O'Charley's Inc.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $445.9 million. For purposes of this calculation, shares held by non-affiliates excludes only those shares beneficially owned by officers, directors and shareholders beneficially owning 10% or more of the outstanding common stock.

The number of shares of common stock outstanding on March 5, 2004 was 21,163,149.

We are a leading casual dining restaurant company headquartered in Nashville, Tennessee. We own and operate three restaurant concepts under the “O’Charley’s,’’ “Ninety Nine Restaurant and Pub’’ and “Stoney River Legendary Steaks’’ trade names. Our two primary concepts, O’Charley’s and Ninety Nine, are leading casual dining concepts in their respective operating markets. At December 28, 2003, we operated 206 O’Charley’s restaurants in 16 states in the Southeast and Midwest regions, 87 Ninety Nine restaurants in seven Northeastern states, and six Stoney River restaurants in the Southeast and Midwest.

We acquired the original O’Charley’s restaurant in Nashville, Tennessee in May 1984. O’Charley’s is a casual dining restaurant concept whose strategy is to differentiate its restaurants by serving high-quality, freshly prepared food at moderate prices and with attentive customer service. O’Charley’s restaurants are intended to appeal to a broad spectrum of customers from a diverse income base, including mainstream casual dining customers, as well as upscale casual dining and value oriented customers. The O’Charley’s menu is mainstream, but innovative and distinctive in taste. The O’Charley’s menu features approximately 55 items including USDA Choice hand-cut and aged steaks, baby-back ribs basted with our own tangy BBQ sauce, a variety of seafood, fresh-cut salads with special recipe salad dressings and O’Charley’s signature caramel pie. All entrees are cooked to order and feature a selection of side items in addition to our hot, freshly baked yeast rolls. We believe the large number of freshly prepared items on the O’Charley’s menu helps differentiate our O’Charley’s concept from other casual dining restaurants.

O’Charley’s restaurants are open seven days a week and serve lunch, dinner and Sunday brunch and offer full bar service. Specialty menu items include “limited-time’’ promotions, O’Charley’s Lunch Club, special selections, a special kids menu and a “kids eat free’’ program in selected markets. We are continually developing new menu items for our O’Charley’s restaurants to respond to changing customer tastes and preferences. Lunch entrees range in price from $5.99 to $9.99, with dinner entrees ranging from $6.99 to $16.99. In 2003, the average check per customer, including beverages, was $11.60.

We seek to create a casual, neighborhood atmosphere in our O’Charley’s restaurants through an open layout and exposed kitchen and by tailoring the decor of our restaurants to the local community. The exterior typically features bright red and green neon borders, multi-colored awnings and attractive landscaping. The interior typically is open, casual and well lighted and features warm woods, exposed brick, color prints and hand-painted murals depicting local history, people, places and events. The prototypical O’Charley’s restaurant is a free-standing building ranging in size from approximately 6,400 to 6,800 square feet with seating for approximately 275 customers, including approximately 60 bar seats. We periodically update the interior and exterior of our restaurants to reflect refinements in the concept and respond to changes in customer tastes and preferences.

In January 2003, we acquired Ninety Nine Restaurant and Pub, a Woburn, Massachusetts based casual dining concept that began in 1952 with its initial location at 99 State Street in downtown Boston. Ninety Nine restaurants are casual dining restaurants that we believe have earned a reputation for providing generous portions of high-quality food at moderate prices combined with attentive service. Ninety Nine restaurants are intended to appeal to mainstream casual dining and value oriented customers. The Ninety Nine menu features approximately 75 items, including a wide selection of appetizers, soups, salads, sandwiches, burgers, beef, chicken and seafood entrees and desserts. Ninety Nine restaurants offer full bar service, including a wide selection of imported and domestic beers, wine and specialty drinks.

Ninety Nine restaurants are open seven days a week and serve lunch and dinner. Lunch entrees range in price from $5.99 to $14.99, with dinner entrees ranging from $6.69 to $14.99. In 2003, the average check per customer, including beverages, was $13.78.

Ninety Nine restaurants seek to provide a warm and friendly neighborhood pub atmosphere. Signature elements of the prototypical Ninety Nine restaurant include an open view kitchen, booth seating, walls decorated with local community memorabilia and a centrally located rectangular bar. The prototypical Ninety Nine restaurant is a free-standing building of approximately 5,800 square feet in size with seating for approximately 190 customers, including approximately 30 bar seats. Ninety Nine has grown through remodeling traditional and non-traditional restaurant locations as well as through developing new restaurants in the style of its prototype restaurant.

We acquired Stoney River in May 2000. Stoney River restaurants are upscale steakhouses that are intended to appeal to both upscale casual dining and fine dining customers by offering the high-quality food and attentive customer service typical of high-end steakhouses at more moderate prices. Stoney River restaurants have an upscale “mountain lodge’’ design with a large stone fireplace, plush sofas and rich woods that is intended to make the interior of the restaurant inviting and comfortable. The Stoney River menu features several offerings of premium midwestern beef, fresh seafood and a variety of other gourmet entrees. An extensive assortment of freshly prepared salads and side dishes is available a la carte. The menu also includes several specialty appetizers and desserts. Stoney River restaurants offer full bar service, including an extensive selection of wines. The price range of entrees is $16.95 to $31.95. In 2003, the average check per customer, including beverages, was $37.42.

We have established a “managing partner program” for the general managers of our Stoney River restaurants pursuant to which each general manager has acquired, or must acquire in the future, a 6% interest in the subsidiary that owns the restaurant that the general manager manages in exchange for a capital contribution to that subsidiary. We have 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, we have 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 us terminates prior to the expiration of the five-year term of his employment agreement, we have the option, but not the obligation, to purchase the general manager’s 6% interest. In addition, the general manager’s 6% interest is subject to forfeiture based on certain events.

Protect the Distinctive Culture and Operating Principles of Each of Our Concepts. We believe our three restaurant concepts have distinctive cultures and operating principles that have made them successful. In order to preserve those distinctive cultures and principles, we have established separate, experienced management teams for each concept. The members of the senior management team of each concept have an average of at least 20 years in the restaurant industry. We operate our three concepts separately, but each concept is integrated with our home office for certain administrative and support functions, such as management information systems, procurement and other administrative services. We believe that having different management teams for each concept should enable us to successfully operate and expand each of our concepts by focusing on their distinctive strengths, while capitalizing on the operating strengths and efficiencies of a large, multi-concept company.

Provide an Attractive Price-to-Value Relationship. We believe our O’Charley’s and Ninety Nine restaurants are recognized by consumers for offering an attractive value. In 2003, the average check per customer, including beverages, was $11.60 for O’Charley’s and $13.78 for Ninety Nine. At our O’Charley’s restaurants, we believe our high-quality, freshly prepared food appeals to a broad spectrum of customers from a diverse income base, including mainstream casual dining customers, as well as upscale casual dining and value oriented customers. The generous portions and quality of the food at our Ninety Nine restaurants are intended to appeal to casual dining customers and value oriented customers.

Pursue Disciplined Growth Strategy. We intend to continue to develop new O’Charley’s restaurants in our target markets, primarily in the Southeast and Midwest, and new Ninety Nine restaurants in the Northeast. Our target markets for the O’Charley’s and Ninety Nine concepts include both metropolitan markets and smaller markets in close proximity to metropolitan markets where we have a significant presence. Our strategy is to cluster our new restaurants to enhance supervisory, marketing and distribution efficiencies. Prior to opening a new restaurant, we use cost, demographic and traffic data to analyze prospective restaurant sites. While we prefer to develop new O’Charley’s restaurants based on our prototype restaurants, we from time to time develop new restaurants in existing buildings. Historically, Ninety Nine has opened a significant number of new restaurants by remodeling existing buildings. Our ability to remodel an existing building into an O’Charley’s or Ninety Nine restaurant can permit greater accessibility to quality sites in more developed markets. We opened 26 new O’Charley’s restaurants, closed two O’Charley’s restaurants, opened ten new Ninety Nine restaurants and closed one Ninety Nine restaurant in 2003.

