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 3, 1999
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
-------------------------------- ------------------
(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 12, 1999
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Common Stock, no par value 15,639,392 shares
2
O'Charley's Inc.
Form 10-Q
For Quarter Ended October 3, 1999
Index
Page No.
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Part I - Financial Statements
Item 1. Financial statements:
Balance sheets as of October 3, 1999 and
December 27, 1998 3
Statements of earnings for the twelve weeks
ended October 3, 1999 and October 4, 1998 4
Statements of earnings for the forty weeks
ended October 3, 1999 and October 4, 1998 5
Statements of cash flows for the forty weeks
ended October 3, 1999 and October 4, 1998 7
Notes to unaudited financial statements 8
Item 2. Management's discussion and analysis of
financial condition and results of operations 10
Item 3. Quantitative and qualitative disclosures about market risk 17
Part II - Other Information
Item 6. Exhibits and reports on Form 8-K 18
Signatures 19
3
O'Charley's Inc.
Balance Sheets
(dollars in thousands)
October 3, December 27,
1999 1998
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Assets
Current Assets:
Cash and cash equivalents $ 694 $ 3,068
Accounts receivable 2,685 2,371
Inventories 9,220 7,029
Preopening costs -- 2,074
Deferred income taxes 869 143
Other current assets 3,115 2,553
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Total current assets 16,583 17,238
Property and Equipment, net 210,073 174,196
Other Assets 2,171 2,348
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$ 228,827 $ 193,782
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 8,164 $ 6,941
Accrued payroll and related expenses 6,427 5,104
Accrued expenses 6,834 7,351
Federal, state and local taxes 6,432 3,984
Current portion of long-term debt and capitalized leases 6,079 5,429
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Total current liabilities 33,936 28,809
Deferred Income Taxes 4,250 4,290
Long-Term Debt 54,463 35,566
Capitalized Lease Obligations 16,177 16,343
Shareholders' Equity:
Common stock - No par value; authorized, 50,000,000
shares; issued and outstanding, 15,533,317 in 1999
and 15,394,128 in 1998 66,715 65,986
Additional paid-in capital 509 509
Accumulated other comprehensive loss, net of tax (177) (103)
Retained earnings 52,954 42,382
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120,001 108,774
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$ 228,827 $ 193,782
========= =========
See notes to financial statements.
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O'Charley's Inc.
Statements of Earnings
Twelve Weeks Ended October 3, 1999 and October 4, 1998
1999 1998
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(in thousands, except per share data)
Revenues:
Restaurant sales $71,466 $ 57,799
Commissary sales 682 452
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72,148 58,251
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 24,004 20,109
Payroll and benefits 21,532 17,316
Restaurant operating costs 10,345 8,144
Cost of commissary sales 643 433
Advertising, general and administrative expenses 4,459 3,763
Depreciation and amortization 3,361 3,208
Preopening costs 910 --
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65,254 52,973
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Income from Operations 6,894 5,278
Other (Income) Expense:
Interest expense, net 1,009 656
Other, net 6 (66)
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1,015 590
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Earnings Before Income Taxes 5,879 4,688
Income Taxes 2,058 1,641
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Net Earnings $ 3,821 $ 3,047
======= ========
Basic Earnings per Share
Earnings per Common Share $ 0.25 $ 0.20
======= ========
Weighted Average Common Shares Outstanding 15,432 15,387
======= ========
Diluted Earnings per Share:
Earnings per Common Share $ 0.23 $ 0.19
======= ========
Weighted Average Common Shares Outstanding 16,702 16,339
======= ========
See notes to financial statements.
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O'Charley's Inc.
