8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):
February 2, 2004 (February 2, 2004)

O’CHARLEY’S INC.

(Exact Name of Registrant as Specified in Charter)

Tennessee	0-18629	62-1192475
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

3038 Sidco Drive, Nashville, Tennessee	37204
(Address of Principal Executive Offices)	(Zip Code)

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

N/A

(Former name or former address, if changed since last report)

TABLE OF CONTENTS

Ex-23 Consent of KPMG LLP

Ex-99.1 Audited Consolidated Financial Statements

Ex-99.2 Unaudited Consolidated Financial Statement

Item 5. Other Events and Regulation FD Disclosure.

     Filed herewith as Exhibits 99.1 and 99.2, respectively, are O’Charley’s Inc.’s (the “Company”) audited financial statements for the three years ended December 29, 2002, which reflect the addition of financial information concerning subsidiaries that are guarantors or non-guarantors of the Company’s outstanding 9% Senior Subordinated Notes due 2013, and similar unaudited financial information for the 40 weeks ended October 5, 2003 and October 6, 2002.

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

(c)	Exhibits:
23	Consent of KPMG LLP.
99.1	Audited Consolidated Financial Statements of O’Charley’s Inc. for the three years ended December 29, 2002.
99.2	Unaudited Consolidated Financial Statements of O’Charley’s Inc. for the 40 weeks ended October 5, 2003 and October 6, 2002.

2

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 hereunto duly authorized.

	O’CHARLEY’S INC.
	By:	/s/ A. Chad Fitzhugh
		Name: Title:	A. Chad Fitzhugh Chief Financial Officer, Secretary and Treasurer
Date: February 2, 2004

3

EXHIBITS

23	Consent of KPMG LLP.
99.1	Audited Consolidated Financial Statements of O’Charley’s Inc. for the three years ended December 29, 2002.
99.2	Unaudited Consolidated Financial Statements of O’Charley’s Inc. for the 40 weeks ended October 5, 2003 and October 6, 2002.

4 EX-23 3 g86784exv23.htm EX-23 CONSENT OF KPMG LLP

EXHIBIT 23

INDEPENDENT AUDITORS’ CONSENT

The Board of Directors
O’Charley’s Inc.

We consent to incorporation by reference in the registration statements (No. 33-39872, No. 33-51316, No. 33-51258, No. 33-83172, No. 33-69934, No. 333-63495, and No. 333-59484 on Form S-8 and No. 333-103287 on Form S-3) of O’Charley’s Inc. of our report dated February 5, 2003, except as to note 18, which is as of January 30, 2004, relating to the consolidated balance sheets of O’Charley’s Inc. and subsidiaries as of December 29, 2002 and December 30, 2001, and the related consolidated statements of earnings, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 29, 2002, which report appears in Form 8-K of O’Charley’s Inc. Our report refers to a change in method of accounting for goodwill and other intangible assets in 2002.

/s/ KPMG LLP

Nashville, Tennessee
January 30, 2004

EX-99.1 4 g86784exv99w1.htm EX-99.1 AUDITED CONSOLIDATED FINANCIAL STATEMENTS

EXHIBIT 99.1

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders

O’Charley’s Inc.

Nashville, Tennessee:

      We have audited the consolidated balance sheets of O’Charley’s Inc. and subsidiaries (the Company) as of December 29, 2002 and December 30, 2001, and the related consolidated statements of earnings, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 29, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of O’Charley’s Inc. and subsidiaries as of December 29, 2002 and December 30, 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 29, 2002, in conformity with accounting principles generally accepted in the United States of America.

      As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002.

KPMG LLP

Nashville, Tennessee

February 5, 2003, except as to note 18,
which is as of January 30, 2004

O’CHARLEY’S INC.

CONSOLIDATED BALANCE SHEETS

			December 29,			December 30,
			2002			2001
			(Dollars in thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	8,311		$	6,369
	Accounts receivable, less allowance for doubtful accounts of $188 in 2002 and $153 in 2001			4,800			4,348
	Inventories			18,300			18,288
	Deferred income taxes			4,255			3,914
	Short-term notes receivable			2,950			2,025
	Other current assets			2,288			1,611
		Total current assets		40,904			36,555
Property and equipment, net				381,553			330,553
Other assets				6,334			16,322
			$	428,791		$	383,430
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	13,284		$	11,334
	Accrued payroll and related expenses			13,328			10,789
	Accrued expenses			10,387			9,490
	Deferred revenue			8,712			4,974
	Federal, state and local taxes			8,595			7,266
	Current portion of long-term debt and capitalized leases			8,015			7,924
		Total current liabilities		62,321			51,777
Long-term debt, net of current portion				98,164			89,181
Capitalized lease obligations, net of current portion				25,923			24,824
Deferred income taxes				7,796			9,576
Other liabilities				4,623			3,870
Shareholders’ equity:
	Common stock — No par value; authorized, 50,000,000 shares; issued and outstanding, 18,838,826 in 2002 and 18,392,554 in 2001			116,171			110,636
	Accumulated other comprehensive loss, net of tax			(931	)		(490	)
	Retained earnings			114,724			94,056
		Total shareholders’ equity		229,964			204,202
			$	428,791		$	383,430

See notes to the consolidated financial statements

O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF EARNINGS

			Year Ended
			December 29,			December 30,		December 31,
			2002			2001		2000
			(In thousands, except per share data)
Revenues:
	Restaurant sales		$	495,112		$	440,875	$	373,700
	Commissary sales			4,800			4,056		3,562
				499,912			444,931		377,262
Costs and expenses:
	Cost of restaurant sales:
		Cost of food and beverage		140,023			129,062		109,480
		Payroll and benefits		154,311			138,009		115,029
		Restaurant operating costs		86,315			76,788		64,818
	Cost of commissary sales			4,488			3,808		3,341
	Advertising, general and administrative expenses			37,677			29,979		24,480
	Depreciation and amortization			25,527			22,135		18,202
	Asset impairment and exit costs			—			5,798		—
	Preopening costs			5,074			5,654		4,705
				453,415			411,233		340,055
Income from operations				46,497			33,698		37,207
Other (income) expense:
	Interest expense, net			5,556			6,610		7,398
	Other, net			(118	)		189		24
				5,438			6,799		7,422
Earnings before income taxes and cumulative effect of change in accounting principle				41,059			26,899		29,785
Income taxes				14,268			9,347		10,425
Earnings before cumulative effect of change in accounting principle				26,791			17,552		19,360
Cumulative effect of change in accounting principle, net of tax				(6,123	)		—		—
Net earnings			$	20,668		$	17,552	$	19,360
Basic earnings per common share before cumulative effect of change in accounting principle			$	1.44		$	0.99	$	1.24
Cumulative effect of change in accounting principle, net of tax				(0.33	)		—		—
Basic earnings per common share			$	1.11		$	0.99	$	1.24
Diluted earnings per common share before cumulative effect of change in accounting principle			$	1.35		$	0.93	$	1.17
Cumulative effect of change in accounting principle, net of tax				(0.31	)		—		—
Diluted earnings per common share			$	1.04		$	0.93	$	1.17

See notes to the consolidated financial statements

O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME

									Accumulated
			Common Stock						Other
									Comprehensive			Retained
			Shares			Amount			Loss, net			Earnings		Total
			(In thousands)
Balance, December 26, 1999				15,502		$	65,732		$	(186	)	$	57,143	$	122,689
	Comprehensive income:
	2000 net earnings			—			—			—			19,360		19,360
	Change in unrealized loss on available for sale securities, net of tax			—			—			(34	)		—		(34	)
		Total comprehensive income													19,326
	Repurchase of common stock			(52	)		(584	)		—			—		(584	)
	Exercise of employee stock options including tax benefits			196			1,436			—			—		1,436
	Shares issued under CHUX Ownership Plan			58			623			—			—		623
Balance, December 31, 2000				15,704			67,207			(220	)		76,503		143,490
	Comprehensive income:
	2001 net earnings			—			—			—			17,552		17,552
	Change in unrealized loss on available for sale securities, net of tax			—			—			220			—		220
	Market value of derivatives, net of tax			—			—			(490	)		—		(490	)
		Total comprehensive income													17,282
	Repurchase of common stock			(286	)		(5,153	)		—			—		(5,153	)
	Sale of common stock			2,300			41,744			—			—		41,744
	Exercise of employee stock options including tax benefits			593			5,619			—			—		5,619
	Shares issued under CHUX Ownership Plan			82			1,219			—			—		1,219
Balance, December 30, 2001				18,393			110,636			(490	)		94,056		204,202
	Comprehensive income:									—			—		—
	2002 net earnings												20,668		20,668
	Market value of derivatives, net of tax			—			—			(441	)		—		(441	)
		Total comprehensive income													20,227
	Exercise of employee stock options net of shares tendered, including tax benefits			361			4,097			—			—		4,097
	Shares issued under CHUX Ownership Plan			85			1,438			—			—		1,438
Balance, December 29, 2002				18,839		$	116,171		$	(931	)	$	114,724	$	229,964

See notes to the consolidated financial statements

O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

				Year Ended
				December 29,			December 30,			December 31,
				2002			2001			2000
				(In thousands)
Cash flows from operating activities:
	Net earnings			$	20,668		$	17,552		$	19,360
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Cumulative effect of accounting change, net of tax			6,123			—			—
		Depreciation and amortization — property and equipment and goodwill			25,527			22,135			18,202
		Amortization of debt issuance costs			380			237			139
		Deferred income taxes			1,845			(1,336	)		2,052
		(Gain) loss on the sale and involuntary conversion of assets			(63	)		104			10
		Asset impairment and exit costs			—			5,798			—
	Changes in assets and liabilities, excluding the effects of the Stoney River acquisition:
		Accounts receivable			(452	)		(712	)		(1,441	)
		Inventories			(12	)		(5,683	)		(3,684	)
		Other current assets and short term notes receivable			(677	)		(2,243	)		(614	)
		Accounts payable			1,950			(1,305	)		3,321
		Deferred revenue			3,738			1,638			762
		Accrued payroll and other accrued expenses			4,766			8,707			1,535
	Tax benefit derived from exercise of stock options				1,100			1,816			368
			Net cash provided by operating activities		64,893			46,708			40,010
Cash flows from investing activities:
	Additions to property and equipment				(69,711	)		(73,467	)		(56,796	)
	Acquisition of company, net of cash acquired				—			—			(15,849	)
	Proceeds from the sale of assets				2,018			1,355			293
	Other, net				(1,083	)		(860	)		56
			Net cash used in investing activities		(68,776	)		(72,972	)		(72,296	)
Cash flows from financing activities:
	Proceeds from long-term debt				9,000			38,700			38,000
	Payments on long-term debt and capitalized lease obligations				(7,610	)		(49,573	)		(7,099	)
	Debt issuance costs				—			(659	)		(348	)
	Net proceeds from sale of common stock				—			41,744			—
	Exercise of employee incentive stock options and issuances under stock purchase plan				4,435			5,022			1,691
	Repurchase of common stock				—			(5,153	)		(584	)
			Net cash provided by financing activities		5,825			30,081			31,660
Increase (decrease) in cash and cash equivalents					1,942			3,817			(626	)
Cash and cash equivalents at beginning of the year					6,369			2,552			3,178
Cash and cash equivalents at end of the year				$	8,311		$	6,369		$	2,552

See notes to the consolidated financial statements

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.     Summary of Significant Accounting Policies

      O’Charley’s Inc. (the “Company”) owns and operates 182 (at December 29, 2002) full-service restaurant facilities in 15 southeastern and midwestern states under the trade name of “O’Charley’s” and six full-service restaurant facilities under the trade name of “Stoney River Legendary Steaks.” The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. The Company’s fiscal year ends on the last Sunday in December. Fiscal 2002 was comprised of 52 weeks, which ended December 29, 2002. Fiscal 2001 was comprised of 52 weeks, which ended December 30, 2001. Fiscal 2000 was comprised of 53 weeks, which ended December 31, 2000. The prior years’ consolidated statement of earnings has been reclassified to conform to the current year presentation. Also see Note 19.

      Cash Equivalents. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. The Company had cash equivalents of $8.5 million and $2.1 million at December 29, 2002 and December 30, 2001, respectively. These cash equivalents consist entirely of overnight repurchase agreements of government securities.

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

      Preopening Costs represent costs incurred prior to a restaurant opening and are expensed as incurred.