Leverage Our Commissary Operations. We operate an approximately 220,000 square foot commissary in Nashville, Tennessee through which we purchase and distribute a substantial majority of the food products and supplies for our O’Charley’s and Stoney River restaurants and manufacture certain O’Charley’s brand food products for our O’Charley’s restaurants and, to a lesser extent, for sale to other customers, including retail grocery chains, mass merchandisers and wholesale clubs. In addition, our Nashville commissary operates a USDA-approved and inspected facility at which we cut beef for our O’Charley’s and Stoney River restaurants and a production facility at which we manufacture the signature yeast rolls and salad dressings served in our O’Charley’s restaurants. We believe our Nashville commissary has sufficient capacity to meet a substantial majority of the distribution needs of our existing and planned O’Charley’s and Stoney River restaurants for the next several years. We also operate a 20,000 square foot commissary and purchasing operation located in Woburn, Massachusetts through which we purchase and distribute a portion of the food products and supplies for our Ninety Nine restaurants, primarily “center of the plate’’ items including red meat, poultry and seafood. Our Woburn commissary operates a USDA-approved and inspected facility at which we cut beef for our Ninety Nine restaurants and a production facility at which we prepare the soups, sauces and marinades served in our Ninety Nine restaurants. We believe our commissaries enhance restaurant operations by helping to maintain consistent food quality, ensure reliable distribution services to our restaurants, simplify our restaurant managers’ food cost management responsibilities and reduce costs through purchasing volumes and operating efficiencies.

Provide an Attractive Operating Environment for Our Employees. We believe that a well-trained, highly motivated restaurant management team is critical to achieving our operating objectives. Our training and compensation systems are designed to create accountability at the restaurant management level for the performance of each restaurant. We invest significant resources to train, motivate and educate our restaurant level managers and hourly employees. To instill a sense of ownership, a portion of the compensation of our restaurant level managers is based upon restaurant operating results. Our focus on restaurant level operations is intended to create a “single store mentality’’ among our restaurant managers and provide an incentive for managers to improve sales and operating results.

Quality Control. We use written customer evaluations, which are available to customers in the restaurants, as a means of monitoring customer satisfaction. We also employ a “mystery shopper” program in our O’Charley’s restaurants to independently monitor quality control in areas such as timeliness of service, atmosphere, cleanliness, employee attitude and food quality. In addition, our customer service department receives calls from customers and, when necessary, routes comments to the appropriate personnel. We have also contracted with a company to provide customer satisfaction surveys for our O’Charley’s concept, whereby customers answer questions regarding their visits to our stores and rank their experience. This program will be rolled out in 2004.

Advertising and Marketing. We have an ongoing advertising and marketing plan for the development of television, radio and newspaper advertising for our restaurants and also use point of sale and local restaurant marketing. We focus our marketing efforts on building brand loyalty and emphasizing the distinctiveness of our restaurant atmosphere and menu offerings. We conduct annual studies of changes in customer tastes and preferences and are continually evaluating the quality of our menu offerings. During 2003, our advertising expenses were approximately 3.2% of restaurant sales. In addition to advertising, we encourage unit level personnel to become active in their communities through local charities and other organizations and sponsorships.

Restaurant Reporting. Our use of technology and management information systems is essential for the management oversight needed to produce strong operating results. We maintain operational and financial controls in each restaurant, including management information systems to monitor sales, inventory, and labor, that provide reports and data to our home office. The management accounting system polls data from our restaurants and generates daily reports of sales, sales mix, customer counts, check average, cash, labor and food cost. Management utilizes this data to monitor the effectiveness of controls and to prepare periodic financial and management reports. We also utilize these systems for financial and budgetary analysis, including analysis of sales by restaurant, product mix and labor utilization.

Real Estate and Construction. We maintain an in-house construction and real estate department to assist in the site selection process, develop architectural and engineering plans and oversee new construction. We maintain a broad database of possible sites and our management team analyzes prospective sites. Once a site is selected, our real estate department oversees the zoning process, obtains required governmental permits, develops detailed building plans and specifications and equips the restaurants.

Human Resources. We maintain a human resources department that supports restaurant operations through the design and implementation of policies, programs, procedures and benefits for our employees. The human resources department also includes an employee relations manager and maintains a toll-free number for employee comments and questions. This department also maintains our code of conduct and addresses any compliance issues. We conduct annual “Impact” meetings at our O’Charley’s restaurants that provide a forum for corporate management to receive feedback from restaurant managers and hourly employees. We have had in place for several years a plan to foster diversity throughout our workforce.

The following table sets forth the markets in which our O’Charley’s, Ninety Nine and Stoney River restaurants were located at December 28, 2003, including the number of restaurants in each market.


Alabama		Kentucky		Ohio
	Birmingham(6)		Bowling Green		Cincinnati(7)
	Decatur		Cold Spring		Cleveland
	Dothan		Elizabethtown		Columbus(5)
	Florence		Florence		Dayton(3)
	Huntsville(2)		Frankfort	South Carolina
	Mobile(4)		Hopkinsville		Anderson
	Montgomery(2)		Lexington(4)		Charleston
	Opelika		Louisville(5)		Columbia(3)
	Oxford		Owensboro		Greenville
	Tuscaloosa		Paducah		Greenwood
Arkansas			Richmond		Rock Hill
	Jonesboro	Louisiana			Spartanburg
Florida			Monroe	Tennessee
	Destin	Mississippi			Chattanooga(2)
	Jacksonville(2)		Biloxi(2)		Clarksville(2)
	Panama City		Hattiesburg		Cleveland
	Pensacola		Jackson		Cookeville
Georgia			Meridian		Jackson
	Atlanta(18)		Olive Branch		Johnson City
	Augusta		Pearl		Kingsport
	Canton		Southhaven		Knoxville(7)
	Columbus		Tupelo		Memphis(3)
	Dalton	Missouri			Morristown
	Ft. Oglethorpe		Cape Girardeau		Murfreesboro(2)
	Gainesville		Kansas City(2)		Nashville(13)
	Macon(2)		St. Louis(6)		Pigeon Forge
Illinois		North Carolina		Virginia
	Champaign		Asheville		Bristol
	Marion		Burlington		Harrisonburg
	O’Fallon		Charlotte(7)		Lynchburg
	Springfield(2)		Fayetteville		Roanoke(2)
Indiana			Greensboro		Richmond(5)
	Bloomington		Greenville	West Virginia
	Clarksville		Hendersonville		Charleston
	Corydon		Hickory
	Evansville(2)		Raleigh(4)
	Fort Wayne(2)		Wilmington
	Indianapolis(10)		Winston-Salem(2)
	Lafayette
	Richmond


Connecticut		New Hampshire		New York
	Hartford(8)		Concord		Albany
Maine			Hookset	Rhode Island
	Augusta		Keene		Cranston
	Bangor		Londonderry		Newport
	Portland(3)		Manchester		Warwick
Massachusetts			Nashua	Vermont
	Auburn		North Conway		Rutland
	Boston(37)		Portsmouth		Williston
	Centerville		Salem
	Fairhaven		Seabrook
	Fall River		Tilton
	Falmouth		West Lebanon
	Fitchburg
	Mashpee
	North Attleboro
	North Dartmouth
	Pittsfield
	Seekonk
	Springfield(4)
	Tewksbury
	West Yarmouth
	Worcester(2)

We have completed a feasibility study of the potential franchising of the O’Charley’s concept and, based upon the results of this study, are reviewing franchising opportunities. We are seeking to enter into franchising arrangements with restaurant operators for the development of O’Charley’s restaurants in areas that are outside of our current development and growth plans. During December 2003, we entered into an exclusive multi-unit development agreement with a third party franchisee to develop and operate up to 15 new O’Charley’s restaurants in Michigan. We intend to enter into additional development agreements to franchise our O’Charley’s restaurant concept in other areas. Franchisees will be required to comply with our specifications as to restaurant space, design and decor, menu items, principal food ingredients, employee training and day-to-day operations.