Statements of Earnings
Forty Weeks Ended October 3, 1999 and October 4, 1998
1999 1998
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(in thousands, except per share data)
Revenues:
Restaurant sales $ 227,811 $ 183,877
Commissary sales 2,411 1,913
Franchise revenue -- 11
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230,222 185,801
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 76,229 63,780
Payroll and benefits 69,202 55,780
Restaurant operating costs 32,436 25,908
Cost of commissary sales 2,274 1,802
Advertising, general and administrative expenses 14,686 11,887
Depreciation and amortization 10,458 9,919
Preopening costs 3,369 --
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208,654 169,076
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Income from Operations 21,568 16,725
Other (Income) Expense:
Interest expense, net 3,149 2,072
Other, net 81 (105)
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3,230 1,967
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Earnings Before Income Taxes and Cumulative
Effect of Change in Accounting Principle 18,338 14,758
Income Taxes 6,418 5,165
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Earnings Before Cumulative Effect of
Change in Accounting Principle 11,920 9,593
Cumulative Effect of Change in Accounting
Principle (net of tax benefit) (1,348) --
========= =========
Net Earnings $ 10,572 $ 9,593
========= =========
See notes to financial statements.
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O'Charley's Inc.
Statements of Earnings
Forty Weeks Ended October 3, 1999 and October 4, 1998
1999 1998
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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 $ 0.77 $0.63
Cumulative Effect of Change in Accounting
Principle ($0.09) --
------ ------
Basic Earnings per Common Share $0.68 $0.63
====== ======
Weighted Average Common Shares Outstanding 15,415 15,328
====== ======
Diluted Earnings per Share:
Earnings per Common Share Before Cumulative
Effect of Change in Accounting Principle $0.72 $0.59
Cumulative Effect of Change in Accounting
Principle ($0.08) --
------ ------
Diluted Earnings per Common Share $0.64 $0.59
====== ======
Weighted Average Common Shares Outstanding 16,652 16,388
====== ======
See notes to financial statements.
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O'Charley's Inc.
Statements of Cash Flows
Forty Weeks Ended October 3, 1999 and October 4, 1998
1999 1998
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(in thousands)
Cash Flows from Operating Activities:
Net earnings $ 10,572 $ 9,593
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 10,458 7,794
Amortization of preopening costs -- 2,125
Provision for deferred income taxes (40) 400
Loss (gain) on the sale and involuntary
conversion of assets 35 (522)
Changes in assets and liabilities:
Accounts receivable (314) (23)
Inventories (2,191) (1,728)
Additions to preopening costs -- (2,544)
Other current assets (562) 36
Accounts payable 1,223 679
Accrued payroll and other accrued expenses 3,254 2,040
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Net cash provided by operating activities 23,783 17,850
Cash Flows from Investing Activities:
Additions to property and equipment (41,443) (34,756)
Proceeds from the sale and involuntary
conversion of assets -- 2,234
Other, net 91 (1,000)
-------- --------
Net cash used by investing activities (41,352) (33,522)
Cash Flows from Financing Activities:
Proceeds from long-term debt 19,000 19,300
Payments on long-term debt and capitalized
lease obligations (4,534) (3,885)
Exercise of employee incentive stock options 729 621
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Net cash provided by financing activities 15,195 16,036
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(Decrease) Increase in Cash (2,374) 364
Cash and cash equivalents at Beginning of the Period 3,068 1,965
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Cash and cash equivalents at End of the Period $ 694 $ 2,329
======== ========
See notes to financial statements.
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O'Charley's Inc.
Notes To Unaudited Financial Statements
Twelve Weeks Ended October 3, 1999 and October 4, 1998
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.
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 27, 1998.
