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 5, 1997
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 November 14,1997
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Common Stock, no par value 10,176,364 shares
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O'Charley's Inc.
Form 10-Q
For Quarter Ended October 5, 1997
Index
Page No.
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Part I - Financial Information
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Item 1. Financial statements:
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Balance sheets as of October 5, 1997 and
December 29, 1996 3
Statements of operations for the twelve weeks
ended October 5, 1997 and October 6, 1996 4
Statements of operations for the forty weeks
ended October 5, 1997 and October 6, 1996 5
Statements of cash flows for the forty weeks
ended October 5, 1997 and October 6, 1996 6
Notes to unaudited financial statements 7-8
Item 2. Management's discussion and analysis of
financial condition and results of operations 9-12
Part II - Other Information
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Item 1. Legal Proceedings 13
Item 6. Exhibits and reports on form 8-K 13
Signatures 14
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O'Charley's Inc.
Balance Sheets
(dollars in thousands)
October 5, December 29,
1997 1996
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Assets
Current Assets:
Cash $ 1,626 $ 1,616
Accounts receivable 2,038 1,546
Inventories 5,903 4,505
Preopening costs 1,289 1,097
Deferred income taxes 962 2,334
Other current assets 2,334 1,357
-------- --------
Total current assets 14,152 12,455
Property and Equipment, net 126,271 103,281
Other Assets 1,217 1,423
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$141,640 $117,159
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 7,082 $ 5,022
Accrued payroll and related expenses 4,449 3,365
Accrued expenses 4,939 9,162
Federal, state and local taxes 3,611 2,461
Current portion of long-term debt and capitalized leases 4,167 3,309
-------- --------
Total current liabilities 24,248 23,319
Deferred Income Taxes 1,295 1,295
Long-Term Debt 46,097 29,822
Capitalized Lease Obligations 12,020 11,797
Shareholders' Equity:
Common stock - No par value; authorized, 50,000,000
shares; issued and outstanding, 7,933,864 in 1997
and 7,854,368 in 1996 30,323 29,592
Additional paid-in capital 652 652
Retained earnings 27,005 20,682
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57,980 50,926
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$141,640 $117,159
======== ========
See notes to financial statements
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O'Charley's Inc.
Statements of Operations
Twelve Weeks Ended October 5, 1997 and October 6, 1996
1997 1996
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in thousands, except per share data)
Revenues:
Restaurant sales $ 46,856 $ 38,712
Commissary sales 683 576
Franchise revenue 7 7
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47,546 39,295
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 16,294 13,986
Payroll and benefits 14,232 12,041
Restaurant operating costs 6,772 5,822
Cost of commissary sales 637 550
Advertising, general and administrative expenses 3,100 2,145
Depreciation and amortization 2,434 1,899
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43,469 36,443
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Income from Operations 4,077 2,852
Other (Income) Expense:
Interest expense, net 965 605
Other, net (45) (56)
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920 549
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Earnings Before Income Taxes 3,157 2,303
Income Taxes 1,107 806
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Net Earnings $ 2,050 $ 1,497
======== ========
Earnings per Common Share $ 0.24 $ 0.18
======== ========
Weighted Average Common Shares Outstanding 8,574 8,310
======== ========
See notes to financial statements.
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O'Charley's Inc.
Statements of Operations
Forty Weeks Ended October 5, 1997 and October 6, 1996
1997 1996
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(in thousands, except per share data)
Revenues:
Restaurant sales $ 148,511 $ 123,018
Commissary sales 2,058 1,817
Franchise revenue 23 24
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150,592 124,859
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 51,541 44,228
Payroll and benefits 45,593 38,258
Restaurant operating costs 21,520 18,772
Cost of commissary sales 1,926 1,731
Advertising, general and administrative expenses 9,839 6,947
Depreciation and amortization 7,595 6,128
Asset revaluation -- 5,110
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138,014 121,174
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Income from Operations 12,578 3,685
Other(Income)Expense:
Interest expense, net 2,936 1,945
Litigation -- 8,500
Other, net (192) 36
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2,744 10,481
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Earnings (Loss) Before Income Taxes 9,834 (6,796)
Income Tax Expense (Benefit) 3,511 (2,379)
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Net Earnings (Loss) $ 6,323 ($ 4,417)
========= =========
Earnings (Loss) per Common Share $ 0.75 ($ 0.57)
========= =========
Weighted Average Common Shares Outstanding 8,464 7,789
========= =========
See notes to financial statements.