The name “O’Charley’s’’ and its logo, the name “Stoney River Legendary Steaks,’’ and the Ninety Nine Restaurant and Pub logo are registered service marks with the United States Patent and Trademark Office. We also have other service marks that are registered in the states in which we operate. We are aware of names and marks similar to our service marks used by third parties in certain limited geographical areas. Use of our service marks by third parties may prevent us from licensing the use of our service marks for restaurants in those areas. We intend to protect our service marks by appropriate legal action whenever necessary.

We are subject to various federal, state and local laws affecting our business. Our commissaries are licensed and subject to regulation by the USDA. In addition, each of our restaurants is subject to licensing and regulation by a

number of governmental authorities, which may include alcoholic beverage control, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Most municipalities in which our restaurants are located require local business licenses. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. We are also subject to federal and state environmental regulations, but those regulations have not had a material adverse effect on our operations to date.

Approximately 12% of restaurant sales in 2003 were attributable to the sale of alcoholic beverages. Each restaurant, where permitted by local law, has appropriate licenses from regulatory authorities allowing it to sell liquor, beer and wine, and in some states or localities to provide service for extended hours and on Sunday. Each restaurant has food service licenses from local health authorities. Similar licenses would be required for each new restaurant. The failure of a restaurant to obtain or retain liquor or food service licenses could adversely affect or, in an extreme case, terminate its operations. We have established standardized procedures for our restaurants designed to assure compliance with applicable codes and regulations.

We are subject, in most states in which we operate restaurants, to “dram-shop’’ statutes or judicial interpretations, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.

The Federal Americans With Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We design our restaurants to be accessible to the disabled and believe that we are in substantial compliance with all current applicable regulations relating to restaurant accommodations for the disabled.

The development and construction of additional restaurants will be subject to compliance with applicable zoning, land use and environmental regulations. Our restaurant operations are also subject to federal and state minimum wage laws and other laws governing matters such as working conditions, citizenship requirements, overtime and tip credits. In the event a proposal is adopted that materially increases the applicable minimum wage, the wage increase would likely result in an increase in payroll and benefits expense.

At December 28, 2003, we employed approximately 8,800 full-time and 11,800 part-time employees, including approximately 300 home office management and staff personnel and approximately 150 commissary personnel, with the remainder being restaurant personnel. None of our employees is covered by a collective bargaining agreement. We consider our employee relations to be good.

Some of the statements we make in this Annual Report on Form 10-K are forward-looking. Forward-looking statements are generally identifiable by the use of the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend,” “seek” or similar expressions. These forward-looking statements include all statements that are not historical statements of fact and those regarding our intent, belief, plans or expectations including, but not limited to, the discussions of our operating and growth strategy, projections of revenue, income or loss, information regarding future restaurant openings and capital expenditures, potential increases in food and other operating costs, and our development, expansion and franchising plans and future operations. Forward-looking statements involve known and unknown risks and uncertainties that may cause actual results in future periods to differ materially from those anticipated in the forward-looking statements. Those risks and uncertainties include, among others, the risks and uncertainties discussed below. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could prove to be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this Annual Report on Form 10-K will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, you should not regard the inclusion of such information as a representation by us or any other person that our objectives and plans will be achieved. We do not undertake any obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

Changing consumer preferences and discretionary spending patterns could force us to modify our concepts and menus and could result in a reduction in our revenues.

Our O’Charley’s and Ninety Nine restaurants are casual dining restaurants that feature menus intended to appeal to a broad spectrum of customers. Our Stoney River restaurants are upscale steakhouses that feature steaks, fresh seafood and other gourmet entrees. Our continued success depends, in part, upon the popularity of these foods and these styles of dining. Shifts in consumer preferences away from this cuisine or dining style could materially adversely affect our future operating results. The restaurant industry is characterized by the continual introduction of new concepts and is subject to rapidly changing consumer preferences, tastes and eating and purchasing habits. Our success will depend in part on our ability to anticipate and respond to changing consumer preferences, tastes and eating and purchasing habits, as well as other factors affecting the restaurant industry, including new market entrants and demographic changes. We may be forced to make changes in our concepts and menus in order to respond to changes in consumer tastes or dining patterns. If we change a restaurant concept or menu, we may lose customers who do not prefer the new concept or menu, and may not be able to attract a sufficient new customer base to produce the revenue needed to make the restaurant profitable. In addition, consumer preferences could be affected by health concerns about the consumption of beef, the primary item on our Stoney River menu, or by specific events such as E. coli food poisoning or outbreaks of bovine spongiform encephalopathy (mad cow disease) or other diseases.

Our success is also dependent to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes in these factors could reduce customer traffic or impose practical limits on pricing, either of which could harm our results of operations.

Same store sales at our O’Charley’s restaurants have declined, and initiatives we have implemented at our O’Charley’s restaurants to improve our same store sales have resulted in increased costs and could continue to adversely affect our results of operations.

Through the end of 2003, we experienced decreases in our same store sales at our O’Charley’s restaurants during six of the previous seven fiscal quarters. During the third quarter of 2003, we introduced a number of business initiatives, including changes to our menu, designed to increase our customer traffic. These initiatives have resulted in increases in our customer traffic, but have also resulted in a lower average check due to the introduction of a number of promotional items, resulting in continued decreases in same store sales at our O’Charley’s restaurants. These initiatives have also resulted in increased costs. There can be no assurance that these initiatives will result in increased revenues or same store sales at our O’Charley’s restaurants and, as a result, such initiatives may continue to adversely affect our results of operations in future periods. Likewise, we cannot assure you that same store sales at our O’Charley’s restaurants will not continue to decline.

An outbreak of Hepatitis A affecting customers and employees of a Knoxville, Tennessee O’Charley’s restaurant has adversely affected our customer traffic, negatively impacted our results of operations and resulted in litigation against us, and we may be further impacted by another outbreak of Hepatitis A linked to restaurants in Georgia, including two O’Charley’s restaurants.

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 has resulted in a number of our employees and customers becoming infected. Hepatitis A is a viral infection spread primarily through contaminated food and water. The negative publicity surrounding this incident has significantly reduced customer traffic at our nine O’Charley’s restaurants in the Knoxville market and to a lesser extent in other markets. 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 the date of this report, we are also aware of 31 lawsuits that have been filed against us to date alleging injuries or fear of injuries from the Hepatitis A incident, some of which claim substantial damages, including treble damages under Tennessee consumer protection laws and punitive damages, and some 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, and his lawsuit has been amended to allege wrongful death. Other plaintiffs have alleged significant health concerns, including ailments requiring hospitalization. We anticipate that additional lawsuits will be filed against us relating to this incident.

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 the Macon, Georgia O’Charley’s restaurant.

We are not able to predict the extent to which the negative publicity surrounding these incidents will continue to adversely affect our customer traffic, or the outcome of the litigation that has been filed against us or that may be filed against us in the future relating to these incidents or the amounts that we may be required to pay to settle that litigation or to satisfy any adverse judgments that may be rendered against us. We have liability and loss of income insurance; however, we cannot assure you that our insurance carriers will reimburse us for any loss, liability or loss of income we suffer in connection with this incident or that our insurance coverage will be sufficient to cover any loss, liability or loss of income. If we suffer losses, liabilities or loss of income in excess of our insurance coverage or if our insurance does not cover those losses, liabilities or loss of income, there could be a material adverse effect on our results of operations or financial condition. The reduction in our customer traffic as a result of the Knoxville incident adversely affected our results of operations for the period of time following the September 2003 exposure and is continuing to adversely affect our results of operations.

Our continued growth depends on our ability to open new restaurants and operate our new restaurants profitably, which in turn depends upon our continued access to capital.