B. Earnings Per Common Share
The Company follows Statement of Financial Accounting Standards No. 128
("FAS 128"), Earnings Per Share. FAS 128 establishes standards for both the
computing and presentation of basic and diluted EPS on the face of the
statements of earnings. 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 3, October 4, October 3, October 4,
except per share data) 1999 1998 1999 1998
- ----------------------------------------------------------------------------- ---------------------------
Earnings Before Cumulative Effect of
Change in Accounting Principle $ 3,821 $ 3,047 $ 11,920 $ 9,593
Cumulative Effect of Change in
Accounting Principle (net of tax benefit) -- -- (1,348) --
---------------------- -------------------------
Net Earnings $ 3,821 $ 3,047 $ 10,572 $ 9,593
====================== =========================
Basic Earnings Per Share:
Weighted average shares outstanding 15,432 15,387 15,415 15,328
====================== =========================
Earnings per share before cumulative
effect of change in accounting principle $ 0.25 $ 0.20 $ 0.77 $ 0.63
Cumulative effect of accounting change -- -- (0.09) --
---------------------- -------------------------
Basic earnings per share $ 0.25 $ 0.20 $ 0.68 $ 0.63
====================== =========================
Diluted Earnings Per Share:
Weighted average shares outstanding 15,432 15,387 15,415 15,328
Incremental stock option shares outstanding 1,270 952 1,237 1,060
---------------------- -------------------------
Weighted average diluted shares outstanding 16,702 16,339 16,652 16,388
====================== =========================
Earnings per share before cumulative
effect of change in accounting principle $ 0.23 $ 0.19 $ 0.72 $ 0.59
Cumulative effect of accounting change -- -- (0.08) --
---------------------- -------------------------
Diluted earnings per share $ 0.23 $ 0.19 $ 0.64 $ 0.59
====================== =========================
C. New Accounting Pronouncements
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP
98-5) which is effective for financial statements issued for fiscal years
beginning after December 15, 1998. The SOP requires that costs incurred during a
start-up activity be expensed as incurred. The Company adopted SOP 98-5
effective December 28, 1998. As a result, the Company recognized as a cumulative
effect of the accounting change a charge of $1.3 million, net of tax benefit, or
$0.08 per diluted share during the first quarter of 1999. The effect of adopting
SOP 98-5 on earnings before the cumulative effect of the change in accounting
principle was a reduction of expense of $176,000, or $0.01 per diluted share for
the third quarter and additional expense of $239,000, or $0.01 per diluted share
for the forty weeks ended October 3, 1999.
D. Comprehensive Income
Comprehensive income consists of net income and other comprehensive income
attributable to unrealized losses on available for sale securities. Other
comprehensive loss for the twelve and fifty week periods in 1999 and 1998 was
$74,000 and $187,000 respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations
RESULTS OF OPERATIONS
GENERAL
At October 3, 1999, we owned and operated 114 O'Charley's restaurants in
Alabama, Florida, Georgia, 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. Our 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. We operate a
commissary for the primary purpose of providing our restaurants with consistent
quality food products that 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.
Earnings before the cumulative effect of the change in accounting principle were
$11.9 million, or $0.72 per diluted share, for the first forty weeks of 1999 as
compared with $9.6 million, or $0.59 per diluted share, for the same period in
1998.
The following table reflects changes in the number of Company-owned restaurants
for the first three quarters of 1999 and 1998.
Restaurants 1999 1998
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In operation, beginning of period 99 82
Restaurants opened first quarter 7 5
Restaurants opened second quarter 5 4
Restaurants opened third quarter 3 4
Restaurants formerly operated by franchisee -- 1
------------------
In operation, end of period 114 96
==================
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.
Consistent with industry trends, liquor sales as a percentage of restaurant
sales has declined in each of the last three fiscal years. We have historically
maintained a "kids eat free" program where we provide meals from a selected menu
to kids 10 years old and under. In select markets, we are currently testing a
value oriented kids program where we provide a meal from a kid's menu, which
includes a beverage and a dessert for a set price. It is too premature to
evaluate the results of this test. Early results indicate that we will realize a
higher check average and a lower number of customers 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.
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 primarily includes depreciation on property and
equipment calculated on a straight-line basis over an estimated useful life and
in 1998, includes amortization of preopening costs for new restaurants, which
includes costs of hiring and training the initial staff and certain other costs.
Depreciation and amortization as a percentage of total revenues may increase as
the number of new store openings increases.