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O'Charley's Inc.
Statements of Cash Flows
Forty Weeks Ended October 5, 1997 and October 6, 1996
1997 1996
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(in thousands)
Cash Flows from Operating Activities:
Net earnings (loss) $ 6,323 ($ 4,417)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 5,821 4,479
Amortization of preopening costs 1,774 1,649
Asset revaluation adjustment -- 5,110
Provision for deferred income taxes 1,372 (1,800)
(Gain) loss on the sale of assets 73 (171)
Changes in assets and liabilities:
Accounts receivable (492) (263)
Inventories (1,398) (1,968)
Additions to preopening costs (1,966) (1,824)
Other current assets (977) (711)
Accounts payable 2,060 1,483
Accrued payroll and other accrued expenses (1,544) 5,123
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Net cash provided by operating activities 11,046 6,690
Cash Flows from Investing Activities:
Additions to property and equipment (25,959) (23,177)
Proceeds from the sale of assets 1,025 171
Other, net 193 (53)
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Net cash used by investing activities (24,741) (23,059)
Cash Flows from Financing Activities:
Proceeds from long-term debt 16,400 17,300
Payments on long-term debt and capitalized
lease obligations (2,981) (3,009)
Distribution to Shoex, Inc. shareholders -- (315)
Exercise of employee incentive stock options 286 147
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Net cash provided by financing activities 13,705 14,123
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Increase (Decrease) in Cash 10 (2,246)
Cash at Beginning of the Period 1,616 2,576
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Cash at End of the Period $ 1,626 $ 330
======== ========
See notes to financial statements.
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O'Charley's Inc.
Notes To Unaudited Financial Statements
Forty Weeks Ended October 5, 1997 and October 6, 1996
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.
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 29, 1996.
B. Earnings Per Share
Earnings per share has been computed on the basis of the weighted average
number of shares outstanding, including common stock equivalents, which consist
of stock options, except for those reporting periods which reflect a net loss,
as the inclusion of common stock equivalents in such periods would be
anti-dilutive. In determining the number of dilutive common stock equivalents,
the Company includes average common shares attributable to dilutive stock
options using the treasury stock method. Fully diluted earnings per share is not
presented since it approximates earnings per share.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS 128), which
establishes standards for the computation, presentation and disclosure
requirements for earnings per share. FAS 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per share, and
fully diluted earnings per share with diluted earnings per share. It also
requires all entities, other than those with simple capital structures, to
present basic and diluted per-share amounts on the face of the income statement.
FAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
Upon adoption, all calculations of prior period earnings per share will be
restated to conform with FAS 128.
The Company's pro forma basic earnings per share as calculated under
FAS 128 for the twelve and forty week periods ending October 5, 1997, were $.26
and $.80, respectively. Pro forma diluted earnings per share for such periods
were $.24 and $.75, respectively.
C. Contingencies
As of October 5, 1997, the Company is a party in a civil action in the
United States District Court for the Middle District of Tennessee involving a
former general manager of the Company. In September 1995, the Company filed an
action against the former employee alleging wrongful conversion of Company funds
and fraudulent misrepresentation. The former employee has moved to amend his
answer in the civil action filed by the Company claiming damages of $30.0
million relating to counterclaims alleging malicious prosecution and intentional
infliction of emotional distress and $600,000 relating to counterclaims alleging
breach of contract and race discrimination. To date the Court has not ruled on
whether it will allow the former employee to pursue
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any of the foregoing counterclaims. The Company believes the counterclaims are
without merit, intends to vigorously prosecute its claims and vigorously defend
any counterclaims. Based on the advice of counsel, the Company believes that to
the extent the counterclaims relating to malicious prosecution and intentional
infliction are allowed to proceed, it is likely that these counterclaims will be
dismissed upon the Company's motion for summary judgement. The Company does not
believe the outcome of this proceeding will materially affect its financial
condition or results of operations.
D. Subsequent Events
During the fourth quarter of 1997, the Company's Registration Statement for
an offering of 2,000,000 additional shares of common stock was declared
effective by the Securities and Exchange Commission. The secondary offering was
consummated on October 16, 1997 and closed on October 21, 1997. The price to the
public was $16.75 per share and the net proceeds to the Company were $15.77 per
share. Additionally, on November 10, 1997, the underwriters exercised their over
- - allotment option to purchase 232,000 additional shares of common stock on the
same terms. The aggregate net proceeds to the Company after deducting expenses
approximates $34.8 million and was used to repay indebtedness under the
Company's Revolver.