      Investments. The Company owns certain marketable securities that are accounted for in accordance with Statement of Financial Accounting Standards No. 115 “Accounting for Certain Debt and Equity Securities”. Marketable securities are classified as available for sale securities and are carried at fair value, with the unrealized gains and losses recorded in a separate component of shareholders’ equity, net of tax unless there is a decline in value which is considered to be other than temporary, in which case the cost of such security is written down to fair value and the amount of the write down is reflected in earnings. At December 29, 2002 and December 30, 2001, the fair value and cost of such securities was approximately $256,000.

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

      Excess of Cost Over Fair Value of Net Assets Acquired (goodwill), represents the excess of costs over fair value of assets of businesses acquired. The Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”, as of December 31, 2001. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimated useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.”

      In connection with SFAS No. 142’s transitional goodwill impairment evaluation, the Statement required the Company to perform an assessment of whether there was an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company was required to identify its reporting units and determine

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of December 31, 2001. The Company was required to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit within six months of December 31, 2001. To the extent the carrying amount of a reporting unit exceeded the fair value of the reporting unit, the Company would be required to perform the second step of the transitional impairment test, as this is an indication that the reporting unit goodwill may be impaired. In this step, the Company compared the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which were measured as of the date of adoption. The implied fair value of goodwill was determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No. 141, “Business Combinations.” The residual fair value after this allocation was the implied fair value of the reporting unit goodwill. Because the first step of the transitional impairment test indicated that all the goodwill was impaired, the second step was not necessary and the Company recorded a non-cash pre-tax charge of $9.9 million, or $0.31 per diluted share, as a cumulative effect of a change in accounting principle effective December 31, 2001 for the goodwill associated with the Stoney River reporting unit.

      Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over 20 years, and assessed for recoverability by determining whether the amortization of the goodwill balance over its remaining life could be recovered through undiscounted future operating cash flows of the acquired operation. All other intangible assets were amortized on a straight-line basis over 5 years.

      Impairment of Long-Lived Assets. The Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” as of December 30, 2001. Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, “Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset held for sale, broadens the scope of business to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company adopted SFAS No. 144 in the first quarter of 2002. The adoption of SFAS No. 144 did not affect the Company’s financial statements.

      In accordance with SFAS No. 144, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet.

      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. Restaurant sales are recognized upon delivery of services. Proceeds from the sale of gift cards and certificates are deferred and recognized as revenue as they are redeemed. Commissary sales represent sales to outside parties consisting primarily of sales of O’Charley’s branded food items, primarily salad dressings, to retail grocery chains, mass merchandisers and wholesale clubs. Commissary sales are recognized when delivery occurs, the revenue amount is determinable and when collection is reasonably assured.

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Advertising Costs. The Company expenses advertising costs as incurred, except for certain advertising production costs that are expensed the first time the advertising takes place. Advertising expense for fiscal years 2002, 2001 and 2000, totaled $17.0 million, $13.3 million, and $9.5 million, respectively.

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

      Stock Option Plan. The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, and interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net earnings if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

		2002			2001			2000
		(In thousands)
Net earnings, as reported		$	20,668		$	17,552		$	19,360
Add stock-based employee compensation expense included in reported net earnings, net of tax			366			—			—
Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax			(1,980	)		(1,572	)		(1,611	)
Pro forma net earnings		$	19,054		$	15,980		$	17,749
Earnings per share:
	Basic — as reported	$	1.11		$	0.99		$	1.24
	Basic — pro forma	$	1.02		$	0.89		$	1.14
	Diluted — as reported	$	1.04		$	0.93		$	1.17
	Diluted — pro forma	$	0.96		$	0.84		$	1.07

      Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1997, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average assumptions used for grants in each respective year is as follows:

	2002			2001			2000
Risk-free investment interest		4.7	%		5.5	%		5.6	%
Expected life in years		4.9			6.1			6.8
Expected volatility		50.7	%		49.6	%		50.8	%
Fair value of options granted (per share)	$	10.69		$	9.78		$	7.32

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Per Share Data. Basic earnings per common share have been computed by dividing net earnings by the weighted average number of common shares outstanding during each year presented. Diluted earnings per common share have been computed by dividing net earnings by the weighted average number of common shares outstanding plus the dilutive effect of options outstanding during the applicable periods.

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

      Fair Value of Financial Instruments. SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair values of most on-and-off balance sheet financial instruments for which it is practicable to estimate that value. The scope of SFAS No. 107 excludes certain financial instruments such as trade receivables and payables when the carrying value approximates the fair value, employee benefit obligations, lease contracts, and all nonfinancial instruments such as land, buildings, and equipment. The fair values of the financial instruments are estimates based upon current market conditions and quoted market prices for the same or similar instruments as of December 29, 2002 and December 30, 2001. Book value approximates fair value for substantially all of the Company’s assets and liabilities that fall under the scope of SFAS No. 107.

      Derivative Instruments and Hedging Activities. All derivatives are recognized on the consolidated balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as a hedge of the variability of cash flows to be paid related to a recognized liability. The Company assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. The Company also determines how ineffectiveness will be measured. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability in cash flows of the designated hedged item. If it is determined that a derivative is ineffective as a hedge, the Company discontinues hedge accounting prospectively.

      During fiscal 2001, the Company entered into interest rate swap agreements to reduce its exposure to market risks from changing interest rates. These agreements were designated as cash flow hedges. For interest rate swaps, the differential to be paid or received is accrued and recognized in interest expense and may change as market interest rates change. If the swaps were to be terminated prior to their maturity, the gain or loss would be recognized over the remaining original life of the swap if the item hedged remained outstanding, or immediately if the item hedged did not remain outstanding.

      Comprehensive Income. SFAS No. 130, “Reporting Comprehensive Income,” establishes rules for the reporting of comprehensive income and its components. Comprehensive income, presented in the Consolidated Statement of Shareholders’ Equity and Comprehensive Income, consists of net income and unrealized gains (losses) on available for sale securities and interest rate swaps. Other comprehensive loss, net of tax, for 2002 was $441,000. The accumulated other comprehensive loss is comprised of an unrealized loss on derivative financial instruments of $931,000, net of tax at December 29, 2002.

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

      Use of Estimates. Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from these estimates.

      Accounting Changes and Recent Accounting Pronouncements. In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”.

      The Company adopted the provisions of SFAS No. 141 on July 1, 2001, except with regard to business combinations initiated prior to July 1, 2001. SFAS No. 142 was adopted by the Company effective December 31, 2001. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized prior to the adoption of SFAS No. 142.

      As of the date of adoption, the Company had unamortized goodwill in the amount of $10.0 million, which was subject to the transition provisions of SFAS No. 142. Amortization expense related to goodwill was $544,000 for the year ended December 30, 2001. During the second quarter of 2002, the Company completed the required goodwill transitional impairment tests under SFAS No. 142 as of December 31, 2001 and recorded a non-cash pretax charge of $9.9 million ($6.1 million after tax or $0.31 per diluted share). This charge is recorded in the consolidated statement of earnings for the year ended December 29, 2002 as a cumulative effect of a change in accounting principle. The Company identified the reporting units as required by SFAS No. 142 and determined the carrying value of each reporting unit by assigning the assets and liabilities, including existing goodwill and intangible assets, to the reporting units at December 31, 2001. The impaired goodwill was related to the Stoney River reporting unit. The amount of the charge was determined by comparing the fair value of the Stoney River reporting unit to the fair value of its net assets, exclusive of goodwill, at December 30, 2001. The fair value of the Stoney River reporting unit was determined by a combination of two approaches: the market approach and the income approach. The market approach values the reporting unit by comparing market multiples of revenue and cash flow for similar concepts. The market approach also uses comparable purchase transactions of similar concepts. The income approach values the reporting unit by discounting the expected future cash flows of the reporting unit. The table below sets forth the adjusted 2001 and 2000 fiscal years assuming no goodwill amortization was recognized during that time (in thousands).

	2001		2000
Earnings before income taxes	$	26,899	$	29,785
Goodwill amortization		544		335
Adjusted earnings before income taxes		27,443		30,120
Adjusted taxes		9,536		10,542
Net earnings	$	17,907	$	19,578
Basic earnings per share	$	1.01	$	1.26
Diluted earnings per share	$	0.95	$	1.18

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In November 2001, the EITF issued EITF Issue 01-09, “Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor’s Products”. This standard deals with how a company recognized the effect of discounts and coupons in the financial statements and requires companies to show revenues net of any sales generated by these discounts and coupon redemptions. The Company adopted this standard in the first quarter of 2002. The adoption had no impact on the consolidated financial statements.

      In June 2001, FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on December 30, 2002. The adoption of SFAS No. 143 is not expected to have a material effect on the Company’s financial statements.

      In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendments of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishments of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of SFAS No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to SFAS No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have a material effect on the Company’s consolidated financial statements.

      In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early applications encouraged.

      In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.” This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. The Company has no guarantees that would be required to be disclosed under FASB Interpretation No. 45.

      In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.

      In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, and interpretation of ARB No. 51.” This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. It applies in the first fiscal year, or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The application of this Interpretation is not expected to have a material effect on the Company’s consolidated financial statements.

2.     Acquisition

      On May 26, 2000, the Company purchased two existing Stoney River Legendary Steaks restaurants and all associated trademarks and intellectual property for approximately $15.8 million in cash. In addition, the transaction includes an earn-out provision pursuant to which the sellers may receive up to $1.25 million at the end of 2002, $1.25 million at the end of 2003, and $2.5 million at the end of 2004. The potential earn-out is based on the Stoney River concept achieving certain performance thresholds (income before taxes and preopening costs) for such year. The performance thresholds were not satisfied as of the end of 2002 and, accordingly, no earnout was paid in 2002. In the event that these performance thresholds are met in future years, the Company would recognize an expense related to the earn-out provision as all of the goodwill related to the acquisition has been written off. The transaction was accounted for using the purchase method of accounting and, accordingly, the results of operations of Stoney River have been included in the Company’s consolidated financial statements from the date of acquisition. The Stoney River concept is being operated as a wholly-owned subsidiary of the Company. Through December 30, 2001, goodwill resulting from the acquisition was being amortized on a straight-line basis over 20 years. The allocation of the purchase price to the acquired net assets is as follows (in thousands):

Estimated fair value of assets acquired	$	5,166
Purchase price in excess of the net assets acquired (goodwill)		10,701
Non-compete agreements		119
Estimated fair value of liabilities assumed		(131	)
Cash paid		15,855
Less cash acquired		(6	)
Net cash paid for acquisition	$	15,849

      The following unaudited pro forma condensed results of operations give effect to the acquisition of Stoney River Legendary Steaks as if such transaction had occurred at the beginning of fiscal 2000:

Fiscal Year 2000 Pro Forma Earnings
(in thousands, except per share data)
Total revenues	$	381,108
Earnings before income taxes		28,930
Net earnings		18,804
Basic earnings per share	$	1.21
Basic weighted average common shares outstanding		15,584
Diluted earnings per share	$	1.14
Diluted weighted average common shares outstanding		16,525

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The foregoing unaudited pro forma amounts are based upon certain assumptions and estimates, including, but not limited to the recognition of interest expense on debt incurred to finance the acquisition and amortization of goodwill over 20 years. The unaudited proforma amounts do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.

      The Company has entered into an arrangement with the general manager of each Stoney River restaurant pursuant to which the general manager has acquired a 6% interest in a subsidiary that owns the restaurant that the general manager manages in exchange for a capital contribution to such subsidiary. The Company has also entered into a five-year employment agreement with each general manager. During the five-year employment term, each general manager is prohibited from selling or otherwise transferring his or her 6% interest. Upon the fifth anniversary of the general manager’s capital contribution to the subsidiary, the Company has the option, but not the obligation, to purchase the general manager’s 6% interest for fair market value. In the event the general manager’s employment with the Company terminates prior to the expiration of the five-year term of his employment agreement, the Company has the option, but not the obligation, to purchase the general manager’s 6% interest on the terms set forth in the operating agreement governing the subsidiary. In addition, the general manager’s 6% interest is subject to forfeiture based on certain events set forth in the operating agreement. The Company has entered into a management agreement with the subsidiary whereby the Company provides management services to the subsidiary.

      See Note 19 for a discussion of the Company’s acquisition of Ninety Restaurant and Pub (Ninety Nine).

3.     Property and Equipment

      Property and equipment consist of the following at year-end:

	December 29,			December 30,
	2002			2001
	(In thousands)
Land and improvements	$	91,237		$	81,275
Buildings and improvements		157,542			133,108
Furniture, fixtures and equipment		106,323			88,514
Leasehold improvements		87,856			73,074
Equipment under capitalized leases		56,218			47,866
Property leased to others		802			1,140
		499,978			424,977
Less accumulated depreciation and amortization		(118,425	)		(94,424	)
	$	381,553		$	330,553

      Depreciation and amortization of property and equipment was $25.5 million, $21.6 million and $17.9 million for the years ended December 29, 2002, December 30, 2001, and December 31, 2000, respectively.