Beginning in the first quarter of 1999, we expense preopening costs as incurred
in accordance with SOP 98-5. This new accounting method affects when preopening
costs are expensed and may impact earnings relative to the previous method from
quarter to quarter and year to year depending on the timing and number of new
store openings and when these costs are incurred. We will continue to capture
preopening costs and these costs, beginning in 1999, are recorded in a new line
item category on the statement of earnings. The depreciation and amortization
category, beginning in 1999, no longer includes any preopening costs or
amortization thereon.
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The following table highlights the operating results for the third quarter and
the first three quarters of 1999 and 1998 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
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1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
Restaurant sales 99.1% 99.2% 99.0% 99.0%
Commissary sales .9% 8% 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 33.6% 34.8% 33.5% 34.7%
Payroll and benefits 30.1% 30.0% 30.4% 30.3%
Restaurant operating costs 14.5% 14.1% 14.2% 14.1%
------------------- ----------------------
78.2% 78.9% 78.1% 79.1%
------------------- ----------------------
Restaurant operating margin (2) 21.8% 21.1% 21.9% 20.9%
Cost of commissary sales (3) 94.3% 95.8% 94.3% 94.2%
Advertising, general and administrative expenses 6.2% 6.5% 6.4% 6.4%
Depreciation and amortization 4.7% 5.5% 4.5% 5.3%
Preopening costs 1.3% -- 1.5% --
------------------- ----------------------
INCOME FROM OPERATIONS 9.6% 9.1% 9.4% 9.0%
OTHER (INCOME) EXPENSE:
Interest expense, net 1.4% 1.1% 1.4% 1.1%
Other, net -- (0.1%) -- (0.1%)
------------------- ----------------------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 8.1% 8.0% 8.0% 7.9%
INCOME TAXES 2.9% 2.8% 2.8% 2.8%
------------------- ----------------------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 5.3% 5.2% 5.2% 5.2%
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE -- -- (0.6%) --
------------------- ----------------------
NET EARNINGS 5.3% 5.2% 4.6% 5.2%
=================== ======================
(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 1999 VERSUS THIRD QUARTER AND FIRST FORTY
WEEKS OF 1998
TOTAL REVENUES in the third quarter of 1999 increased $13.9 million, or 23.8%,
to $72.1 million from $58.2 million in the third quarter of 1998 primarily as a
result of an increase in restaurant sales of $13.7 million, or 23.7%. For the
first forty weeks of 1999, total revenues increased $44.4 million, or 23.9%, to
$230.2 million from $185.8 million in 1998 as restaurant sales increased $43.9
million and commissary sales increased $498,000. The increase in restaurant
sales was attributable to additional units in operation in 1999 and increases in
same store sales. We operated 19 additional units in each of the first and
second quarters and 18 additional units in the third quarter of 1999 as compared
to the same periods in 1998. Same store sales increased in the third quarter by
2.5% and increased in the first forty weeks by 3.3%. In March 1999, we increased
menu prices by approximately 2%.
COST OF FOOD, BEVERAGE AND SUPPLIES in the third quarter of 1999 increased $3.9
million, or 19.4%, to $24.0 million from $20.1 million in the third quarter of
1998. As a percentage of restaurant sales, cost of food, beverage and supplies
decreased to 33.6% in the third quarter of 1999 from 34.8% in the third quarter
of 1998. For the first forty weeks of 1999, cost of food, beverage and supplies
increased $12.4 million, or 19.5%, to $76.2 million from $63.8 million in the
same period of 1998. As a percentage of restaurant sales, these costs decreased
to 33.5% in the first three quarters of 1999 from 34.7% in the first three
quarters of 1998. We attribute these lower food cost percentages primarily to
three factors: we took a menu price increase in March 1999, 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 an increase in red meat costs. For
the remainder of 1999, we expect nominal increases in the cost of food items and
expect to experience the normal seasonal fluctuations for certain items,
including produce and poultry. Currently, we are anticipating further increases
in red meat cost in 2000 but cannot quantify the impact of these possible
increases at this time. There can be no assurance that events outside our
control will not result in increased food costs.