A significant portion of our historical growth has been due to opening new restaurants. We opened 24 new O’Charley’s restaurants and three new Stoney River restaurants in 2002. We opened 26 new O’Charley’s restaurants, closed two O’Charley’s restaurants, opened ten new Ninety Nine restaurants and closed one Ninety Nine restaurant in 2003. Our ability to open new restaurants will depend on a number of factors, such as:

	•		the selection and availability of quality restaurant sites;

	•		our ability to negotiate acceptable lease or purchase terms;

	•		our ability to hire, train and retain the skilled management and other personnel necessary to open, manage and operate new restaurants;

	•		our ability to secure the governmental permits and approvals required to open new restaurants;

	•		our ability to manage the amount of time and money required to build and open new restaurants, including the possibility that adverse weather conditions may delay construction and the opening of new restaurants; and

	•		the availability of adequate financing.

Many of these factors are beyond our control. In addition, we have historically generated insufficient cash flow from operations to fund our working capital and capital expenditures and, accordingly, our ability to open new restaurants and our ability to grow, as well as our ability to meet other anticipated capital needs, is dependent on our continued access to external financing, including borrowings under our credit facility and financing obtained in the capital markets. Our ability to make borrowings under our credit facility will require, among other things, that we comply with certain financial and other covenants, and we cannot assure you that we will be able to do so. Accordingly, we cannot assure you that we will be successful in opening new restaurants in accordance with our current plans or otherwise. Furthermore, we cannot assure you that our new restaurants will generate revenues or profit margins consistent with those of our existing restaurants, or that the new restaurants will be operated profitably.

We may not be able to successfully integrate the operations of Ninety Nine Restaurant and Pub, which could adversely affect our business, financial condition and results of operations.

On January 27, 2003, we acquired Ninety Nine Restaurant and Pub. The acquisition of Ninety Nine was substantially larger than any acquisition we have previously completed, and our management team does not have significant experience integrating the operations of acquired businesses. In addition, our Ninety Nine restaurants are located in markets in which we have not historically operated. Achieving the expected benefits of the Ninety Nine acquisition will depend in large part on our completion of the integration of Ninety Nine’s operations and personnel in a timely and efficient manner. The challenges involved in this integration include the following:

	•		persuading employees of Ninety Nine that we will maintain Ninety Nine’s distinctive business culture and employee morale;

	•		retaining the senior management team of Ninety Nine, several of whom received significant payments in connection with the acquisition;

	•		maintaining a workforce over expanded geographic locations; and

	•		consolidating certain corporate, commissary, information technology, accounting and administrative infrastructures.

If we cannot overcome the challenges we face in completing the integration of Ninety Nine, our ability to effectively and profitably manage Ninety Nine’s business could suffer. We cannot assure you that our Ninety Nine restaurants will generate revenues or profit margins consistent with prior years or that these restaurants will not operate at a loss. Moreover, the integration process itself may be disruptive to our business, as it will divert the attention of management from its normal operational responsibilities and duties. We cannot offer any assurance that we will be able to successfully integrate Ninety Nine’s operations or personnel or realize the anticipated benefits of the acquisition. Our failure to successfully complete the integration of Ninety Nine could harm our business, financial condition and results of operations.

Our growth may strain our management and infrastructure, which could slow our development of new restaurants and adversely affect our ability to manage existing restaurants.

Our growth has placed significant demands upon our management. We also face the risk that our existing systems and procedures, restaurant management systems, financial controls and information systems will be inadequate to support our planned growth. We cannot predict whether we will be able to respond on a timely basis to all of the changing demands that our planned growth will impose on management and these systems and controls. In May 2000, we acquired Stoney River and, in January 2003, we acquired Ninety Nine. The development of the Stoney River concept and the integration and operation of the Ninety Nine concept will continue to place significant demands on our management. These demands on our management and systems could also adversely affect our ability to manage our existing restaurants. If our management is unable to meet these demands or if we fail to continue to improve our information systems and financial controls or to manage other factors necessary for us to achieve our growth objectives, our operating results or cash flows could be materially adversely affected.

Unanticipated expenses and market acceptance could affect the results of restaurants we open in new and existing markets.

As part of our growth plans, we may open new restaurants in areas in which we have little or no operating experience and in which potential customers may not be familiar with our restaurants. As a result, we may have to incur costs related to the opening, operation, supervision and promotion of those new restaurants that are substantially greater than those incurred in other areas. Even though we may incur substantial additional costs with these new restaurants, they may attract fewer customers than our more established restaurants in existing markets. As a result, the results of operations at new restaurants may be inferior to those of our existing restaurants. The new restaurants may even operate at a loss.

Another part of our growth plan is to open restaurants in markets in which we already have existing restaurants. We may be unable to attract enough customers to the new restaurants for them to operate at a profit. Even if we are able to attract enough customers to the new restaurants to operate them at a profit, those customers may be former customers of one of our existing restaurants in that market and the opening of a new restaurant in the existing market could reduce the revenue of our existing restaurants in that market.

We may experience higher operating costs, which would adversely affect our operating results, if we cannot increase menu prices to cover them.

Our operating results are significantly dependent on our ability to anticipate and react to increases in food, labor, employee benefits and other costs. Various factors beyond our control, including adverse weather conditions, governmental regulation, production, availability, recalls of food products and seasonality may affect our food costs or cause a disruption in our supply chain. We cannot predict whether we will be able to anticipate and react to changing

food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results. In addition, because the pricing strategy at our O’Charley’s and Ninety Nine restaurants is intended to provide an attractive price-to-value relationship, we may not be able to pass along price increases to our guests.

We compete with other restaurants for experienced management personnel and hourly employees. Given the low unemployment rates in certain areas in which we operate, we will likely be required to continue to enhance our wage and benefits package in order to attract qualified management and other personnel. For example, in 2003 we began offering expanded medical benefits for our hourly employees at the O’Charley’s concept, which has increased our benefit costs. In addition, any increase in the federal minimum wage rate would likely cause an increase in our labor costs. We cannot assure you that we will be able to offset increased wage and benefit costs through our purchasing and hiring practices or menu price increases, particularly over the short term. As a result, increases in wages and benefits could have a material adverse effect on our business and could decrease the cash available to service our obligations.

We have completed a feasibility study on franchising our O’Charley’s restaurant concept and have begun marketing the franchise concept. During December 2003, we entered into an exclusive multi-unit development agreement with a third party franchisee to develop and operate up to 15 new O’Charley’s restaurants in Michigan. We intend to enter into additional development agreements to franchise our O’Charley’s restaurant concept. We will continue to experience expenditures and losses in implementing our franchising initiative until such time, if ever, that we generate sufficient franchising revenue to cover these expenditures.

We could face labor shortages that could adversely affect our results of operations.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including restaurant managers, kitchen staff and servers, necessary to continue our operations and to keep pace with our growth. Qualified individuals of the requisite caliber and quantity needed to fill these positions are in short supply. Given the low unemployment rates in certain areas in which we operate, we may have difficulty hiring and retaining qualified management and other personnel. Any inability to recruit and retain sufficient qualified individuals may adversely affect operating results at existing restaurants and delay the planned openings of new restaurants. Any delays in opening new restaurants or any material increases in employee turnover rates in existing restaurants could have a material adverse effect on our business, financial condition, operating results or cash flows. Additionally, we have increased wages and benefits to attract a sufficient number of competent employees, resulting in higher labor costs.

Our restaurants are concentrated geographically; if any one of the regions in which our restaurants are located experiences an economic downturn, adverse weather or other material change, our business results may suffer.

Our O’Charley’s restaurants are located predominately in the southeastern and midwestern United States. Our Ninety Nine restaurants are located in the northeastern United States. At December 28, 2003, we operated 36 of our 206 O’Charley’s restaurants in Tennessee and 56 of our 87 Ninety Nine restaurants in Massachusetts. As a result, our business and our financial or operating results may be materially adversely affected by adverse economic, weather or business conditions in these markets, as well as in other geographic regions in which we locate restaurants.

Our future performance depends on our senior management who are experienced in restaurant management and who could not easily be replaced with executives of equal experience and capabilities.

