005. Monthly rental payments for each
property lease are based on the total costs advanced by the lessor to acquire or
construct such property, and the amount of those payments varies based upon the
floating interest rate in effect from time to time under our revolving credit
facility. At April 22, 2001, the monthly lease payment for these properties was
based on an interest rate of 5.9%, and the lessor's total accumulated cost of
properties acquired under the facility was approximately $6.0 million. The lease
facility requires us to meet certain financial and other covenants similar to
the covenants and restrictions contained in our revolving credit facility. The
acquisition and construction costs paid by the lessor under the synthetic lease
facility reduce the maximum borrowing capacity under our $135.0 million
revolving credit facility as described above.
Upon the expiration of the synthetic lease facility, we may seek to renew the
facility. Any renewal of the facility requires the lessor's consent. If we are
unable to or choose not to renew the facility, we have the option to sell the
properties to third parties on behalf of the lessor, surrender the properties to
the lessor or purchase the properties at their original cost. If we sell the
properties to third parties for less than their aggregate original cost, we are
obligated, under a residual value guarantee, to pay the lessor an amount equal
to any shortfall, not to exceed 85% of the aggregate original cost of the
properties. To the extent the aggregate sales proceeds exceed the aggregate
original cost of the properties, the lessor is required to remit any excess to
us. If we surrender the properties to the lessor, we are obligated, under our
residual value guarantee, to pay the lessor an amount equal to 85% of the
aggregate original cost of such properties. If the lessor later sells such
properties to third parties, the lessor must remit the sales proceeds to us to
the extent the sale proceeds, plus the amount of our residual value guarantee
payment, exceeds the aggregate original cost of the properties. There can be no
assurance that we will be able to renew the facility or sell the properties to
third parties, and we will require substantial additional financing if we
purchase these properties or surrender the properties to the lessor upon the
expiration of the synthetic lease facility. We believe that the anticipated fair
value of the properties currently leased under this facility could eliminate or
substantially reduce our exposure under the residual value guarantee with
respect to those properties. However, there can be no assurance that we will not
be required to make substantial payments to satisfy this guarantee or the
guarantee on any other properties that may be constructed or purchased by the
lessor in the future under this facility.
Property and equipment expenditures were $24.2 million in the first quarter of
2001. These additions were made primarily for nine new O'Charley's restaurants
opened during the quarter, restaurants under construction at April 22, 2001,
expansion of the Stoney River concept and improvements to existing restaurants.
In the first quarter 2001, we repaid $2.3 million in principal on our
capitalized lease obligations. Through the first quarter 2001, we have not
financed any additional restaurant equipment through capitalized lease
obligations.
On September 2, 1998, the Board of Directors of the Company approved the
repurchase of up to 750,000 shares of our outstanding common stock. As of
December 31, 2000, approximately 311,000 shares, or 1.7% of our outstanding
stock, had been repurchased. No shares have been repurchased to date in 2001;
however, we continually evaluate the best uses of our capital and may repurchase
additional shares in the future.
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Our capital budget includes approximately $44.0 million to $48.0 million in
capital expenditures for the remainder of 2001. These expenditures are for the
planned 15 to 16 new O'Charley's restaurants, improvements to existing
O'Charley's restaurants and expansion of the Stoney River concept, including one
Stoney River restaurant opened during the second quarter of 2001 and one Stoney
River restaurant currently under development. As of April 22, 2001, we had
thirteen O'Charley's restaurants under construction; six to seven of which are
expected to open during the second quarter of 2001. There can be no assurance
that actual capital expenditures for the remainder of 2001 will not vary
significantly from budgeted amounts based upon a number of factors, including
the timing of additional purchases of restaurant sites. We expect to finance
these capital expenditures with operating cash flows, borrowings under our
revolving credit facility and capitalized lease obligations. We intend to
continue financing the furniture, fixtures and equipment for our new restaurants
primarily with capitalized lease obligations and to finance the acquisition and
construction of certain properties with our synthetic lease facility.
We are currently evaluating a possible sale and leaseback facility pursuant to
which we would sell some of the 91 restaurant properties at which we currently
own the land and building and then lease those properties from the buyer. We
currently anticipate that proceeds from the sale would be used primarily to
repay indebtedness under our revolving credit facility. We cannot assure you
that we will enter into a sale and leaseback facility or, if we do so, the
number of restaurant properties that we may sell or the terms of the leases
pursuant to which we lease properties from the buyer.