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.     Other Assets

      Other assets consist of the following at year-end:

	December 29,		December 30,
	2002		2001
	(In thousands)
Excess of cost over fair value of net assets acquired (goodwill), net of accumulated amortization of $163 in 2002 and $1,010 in 2001	$	159	$	10,013
Cash surrender value of life insurance, deferred compensation		2,514		2,588
Marketable securities available for sale		256		256
Notes receivable		917		1,176
Other assets		2,488		2,289
	$	6,334	$	16,322

      Amortization of goodwill was $0, $544,000 and $335,000 for the years ended December 29, 2002, December 30, 2001 and December 31, 2000, respectively. Included in the notes receivable shown above are notes from related parties. (See note 14)

5.     Accrued Expenses

      Accrued expenses include the following at year-end:

	December 29,		December 30,
	2002		2001
	(In thousands)
Insurance expenses	$	5,033	$	4,058
Employee benefits		1,543		1,969
Other accrued expenses		3,811		3,463
	$	10,387	$	9,490

6.     Long-Term Debt

      Long-term debt consists of the following at year-end:

	December 29,			December 30,
	2002			2001
	(In thousands)
Revolving line of credit	$	98,000		$	89,000
Secured mortgage note payable		181			196
Installment note payable		—			110
		98,181			89,306
Less current portion of long-term debt		(17	)		(125	)
Long-term debt, net of current portion	$	98,164		$	89,181

      On January 31, 2000, the Company entered into an amended and restated revolving credit agreement (the “Third Amendment”) which increased its unsecured line of credit facility to $135.0 million from $100.0 million. At December 29, 2002, the $98.0 million outstanding balance carried interest rates from 2.2% to 2.3%. At December 30, 2001, the $89.0 million outstanding balance carried interest rates from 2.7% to 4.3%. At December 29, 2002, the Company was in compliance with all covenants associated with this credit

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

facility. The Company was required to pay commitment fees on the $135 million revolving line of credit. The commitment fees in 2002 ranged from 0.125% to 0.15% depending upon the Company’s performance in meeting certain financial and other covenants. The total amount paid in 2002 for commitment fees was approximately $195,000.

      The secured mortgage note payable at December 29, 2002, bears interest at 10.5% and is payable in monthly installments, including interest, through June 2010. This debt is collateralized by land and buildings having a depreciated cost of approximately $1.0 million at December 29, 2002.

      The installment note payable at December 30, 2001 was paid in full in February 2002.

      The annual maturities of long-term debt as of December 29, 2002, were: $17,000 — 2003; $19,000 — 2004; $21,000 — 2005; $98.0 million — 2006; $25,000 — 2007; and $77,000 thereafter.

      See Note 19 for a discussion of the Ninety Nine acquisition, the Company’s new credit facility and related impact on the Company’s debt agreements.

7.     Lease Commitments

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

      As of December 29, 2002, approximately $36.3 million net book value of the Company’s property and equipment is under capitalized lease obligations. Interest rates on capitalized lease obligations range from 4.0% to 7.5%. Future minimum lease payments at December 29, 2002, are as follows:

		Capitalized
		Equipment			Operating
		Leases			Leases
		(In thousands)
2003		$	9,389		$	7,689
2004			8,911			7,386
2005			8,978			7,169
2006			5,844			7,138
2007			3,276			6,885
Thereafter			2,392			48,881
	Total minimum rentals		38,790		$	85,148
Less amount representing interest			(4,869	)
Net minimum lease payments			33,921
Less current maturities			(7,998	)
Capitalized lease obligations, net of current portion		$	25,923

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Rent expense for 2000, 2001 and 2002 for operating leases is as follows:

	2002		2001		2000
	(In thousands)
Minimum rentals	$	8,104	$	7,429	$	6,272
Contingent rentals		302		602		614
	$	8,406	$	8,031	$	6,886

      See Note 19.

8.     Derivative Instruments and Hedging Activities.

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

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

      As of December 29, 2002, the Company had in effect $20.0 million in swaps at an average fixed rate of 5.6%, $10.0 million of which matures in January 2004 and $10.0 million of which matures in January 2006. As of December 29, 2002, $931,000 of deferred losses, net of tax, on the swaps were included in accumulated other comprehensive income.

9.     Income Taxes

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

	2002			2001			2000
	(In thousands)
Earnings before cumulative effect of accounting change	$	14,268		$	9,347		$	10,425
Tax effect of cumulative effect of accounting change		(3,731	)		—			—
Shareholders’ equity, tax benefit on market value loss on derivative instruments		(235	)		(260	)		—
Shareholders’ equity, tax benefit derived from non-statutory stock options exercised		(1,100	)		(1,816	)		(387	)
	$	9,202		$	7,271		$	10,038

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	2002		2001			2000
	(In thousands)
Current	$	12,423	$	10,683		$	8,373
Deferred		1,845		(1,336	)		2,052
	$	14,268	$	9,347		$	10,425

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

		2002			2001			2000
Federal statutory rate			35.0	%		35.0	%		35.0	%
Increase (decrease) in taxes due to:
	State income taxes, net of federal tax benefit		3.1			3.2			3.0
	Tax credits and other		(3.3	)		(3.4	)		(3.0	)
			34.8	%		34.8	%		35.0	%

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

			2002		2001
			(In thousands)
Deferred tax assets:
	Inventories, principally due to uniform capitalization		$	714	$	56
	Goodwill impairment			3,364		—
	Accrued expenses, principally due to accruals for workers’ compensation, employee health and retirement benefits			2,446		2,606
	Asset impairment and exit cost			2,135		2,242
	Other			705		195
		Total gross deferred tax assets		9,364		5,099
Deferred tax liabilities:
	Property and equipment, principally due to differences in depreciation and capitalized lease amortization			12,905		10,658
	Other			—		103
		Total gross deferred tax liabilities		12,905		10,761
		Net deferred tax liability	$	3,541	$	5,662

      The net deferred tax liability (asset) at year-end is recorded as follows:

	2002			2001
	(In thousands)
Deferred income taxes, long-term liability	$	7,796		$	9,576
Deferred income taxes, current asset		(4,255	)		(3,914	)
	$	3,541		$	5,662

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      There was no valuation allowance for deferred tax assets recorded as of December 29, 2002, December 30, 2001 and December 31, 2000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.

10.     Shareholders’ Equity

      The Company’s charter authorizes 100,000 shares of preferred stock of which the Board of Directors may, without shareholder approval, issue with voting or conversion rights upon the occurrence of certain events. At December 29, 2002, no preferred shares had been issued.

      On December 8, 2000, the Company’s Board of Directors adopted a Shareholders’ Rights Plan (the “Rights Plan”) to protect the interests of the Company’s shareholders if the Company is confronted with coercive or unfair takeover tactics by third parties. Pursuant to the Rights Plan, a dividend of one Right for each share of outstanding share of the Company’s Common Stock was issued to shareholders of record on December 27, 2000. Under certain conditions, each Right may be exercised to purchase one-thousandth of a share of a new Series A Junior Preferred Stock at an exercise price of $80 per Right. Each Right will become exercisable following the tenth day after a person’s or group’s acquisition of, or commencement of a tender exchange offer for 18% or more of the Company’s Common Stock. If a person or group acquires 18% or more of the Company’s Common Stock, each right will entitle its holder (other than the person or group whose action has triggered the exercisability of the Rights) to purchase common stock of either O’Charley’s Inc. or the acquiring company (depending on the form of the transaction) having a value of twice the exercise price of the Rights. The Rights will also become exercisable in the event of certain mergers or asset sales involving more than 50% of the Company’s assets or earning power. The Rights may be redeemed prior to becoming exercisable, subject to approval by the Company’s Board of Directors, for $0.001 per Right. The Rights expire on December 8, 2010. The Company has reserved 50,000 shares of Series A Junior Preferred Stock for issuance upon exercise of the Rights.

11.     Earnings Per Share

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

	2002		2001		2000
	(In thousands)
Weighted average shares outstanding — basic		18,683		17,772		15,584
Incremental stock option shares outstanding		1,103		1,101		941
Weighted average shares outstanding — diluted		19,786		18,873		16,525

      For the fiscal years 2002, 2001, and 2000, the number of anti-dilutive shares excluded from the weighted average shares calculation were approximately 233,000, 73,000, and 1,016,000, respectively.

12.     Stock Compensation and Purchase Plans

      The Company has various incentive stock option plans that provide for the grant of both statutory and nonstatutory stock options to officers, key employees, nonemployee directors and consultants of the Company.

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company has reserved 5,545,924 shares of common stock for issuance pursuant to these plans. Options are granted at 100% of the fair market value of common stock on the date of the grant, expire ten years from the date of the grant and are exercisable at various times as previously determined by the Board of Directors. The Company adopted the O’Charley’s 2000 Stock Incentive Plan (the “2000 Plan”) in May 2000. The Company has reserved 3,000,000 shares of common stock for issuance pursuant to the 2000 Plan. At December 29, 2002, options to purchase 939,525 shares of common stock were outstanding under the 2000 Plan. Following adoption of the 2000 Plan, no additional options may be granted pursuant to previously adopted stock option plans. At December 30, 2001, options to purchase 2,583,799 shares of common stock were outstanding under those previously adopted plans. The Company applies APB Opinion No. 25 in accounting for its plan; and, accordingly, no compensation cost has been recognized.

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

					Weighted-
					Average
		Number of Shares			Exercise Price
Balance at December 26, 1999			3,679,895		$	9.21
	Granted		544,400			12.50
	Exercised		(195,884	)		5.69
	Forfeited		(177,539	)		13.08
Balance at December 31, 2000			3,850,872			9.67
	Granted		514,550			17.84
	Exercised		(593,285	)		6.64
	Forfeited		(173,919	)		14.49
Balance at December 30, 2001			3,598,218			11.11
	Granted		392,500			21.67
	Exercised		(366,101	)		8.51
	Forfeited		(101,293	)		13.67
Balance at December 29, 2002			3,523,324		$	12.43

      At the end of 2002, 2001 and 2000, the number of options exercisable was approximately 2,180,000, 2,267,000 and 2,362,000, respectively, and the weighted average exercise price of those options was $9.81, $8.82, and $7.48, respectively.

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes information about stock options outstanding at December 29, 2002.

Options Outstanding								Options Exercisable
			Weighted-
			Avg.
			Remaining			Weighted-				Weighted-
			Contractual			Average				Average
Exercise Price	Number		Life			Exercise Price		Number		Exercise Price
$1.00 to 4.99		50,775		0.2	years	$	4.25		50,775	$	4.25
$5.00 to 5.99		699,102		0.8			5.61		699,102		5.61
$6.00 to 7.99		331,238		2.0			7.53		330,035		7.53
$8.00 to 10.99		269,261		3.6			8.95		247,598		8.85
$11.00 to 13.99		575,967		6.1			12.18		335,080		12.19
$14.00 to 15.99		811,806		6.3			15.08		370,640		15.07
$16.00 to 18.99		400,675		8.3			17.84		98,925		17.89
Over $18.99		384,500		9.3			21.69		48,250		23.63
$1.00 to 24.19		3,523,324		5.0		$	12.43		2,180,405	$	9.81

      In the first quarter of 2002, the Company granted approximately 84,000 restricted stock units to certain of its executive officers and senior management in order to provide retention incentives and to encourage them to meet and exceed budgeted increases in targeted performance criteria. Each restricted stock unit represents the right to receive one share of the Company’s common stock. For each of fiscal years 2002, 2003 and 2004, the compensation committee of the board of directors will establish performance criteria related to targeted earnings per share. If the annual performance targets are achieved, one-third of the restricted stock units will vest in that year and the Company will issue the corresponding number of common shares. In the event the performance criteria are not achieved, the restricted stock units that would have vested related to that fiscal year shall not vest and all rights thereto shall forfeit. In the event that the employment of the individual by the Company is terminated for any reason, no further vesting of restricted stock units shall occur. Compensation cost related to these restricted stock unit awards recognized by the Company during the fiscal year ended December 29, 2002 approximated $560,000.