We depend significantly on the services of Gregory L. Burns, our Chief Executive Officer, Steven J. Hislop, our President and Chief Operating Officer, and A. Chad Fitzhugh, our Chief Financial Officer. We also depend significantly on the services of each of our Concept Presidents, William E. Hall, Jr., our Concept President-O’Charley’s, Herman A Moore, Jr., our President, Commissary Operations, and Charles F. Doe, Jr., our Concept President-Ninety Nine Restaurant and Pub. Mr. Doe, who joined our company when we acquired Ninety Nine in January 2003, received significant payments at the time of our acquisition of Ninety Nine, and we do not have an employment agreement with Mr. Doe. In February 2004, we announced that Mr. Doe would transition from concept president of Ninety Nine, responsible for oversight of day-to-day operations, to chairman of an advisory board at Ninety Nine, responsible for the strategic development of the Ninety Nine brand. If we lose the services of any members of our senior management for any reason, we may be unable to replace them with qualified personnel, which could have a material adverse effect on our business

and development. We do not have employment agreements with any of our executive officers and we do not carry key person life insurance on any of our executive officers.

Our restaurants may not be able to compete successfully with other restaurants, which could adversely affect our results of operations.

The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many well-established competitors with substantially greater financial and other resources than us, including a large number of national and regional restaurant chains. Some of our competitors have been in existence for a substantially longer period than us and may be better established in the markets where our restaurants are or may be located. If our restaurants are unable to compete successfully with other restaurants in new and existing markets, our results of operations will be adversely affected.

To the extent that we open restaurants in larger cities and metropolitan areas, we expect competition to be more intense in those markets. We also compete with other restaurants for experienced management personnel and hourly employees and with other restaurants and retail establishments for quality sites.

Any disruption in the operation of our commissaries could adversely affect our ability to operate our restaurants.

We operate a commissary in Nashville, Tennessee through which we purchase and distribute a substantial majority of the food products and supplies for our O’Charley’s and Stoney River restaurants. We also operate a commissary in Woburn, Massachusetts, through which we purchase and distribute a portion of the food products and supplies for our Ninety Nine restaurants. If the operations of our commissaries are disrupted, we may not be able to deliver food and supplies to our restaurants. If our commissaries are unable to deliver the food products and supplies required to run our restaurants, we may not be able to find other sources of food or supplies, or, if alternative sources of food or supplies are located, our operating costs may increase. Accordingly, any disruption in the operation of our commissaries could adversely affect our ability to operate our restaurants and our results of operations.

We may incur costs or liabilities and lose revenue as the result of government regulation.

Our restaurants are subject to extensive federal, state and local government regulation, including regulations related to the preparation and sale of food, the sale of alcoholic beverages, zoning and building codes and other health, sanitation and safety matters. All of these regulations impact not only our current restaurant operations but also our ability to open new restaurants. We will be required to comply with applicable state and local regulations in new locations into which we expand. Any difficulties, delays or failures in obtaining licenses, permits or approvals in such new locations could delay or prevent the opening of a restaurant in a particular area or reduce operations at an existing location, either of which would materially and adversely affect our growth and results of operations. In addition, our commissaries are licensed and subject to regulation by the United States Department of Agriculture and are subject to further regulation by state and local agencies. Our failure to obtain or retain federal, state or local licenses for our commissaries or to comply with applicable regulations could adversely affect our commissary operations and disrupt delivery of food and other products to our restaurants. If one or more of our restaurants were unable to serve alcohol or food for even a short time period, we could experience a reduction in our overall revenue.

The costs of operating our restaurants may increase if there are changes in laws governing minimum hourly wages, workers’ compensation insurance rates, unemployment tax rates, sales taxes or other laws and regulations, such as the federal Americans with Disabilities Act, which governs access for the disabled. If any of the above costs increase, we cannot assure you that we will be able to offset the increase by increasing our menu prices or by other means, which would adversely affect our results of operations.

We may incur costs or liabilities as a result of litigation and publicity concerning food quality, health and other issues that can cause customers to avoid our restaurants.

In addition to the litigation that has been or may in the future be filed concerning the Hepatitis A incidents discussed above, we are sometimes the subject of other complaints or litigation from customers alleging illness, injury or other food quality or health concerns. Litigation or adverse publicity resulting from these allegations may materially

adversely affect us or our restaurants, regardless of whether the allegations are valid or whether we are liable. In addition, our restaurants are subject in each state in which we operate to “dram shop’’ laws that allow a person to sue us if that person was injured by an intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. A lawsuit under a dram shop law or alleging illness or injury from food may result in a verdict in excess of our liability insurance policy limits, which could result in substantial liability for us and may have a material adverse effect on our results of operations.

Restaurant companies have been the target of class actions and other lawsuits alleging, among other things, violations of federal and state law.

We are subject to the risk that our results of operations may be adversely affected by legal or governmental proceedings brought by or on behalf of our employees or customers. In recent years, a number of restaurant companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted against us from time to time and we are also the defendant in a number of pending lawsuits in connection with the Knoxville Hepatitis A incident discussed above under “- An outbreak of Hepatitis A affecting customers and employees of a Knoxville, Tennessee O’Charley’s restaurant has adversely affected our customer traffic, negatively impacted our results of operations and resulted in litigation against us, and we may be further impacted by another outbreak of Hepatitis A linked to restaurants in Georgia, including two O’Charley’s restaurants.’’ Accordingly, we cannot assure you that we will not incur substantial damages and expenses resulting from lawsuits, which could have a material adverse effect on our business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and Nasdaq Stock Market rules, has required an increased amount of management attention and external resources. We remain committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment has resulted in and may continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Our executive officers are elected by the board of directors and serve at the pleasure of the board of directors. The following table sets forth certain information regarding our executive officers.

The following is a brief summary of the business experience of each of our executive officers.

Gregory L. Burns has served as Chairman of the Board and Chief Executive Officer since February 1994. Mr. Burns, a director since 1990, served as President from September 1996 to May 1999 and from May 1993 to February 1994, as Chief Financial Officer from October 1983 to September 1996, and as Executive Vice President and Secretary from October 1983 to May 1993.

Steven J. Hislop has served as President since May 1999, as Chief Operating Officer since March 1997 and as a director since March 1998. From March 1997 until May 1999, Mr. Hislop served as an Executive Vice President of our company. Mr. Hislop served as Senior Vice President – Operations from January 1993 to March 1997, and as Vice President – Operations from April 1990 to January 1993.

A. Chad Fitzhugh has served as Chief Financial Officer since September 1996, as Secretary since May 1993, and as Treasurer since April 1990. He served as our Controller from 1987 until his appointment as Chief Financial Officer. Mr. Fitzhugh is a certified public accountant.

William E. Hall, Jr. has served as Concept President-O’Charley’s since December 2002. Mr. Hall served as Executive Vice President, Operations from September 1999 to December 2002. Mr. Hall served as Vice President, Operations from March 1997 to September 1999, as Director of Operations from December 1996 to March 1997, as a Regional Director from July 1992 to December 1996, and as an Area Supervisor from May 1991 to July 1992.

Herman A. Moore, Jr. has served as President, Commissary Operations since December 2002. Mr. Moore served as Vice President, Commissary Operations from January 1996 to December 2002. Mr. Moore served as Director of Commissary Operations from 1988 to January 1996.

Charles F. Doe, Jr. has served as Concept President-Ninety Nine Restaurant and Pub since February 2003. Mr. Doe served as President of Ninety Nine Restaurant and Pub from 1991 until we acquired Ninety Nine Restaurant and Pub. Mr. Doe served in various capacities in the Operations and Real Estate departments for Ninety Nine Restaurant and Pub prior to 1991.

Suzanne M. Osterberg has served as Chief Support Officer since December 2002. Mrs. Osterberg served as Vice President of Human Resources, Training and Development from December 2001 to December 2002. Mrs.