PAYROLL AND BENEFITS in the third quarter of 1999 increased $4.2 million, or
24.3%, to $21.5 million from $17.3 million in the third quarter of 1998. As a
percentage of restaurant sales, payroll and benefits increased slightly to 30.1%
in the third quarter of 1999 from 30.0% in the third quarter of 1998. For the
first forty weeks of 1999, payroll and benefits increased $13.4 million, or
24.0%, to $69.2 million from $55.8 million in the same period of 1998. As a
percentage of restaurant sales, payroll and benefits increased slightly to 30.4%
in the first three quarters of 1999 from 30.3% in the first three quarters of
1998. Wage rates and salaries for restaurant support staff and management
continued to increase in 1999. Those higher wages and salaries were partially
offset by the economies achieved from higher average unit sales volumes.
RESTAURANT OPERATING COSTS in the third quarter of 1999 increased $2.2 million,
or 27.2%, to $10.3 million from $8.1 million in the third quarter of 1998. For
the first forty weeks of 1999, restaurant operating costs increased $6.5
million, or 25.1%, to $32.4 million from $25.9 million in 1998. Restaurant
operating costs, as a percentage of restaurant sales, increased to 14.5% for the
third quarter of 1999 from 14.1% in the third quarter of 1998. For the first
forty weeks of 1999, restaurant operating costs, as a percentage of restaurant
sales, increased to 14.2% in 1999 from 14.1% in the first forty weeks of 1998.
This increase is primarily attributable to an increase in management training
salaries and benefits related to the hiring and training of new store managers
assigned to stores opening in 2000. Additionally, we entered two new major
markets in 1999, Charlotte, North Carolina in the first quarter and Columbus,
Ohio in the second quarter, which increased certain supervision costs.
Typically, we incur higher initial supervision and other operating costs when
entering new markets.
RESTAURANT OPERATING MARGIN in the third quarter of 1999 increased $3.4 million,
or 27.9%, to $15.6 million from $12.2 million in the third quarter of 1998. For
the first forty weeks of 1999, restaurant operating margin increased $11.5
million, or 30.0%, to $49.9 million from $38.4 million in the same period of
1998. As a percentage of restaurant sales, restaurant operating margin increased
to 21.8% in the third quarter of 1999 from 21.1% in the third quarter of 1998.
For the first forty weeks of 1999, restaurant operating margin increased to
21.9% from 20.9% in 1998.
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ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES in the third quarter of 1999
increased $696,000, or 18.3%, to $4.5 million from $3.8 million in the third
quarter of 1998. As a percentage of total revenue, advertising, general and
administrative expenses decreased to 6.2% from 6.5% in the third quarter of
1998. This decrease is primarily attributable to a decrease in the amount of
advertising expenditures to 2.7% of total revenue in 1999 from 2.9% of total
revenues in 1998. Overall advertising expenditures were $1.9 million in the
third quarter of 1999, an increase of 16.2% from the $1.7 million expended in
1998. General and administrative expenses increased 20.3% to $2.5 million in
1999 from $2.1 million in 1998. General and administrative expenses increased
due primarily to higher incentive bonus compensation, increased salaries,
employee benefits and legal expenses. For the first forty weeks of 1999,
advertising, general and administrative expenses increased $2.8 million, or
23.5% to $14.7 million from $11.9 million in 1998. As a percentage of total
revenue, advertising, general and administrative expenses remained at 6.4% for
the first forty weeks of 1999. Advertising expenditures in the first three
quarters of 1999 increased $1.3 million, or 26% to $6.3 million from $5.0
million in 1998. As a percentage of total revenue, advertising remained at 2.7%
for the first forty weeks of 1999.