      The Company has established the CHUX Ownership Plan for the purpose of providing an opportunity for eligible employees of the Company to become shareholders in O’Charley’s. The Company has reserved 675,000 common shares for this plan. The CHUX Ownership Plan is intended to be an employee stock purchase plan, which qualifies for favorable tax treatment under Section 423 of the Internal Revenue Code. The Plan allows participants to purchase common shares at 85% of the lower of 1) the closing market price per share of the Company’s Common Stock on the last trading date of the plan period or 2) the average of the closing market price of the Company’s Common Stock on the first and the last trading day of the plan period. Contributions of up to 15% of base salary are made by each participant through payroll deductions. As of December 29, 2002, 353,955 shares have been issued under this plan.

      During the first quarter of 2003, the Company granted options to purchase approximately 1.1 million shares of common stock to certain senior management, operations management and support staffs of all three restaurant concepts. In addition, the Company granted approximately 134,000 restricted stock units under the 2000 Plan.

13.     Employee Benefit Plans

      The Company has a 401(k) salary reduction and profit-sharing plan called the CHUX Savings Plan (the “Plan”). Under the Plan, employees can make contributions up to 15% of their annual compensation. The Company contributes annually to the Plan an amount equal to 50% of employee contributions, subject to

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

certain limitations. Additional contributions are made at the discretion of the Board of Directors. Company contributions vest at the rate of 20% each year beginning after the employee’s initial year of employment. Company contributions were approximately $500,000 in 2002, $550,000 in 2001 and $439,000 in 2000.

      The Company maintains a deferred compensation plan for a select group of management employees to provide supplemental retirement income benefits through deferrals of salary, bonus and deferral of contributions which cannot be made to the Company’s 401(k) Plan due to Internal Revenue Code limitations. Participants in this plan can contribute, on a pre-tax basis, up to 50% of their base pay and 100% of their bonuses. The Company contributes annually to this plan an amount equal to a matching formula of each participant’s deferrals. Company contributions were $203,000 in 2002, $248,000 in 2001 and $214,000 in 2000. The amount of the deferred compensation liability payable to the participants is recorded as “other liabilities” on the consolidated balance sheets.

14.     Related-Party Transactions

      At the beginning of 2000, the Company leased two of its restaurants from CWF Associates, Inc., an entity that was controlled by certain directors and Gregory L. Burns, the Company’s chairman of the board and chief executive officer. During 2000, the Company purchased the leased properties for an aggregate of $1.9 million.

      At the beginning of 2000, the Company leased the land and building of four of its restaurants from Two Mile Partners, a partnership whose partners were David K. Wachtel, Jr., who owned 75% and was the managing partner of the partnership and a former director and executive officer of the Company, and Gregory L. Burns, the Company’s chairman of the board and chief executive officer, who owns 25% of the partnership. During 2000, the Company terminated one of the leases. The three remaining leases were to expire at various times through 2007, with options to renew for a term of 10 years. The Company purchased the land and buildings for three of its restaurant sites from Two Mile Partners during January 2002 for $4.3 million.

      The aforementioned related-party transactions are reflected in the consolidated financial statements as follows:

		2002		2001		2000
		(In thousands)
Consolidated statements of operations
Restaurant operating costs:
	Rent expense	$	29	$	330	$	448
	Contingent rentals		15		160		327

      During 2001, the Company paid a portion of the cash bonuses to its executive officers on a quarterly basis as an advance on the cash bonuses that the Company expected to pay for 2001. The Company did not achieve the targeted level of earnings during 2001 necessary for the payment of cash bonuses to these executive officers. Each of the executive officers has agreed to repay the amounts paid to such officer as a cash bonus during 2001. The total amount of the loans to these executive officers was approximately $495,000. The loans have a three-year term with principal and accrued interest, at the rate of 5% per annum, payable at the end of the term.

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15.     Consolidated Statements of Cash Flows

      Supplemental disclosure of cash flow information is as follows:

	2002		2001		2000
	(In thousands)
Cash paid for interest	$	5,828	$	7,552	$	8,003
Additions to capitalized lease obligations		8,749		10,559		10,871
Income taxes paid (net of refunds)		11,048		7,242		10,203

16.     Asset Impairment and Exit Costs

      During the 2001 third quarter, the Company decided to close five stores. This decision followed a review of historical and projected cash flows of the Company’s stores in view of the difficult economic environment in which the Company was operating. As a result of this decision, the Company recognized a charge during the third quarter of 2001 for asset impairment and exit costs totaling $5.8 million. This amount includes an asset impairment charge of approximately $5.0 million related to building, leasehold improvement and equipment write-downs, and an exit cost accrual of approximately $800,000 relating primarily to minimum property lease payments from the post-closure date to the projected sublease date, if applicable, otherwise to the end of the lease term. With respect to the asset impairment charge, fair value was determined by discounting projected cash flow for each location, which is the lowest level of identifiable cash flows largely independent of the cash flows of other groups of assets, over its remaining operating period, including the estimated proceeds from the disposition of such assets. The exit cost accrual is reflected in accrued expenses on the accompanying consolidated balance sheet at December 29, 2002. The balance in the exit cost accrual at December 29, 2002 was approximately $686,000.

17.     Litigation

      The Company is also involved in various other legal actions incidental to its business. In the opinion of management, the ultimate outcome of these matters will not have a material impact on the Company’s operating results, liquidity or financial position.

18.     Supplementary Condensed Consolidating Financial Information of Subsidiary Guarantors

      In the fourth quarter of 2003, the Company issued $125 million aggregate principal amount of 9% Senior Subordinated Notes due 2013. The obligations of the Company under the Senior Subordinated Notes are guaranteed by all of the Company’s subsidiaries, with the exception of certain minor subsidiaries. The guarantees are made on a joint and several basis. The claims of creditors of the non-guarantor subsidiaries have priority over the rights of the Company to receive dividends or distributions from such subsidiaries. Presented below is supplementary condensed consolidating financial information for the Company and the subsidiary guarantors as of December 29, 2002 and December 30, 2001 and for each of the three years in the period ended December 29, 2002.

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Balance Sheet

As of December 29, 2002

			Parent Company			Subsidiary Guarantors		Minor Subsidiaries and Consolidating Adjustments			Consolidated
			(Dollars in thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	3,292		$	5,019	$	—		$	8,311
	Accounts receivable			2,888			1,912		—			4,800
	Intercompany receivables (payable)			(75,700	)		82,717		(7,017	)		—
	Inventories			2,939			15,361		—			18,300
	Deferred income taxes			4,255			—		—			4,255
	Short-term notes receivable			2,950			—		—			2,950
	Other current assets			1,832			457		(1	)		2,288
		Total current assets		(57,544	)		105,466		(7,018	)		40,904
Property and equipment, net				348,439			33,114		—			381,553
Other assets				46,664			17,664		(57,994	)		6,334
Total assets			$	337,559		$	156,244	$	(65,012	)	$	428,791
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	14,574		$	5,827	$	(7,117	)	$	13,284
	Accrued payroll and related expenses			10,078			3,250		—			13,328
	Accrued expenses			8,307			2,251		(171	)		10,387
	Deferred revenue			7,213			1,499		—			8,712
	Federal, state and local taxes			2,779			5,816		—			8,595
	Current portion of long-term debt and capitalized leases			7,926			89		—			8,015
		Total current liabilities		50,877			18,732		(7,288	)		62,321
Long-term debt, net of current portion				112,324			—		(14,160	)		98,164
Capitalized lease obligations, net of current portion				25,341			582		—			25,923
Deferred income taxes				7,796			—		—			7,796
Other liabilities				1,224			3,299		100			4,623
Shareholders’ equity:
	Common stock			115,793			44,034		(43,656	)		116,171
	Accumulated other comprehensive loss, net of tax			(931	)		—		—			(931	)
	Retained earnings			25,135			89,597		(8	)		114,724
		Total shareholders’ equity		139,997			133,631		(43,664	)		229,964
Total liabilities and shareholders’ equity			$	337,559		$	156,244	$	(65,012	)	$	428,791

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Balance Sheet

As of December 30, 2001

								Minor Subsidiaries
			Parent			Subsidiary		and Consolidating
			Company			Guarantors		Adjustments			Consolidated
			(Dollars in thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	2,883		$	3,486	$	—		$	6,369
	Accounts receivable			2,583			1,765		—			4,348
	Intercompany receivables (payable)			(59,328	)		61,855		(2,527	)		—
	Inventories			2,453			15,835		—			18,288
	Deferred income taxes			3,914			—		—			3,914
	Short-term notes receivable			2,025			—		—			2,025
	Other current assets			1,333			278		—			1,611
		Total current assets		(44,137	)		83,219		(2,527	)		36,555
Property and equipment, net				295,013			35,540		—			330,553
Other assets				49,249			22,874		(55,801	)		16,322
Total assets			$	300,125		$	141,633	$	(58,328	)	$	383,430
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	8,535		$	5,326	$	(2,527	)	$	11,334
	Accrued payroll and related expenses			8,058			2,731		—			10,789
	Accrued expenses			7,665			2,002		(177	)		9,490
	Deferred revenue			4,101			873		—			4,974
	Federal, state and local taxes			2,039			5,227		—			7,266
	Current portion of long-term debt and capitalized leases			7,814			110		—			7,924
		Total current liabilities		38,212			16,269		(2,704	)		51,777
Long-term debt, net of current portion				101,291			—		(12,110	)		89,181
Capitalized lease obligations, net of current portion				24,824			—		—			24,824
Deferred income taxes				9,576			—		—			9,576
Other liabilities				3,870			—		—			3,870
Shareholders’ equity:
	Common stock			110,258			43,884		(43,506	)		110,636
	Accumulated other comprehensive loss, net of tax			(490	)		—		—			(490	)
	Retained earnings			12,584			81,480		(8	)		94,056
		Total shareholders’ equity		122,352			125,364		(43,514	)		204,202
Total liabilities and shareholders’ equity			$	300,125		$	141,633	$	(58,328	)	$	383,430

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Earnings
For the Year Ended December 29, 2002

								Minor
								Subsidiaries and
			Parent		Subsidiary			Consolidating
			Company		Guarantors			Adjustments			Consolidated
			(In thousands)
Revenues:
	Restaurant sales		$	423,218	$	57,782		$	14,112		$	495,112
	Commissary sales			—		138,075			(133,275	)		4,800
Costs and expenses:				423,218		195,857			(119,163	)		499,912
	Cost of restaurant sales:
		Cost of food and beverage		123,088		19,599			(2,664	)		140,023
		Payroll and benefits		136,561		14,651			3,099			154,311
		Restaurant operating costs		68,407		14,295			3,613			86,315
	Cost of commissary sales			—		129,096			(124,608	)		4,488
	Advertising, general and administrative expenses			1,929		35,748			—			37,677
	Depreciation and amortization			23,276		2,251			—			25,527
	Preopening costs			4,422		652			—			5,074
				357,683		216,292			(120,560	)		453,415
Income from operations				65,535		(20,435	)		1,397			46,497
Other (income) expense:
	Interest expense, net			4,905		651			—			5,556
	Other, net			42,114		(42,232	)		—			(118	)
				47,019		(41,581	)		—			5,438
Earnings before income taxes and cumulative effect of change in accounting principle				18,516		21,146			1,397			41,059
Income taxes				6,434		7,348			486			14,268
Earnings before cumulative effect of change in accounting principle				12,082		13,798			911			26,791
Cumulative effect of change in accounting principle, net of tax				—		(6,123	)		—			(6,123	)
Net earnings			$	12,082	$	7,675		$	911		$	20,668

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Earnings
For the Year Ended December 30, 2001

								Minor
								Subsidiaries and
			Parent		Subsidiary			Consolidating
			Company		Guarantors			Adjustments			Consolidated
			(In thousands)
Revenues:
	Restaurant sales		$	377,377	$	63,498		$	—		$	440,875
	Commissary sales			—		124,156			(120,100	)		4,056
				377,377		187,654			(120,100	)		444,931
Costs and expenses:
	Cost of restaurant sales:
		Cost of food and beverage		113,411		22,507			(6,856	)		129,062
		Payroll and benefits		122,454		15,555			—			138,009
		Restaurant operating costs		60,719		16,537			(468	)		76,788
	Cost of commissary sales			—		116,584			(112,776	)		3,808
	Advertising, general and administrative expenses			1,949		28,030			—			29,979
	Depreciation and amortization			19,971		2,164			—			22,135
	Preopening costs			5,232		422			—			5,654
	Asset impairment and exit costs			5,798		—			—			5,798
				329,534		201,799			(120,100	)		411,233
Income from operations				47,843		(14,145	)		—			33,698
Other (income) expense:
	Interest expense, net			6,254		356			—			6,610
	Other, net			37,463		(37,274	)		—			189
				43,717		(36,918	)		—			6,799
Earnings before income taxes				4,126		22,773			—			26,899
Income taxes				1,434		7,913			—			9,347
Net earnings			$	2,692	$	14,860		$	—		$	17,552