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O'Charley's Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forty Weeks Ended October 5, 1997 and October 6, 1996
Results of Operations
The following table highlights the operating results for the third quarter
and first three quarters of 1997 and 1996 as a percentage of total revenue
unless otherwise indicated. Each of the third quarters is comprised of 12 weeks.
Each of the first three quarters is comprised of 40 weeks. All comparisons
included in management's discussion and analysis compares the respective third
quarter and first three quarters of 1997 to the third quarter and first three
quarters of 1996 unless otherwise indicated.
Third Quarter Year To Date
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1997 1996 1997 1996
------ ------ ------ ------
Revenues:
Restaurant sales 98.5% 98.5% 98.6% 98.5%
Commissary sales 1.5% 1.5% 1.4% 1.5%
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of restaurant sales: (1)
Cost of food, beverage and supplies 34.8% 36.2% 34.7% 36.0%
Payroll and benefits 30.4% 31.1% 30.7% 31.1%
Restaurant operating costs 14.4% 15.0% 14.5% 15.2%
------ ------ ------ ------
79.5% 82.4% 79.9% 82.3%
Restaurant operating margin (2) 20.5% 17.6% 20.1% 17.7%
Cost of commissary sales (3) 93.3% 95.5% 93.6% 95.3%
Advertising, general and
administrative expenses 6.5% 5.5% 6.5% 5.6%
Depreciation and amortization 5.1% 4.8% 5.0% 4.9%
Asset revaluation -- -- -- 4.1%
Other(Income)Expense:
Interest expense, net 2.0% 1.5% 1.9% 1.6%
Litigation -- -- -- 6.8%
Other, net -0.1% -0.1% -0.1% --
Earnings (Loss) Before Income Taxes 6.6% 5.9% 6.5% -5.4%
Net Earnings (Loss) 4.3% 3.8% 4.2% -3.5%
====== ====== ====== ======
(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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The following discussion includes certain forward-looking statements. Actual
results could differ materially from those reflected by the forward-looking
statements and several factors may affect future results, liquidity and capital
resources. These factors include increased food, labor and employee benefit
costs, the availability of experienced management and hourly employees, the
Company's ability to locate and open new restaurants and to operate such
restaurants profitably and the intense competition in the restaurant industry.
Although the Company believes it has the business strategy and resources needed
for improved operations, future revenue and margin trends cannot always be
reliably predicted and may cause the Company to adjust its strategy during
fiscal 1997.
TOTAL REVENUES increased $8,251,000, or 21.0%, for the third quarter of 1997
and $25,733,000, or 20.6%, for the first forty weeks of 1997. Restaurant sales
increased $8,144,000, or 21.0%, and $25,493,000, or 20.7%, for the third quarter
and first forty weeks of 1997, respectively. These increases for the third
quarter and the year to date are primarily the result of operating additional
restaurants in 1997 and same store sales increases for the third quarter and
year to date of 3.6% and 4.1%, respectively. The following table presents the
number of restaurants in operation for each of the first three quarters in 1997
and 1996:
1997 1996
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Beginning number of Company restaurants 69 61
Opened during the first quarter 6 5
Opened during the second quarter 3 3
Opened during the third quarter 1 3
Closed during the third quarter -- (4)
-- ---
Ending number of Company restaurants 79 68
== ===
The increase in same store sales was primarily a result of increased
customer counts which the Company believes resulted from the introduction of a
redesigned menu, a new advertising campaign which began in the fourth quarter of
1996 and milder winter weather in the Company's markets during the first quarter
of 1997 as compared to the same period in 1996. In addition, the Company
instituted a menu price increase of approximately 1.4% in the last six weeks of
the first quarter of 1997. Liquor sales as a percentage of restaurant sales
decreased to 11.9% in the first three quarters of 1997 from 13.3% in the first
three quarters of 1996 reflecting industry trends.
COST OF FOOD, BEVERAGE AND SUPPLIES as a percentage of restaurant sales
decreased 1.4% in the third quarter and 1.3% in the first three quarters of 1997
to 34.8% and 34.7%, respectively. These decreases were primarily attributable to
cost reductions in certain high volume commodities, increased operating
efficiencies of the Company's commissary and to a menu price increase in the
first quarter of 1997. On a year to date basis, food cost was lower in 1997 due
to lower potato costs. Potato costs are expected to return to more historical
levels beginning in the fourth quarter of 1997 which may increase food costs as
a percentage of restaurant sales.