DEPRECIATION AND AMORTIZATION in the third quarter of 1999 increased $153,000 to
$3.4 million from $3.2 million in the third quarter of 1998. We adopted SOP 98-5
in the first quarter of 1999, which requires preopening costs to be expensed as
incurred. Previously, we capitalized preopening costs and amortized these
amounts over one year from the opening of each store. The depreciation and
amortization expense in the third quarter of 1998 included preopening cost
amortization of $693,000. Preopening costs are now recorded in a separate line
item category and the depreciation and amortization line, beginning in 1999, no
longer includes any preopening cost amortization. Excluding the preopening cost
amortization, depreciation expense in the third quarter of 1999 increased
$846,000, or 33.6%, to $3.4 million from $2.5 million in 1998, and on a
year-to-date basis, depreciation expense increased $2.7 million, or 34.6% to
$10.5 million from $7.8 million in 1998. The increase in depreciation expense is
primarily attributable to additional capital expenditures for new units and for
the remodeling of certain existing stores.
PREOPENING COSTS, excluding the one-time cumulative adjustment for the change in
accounting principle as measured under SOP 98-5, were $910,000 in the third
quarter of 1999 and $3.4 million for the first forty weeks of 1999. Preopening
costs includes operating costs and expenses incurred prior to a new restaurant
opening. This new accounting method affects when preopening costs are expensed
and may impact earnings relative to the previous method from quarter to quarter
and year to year depending on the timing and number of new store openings and
when these costs are incurred. We typically incur average preopening costs of
approximately $200,000 for each new store. The amount of preopening costs
incurred in any one quarter will include costs associated with new stores opened
during that particular quarter and most likely will include costs associated
with stores expected to open subsequent to the quarter. As a percentage of total
revenue, preopening costs were 1.3% and 1.5% in the third quarter and first
forty weeks of 1999, respectively, as compared with preopening cost amortization
of 1.2% and 1.1% of total revenue in each corresponding period in 1998.
INCOME FROM OPERATIONS in the third quarter of 1999 increased $1.6 million, or
30.2%, to $6.9 million from $5.3 million in 1998. For the first forty weeks of
1999, income from operations increased $4.9 million or 29.3% to $21.6 million
from $16.7 million in 1998.
INTEREST EXPENSE in the third quarter of 1999 increased $353,000, or 53.8%, to
$1.0 million from $656,000 in 1998. For the first forty weeks, interest expense
increased $1.0 million or 48.0% to $3.1 million from $2.1 million in 1998. This
increase is primarily related to the increased borrowings under our revolving
line of credit. During the fourth quarter of 1997, we reduced our long-term debt
by $34.7 million with the net proceeds received from the sale of common stock,
which reduced interest expense.
EARNINGS FOR THE THIRD QUARTER increased $774,000, or 25.4%, to $3.8 million
from $3.0 million in 1998.
THE CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE, recorded in the
first quarter of 1999 and included in the results for the first forty weeks,
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.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of capital have historically been cash provided by
operations, borrowings under our bank credit facilities and capitalized lease
obligations. Our principal capital needs arise primarily from the purchase of
real estate and the development of new restaurants, equipment replacement and
improvements to existing restaurants.
Property and equipment expenditures were $41.4 million in the first forty weeks
of 1999. Of these expenditures, $37.9 were made primarily for new stores opened
during the year, stores under construction at October 3, 1999 and for
improvements to existing restaurants. An additional $3.5 million was used for
the construction of a new commissary freezer to be placed in operation in the
fourth quarter of 1999. Additionally, we repaid $4.5 million in principal on our
long-term debt and capitalized lease obligations. These cash outlays were funded
primarily by $23.8 million in cash provided by operations and net borrowings of
$19.0 million under our revolving credit agreement (the "Revolver"). Total net
uses of cash was $2.4 million in 1999.
For the remainder of 1999, we believe we will incur additional capital
expenditures of approximately $8.0 to $10.0 million for three additional new
restaurants in 1999, for improvements to existing units and our commissary and
for the purchase of real estate and construction for certain stores expected to
open in 2000. As of October 3, 1999, we had ten restaurants under construction,
three of which are expected to open during the fourth quarter of 1999. We are
currently in discussions concerning the possible purchase of the existing
commissary and home office land and building facilities, which are currently
occupied under an operating lease. We estimate the cost to purchase the
commissary and home office facilities to be approximately $5.0 to $6.0 million.