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Earnings
For the Year Ended December 31, 2000

									Minor Subsidiaries
				Parent		Subsidiary			and Consolidating
				Company		Guarantors			Adjustments			Consolidated
			(In thousands)
Revenues:
	Restaurant sales			$	316,628	$	57,072		$	—		$	373,700
	Commissary sales				—		101,436			(97,874	)		3,562
					316,628		158,508			(97,874	)		377,262
Costs and expenses:
	Cost of restaurant sales:
		Cost of food and beverage			95,194		19,995			(5,709	)		109,480
		Payroll and benefits			101,257		13,772			—			115,029
		Restaurant operating costs			50,360		14,848			(390	)		64,818
	Cost of commissary sales				—		95,116			(91,775	)		3,341
	Advertising, general and administrative expenses				788		23,692			—			24,480
	Depreciation and amortization				16,712		1,490			—			18,202
	Preopening costs				4,520		185			—			4,705
					268,831		169,098			(97,874	)		340,055
Income from operations					47,797		(10,590	)		—			37,207
Other (income) expense:
	Interest expense, net				7,574		(176	)		—			7,398
	Other, net				31,691		(31,667	)		—			24
					39,265		(31,843	)		—			7,422
Earnings before income taxes					8,532		21,253			—			29,785
Income taxes					2,986		7,439			—			10,425
Net earnings				$	5,546	$	13,814		$	—		$	19,360

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows

For the Year Ended December 29, 2002

										Minor
										Subsidiaries
				Parent			Subsidiary			and Consolidating
				Company			Guarantors			Adjustments			Consolidated
				(In thousands)
Cash flows from operating activities:
	Net earnings			$	12,082		$	7,675		$	911		$	20,668
	Cumulative effect of change in accounting principal, net				—			6,123			—			6,123
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation and amortization — property and equipment and goodwill			23,276			2,251			—			25,527
		Amortization of debt issuance costs			380			—			—			380
		Deferred income taxes			1,845			—			—			1,845
		(Gain) loss on the sale and involuntary conversion of assets			(63	)		—			—			(63	)
	Changes in assets and liabilities
		Accounts receivable			(305	)		(147	)		—			(452	)
		Inventories			(486	)		474			—			(12	)
		Other current assets			(499	)		(178	)		—			(677	)
		Accounts payable			13,883			(11,926	)		(7	)		1,950
		Deferred revenue			3,112			626			—			3,738
		Accrued payroll and other accrued expenses			3,402			1,357			7			4,766
	Tax benefit derived from exercise of stock options				1,100			—			—			1,100
			Net cash provided by operating activities		57,727			6,255			911			64,893
Cash flows from investing activities:
	Additions to property and equipment				(64,989	)		(4,722	)		—			(69,711	)
	Proceeds from the sale and involuntary conversion of assets				2,018			—			—			2,018
	Other, net				(172	)		—			(911	)		(1,083	)
			Net cash used in investing activities		(63,143	)		(4,722	)		(911	)		(68,776	)
Cash flows from financing activities:
	Proceeds from long-term debt				9,000			—			—			9,000
	Payments on long-term debt and capitalized lease obligations				(7,610	)		—			—			(7,610	)
	Exercise of employee incentive stock options and issuances under stock purchase plan				4,435			—			—			4,435
			Net cash provided by financing activities		5,825			—			—			5,825
Increase in cash and cash equivalents					409			1,533			—			1,942
Cash and cash equivalents at beginning of the year					2,883			3,486			—			6,369
Cash and cash equivalents at end of the year				$	3,292		$	5,019		$	—		$	8,311

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
For the Year Ended December 30, 2001

									Minor Subsidiaries
			Parent			Subsidiary			and Consolidating
			Company			Guarantors			Adjustments			Consolidated
			(In thousands)
Cash flows from operating activities:
	Net earnings		$	2,692		$	14,860		$	—		$	17,552
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation and amortization — property and equipment and goodwill		19,971			2,164			—			22,135
		Amortization of debt issuance costs		237			—			—			237
		Deferred income taxes		(1,336	)		—			—			(1,336	)
		(Gain) loss on the sale and involuntary conversion of assets		104			—			—			104
		Asset impairment and exit costs		5,798			—			—			5,798
	Changes in assets and liabilities:
		Accounts receivable		(177	)		(535	)		—			(712	)
		Inventories		(475	)		(5,208	)		—			(5,683	)
		Other current assets		(2,129	)		(114	)		—			(2,243	)
		Accounts payable		442			(1,553	)		(194	)		(1,305	)
		Deferred revenue		765			873			—			1,638
		Accrued payroll and other accrued expenses		1,408			7,105			194			8,707
	Tax benefit derived from exercise of stock options			1,816			—			—			1,816
		Net cash provided by operating activities		29,116			17,592			—			46,708
Cash flows from investing activities:
	Additions to property and equipment			(59,333	)		(14,134	)		—			(73,467	)
	Proceeds from the sale and involuntary conversion of assets			1,355			—			—			1,355
	Other, net			(860	)		—			—			(860	)
		Net cash used in investing activities		(58,838	)		(14,134	)		—			(72,972	)
Cash flows from financing activities:
	Proceeds from long-term debt			38,700			—			—			38,700
	Payments on long-term debt and capitalized lease obligations			(49,573	)		—			—			(49,573	)
	Debt issuance cost			(659	)		—			—			(659	)
	Net proceeds from sale of common stock			41,744			—			—			41,744
	Exercise of employee incentive stock options and issuances under stock purchase plan			5,022			—			—			5,022
	Repurchase of common stock			(5,153	)		—			—			(5,153	)
		Net cash provided by financing activities		30,081			—			—			30,081
Increase in cash and cash equivalents				359			3,458			—			3,817
Cash and cash equivalents at beginning of the year				2,524			28			—			2,552
Cash and cash equivalents at end of the year			$	2,883		$	3,486		$	—		$	6,369

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2000

									Minor
									Subsidiaries and
			Parent			Subsidiary			Consolidating
			Company			Guarantors			Adjustments			Consolidated
			(In thousands)
Cash flows from operating activities:
	Net earnings		$	5,546		$	13,814		$	—		$	19,360
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation and amortization — property and equipment and goodwill		16,712			1,490			—			18,202
		Amortization of debt issuance costs		139			—			—			139
		Deferred income taxes		2,052			—			—			2,052
		(Gain) loss on the sale and involuntary conversion of assets		10			—			—			10
	Changes in assets and liabilities:
		Accounts receivable		(981	)		(460	)		—			(1,441	)
		Inventories		(295	)		(3,534	)		145			(3,684	)
		Other current assets		(562	)		(37	)		(15	)		(614	)
		Accounts payable		1,053			2,751			(483	)		3,321
		Deferred revenue		465			297			—			762
		Accrued payroll and other accrued expenses		654			167			714			1,535
	Tax benefit derived from exercise of stock options			368			—			—			368
		Net cash provided by operating activities		25,161			14,488			361			40,010
Cash flow from investing activities:
	Additions to property and equipment			(50,624	)		(6,172	)		—			(56,796	)
	Acquisition of company, net of cash acquired			—			(15,849	)		—			(15,849	)
	Proceeds from the sale and involuntary conversion of assets			293			—			—			293
	Other, net			(5,559	)		5,976			(361	)		56
		Net cash used in investing activities		(55,890	)		(16,045	)		(361	)		(72,296	)
Cash flows from financing activities:
	Proceeds from long-term debt			38,000			—			—			38,000
	Payments on long-term debt and capitalized lease obligations			(7,099	)		—			—			(7,099	)
	Debt issuance costs			(348	)		—			—			(348	)
	Exercise of employee incentive stock options and issuances under stock purchase plan			1,691			—			—			1,691
	Repurchase of common stock			(584	)		—			—			(584	)
		Net cash provided by financing activities		31,660			—			—			31,660
Increase (decrease) in cash and cash equivalents				931			(1,557	)		—			(626	)
Cash and cash equivalents at beginning of the year				1,593			1,585			—			3,178
Cash and cash equivalents at end of the year			$	2,524		$	28		$	—		$	2,552

O’CHARLEY’S INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

19.     Subsequent Events

      On January 27, 2003, the Company acquired Ninety Nine Restaurant and Pub (“Ninety Nine”), a casual dining chain based in Woburn, Massachusetts. The Company acquired Ninety Nine for $116 million in cash and approximately 2.35 million shares of its common stock, plus the assumption of certain liabilities. In addition to the purchase price, the Company has agreed to pay a total of $1.0 million per year, plus accrued interest, on each of January 1, 2004, 2005, 2006 and 2007, to certain key employees of Ninety Nine who the Company continues to employ at the time of such payments. Of the stock portion of the purchase price, the Company delivered approximately 941,000 shares at closing, and will deliver approximately 408,000 shares on each of the first, second, and third anniversaries of the closing and 94,000 shares on each of the fourth and fifth anniversaries of the closing.

      The transaction will be accounted for using the purchase method of accounting as required by SFAS No. 141 and, accordingly, the results of operations of Ninety Nine will be included in the Company’s consolidated financial statements from the date of acquisition. The Ninety Nine concept is being operated as a wholly owned subsidiary of the Company. The Company is in the process of determining the preliminary allocation of the purchase price to the acquired net assets, but such process has not been completed.

      On January 27, 2003, the Company entered into a new credit facility for the purpose of purchasing Ninety Nine, retiring the previous revolving credit facility and providing capital for future growth. The new credit facility is comprised of a revolving credit facility in the maximum principal amount of $200 million and a term loan in the original principal amount of $100 million. The revolving credit facility matures on January 27, 2007 and the term loan matures on January 27, 2009. The term loan provides for scheduled quarterly principal amortization of $2.5 million commencing June 30, 2003 and ending March 31, 2008 and quarterly principal amortization of $16.5 million commencing June 30, 2008, with a final payment of $17.0 million due at maturity.

      Amounts outstanding under the new revolving credit facility bear interest, at the Company’s option, at either LIBOR plus a specified margin ranging from 2.25% to 3.0% based on certain financial ratios or the base rate, which is the higher of the lender’s prime rate and the federal funds rate plus 0.5%, plus a specified margin ranging from 1.0% to 1.75% based on certain financial ratios. Amounts outstanding under the term loan bear interest, at the Company’s option, at either LIBOR plus 4.0% or the base rate plus 2.75%. The new credit facility imposes restrictions on the Company with respect to the incurrence of additional indebtedness, sales of assets, mergers, acquisitions, joint ventures, investments, repurchases of stock and the payment of dividends. In addition, the credit facility requires the Company to comply with certain specified financial covenants, including covenants relating to maximum adjusted debt to EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) ratio, maximum leverage, minimum fixed charge coverage ratio, minimum asset coverage ratio and minimum capital expenditures ratio.

      Future minimum operating lease payments for the Company, including lease obligations of Ninety Nine, are as follows: (in thousands)

2003	$	16,900
2004		16,647
2005		16,538
2006		16,643
2007		16,519
Thereafter		187,375
	$	270,622

      Also, see Note 18.

EX-99.2 5 g86784exv99w2.htm EX-99.2 UNAUDITED CONSOLIDATED FINANCIAL STATEMENT

EXHIBIT 99.2

O’CHARLEY’S INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

			October 5,			December 29,
			2003			2002
Assets
Current Assets:
	Cash and cash equivalents		$	3,175		$	8,311
	Accounts receivable			7,376			4,800
	Inventories			20,667			18,300
	Deferred income taxes			4,249			4,255
	Short-term notes receivable			3,070			2,950
	Other current assets			6,947			2,288
		Total current assets		45,484			40,904
Property and Equipment, net				465,072			381,553
Goodwill				93,353			—
Other Intangible Assets				25,921			—
Other Assets				15,421			6,334
			$	645,242		$	428,791
Liabilities and Shareholders’ Equity
Current Liabilities:
	Accounts payable		$	21,179		$	13,284
	Accrued payroll and related expenses			12,382			13,328
	Accrued expenses			17,542			10,387
	Deferred revenue			5,259			8,712
	Federal, state and local taxes			4,789			8,595
	Current portion of long-term debt and capitalized leases			9,094			8,015
		Total current liabilities		70,245			62,321
Deferred Income Taxes				10,474			7,796
Other Liabilities				8,629			4,623
Long-Term Debt, less current portion				223,212			98,164
Capitalized Lease Obligations, less current portion				33,757			25,923
Shareholders’ Equity:
	Common stock — No par value; authorized, 50,000,000 shares; issued and outstanding, 22,173,257 in 2003 and 18,838,826 in 2002			168,692			116,171
	Accumulated other comprehensive loss, net of tax			(628	)		(931	)
	Unearned compensation			(2,279	)		—
	Retained earnings			133,140			114,724
		Total shareholders’ equity		298,925			229,964
			$	645,242		$	428,791

See notes to unaudited consolidated financial statements.