Osterberg served as Vice President of Human Resources and Development from December 2000 to December 2001. Mrs. Osterberg served as Vice President of Training and Management Development from 1999 to 2001. Mrs. Osterberg served in various capacities in the Operations and Training departments for O’Charley’s prior to 1999.

R. Jeffrey Williams has served as Controller since February 2003. Mr. Williams served as Controller for the O’Charley’s Concept from July 2001 to February 2003. Mr. Williams served as Controller of The Krystal Company from July 2000 to July 2001. Mr. Williams served as a Director of Financial Planning and Analysis for Cracker Barrel Old Country Store from July 1999 to July 2000 and as Accounting Manager for Cracker Barrel Old Country Store from November 1996 to July 1999. Mr. Williams is a certified public accountant.

The Company’s internet website address is http://www.ocharleys.com. The Company makes available free of charge through its website the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after it electronically files or furnishes such materials to the Securities and Exchange Commission. Information contained on the Company’s website is not part of this report.

At December 28, 2003, we operated 206 O’Charley’s restaurants, 87 Ninety Nine restaurants and six Stoney River Legendary Steak restaurants. As of that date, we owned the land and building at 95 of our O’Charley’s restaurants, leased the land and building at eight of our O’Charley’s restaurants and leased the land only at 103 of our O’Charley’s restaurants. We lease the land and building at 71 of our Ninety Nine restaurants and lease the land only at 16 of our Ninety Nine restaurants. We own the land and building at three of our Stoney River restaurants and lease the land only at our other three Stoney River restaurants. See “Restaurant Locations” in Item 1 above for a list of the markets in which our restaurants were located at December 28, 2003. Restaurant lease expirations range from 2004 to 2025, with the majority of the leases providing for an option to renew for additional terms ranging from five to 20 years. All of our restaurant leases provide for a specified annual rental, and some leases call for additional rental based on sales volume at the particular location over specified minimum levels. Generally, our restaurant leases are net leases, which require us to pay the cost of insurance and taxes.

Our home office and Nashville commissary are located in Nashville, Tennessee in approximately 290,000 square feet of office and warehouse space. We own these facilities. We also have administrative offices in Woburn, Massachusetts and a commissary located in approximately 20,000 square feet of space. We lease these facilities.

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, most of whom have been linked to our Knoxville restaurant during the time of the outbreak. As of the date of this report, we are also aware of 31 lawsuits that have been 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 suits seek substantial damages, including treble damages under Tennessee consumer protection laws and punitive damages, and some of which seek to be certified as class actions. One of the lawsuits was filed by an individual who contracted Hepatitis A 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. Other plaintiffs have alleged significant health concerns, including ailments requiring hospitalization. The Company has filed a motion to consolidate the cases claiming injury for discovery purposes only.

they had eaten at the Centerville, Georgia or the 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 that 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 incident or that our insurance will be sufficient to cover any loss or liability. If we suffer losses or liabilities in excess of our insurance coverage or if our insurance does not cover those losses or liabilities, there could be a material adverse effect on our results of operations and financial condition.

The Company has a foodborne illness policy that reimburses the Company for certain lost profits associated with this type of incident. The Company is currently developing supporting documentation for the claim associated with this incident. The Company has not recognized any recoveries under its foodborne illness policy. At this time, the Company cannot reasonably estimate the amount or timing of the settlement of this claim.

In addition, we are defendants from time to time in various other legal proceedings arising in the ordinary course of our business, including claims relating to workplace and employment matters, discrimination and similar matters, claims resulting from “slip and fall” accidents and claims from customers or employees alleging illness, injury or other food quality, health or operational concerns. We do not believe that any of the other legal proceedings pending against us as of the date of this report will have a material adverse effect on our operating results, liquidity or financial condition. In addition, we may incur or accrue expenses relating to legal proceedings, which may materially adversely affect our results of operations.

No matters were submitted to a vote of shareholders during the fourth quarter ended December 28, 2003.

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

Our common stock trades on the NASDAQ National Market under the symbol “CHUX.” As of March 5, 2004, there were approximately 2,600 shareholders of record of our common stock. The following table shows quarterly high and low bid prices for our common stock for the periods indicated, as reported by the NASDAQ National Market.

We have never paid a cash dividend on our common stock and we presently intend to retain our cash to finance the growth and development of our business. Our revolving credit facility prohibits the payment of cash dividends on our common stock without the consent of the participating banks.

On January 27, 2003, we issued 941,176 shares of common stock to the former owners of Ninety Nine Restaurant and Pub as part of the purchase price of the acquisition of Ninety Nine. The Company issued an additional 390,586 shares in January 2004 and is required to issue an additional 407,843 shares on each of the second and third anniversaries of the closing of the acquisition and 94,118 shares on each of the fourth and fifth anniversaries of the closing. The issuance of the shares to the former owners of Ninety Nine was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933.

The selected financial data presented below under the captions “Statement of Earnings Data” and “Balance Sheet Data” for, and as of the end of, each of the fiscal years in the five-year period ended December 28, 2003, were derived from the consolidated financial statements of O’Charley’s Inc. and subsidiaries, which consolidated financial statements have been audited by KPMG LLP, independent auditors. The selected data should be read in conjunction with the consolidated financial statements for the year ended December 28, 2003, and the related notes thereto.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We are a leading casual dining restaurant company operating 206 O’Charley’s restaurants in 16 states in the Southeast and Midwest regions, 87 Ninety Nine restaurants in seven Northeastern states, and six Stoney River restaurants in the Southeast and Midwest.

Historically, we have grown the O’Charley’s concept by a combination of opening new stores and same store sales growth. The growth in new stores has typically been in the 15% - 20% range year over year. During 2003, we opened 26 new stores and closed two stores. This represents an approximate 13% increase over 2002. In 2004, we expect to open 15 O’Charley’s restaurants, a growth rate of approximately 8%. We reduced our growth rate for 2004 in order to better focus on our sales building initiatives in our existing restaurants as well as focusing on brand development in new expansion markets. As we have expanded into new markets outside of our core operating areas, we have experienced sales levels lower than in our core markets. We believe these lower sales levels are due to a lack of brand awareness and we are taking steps to improve awareness, which we believe will improve our sales and profitability in these new markets. We are currently strategically evaluating the appropriate level of new unit growth for the O’Charley’s concept that will allow us to maximize long-term shareholder value.

According to an industry survey, the casual dining segment within the full-service restaurant segment of the U.S. restaurant industry, of which both O’Charley’s and Ninety Nine are a part, reported average customer visit and same restaurant sales increases during 2003. Our O’Charley’s restaurants reported declining customer visits of 2.3% and same restaurant sales decreases of 2.5% in 2003. The lower same restaurant sales at the O’Charley’s restaurants, combined with costs associated with the O’Charley’s restaurants sales-building initiatives and higher overall labor costs, resulted in lower than expected financial results during 2003. While fiscal 2003 was clearly a year that did not meet our sales and earnings objectives, there were several significant events that occurred. We took significant steps to reverse the declining trend in customer visits at O’Charley’s restaurants; we acquired the Ninety Nine Restaurant and Pub concept; we restructured our balance sheet providing a more flexible, long-term capital structure; and we announced the signing of our first O’Charley’s franchisee. Following is an overview of these important events to facilitate a better understanding of the discussion and analysis that follows.

Prior to 2002, we consistently reported annual increases in same restaurant sales and customer visits at O’Charley’s. In the second fiscal quarter of 2002, we began to experience decreases in customer visits at our O’Charley’s restaurants, which eventually led to declines in same restaurant sales. The decrease in customer visits at O’Charley’s continued through the first two quarters of fiscal 2003. Based on our analysis of marketing research, impact meetings with co-workers and customer focus group results, we believe the customer visit declines occurred in part because our price to value relationship diminished for our value-conscious customers, and certain service initiatives introduced during 2001 negatively impacted our customers’ experience.