PAYROLL AND BENEFITS as a percentage of restaurant sales decreased to 30.4%
in the third quarter and decreased to 30.7% in the first three quarters of 1997
from 31.1% for both comparable periods in 1996. Increases in restaurant
management bonuses and certain hourly wage rates due to a $.50 per hour increase
in the federal minimum wage rate on September 1, 1997 were offset by certain
employee benefit cost reductions, including workers compensation, health
insurance and economies achieved from overall higher sales volume. The increase
in bonus expense resulted from higher bonuses earned by restaurant management
upon the improvement in restaurant level profits in 1997.
RESTAURANT OPERATING COSTS as a percentage of restaurant sales decreased .6%
and .7% in the third quarter and the first forty weeks of 1997, respectively, to
14.4% for the third quarter and 14.5% year to date in 1997. The Company
continued to lower the restaurant operating cost percentage by allocating
certain supervisory and overhead
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costs over a greater number of stores and higher average unit sales. Since
January 1996, the Company has generally opened new stores in existing
geographical markets which has contributed to a slower growth rate in certain
expenses, particularly supervisory costs. Additionally, rent expense as a
percentage of restaurant sales was lower as the Company continued to purchase
most of its restaurant sites.
RESTAURANT OPERATING MARGIN as a percentage of restaurant sales increased to
20.4% in the third quarter and 20.1% in the first three quarters of 1997 from
17.7% in both comparable periods in 1996.
ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of total
revenue increased to 6.5% in both the third quarter and the first three quarters
of 1997 from 5.5% and 5.6%, respectively, in the comparable periods in 1996.
These increases were primarily attributable to an increase in advertising
expense and bonus expense for corporate management. The Company introduced a
television and radio advertising campaign in the fourth quarter of 1996 in
conjunction with the introduction of a redesigned menu. Advertising expenses
increased to 2.9% and 2.8% of restaurant sales in the third quarter and first
three quarters of 1997, respectively, as compared to approximately 2.1% and 2.2%
in the comparable periods in 1996. Bonus expense increased primarily as a result
of an increase in corporate management bonus compensation which is based in part
on a formula that rewards increased profits.
DEPRECIATION AND AMORTIZATION EXPENSE as a percentage of total revenues
increased to 5.1% and 5.0% in the third quarter and first three quarters of 1997
from 4.8% and 4.9%, respectively. The increase is primarily a result of an
increase in depreciation attributable to increased amounts of building
improvement costs associated with the remodeling of certain existing
restaurants.
INTEREST EXPENSE, NET, increased $360,000, or 59.5%, to $965,000 in the third
quarter and increased $991,000, or 51.0%, to $2,936,000 in the first three
quarters of 1997. These increases in interest expense were primarily the result
of increased borrowings under the Company's revolving credit facility and
capitalized lease obligations to fund the Company's growth.
LITIGATION EXPENSE of $8.5 million for the forty-weeks ended October 6,
1996 represents the settlement pool of $7.5 million and an additional $1.0
million for legal and other expenses accrued in the second quarter of 1996 in
connection with the settlement agreement of a class action suit filed on
February 15, 1994.
OTHER (INCOME) EXPENSE, NET was net income of $45,000 in the third quarter
of 1997 and $192,000 in the first three quarters of 1997 as compared to net
income of $56,000 in the third quarter of 1996 and net expense of $36,000 in the
first three quarters of 1996. In the first quarter of 1996, the Company expensed
approximately $290,000 in costs associated with the merger of Shoex Inc., a
former franchisee of the Company which owned and operated six O'Charley's
restaurants in Alabama.
INCOME TAXES EXPENSE (BENEFIT) as a percentage to earnings (loss) before
income taxes was 35.1% and 35.7% for the third quarter and first three quarters
of 1997, respectively, compared to 35.0% for the comparable periods in 1996.
Liquidity and Capital Resources
The Company's principal capital needs arise from the development of new
restaurants and the maintenance and improvement of existing restaurants.
Historically, the Company's primary sources for working capital have been cash
provided from operations, bank indebtedness and capitalized lease obligations.