O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF EARNINGS
12 Weeks Ended October 5, 2003 and October 6, 2002
(In thousands, except per share data)
(Unaudited)

			2003		2002
Revenues:
	Restaurant sales		$	180,528	$	115,565
	Commissary sales			1,192		1,057
				181,720		116,622
Costs and Expenses:
	Cost of restaurant sales:
		Cost of food and beverage		54,646		32,849
		Payroll and benefits		61,321		35,872
		Restaurant operating costs		34,088		20,970
	Cost of commissary sales			1,131		992
	Advertising, general and administrative expenses			12,324		8,492
	Depreciation and amortization			8,817		5,976
	Pre-opening costs			1,579		1,194
				173,906		106,345
Income from Operations				7,814		10,277
Other Expense:
	Interest expense, net			3,264		1,221
	Other, net			25		11
				3,289		1,232
Earnings Before Income Taxes				4,525		9,045
Income Taxes				1,118		3,143
Net Earnings			$	3,407	$	5,902
Basic Earnings per Common Share:
		Net earnings	$	0.15	$	0.31
		Weighted average common shares outstanding		22,162		18,751
Diluted Earnings per Common Share:
		Net earnings	$	0.15	$	0.30
		Weighted average common shares outstanding		22,539		19,726

See notes to unaudited consolidated financial statements.

O’CHARLEY’S INC.

CONSOLIDATED STATEMENTS OF EARNINGS
40 Weeks Ended October 5, 2003 and October 6, 2002
(In thousands, except per share data)
(Unaudited)

				2003			2002
Revenues:
	Restaurant sales			$	571,821		$	377,691
	Commissary sales				4,197			3,704
					576,018			381,395
Cost and Expenses:
	Cost of restaurant sales:
		Cost of food and beverage			165,486			108,707
		Payroll and benefits			189,605			118,050
		Restaurant operating costs			104,775			65,202
	Cost of commissary sales				3,954			3,466
	Advertising, general and administrative expenses				41,385			27,858
	Depreciation and amortization				27,423			19,300
	Pre-opening costs				5,535			4,143
					538,163			346,726
Income from Operations					37,855			34,669
Other (Income) Expense:
	Interest expense, net				10,425			4,205
	Other, net				(98	)		(87	)
					10,327			4,118
Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle					27,528			30,551
Income Taxes					9,112			10,616
Earnings Before Cumulative Effect of Change in Accounting Principle					18,416			19,935
Cumulative Effect of Change in Accounting Principle, net of tax					—			(6,123	)
Net Earnings				$	18,416		$	13,812
Basic Earnings per Share:
			Earnings Before Cumulative Effect of Change in Accounting Principle	$	0.86		$	1.07
			Cumulative Effect of Change in Accounting Principle, net of tax		—			(0.33	)
			Net Earnings	$	0.86		$	0.74
			Weighted Average Common Shares Outstanding		21,507			18,645
Diluted Earnings per Share:
			Earnings Before Cumulative Effect of Change in Accounting Principle	$	0.83		$	1.01
			Cumulative Effect of Change in Accounting Principle, net of tax		—			(0.31	)
			Net Earnings	$	0.83		$	0.70
			Weighted Average Common Shares Outstanding		22,222			19,795

See notes to unaudited consolidated financial statements.

O’CHARLEY’S INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
40 Weeks Ended October 5, 2003 and October 6, 2002
(In thousands)
(Unaudited)

				2003			2002
Cash Flows from Operating Activities:
	Net earnings			$	18,416		$	13,812
	Cumulative effect of change in accounting principle, net of tax				—			6,123
	Adjustments to reconcile net earnings to net cash provided by operations:
		Depreciation and amortization, property and equipment			27,423			19,300
		Amortization of debt issuance costs			878			176
		Compensation expense related to restricted stock plans			543			—
		Provision for deferred income taxes			3,299			2,577
		Loss (gain) on the sale and disposal of assets			21			(34	)
	Changes in assets and liabilities, net of acquisition:
		Accounts receivable			(1,288	)		(307	)
		Inventories			689			(1,407	)
		Other current assets			(2,995	)		(1,429	)
		Accounts payable			5,411			2,343
		Deferred revenue			(7,148	)		(2,562	)
		Accrued payroll and other accrued expenses			(4,269	)		2,789
	Tax benefit derived from exercise of stock options				3,630			960
			Net cash provided by operating activities		44,610			42,341
Cash Flows from Investing Activities:
	Capital expenditures for property and equipment				(54,596	)		(60,017	)
	Proceeds from the sale of assets				1,934			1,637
	Acquisition of company, net of cash acquired				(114,271	)		—
	Note receivable				(120	)		(925	)
	Other, net				434			418
			Net cash used in investing activities		(166,619	)		(58,887	)
Cash Flows from Financing Activities:
	Proceeds from long-term debt				241,563			14,100
	Payments on long-term debt and capitalized lease obligations				(124,380	)		(6,377	)
	Debt issuance costs				(4,767	)		—
	Exercise of incentive stock options and issuances under stock purchase plan				4,457			3,635
			Net cash provided by financing activities		116,873			11,358
Net decrease in cash and cash equivalents					(5,136	)		(5,188	)
Cash and cash equivalents at beginning of the period					8,311			6,369
Cash and cash equivalents at end of the period				$	3,175		$	1,181
Supplemental disclosures:
	Cash paid for interest			$	14,513		$	4,542
	Cash paid for income taxes			$	7,994		$	8,417
	Additions to capitalized lease obligations			$	16,778		$	3,498
Effect of acquisition:
	Fair value of assets acquired			$	42,440
	Purchase price in excess of the net assets acquired (goodwill)				93,353
	Other intangible assets				25,921
	Less fair value of liabilities assumed				(770	)
	Purchase price of acquisition				160,944
	Less value of stock issued				(41,153	)
	Less cash acquired				(5,520	)
	Net cash paid for acquisition and related transaction costs			$	114,271

See notes to unaudited consolidated financial statements.

O’CHARLEY’S INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12 and 40 Weeks Ended October 5, 2003 and October 6, 2002

A.     BASIS OF PRESENTATION

      The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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. Both fiscal 2003 and 2002 consist of fifty-two weeks each.

      In the opinion of management, the unaudited interim consolidated 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 unaudited consolidated 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/A for the year ended December 29, 2002.

B.     NET EARNINGS PER COMMON SHARE AND STOCK BASED COMPENSATION

      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.

      Following is a reconciliation of the weighted average common shares used in the Company’s basic and diluted earnings per share calculation.

	12 Weeks Ended				40 Weeks Ended
	October 5,		October 6,		October 5,		October 6,
	2003		2002		2003		2002
Weighted average common shares outstanding		22,162		18,751		21,507		18,645
Incremental stock option shares outstanding		377		975		715		1,150
Weighted average diluted common shares outstanding		22,539		19,726		22,222		19,795

      Options for approximately 1.9 million and 1.3 million shares were excluded from the 2003 12 and 40-week diluted weighted average common share calculation, respectively, due to these shares being anti-dilutive. Options for approximately 285,000 and 42,000 shares were excluded from the 2002 12 and 40-week diluted weighted average common share calculation, respectively, due to these shares being anti-dilutive.

      The Company has elected to continue to apply the intrinsic-value-based method of accounting pursuant to APB Opinion 25, and has adopted only the disclosure requirements of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation” as amended by SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of Financial Accounting Standards Board Statement No. 123”. The following table illustrates the effect on net

O’CHARLEY’S INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

earnings for the 12 and 40-week periods ended October 5, 2003 and October 6, 2002 if the fair-value-based method had been applied to awards that were granted in each period:

		12 Weeks Ended						40 Weeks Ended
		October 5,			October 6,			October 5,			October 6,
		2003			2002			2003			2002
		(In thousands, except per share data)
Net earnings, as reported		$	3,407		$	5,902		$	18,416		$	13,812
Add stock-based employee compensation expense included in reported net earnings, net of tax			130			100			363			299
Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax			(724	)		(627	)		(2,344	)		(2,057	)
Pro forma net earnings		$	2,813		$	5,375		$	16,435		$	12,054
Earnings per share:
	Basic — as reported	$	0.15		$	0.31		$	0.86		$	0.74
	Basic — pro forma	$	0.13		$	0.29		$	0.76		$	0.65
	Diluted — as reported	$	0.15		$	0.30		$	0.83		$	0.70
	Diluted — pro forma	$	0.12		$	0.27		$	0.74		$	0.61

      During the first 40 weeks of 2003, the Company granted approximately 1.2 million stock options to various employees within the Company. These options have vesting periods ranging from two to five years and have a weighted average exercise price of $20.69.

C.     ACQUISITION OF NINETY NINE RESTAURANT & PUB AND SENIOR CREDIT FACILITY

      On January 27, 2003, the Company acquired Ninety Nine Restaurant and Pub (“Ninety Nine”), a family-owned and operated casual dining chain based in Woburn, Massachusetts with operations in Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. The Company acquired Ninety Nine for $116 million in cash and approximately 2.35 million shares of its common stock, plus the assumption of certain liabilities. The cash portion of the purchase price is subject to adjustment based on the consolidated net book value of Ninety Nine on the closing date. Of the stock portion of the purchase price, the Company delivered approximately 941,000 shares at closing, and will deliver approximately 408,000 shares on each of the first, second, and third anniversaries of the closing and 94,000 shares on each of the fourth and fifth anniversaries of the closing. As the passage of time is the only condition for the ultimate issuance of the common shares, all shares are assumed issued for purposes of basic and diluted earnings per share, and were valued in determining the purchase price of the acquisition. The results of operations for Ninety Nine are included in the consolidated results from January 27, 2003, the date of the acquisition.

      The transaction was accounted for using the purchase method of accounting as required by SFAS No. 141. Ninety Nine is being operated through indirect wholly owned subsidiaries of the Company.

      In order to retain and incentivize certain key employees of Ninety Nine, the Company agreed to pay a total of $1 million per year, plus interest, on each of January 1, 2004, 2005, 2006 and 2007 to those key employees of Ninety Nine who continue to be employed at such dates. Compensation cost recognized by the Company in the 12 and 40-week periods ended October 5, 2003 approximated $261,000 and $751,000, respectively.

      On January 27, 2003, the Company entered into a new senior secured credit facility for the purpose of funding the cash portion of the purchase price of Ninety Nine, retiring the previous revolving credit facility and providing capital for future growth. As discussed in Note K below, on November 4, 2003, the Company amended and restated its senior secured credit facility.

      The purchase price paid for the acquisition of Ninety Nine was $160.9 million, calculated as follows:

(in thousands)
Cash paid to sellers	$116,000
Fair value of shares issued to sellers	41,153
Closing and other transaction costs	3,791
Total purchase price	$160,944

      The following table sets forth the preliminary purchase price allocation in accordance with SFAS No. 141. The information set forth below is management’s preliminary purchase price allocation, and is subject to change:

(in thousands)
Net working capital (deficit)	$	(2,106	)
Property and equipment		41,990
Other		1,981
Purchase price in excess of the net assets acquired (goodwill)		93,353
Other indefinite life intangible assets — trademarks		25,921
Favorable operating leases		575
Estimated fair value of liabilities assumed		(770	)
Purchase price of acquisition		160,944
Less value of stock issued		(41,153	)
Less cash acquired		(5,520	)
Net cash paid for acquisition and related transaction costs	$	114,271

      The following unaudited pro forma condensed results of operations give effect to the acquisition of Ninety Nine as if such transaction had occurred at the beginning of fiscal 2002:

	Third Quarter				First 40 Weeks
Third Quarter and First 40 Weeks 2003 and 2002	2003		2002		2003		2002
Pro Forma Earnings:
	(in thousands, except per share data)
Total revenues	$	181,720	$	161,937	$	592,201	$	532,449
Earnings before income taxes and cumulative effect of change in accounting principle		4,525		11,954		27,911		39,594
Earnings before cumulative effect of change in accounting principle		3,407		7,800		18,666		25,835
Cumulative effect of change in accounting principle		—		—		—		(6,123	)
Net earnings	$	3,407	$	7,800	$	18,666	$	19,712
Basic earnings per share
Earnings before cumulative effect of change in accounting principle	$	0.15	$	0.37	$	0.84	$	1.23
Cumulative effect of change in accounting principle		—		—		—		(0.29	)
Net earnings	$	0.15	$	0.37	$	0.84	$	0.94
Basic weighted average common shares outstanding		22,162		21,104		22,095		20,998
Diluted earnings per share
Earnings before cumulative effect of change in accounting principle	$	0.15	$	0.35	$	0.82	$	1.17
Cumulative effect of change in accounting principle		—		—		—		(0.28	)
Net earnings	$	0.15	$	0.35	$	0.82	$	0.89
Diluted weighted average common shares outstanding		22,539		22,079		22,810		22,148

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

D.     ASSET IMPAIRMENT AND EXIT COSTS

      As discussed in Note 16 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 29, 2002, the Company incurred charges during the third quarter of fiscal 2001 for asset impairment of approximately $5.0 million and exit costs totaling approximately $800,000 related to our decision to close five restaurants. We closed one store during the fourth quarter of 2001, two stores during the first quarter of 2002, one store during the third quarter of 2002 and one store during the first quarter of 2003. During the quarter ended October 5, 2003, the Company paid exit costs totaling approximately $42,000. During the first 40 weeks of 2003, the Company paid exit costs totaling approximately $275,000. The remaining balance of the accrual at October 5, 2003, which primarily represents the Company’s estimate of its remaining net lease obligations related to the closed stores, was approximately $260,000.