We believe that available cash, cash generated from operations and borrowings
under our revolving credit facility and capitalized lease obligations will be
sufficient to finance our operations and expected capital outlays for at least
the next twelve months. Our growth strategy includes possible acquisitions or
strategic joint ventures. Any acquisitions, joint ventures or other growth
opportunities may require additional external financing, and we 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.
IMPACT OF INFLATION
The impact of inflation on the cost of food, labor, equipment, land and
construction costs could adversely affect our operations. A majority of our
employees are paid hourly rates related to federal and state minimum wage laws.
As a result of increased competition and the low unemployment rates in the
markets in which our restaurants are located, we have continued to increase
wages and benefits in order to attract and retain management personnel and
hourly coworkers. 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. Utility costs increased significantly during the
first quarter 2001 which had a material impact on our restaurant operating costs
in the first quarter 2001. We anticipate continued utility rate increases for
the remainder of 2001, which could adversely affect our results of operations.
We attempt to offset the effect of inflation through periodic menu price
increases, economies of scale in purchasing and cost controls and efficiencies
at our restaurants.
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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 and 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 31, 2000. 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 DISCLOSURES ABOUT 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 and variable-rate debt to manage
its exposures to changes in interest rates. The Company's fixed-rate debt
consists primarily of capitalized lease obligations and our variable-rate debt
consists primarily of our revolving credit facility. In addition, lease payments
under our synthetic lease facility are and will continue to be at variable rates
based upon prevailing interest rates.
As an additional method of managing our interest rate exposure on our revolving
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 April 22, 2001, we
have in effect $70.0 million in swaps at an average fixed rate of 4.98%, $50.0
million of which mature in December 2001, $10.0 million of which mature in
January 2004 and $10.0 million of which mature in January 2006.
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PART II - OTHER INFORMATION
Item 1. Litigation
In November 2000, the Company was sued by Two Mile Partners in the
circuit court for Montgomery County, Tennessee. Two Mile Partners is a
Tennessee general partnership whose partners are David K. Wachtel, Jr.,
who owns 75% and is the managing partner of the partnership and is a
former director and officer and a principal shareholder of the Company,
and Gregory L. Burns, who owns 25% of the partnership and is the
Company's Chairman of the Board and Chief Executive Officer. In the
complaint, Two Mile Partners is seeking $1.5 million in damages, plus
interest, attorneys' fees and costs as a result of the Company's
alleged breach of a lease entered into in 1985 for a restaurant
property owned by the partnership and located in Clarksville,
Tennessee. Two Mile Partners alleges that the Company breached a
continuous operation provision in the lease by vacating the property in
July 2000 and opening another O'Charley's restaurant in Clarksville,
Tennessee. On May 24, 2001, the court granted a motion for summary
judgment filed by Two Mile Partners seeking to invalidate an amendment
to the lease which granted the Company the right to terminate the
lease. The court held that the amendment to the lease was executed by
the parties without consideration and that the amendment is void and
unenforceable. The Company believes the amendment to the lease is
enforceable and that it terminated the lease in accordance with its
terms and intends to seek an interlocutory appeal from the court's
order. The right to seek an interlocutory appeal is discretionary on
the trial court and the court of appeals. In the event either court
determines not to grant the Company the right to seek the appeal or in
the event the right to appeal is granted but the Company does not
prevail, the parties will proceed to a trial to determine the amount of
damages owed by the Company. After any such trial, the Company will
have the right to appeal any issues determined on summary judgment or
at the trial. The Company intends to continue to defend this case
vigorously and cannot predict its outcome.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3 - Amended and Restated Bylaws of the Company
10.1 - Severance Compensation Agreement, dated April 5, 2001,
by and between O'Charley's Inc. and Steven J. Hislop
10.2 - Severance Compensation Agreement, dated April 5, 2001,
by and between O'Charley's Inc. and A. Chad Fitzhugh
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
sixteen weeks ended April 22, 2001.
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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: 6-6-01 By: /s/ Gregory L. Burns
----------------------------------------
Gregory L. Burns
Chief Executive Officer
Date: 6-6-01 By: /s/ A. Chad Fitzhugh
----------------------------------------
A. Chad Fitzhugh
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3 - Amended and Restated Bylaws of the Company
10.1 - Severance Compensation Agreement, dated April 5, 2001,
by and between O'Charley's Inc. and Steven J. Hislop
10.2 - Severance Compensation Agreement, dated April 5, 2001,
by and between O'Charley's Inc. and A. Chad Fitzhugh