During the third fiscal quarter of 2003, we initiated a three phase plan intended to increase our sales and customer visits at our O’Charley’s restaurants. During the first phase, we improved the price-value relationship with a new multi-colored menu, introducing the “Pick Two” and “Pick Three” combo promotions and a price decrease on certain menu items. Additionally, we made improvements to our store atmosphere and increased our service levels. Each of these actions significantly increased customer visits but adversely affected operating margins due primarily to the better than expected customer response to the lower margin combo promotions. During phase two, which occurred during the fourth fiscal quarter of 2003, we introduced certain higher margin items to the menu and increased the prices on the “Pick Two” and “Pick Three” combos. Prior to implementing these two phases, customer visits were down on average 4.0% to 4.5% as compared to the same prior-year period. Subsequent to implementing these initiatives, customer visits increased on average approximately 1.0% through the end of fiscal 2003 over the same prior-year period. While customer visits improved, the overall check average declined approximately 3.0% to 3.5% during the same period, resulting in same restaurant sales at O’Charley’s declining 2.0% to 2.5% during the period of these sales-building initiatives. In addition, these initiatives negatively impacted our margins in the third and fourth quarters of 2003.

During the first quarter of 2004, we have introduced the third phase of our sales-building initiatives which is designed to maintain the customer visit momentum established in 2003, while improving the overall check average and same restaurant sales. We expect phase three to be longer in term and broader in scope than the prior two phases, which lasted approximately four months. We believe the third phase will broaden our customer base, appeal to core customers and improve our margins. While these initiatives are currently meeting our expectations, there can be no assurance they will result in a sustained improvement in customer visits or in same restaurant sales.

We believe the intense competitive nature of the restaurant business has been, and will continue to be, an impetus for industry consolidation. We believe multi-concept operators with significant financial and physical resources will be better positioned to leverage advertising and support services, fully penetrate and establish brand dominance in specific geographic regions and reduce profit variations during weak economic times. In January 2003, we completed the acquisition of Ninety Nine Restaurant and Pub, a Woburn, Massachusetts based casual dining concept with 78 locations

in seven Northeastern states. We acquired Ninety Nine for $116 million in cash and approximately 2.34 million shares of common stock, plus the assumption of certain liabilities. While the acquisition of Ninety Nine was substantially larger than any we have previously completed, we met our overall financial, operational and integration goals at Ninety Nine during 2003. See “Note 2 to the Notes to the Consolidated Financial Statements” included elsewhere in this report for additional information regarding the acquisition of Ninety Nine.

In conjunction with the acquisition of Ninety Nine, we entered into a $300 million senior secured credit facility, comprised of a $200 million revolving credit facility and a $100 million term loan. This credit facility remained in place through the first four weeks of the fourth fiscal quarter of 2003, at which time we refinanced our capital structure in order to reduce our balance sheet leverage, reduce our exposure to interest rate risk and provide a more flexible, long-term capital structure to support our overall business strategy. To that end, during the fourth quarter we amended and restated our credit facility to a $125 million revolving credit facility and issued $125 million of unsecured, senior subordinated notes due 2013. The proceeds from the notes offering were used to repay the $95 million term loan balance and to repay a portion of the revolving credit loan. In addition, during the fourth quarter of 2003 and the first quarter of 2004, we repaid certain amounts outstanding under our revolving credit facility with proceeds from the sale and lease-back of 34 O’Charley’s restaurant properties. See “Liquidity and Capital Resources” for additional information regarding these arrangements.

During December 2003, we entered into an exclusive multi-unit development agreement with Meritage Hospitality Group to develop and operate up to 15 new O’Charley’s restaurants in Michigan. Meritage Hospitality appointed Roger Zingle, a 25 year veteran of the restaurant industry, as its President and Chief Operating Officer of O’Charley’s of Michigan. We intend to enter into additional development agreements to franchise our O’Charley’s concept in other areas. We will continue to experience expenditures and losses in implementing our franchising initiative until such time, if ever, that we generate sufficient franchising revenue to cover these expenditures.

Following is an explanation of certain items in the Company’s consolidated statement of earnings:

Revenues consist of restaurant sales and, to a lesser extent, commissary sales. Restaurant sales include food and beverage sales and are net of applicable state and local sales taxes. Commissary sales represent sales to outside parties consisting primarily of sales of O’Charley’s branded food items, primarily salad dressings, to retail grocery chains, mass merchandisers and wholesale clubs.

Cost of Food and Beverage primarily consists of the costs of beef, poultry, seafood, produce and alcoholic and non-alcoholic beverages. We believe our menus offer a broad selection of menu items and as a result there is not a high concentration of our food costs in any one product category. Generally, temporary increases in these costs are not passed on to customers; however, we have in the past generally adjusted menu prices to compensate for increased costs of a more permanent nature.

Payroll and Benefits include payroll and related costs and expenses directly relating to restaurant level activities including restaurant management salaries and bonuses, hourly wages for restaurant level employees, payroll taxes, workers’ compensation, various health, life and dental insurance programs, vacation expense and sick pay. We have an incentive bonus plan that compensates restaurant management for achieving and exceeding certain restaurant level financial targets and performance goals.

Restaurant Operating Costs include occupancy and other expenses at the restaurant level, except property and equipment depreciation and amortization. Supplies, rent, supervisory salaries, bonuses and related expenses, management training salaries, general liability and property insurance, property taxes, utilities, repairs and maintenance, outside services and credit card fees account for the major expenses in this category.

Advertising, General and Administrative Expenses include all advertising and home office administrative functions that support the existing restaurant base and provide the infrastructure for future growth. Advertising, executive management and support staff salaries, bonuses and related expenses, data processing, legal and accounting expenses and office expenses account for the major expenses in this category.

Depreciation and Amortization primarily includes depreciation on property and equipment calculated on a straight-line basis over the estimated useful lives of the respective assets. For periods prior to December 31, 2001, depreciation and amortization also includes amortization of goodwill, which related primarily to the acquisition of the Stoney River concept. In accordance with SFAS No. 142, beginning December 31, 2001, we no longer amortize goodwill.

Preopening Costs include operating costs and expenses incurred prior to a new restaurant opening. The amount of preopening costs incurred in any one period includes costs incurred during the period for restaurants opened and under development. Our preopening costs may vary significantly from quarter to quarter primarily due to the timing of restaurant openings.

The following information should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere herein. The following table reflects our operating results for 2003, 2002, and 2001 as a percentage of total revenues unless otherwise indicated. All fiscal years presented were comprised of 52 weeks.

The following tables set forth certain unaudited financial and other restaurant data relating to Company restaurants:

During 2003, total revenues increased $259.1 million, or 51.8%, primarily related to the inclusion of $205.5 million of sales from the operations of Ninety Nine restaurants since we acquired that concept on January 27, 2003. Excluding the revenues of the Ninety Nine restaurants, revenues increased $53.6 million, or 10.7%.

O’Charley’s restaurant sales increased $47.0 million, or 9.8%, as a result of the net addition of 24 restaurants during 2003, comprised of 26 new restaurants opened and the closure of two restaurants. Same restaurant sales for the O’Charley’s restaurants decreased 2.5% in 2003 as compared to 2002, due principally to a 2.3% decline in the number of customer visits. During the third fiscal quarter of 2003, we implemented sales-building initiatives that improved customer visits at the O’Charley’s restaurants during the third and fourth quarters of 2003 but adversely affected operating margins. Sales at our O’Charley’s restaurants were negatively affected in fiscal 2003 when customers and employees at one of our O’Charley’s restaurants were exposed to the Hepatitis A virus. See “Legal Proceedings.” We believe that the Hepatitis A incident adversely affected sales at our nine Knoxville, Tennessee area restaurants during the fourth quarter of 2003 by approximately 20% as compared to the same prior-year period and adversely affected O’Charley’s same restaurant sales and customer visits for the fourth quarter by approximately 100 basis points. Although comparable sales at our Knoxville area restaurants have improved sequentially since the outbreak was first publicized, we expect the negative publicity surrounding the Hepatitis A incident will continue to adversely affect sales at our O’Charley’s restaurants in 2004.