E.     DERIVATIVE INSTRUMENTS

      At October 5, 2003, the Company’s derivative financial instruments consisted of interest rate swaps with a combined notional amount of $20 million that effectively convert an equal portion of the Company’s 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 at October 5, 2003 is a liability of $939,000 compared to a liability of $1.4 million at December 29, 2002, which is included in other long-term liabilities on the consolidated balance sheets. The fair value adjustment resulted in the recognition of an unrealized gain of $488,000, net of related income taxes of $185,000, in accumulated other comprehensive loss in 2003.

O’CHARLEY’S INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

F.     COMPREHENSIVE INCOME

      Comprehensive income consists of net earnings and other comprehensive income/loss items attributable to unrealized gains and losses on derivative financial instruments and unrealized gains and losses on available for sale securities. The components of total comprehensive income for all periods presented are as follows:

	12 Weeks Ended					40 Weeks Ended
	October 5,		October 6,			October 5,		October 6,
	2003		2002			2003		2002
	(In thousands)
Net income	$	3,407	$	5,902		$	18,416	$	13,812
Other comprehensive income (loss), net of tax		180		(176	)		303		(445	)
Total comprehensive income	$	3,587	$	5,726		$	18,719	$	13,367

G.     RESTRICTED STOCK UNIT GRANTS

      In the first quarter of 2002, the Company granted approximately 84,000 restricted stock units to certain executive officers and members of senior management in order to provide retention incentives and to incentivize them to meet and exceed budgeted increases in targeted performance criteria. Each restricted stock unit represents the right to receive one share of the Company’s common stock. For each of fiscal years 2002, 2003, and 2004, the compensation committee of the board of directors will establish performance criteria related to targeted earnings per share. If the annual performance targets are achieved, one-third of the restricted stock units will vest in that year and the Company will issue the corresponding number of common shares to the individuals. In the event the performance criteria are not achieved, the restricted stock units that would have vested related to that fiscal year shall not vest and all rights thereto shall terminate. In the event that the employment of the individual by the Company is terminated for any reason, no further vesting of restricted stock units shall occur. The 2002 restricted stock unit tranche vested in 2002 due to the attainment of the applicable performance targets. No compensation cost attributable to the 2003 restricted stock units was recognized in the 12 and 40-week periods ended October 5, 2003 due to the Company’s earnings being below the established performance criteria.

      During the first quarter of 2003, the Company granted approximately 135,000 shares of restricted stock to certain executives and members of senior management associated with a performance accelerated restricted stock plan in order to provide retention incentives for these individuals. The grantee’s rights in the restricted stock shall become fully vested on the sixth anniversary of the grant date. Vesting can be accelerated on the attainment of certain stock performance criteria that are measured against the total shareholder return for the Standard and Poor’s 500 Restaurant Index for the period from the grant date to the measurement date. The awards may vest as early as three years from the grant date if the stock performance criteria are met at that time. In the event that the employment of the individual by the Company is terminated for any reason, no further vesting of restricted stock units shall occur. Upon issuance of restricted stock awards, unearned compensation is charged to shareholders’ equity for the fair value of the restricted stock and recognized as compensation expense ratably over the vesting periods, as applicable. Compensation cost related to these restricted stock awards recognized by the Company during the 12 and 40-week periods ended October 5, 2003 approximated $194,000 and $543,000, respectively.

H.     NEW ACCOUNTING PRONOUNCEMENTS

      In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest

O’CHARLEY’S INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

entities obtained after January 31, 2003. It applies in the first fiscal year, or interim period ending after December 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The application of this Interpretation is not expected to have an impact on the Company’s consolidated financial statements.

      On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No. 150 on July 14, 2003. The adoption of SFAS No. 150 did not have an impact on the Company’s consolidated financial statements or the disclosures thereto.

I.     CONTINGENCIES

     In September 2003, we became aware that customers and employees at one of our O’Charley’s restaurants located in Knoxville, Tennessee were exposed to the Hepatitis A virus, which resulted in a number of our employees and customers becoming infected. We have worked closely with the Knox County Health Department and the Centers for Disease Control and Prevention since we became aware of this incident and have cooperated fully with their directives and recommendations. We are aware of 81 individuals who have contracted the Hepatitis A virus in the Knoxville area, most of whom have been linked to our Knoxville restaurant during the time of the outbreak. As of February 2, 2004, we are also aware of 20 lawsuits filed against us, all of which have been filed in the Circuit Court for Knox County, Tennessee, that allege injuries or fear of injuries from the Hepatitis A incident. A number of these lawsuits seek substantial damages, including treble damages under certain Tennessee consumer protection laws and punitive damages, and certain of which seek to be certified as class actions. One of the lawsuits was filed by an individual who contracted the Hepatitis A virus and died following the filing of his lawsuit. This suit has been amended to seek compensatory damages not to exceed $7.5 million and punitive damages not to exceed $10.0 million alleging wrongful death. Certain other plaintiffs have alleged significant health concerns, including ailments requiring hospitalization. We are also aware of an outbreak of Hepatitis A linked to numerous independent restaurants and restaurant chains located in Georgia, including two of our O’Charley’s restaurants. We have received the preliminary report of the Georgia Division of Public Health indicating that ten persons who contracted the Hepatitis A virus in Georgia stated that they had eaten at the Centerville, Georgia or Macon, Georgia O’Charley’s restaurant. Each of the Knox County Health Department, the Georgia Division of Public Health, the Centers for Disease Control and Prevention and the Food and Drug Administration have tentatively associated the recent outbreaks of the Hepatitis A virus affecting a number of restaurants, including O’Charley’s, to eating green onions (scallions).

     While we intend to vigorously defend the litigation that has been filed against us, we are not able to predict the outcome of the litigation that has been filed against us or that may be filed against us in the future relating to the Hepatitis A outbreak or the amounts that we may be required to pay to settle any such litigation or to satisfy any adverse judgments that may be rendered against us. We have liability insurance; however, we cannot assure you that our insurance carriers will reimburse us for any loss or liability we suffer in connection with this litigation or that our insurance will be sufficient to cover such loss or liability. We do not believe that any of the legal proceedings pending against us will have a material adverse effect on our financial condition. We may incur or accrue expenses in a particular quarterly period relating to the Hepatitis A litigation or other legal proceedings that may adversely affect our results of operations for such period.

J.     SUPPLEMENTARY CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF SUBSIDIARY GUARANTORS

      The obligations of the Company under its 9% Senior Subordinated Notes due 2013 (see Note K) are guaranteed by all of the Company’s subsidiaries, with the exception of certain minor subsidiaries. The guarantees are made on a joint and several basis. The claims of creditors of the non-guarantor subsidiaries have priority over the rights of the Company to receive dividends or distributions from such subsidiaries. Presented below is supplementary condensed consolidating financial information for the Company and the subsidiary guarantors as of October 5, 2003 and December 29, 2002 and for the 40 weeks ended October 5, 2003 and October 6, 2002.

O’CHARLEY’S INC.

CONDENSED CONSOLIDATING BALANCE SHEET

As of October 5, 2003

(In thousands)

(Unaudited)

									Minor
									Subsidiaries and
			Parent			Subsidiary			Consolidating
			Company			Guarantors			Adjustments			Consolidated
ASSETS
Current assets:
	Cash and cash equivalents		$	6,668		$	(3,493	)	$	—		$	3,175
	Accounts receivable			3,692			3,684			—			7,376
	Intercompany receivables (payable)			(136,643	)		140,263			(3,620	)		—
	Inventories			3,363			17,304			—			20,667
	Deferred income taxes			3,865			384			—			4,249
	Short-term notes receivable			3,070			—			—			3,070
	Other current assets			2,913			4,034			—			6,947
		Total current assets		(113,072	)		162,176			(3,620	)		45,484
Property and equipment, net				383,050			82,022			—			465,072
Goodwill and other intangible assets				—			93,353			—			93,353
Other intangible assets				—			25,921			—			25,921
Other assets				211,581			22,746			(218,915	)		15,412
Total assets			$	481,559		$	386,218		$	(222,535	)	$	645,242
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	13,417		$	11,418		$	(3,656	)	$	21,179
	Accrued payroll and related expenses			8,119			4,263			—			12,382
	Accrued expenses			9,279			8,500			(237	)		17,542
	Deferred revenue			2,726			2,533			—			5,259
	Federal, state and local taxes			(4,996	)		9,785			—			4,789
	Current portion of long-term debt and capitalized leases			8,757			337			—			9,094
		Total current liabilities		37,302			36,836			(3,893	)		70,245
Long-term debt, net of current portion				237,372			—			(14,160	)		223,212
Capitalized lease obligations, net of current portion				31,689			2,068			—			33,757
Deferred income taxes				10,889			(415	)		—			10,474
Other liabilities				1,451			7,053			125			8,629
Shareholders’ equity:
	Common stock			168,313			168,752			(168,373	)		168,692
	Accumulated other comprehensive loss, net of tax			(628	)		—			—			(628	)
	Unearned compensation expense			(2,279	)		—			—			(2,279	)
	Retained earnings			(2,550	)		171,924			(36,234	)		133,140
		Total shareholders’ equity		162,856			340,676			(204,607	)		298,925
Total liabilities and shareholders’ equity			$	481,559		$	386,218		$	(222,535	)	$	645,242

O’CHARLEY’S INC.
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 29, 2002

			Parent Company			Subsidiary Guarantors		Minor Subsidiaries and Consolidating Adjustments			Consolidated
			(Dollars in thousands)
ASSETS
Current assets:
	Cash and cash equivalents		$	3,292		$	5,019	$	—		$	8,311
	Accounts receivable			2,888			1,912		—			4,800
	Intercompany receivables (payable)			(75,700	)		82,717		(7,017	)		—
	Inventories			2,939			15,361		—			18,300
	Deferred income taxes			4,255			—		—			4,255
	Short-term notes receivable			2,950			—		—			2,950
	Other current assets			1,832			457		(1	)		2,288
		Total current assets		(57,544	)		105,466		(7,018	)		40,904
Property and equipment, net				348,439			33,114		—			381,553
Other assets				46,664			17,664		(57,994	)		6,334
Total assets			$	337,559		$	156,244	$	(65,012	)	$	428,791
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	14,574		$	5,827	$	(7,117	)	$	13,284
	Accrued payroll and related expenses			10,078			3,250		—			13,328
	Accrued expenses			8,307			2,251		(171	)		10,387
	Deferred revenue			7,213			1,499		—			8,712
	Federal, state and local taxes			2,779			5,816		—			8,595
	Current portion of long-term debt and capitalized leases			7,926			89		—			8,015
		Total current liabilities		50,877			18,732		(7,288	)		62,321
Long-term debt, net of current portion				112,324			—		(14,160	)		98,164
Capitalized lease obligations, net of current portion				25,341			582		—			25,923
Deferred income taxes				7,796			—		—			7,796
Other liabilities				1,224			3,299		100			4,623
Shareholders’ equity:
	Common stock			115,793			44,034		(43,656	)		116,171
	Accumulated other comprehensive loss, net of tax			(931	)		—		—			(931	)
	Retained earnings			25,135			89,597		(8	)		114,724
		Total shareholders’ equity		139,997			133,631		(43,664	)		229,964
Total liabilities and shareholders’ equity			$	337,559		$	156,244	$	(65,012	)	$	428,791

O’CHARLEY’S INC.