During the first forty weeks of
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1997, the Company expended approximately $29.9 million in capital for the
development of 10 new restaurants, improvements to and relocation of certain
existing restaurants, the construction of the Company's training center and for
new equipment and additional warehouse space at the Company's commissary
(including $3.9 million of equipment financed under capitalized lease
arrangements). The Company also incurred approximately $2.0 million in
preopening costs and repaid $3.0 million in principal reductions in its
long-term debt and capitalized lease obligations. Additionally, the Company
settled the remaining $2.3 million with the class participants (consisting of
approximately $1.8 million in cash and $482,000 in common stock) relating to the
settlement of a two year old class action lawsuit. These capital outlays were
funded primarily by borrowings of $16.4 million under the Company's revolving
credit facility (the "Revolver"), borrowings of approximately $3.9 million under
capitalized lease obligations, $11.1 million in cash provided by operating
activities and approximately $1.0 million in proceeds from the sale of certain
assets.
The Company opened 10 new stores in the first three quarters of 1997. As
of October 5, 1997, the Company had 6 additional restaurants under construction,
three of which are expected to open in the fourth quarter of 1997. The Company
expects to open 14 to 16 new Company-owned restaurants in 1998. Management
estimates that the Company will make approximately $5.0 million in capital
expenditures during the remainder of 1997 and approximately $39.0 million in
1998. Actual expenditures may increase based on a number of factors, including
the timing of additional purchases of future restaurant sites. The Company
intends to continue financing the furniture, fixtures and equipment for its new
stores with capitalized lease obligations.
As of October 5, 1997, $45.4 million of indebtedness was outstanding under
the Revolver and bore interest at a weighted average rate of 7.0%. The Revolver
provides for a maximum borrowing capacity of $70.0 million and matures on
November 30, 1999. The Revolver includes a provision to extend the maturity
annually by one year, at the participating banks' option, beginning on the first
anniversary of the Revolver (November 22, 1997). The Revolver imposes
restrictions on the Company with respect to the maintenance of certain financial
ratios, the incurrence of indebtedness, the sale of assets, mergers and the
payment of dividends.
The Company has received a commitment letter from its bank group to
restructure its existing line of credit facility to increase the amount
available under its line of credit to $100 million and to extend its term. The
anticipated terms and conditions of the new facility are expected to be similar
to the existing facility. The new facility should be in place by the end of
1997.
During the fourth quarter of 1997, the Company's Registration Statement
for an offering of 2,000,000 additional shares of common stock was declared
effective by the Securities and Exchange Commission. The secondary offering was
consummated on October 16, 1997 and closed on October 21, 1997. The price to the
public was $16.75 per share and the proceeds to the Company were $15.77 per
share. Additionally, on November 10, 1997, the underwriters 30-day allotment
option to purchase 232,000 additional shares of common stock was exercised on
the same terms. The net proceeds to the Company after deducting expenses
approximates $34.8 million and was used to repay indebtedness under the
Company's Revolver.
Management believes that available cash, cash generated from operations
and borrowings under the Revolver and capitalized lease obligations will be
sufficient to finance the Company's operations and expected growth at least
through 1998.
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Part II - Other Information
Item 1. Legal Proceedings
The Company is presently a party in a civil action in the United States Court
for the Middle District of Tennessee involving a former general manager of the
Company. In September 1995, the Company filed an action against the former
employee alleging wrongful conversion of Company funds and fraudulent
misrepresentation. The former employee has moved to amend his answer in the
civil action filed by the Company claiming damages of $30.0 million relating to
counterclaims alleging malicious prosecution and intentional infliction of
emotional distress and $600,000 relating to counterclaims alleging breach of
contract and race discrimination. To date the Court has not ruled on whether it
will allow the former employee to pursue any of the foregoing counterclaims. The
Company believes the counterclaims are without merit, intends to vigorously
prosecute its claims and vigorously defend any counterclaims. Based on the
advice of counsel, the Company believes that to the extent the counterclaims
relating to malicious prosecution and intentional infliction are allowed to
proceed, it is likely that these counterclaims will be dismissed upon the
Company's motion for summary judgement. The Company does not believe the outcome
of this proceeding will materially affect its financial condition or results of
operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 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 5, 1997.
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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: 11/18/97 By: /s/ Gregory L. Burns
------------------ ----------------------------
Gregory L. Burns
President and
Chief Executive Officer
Date: 11/18/97 By: /s/ A. Chad Fitzhugh
------------------ ----------------------------
A. Chad Fitzhugh
Chief Financial Officer
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