Financing to fund these projects is currently being evaluated and would likely
include borrowings under the Revolver and off balance sheet financing. Actual
capital expenditures in 1999 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.
The Revolver provides for a maximum borrowing capacity of $100 million. As of
October 3, 1999, $54.0 million was outstanding under the Revolver and bore
interest at an average rate of 6.13%. The Revolver matures on November 30, 2001,
which may be extended annually by one year, at the participating banks' option,
on each anniversary of the Revolver. The Revolver imposes restrictions with
respect to the maintenance of certain financial ratios, the incurrence of
indebtedness, the sale of assets, mergers and the payment of dividends.
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 October 3, 1999, the working capital deficiency and
the current ratio were $17.4 million and 0.5 to 1, respectively.
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 3, 1999
approximately 14,000 shares had been repurchased. These shares were repurchased
during the fourth quarter of 1998. While we do not anticipate repurchasing any
additional shares at this time, we continually evaluate the best uses of our
capital and may buy back additional shares in the future.
For the next twelve months, we believe that available cash, cash generated from
operations and borrowings under the Revolver and capitalized lease obligations
will be sufficient to finance our operations and expected capital outlays. Our
growth strategy includes the consideration of acquisitions or strategic joint
ventures. Any such acquisitions, or 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.
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YEAR 2000
A business issue exists with regard to existing software applications and the
ability of these applications to process date values. Specifically, many
computer applications are written in two digits rather than four to define the
applicable year. Beginning in the year 2000, these applications will need to be
capable of recognizing four digit dates in order to properly distinguish the
year 2000 from prior periods.
We are considering the impact of the year 2000 issues on our business and
operations, and we have a remediation plan. We have completed testing of our
information technology ("IT") systems, and we believe our IT systems are
compliant. We have completed inquiries to our suppliers and other third-party
entities with which we have business relations as to their own year 2000 issues.
We are continuing the process of developing contingency plans to be implemented
in the event any IT system, non-IT system, third party or supplier is not year
2000 compliant by January 1, 2000. We expense all costs associated with system
changes as the costs are incurred. A significant portion of our year
2000-related costs are already included in our software support agreements;
therefore, we do not believe the year 2000 issues will have a significant impact
on our operations or liquidity. However, the malfunction or complete failure of
our systems would likely have a material adverse effect on the results of
operations and financial condition of the Company. Should the remaining review
of our year 2000 risks reveal potentially non-compliant systems or material
third-party risks, contingency plans will be developed to address the
deficiencies revealed at that time. Our statements regarding year 2000 issues
are dependent on many factors, some of which are beyond our control. Due to the
general uncertainty inherent in the year 2000 problem, resulting in part from
the uncertainty of the year 2000 readiness of third-party suppliers and
customers, we are unable to determine at this time whether the consequences of
year 2000 failures will have a material impact on our operations, liquidity or
financial condition.
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. The Federal minimum wage rate is
$5.15 per hour and there are proposals in Congress to raise it to $6.15 per
hour. We typically pay our hourly co-workers more than minimum wage; however, an
increase in the minimum wage rate may have an impact on the overall average rate
of pay. 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.
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 and our operating and growth strategies.
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 27, 1998. 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.
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Item 3. QUANTITATIVE AND QUALITATIVE MARKET 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 does not expect changes in interest rates to have a
material effect on income or cash flows in fiscal 1999, 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
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 3, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
O'Charley's Inc.
(Registrant)
Date: November 17, 1999 By: /s/ Gregory L. Burns
----------------- ----------------------------
Gregory L. Burns
Chief Executive Officer
Date: November 17, 1999 By: /s/ A. Chad Fitzhugh
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A. Chad Fitzhugh
Chief Financial Officer
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