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

40 Weeks Ended October 5, 2003

(In thousands)

(Unaudited)

									Minor
									Subsidiaries and
			Parent			Subsidiary			Consolidating
			Company			Guarantors			Adjustments			Consolidated
Revenues
	Restaurant sales		$	356,997		$	198,334		$	16,490		$	571,821
	Commissary sales			—			121,630			(117,433	)		4,197
	Total sales			356,997			319,964			(100,943	)		576,018
Costs and expenses
	Cost of sales
		Cost of food and beverage		106,045			59,330			111			165,486
		Payroll and benefits		121,811			64,113			3,681			189,605
		Restaurant operating costs		62,823			37,485			4,467			104,775
	Cost of commissary sales			—			114,587			(110,633	)		3,954
	Advertising, general and administrative expenses			1,938			39,447			—			41,385
	Depreciation and amortization			20,613			6,810			—			27,423
	Preopening costs			4,551			984			—			5,535
	Total expenses			317,781			322,756			(102,374	)		538,163
	Income from operations			39,216			(2,792	)		1,431			37,855
Other (income) expense
	Interest expense, net			9,843			582			—			10,425
	Other, net			35,448			(35,546	)		—			(98	)
Earnings before income taxes				(6,075	)		32,172			1,431			27,528
Income taxes				(2,012	)		10,650			474			9,112
Net earnings			$	(4,063	)	$	21,522		$	957		$	18,416

O’CHARLEY’S INC.

CONDENSED CONSOLIDATING STATEMENT OF EARNINGS

40 Weeks Ended October 6, 2002

(In thousands)

(Unaudited)

								Minor
								Subsidiaries and
			Parent		Subsidiary			Consolidating
			Company		Guarantors			Adjustments			Consolidated
Revenues
	Restaurant sales		$	324,157	$	44,624		$	8,910		$	377,691
	Commissary sales					106,622			(102,918	)		3,704
	Total sales			324,157		151,246			(94,008	)		381,395
Costs and expenses
	Cost of sales
		Cost of food and beverage		96,124		15,293			(2,710	)		108,707
		Payroll and benefits		104,862		11,278			1,910			118,050
		Restaurant operating costs		51,818		11,214			2,170			65,202
	Cost of commissary sales			—		99,789			(96,323	)		3,466
	Advertising, general and administrative expenses			1,430		26,428			—			27,858
	Depreciation and amortization			17,565		1,735			—			19,300
	Preopening costs			3,710		433			—			4,143
	Total expenses			275,509		166,170			(94,953	)		346,726
	Income from operations			48,648		(14,924	)		945			34,669
Other (income) expense
	Interest expense, net			3,681		524			—			4,205
	Other, net			32,278		(32,365	)		—			(87	)
Earnings before income taxes				12,689		16,917			945			30,551
Income taxes				4,410		5,878			328			10,616
Income before cumulative effect of change in accounting principle				8,279		11,039			617			19,935
Cumulative effect of change in accounting principle, net of tax				—		(6,123	)		—			(6,123	)
Net earnings			$	8,279	$	4,916		$	617		$	13,812

O’CHARLEY’S INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

40 Weeks Ended October 5, 2003

(In thousands)

(Unaudited)

										Minor
										Subsidiaries and
				Parent			Subsidiary			Consolidating
				Company			Guarantors			Adjustments			Consolidated
Cash flows from operating activities:
	Net earnings (loss)			$	(4,063	)	$	21,522		$	957		$	18,416
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation and amortization — property and equipment and goodwill			20,613			6,810			—			27,423
		Amortization of debt issuance costs			878			—			—			878
		Compensation expense related to restricted stock plans			—			543			—			543
		Deferred income taxes			3,299			—			—			3,299
		(Gain) loss on the sale and involuntary conversion of assets			25			(4	)		—			21
	Changes in assets and liabilities:
		Accounts receivable			(805	)		(483	)		—			(1,288	)
		Inventories			(425	)		1,114			—			689
		Other current assets			(1,081	)		(1,913	)		(1	)		(2,995	)
		Accounts payable			(1,156	)		3,107			3,460			5,411
		Deferred revenue			(4,488	)		(2,660	)		—			(7,148	)
		Accrued payroll and other accrued expenses			(8,760	)		4,558			(67	)		(4,269	)
	Tax benefit derived from exercise of stock options				3,630			—			—			3,630
			Net cash provided by operating activities		7,667			32,594			4,349			44,610
Cash flows from investing activities
	Additions to property and equipment				(42,884	)		(11,992	)		280			(54,596	)
	Proceeds from the sale and involuntary conversion of assets				1,930			4			—			1,934
	Acquisition of company, net of cash acquired				—			—			(114,271	)		(114,271	)
	Change in note receivable				(120	)		—			—			(120	)
	Other, net				(121,243	)		(29,118	)		150,795			434
	Stock issued for purchase of company				41,153			—			(41,153	)		—
			Net cash used in investing activities		(121,164	)		(41,106	)		(4,349	)		(166,619	)
Cash flows from financing activities:
	Proceeds from long-term debt				241,563			—			—			241,563
	Payments on long-term debt and capitalized lease obligations				(124,380	)		—			—			(124,380	)
	Debt issuance costs				(4,767	)		—			—			(4,767	)
	Exercise of employee incentive stock options and issuances under stock purchase plan				4,457			—			—			4,457
			Net cash provided by financing activities		116,873			—			—			116,873
Increase (decrease) in cash and cash equivalents					3,376			(8,512	)		—			(5,136	)
Cash and cash equivalents at beginning of the period					3,292			5,019			—			8,311
Cash and cash equivalents at end of the period				$	6,668		$	(3,493	)	$	—		$	3,175

O’CHARLEY’S INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

40 Weeks Ended October 6, 2002

(In thousands)

(Unaudited)

										Minor
										Subsidiaries and
				Parent			Subsidiary			Consolidating
				Company			Guarantors			Adjustments			Consolidated
Cash flows from operating activities:
	Net earnings			$	8,279		$	4,916		$	617		$	13,812
	Cumulative effect of change in accounting principle, net				—			6,123			—			6,123
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Depreciation and amortization — property and equipment and goodwill			17,565			1,735			—			19,300
		Amortization of debt issuance costs			176			—			—			176
		Deferred income taxes			2,577			—			—			2,577
		(Gain) loss on the sale and involuntary conversion of assets			(34	)		—			—			(34	)
	Changes in assets and liabilities:
		Accounts receivable			(595	)		288			—			(307	)
		Inventories			(147	)		(1,260	)		—			(1,407	)
		Other current assets			(737	)		(691	)		(1	)		(1,429	)
		Accounts payable			3,291			(550	)		(398	)		2,343
		Deferred revenue			(2,117	)		(373	)		(72	)		(2,562	)
		Accrued payroll and other accrued expenses			2,113			669			7			2,789
	Tax benefit derived from exercise of stock options				960			—			—			960
			Net cash provided by operating activities		31,331			10,857			153			42,341
Cash flows from investing activities:
	Additions to property and equipment				(60,094	)		(31	)		108			(60,017	)
	Proceeds from the sale and involuntary conversion of assets				1,637			—			—			1,637
	Change in note receivable				(925	)		—			—			(925	)
	Other, net				19,382			(18,703	)		(261	)		418
			Net cash used in investing activities		(40,000	)		(18,734	)		(153	)		(58,887	)
Cash flows from financing activities:
	Proceeds from long-term debt				14,100			—			—			14,100
	Payments on long-term debt and capitalized lease obligations				(6,377	)		—			—			(6,377	)
	Exercise of employee incentive stock options and issuances under stock purchase plan				3,635			—			—			3,635
			Net cash provided by financing activities		11,358			—			—			11,358
Increase (decrease) in cash and cash equivalents					2,689			(7,877	)		—			(5,188	)
Cash and cash equivalents at beginning of the period					2,883			3,486			—			6,369
Cash and cash equivalents at end of the period				$	5,572		$	(4,391	)	$	—		$	1,181

O’CHARLEY’S INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

K.     SUBSEQUENT EVENTS

      In the fourth quarter of 2003, we amended and restated our credit facility and issued $125 million aggregate principal amount of our 9.0% senior subordinated notes due 2013. Interest on the notes accrues at the stated rate and is payable semi-annually on May 1 and November 1 of each year commencing May 1, 2004. The notes mature on November 1, 2013. The notes are unsecured, senior subordinated obligations and rank junior in right of payment to all of our existing and future senior debt (as defined in the indenture governing the notes). At any time before November 1, 2006, we may redeem up to 35% of the original aggregate principal amount of the notes at a redemption price equal to 109% of the principal amount of the notes, plus accrued and unpaid interest, with the cash proceeds of certain equity offerings. We may also redeem all or a portion of the notes on or after November 1, 2006 at the redemption prices set forth in the indenture governing the notes. The notes are guaranteed on an unsecured, senior subordinated basis by certain of our subsidiaries.

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

     The proceeds from the note offering were used to pay off the term loan and to repay a portion of the revolving credit loan under our existing bank credit facility. Our amended and restated bank credit facility consists of a revolving credit facility in a maximum principal amount of $125.0 million and does not provide for a term loan facility. The facility has a four-year term maturing in 2007, and bears interest, at our option, at either LIBOR plus a specified margin ranging from 1.25% to 2.25% based on certain financial ratios or the base rate, which is the higher of the lender’s prime rate and the federal funds rate plus 0.5%, plus a specified margin from 0.0% to 1.0% based on certain financial ratios. The amended and restated credit facility imposes restrictions on us with respect to the incurrence of additional indebtedness, sales of assets, mergers, acquisitions, joint ventures, investments, repurchases of stock and the payment of dividends. In addition, the amended and restated credit facility requires us to comply with certain specified financial covenants, including covenants and ratios relating to our senior secured leverage, maximum adjusted leverage, minimum fixed charge coverage, minimum asset coverage and maximum capital expenditures. The amended and restated credit facility contains certain events of default, including an event of default resulting from certain changes in control. In the consolidated balance sheet at October 5, 2003, we have reclassified $10.0 million from current portion of long-term debt to long-term debt based on these refinancings and the extension of the maturity date of the debt.

     During the fourth quarter of 2003, we also completed two sale and leaseback transactions. The first transaction, completed on October 17, 2003, involved the sale of 23 of our O’Charley’s restaurant properties for aggregate gross proceeds of approximately $50.0 million. The second transaction, completed on November 7, 2003, involved the sale of five of our O’Charley’s restaurants for aggregate gross proceeds of approximately $9.1 million. During the first quarter of 2004, we completed a transaction involving the sale of six of our O’Charley’s restaurants for aggregate gross proceeds of approximately $12.1 million. All of these sales were made to an unrelated entity who then leased the properties back to us. The leases that we entered into in connection with these transactions require us to make additional future minimum lease payments aggregating approximately $119.4 million over the 20-year term of the leases, or an average of approximately $6.0 million annually. The leases also provide for the payment of additional rent beginning in the sixth year of the lease term based on increases in the Consumer Price Index. The net proceeds from these transactions were used to pay down indebtedness under our existing bank credit facility. We expect to enter into additional sale and leaseback transactions totalling aggregate gross proceeds of approximately $14.0 million before the end of the first quarter in 2004.

     During the first quarter of 2004, we entered into interest rate swap agreements with a financial institution. These swap agreements effectively convert a portion of the fixed-rate indebtedness related to our 9% Senior Subordinated Notes into variable-rate obligations. The total notional amount of these swaps was $100.0 million and are based on six-month LIBOR rates in arrears plus a specified margin, the average of which is 3.87%. The terms and conditions of these swaps mirror the interest terms and conditions on our 9% Senior Subordinated Notes. These swap agreements expire in January 2014.

     In October 2003, we announced an authorization to repurchase up to $25.0 million of our common stock. Any repurchases will be made from time to time in open market transactions or privately negotiated transactions at our discretion. To date, we have not repurchased any shares of our common stock under this authorization. Any repurchases will be funded with borrowings under our amended and restated bank credit facility. -----END PRIVACY-ENHANCED MESSAGE-----

EX-23

Ex-23 Consent of KPMG LLP

EX-99.1

Ex-99.1 Audited Consolidated Financial Statements

EX-99.2

Ex-99.2 Unaudited Consolidated Financial Statement