Ninety Nine restaurant sales were $205.5 million for the period since its acquisition on January 27, 2003. Same restaurant sales for Ninety Nine restaurants were up 1.1% for 2003, compared with 2002.

Stoney River restaurant sales increased $6.1 million, or 38.9%, due primarily to full year effect of the three new restaurants opened in 2002, same restaurant sales increases of 1.6% in 2003 as compared to 2002 and higher sales volumes at new restaurants.

Beginning in the second quarter of 2003 and continuing through the end of 2003, cost of food and beverage increased as a percentage of restaurant sales compared to the same prior-year period as commodity costs, primarily the cost of red meat, poultry and lettuce, increased as compared to the same prior-year period. In addition to the higher commodity costs, the sales-building initiatives we implemented during the third fiscal quarter of 2003 at our O’Charley’s restaurants included promotions of lower priced items, and a price reduction on certain menu items, both of which increased our food cost as a percentage of restaurant sales.

More recently, the cost of red meat has become erratic as bovine spongiform encephalopathy (BSE) was confirmed in a dairy cow in Washington in December 2003. It appears that domestic consumer reaction was muted from this event and consumer beef demand has remained relatively strong. Overall beef costs have declined since the discovery of BSE due to various factors including the reduction in beef exports. Following the BSE discovery, avian influenza (AI) in broiler flocks has been reported in a number of Asian countries. Some international consumers reacted to the finding of AI by increasing imports of U.S. poultry products after banning imports from these Asian countries. This change in U.S. poultry export demand drove prices sharply higher. However, more recently there were broiler flocks in the United States that tested positive for AI, causing the higher prices to moderate as a number of major importers have placed bans on imports from the United States pending additional test results of these flocks. We are unable to predict the repercussions of the BSE and AI discoveries on consumer demand and commodity costs.

During the first quarter of 2004, we expect commodity costs will average 3% to 4% higher compared to the same prior-year period due principally to higher poultry and red meat costs. For fiscal 2004, however, we expect commodity costs to moderate to average 0% to 1% higher compared to the same prior-year period due principally to higher poultry costs, offset by flat to slightly lower red meat costs. Various factors beyond our control, including adverse weather conditions, governmental regulation, production, availability, recalls of food products and seasonality, may affect our commodity costs. We also expect to continue to realize improvements in our meat yields of approximately 4% at our new commissary meat facility that has been in operation since the third quarter of 2003. We believe our expected yield improvement for 2004 equates to an estimated red meat cost savings of approximately $1.0 million.

During 2003, we improved the insurance benefits offered to O’Charley’s and Stoney River hourly employees to enable us to attract and retain the most qualified candidates available. These improvements resulted in a $2.6 million, or 50 basis point, increase in our payroll and benefits costs and expenses in 2003. In addition to the improved insurance benefits, payroll and benefit costs increased as a percent of restaurant sales in 2003 as a result of the higher average wage rates for the Ninety Nine managers and hourly co-workers, lower average weekly sales at O’Charley’s, which increased the percentage of fixed payroll costs, and increased service levels we introduced with the sales-building plan at O’Charley’s. Partially offsetting these increases was a decrease in restaurant level bonus expense. Restaurant management compensation is based, in part, on restaurant sales and profitability, and since both were below our annual targets we paid less bonus compensation during 2003.

Restaurant operating costs increased in 2003 primarily due to the higher base of restaurants that are leased by Ninety Nine, and to higher utility costs, primarily natural gas from increased usage due to inclement winter weather in the first quarter of 2003 and rate increases through the year. These increases were partially offset by lower supervisory bonus expense in 2003 compared to the same prior-year period. Restaurant supervisor compensation is based, in part, on restaurant sales and profitability, and since both were below our annual targets we paid less bonus compensation during 2003.

During 2003, we completed sale and lease-back transactions pursuant to which we sold 28 O’Charley’s restaurant properties for aggregate gross proceeds of approximately $59.1 million. During the first quarter of 2004, we completed transactions involving the sale of six additional O’Charley’s restaurant properties for aggregate gross proceeds of approximately $12.1 million. The leases that we have entered into in connection with the $71.2 million sale and lease-back transactions will require us to expense on a straight-line basis approximately $4.9 million annually, including the amortization of the $16.9 million deferred gain, over the 20-year lease term.

We may enter into an additional sale and lease-back transaction before the end of the first fiscal quarter of 2004 pursuant to which we may sell and lease-back up to seven O’Charley’s restaurant properties for estimated aggregate gross proceeds of $13.8 million. We cannot assure you, however, that this proposed sale and lease-back transaction will be completed or, if we do complete this transaction, that the terms will not differ, perhaps significantly, from those reflected in this report. We expect the recently completed $71.2 million of sale and lease-back transactions and, if completed, the proposed $13.8 million sale and lease-back transaction will increase rent expense by approximately $6.0 million on an annual basis, including the amortization of the related deferred gain over the lease term. For the first fiscal quarter of 2004, we expect to have approximately $1.8 million of additional net rent expense from these sale and lease-back transactions.

In 2003, advertising expenditures increased 43.6% to $24.4 million from $17.0 million in 2002 and, as a percentage of total revenues, declined to 3.2% in 2003 from 3.4% in 2002. The increase in advertising was primarily due to the acquisition of Ninety Nine and as part of the sales-building initiatives at O’Charley’s. Advertising expenditures were lower, as a percentage of revenues, as Ninety Nine spends less on advertising as a percent of restaurant sales compared to O’Charley’s restaurants. General and administrative expenses increased 40.7% to $29.1 million in 2003 from $20.7 million in 2002, and as a percentage of total revenues decreased to 3.8% in 2003 from 4.1% in 2002. During the first fiscal quarter of 2003, we adopted a deferred compensation plan for the senior management of Ninety Nine that increased general and administrative costs. In addition, we incurred incremental costs, primarily in salaries and related expenses, associated with operating multiple concepts, which increased general and administrative expenses. These increases were offset primarily by a decrease in bonus expense. Executive and senior management compensation is based, in part, on Company sales and profitability, and since both were below our annual targets we paid less bonus compensation during 2003.

The decrease in depreciation and amortization expense as a percentage of total revenues in 2003 was primarily attributable to the acquisition of Ninety Nine, which leases all of its restaurants. During 2004, we will have less depreciation expense as a result of no longer depreciating the 28 O’Charley’s properties included in the recently

completed $71.2 million sale and lease-back transactions and, if completed, the approximately seven O’Charley’s properties included in the proposed $13.8 million sale and lease-back transaction.

In 2003, preopening costs declined as a percentage of total revenues due primarily to lower average cost for each new restaurant opening in 2003 as compared to 2002. Currently, we incur average preopening costs of approximately $200,000 for each new O’Charley’s and Stoney River restaurant and approximately $130,000 for each new Ninety Nine restaurant.

Interest expense increased in 2003 primarily due to increased borrowings incurred to finance the acquisition of Ninety Nine coupled with higher average interest rates under our credit facility.

Our income tax rate in 2003 was 32.2% which is lower than the 34.8% income tax rate in the previous two years. This income tax rate reduction occurred primarily because of higher income tax credits, primarily FICA tip credits, relative to the lower than expected earnings. The tax credits increased as expected in 2003 while pre-tax earnings decreased in 2003. For the first quarter of 2004, we currently expect the income tax rate to be in the mid- to high-32% range.

The increase in diluted weighted shares relates primarily to the shares issued and committed to be issued in connection with the acquisition of Ninety Nine. We issued approximately 941,000 shares at the closing of the acquisition, 390,586 shares on the first anniversary and will issue the remaining approximately 1.4 million shares over the next five years. Since the remaining shares to be issued are not contingent on any future event other than the passage of time, they are included in the weighted share calculations.

Total revenues increased $55.0 million, or 12.4%, primarily as a result of an increase in restaurant sales of $54.2 million, or 12.3%. The increase in restaurant sales was attributable to the net addition of 21 O’Charley’s restaurants, three new Stoney River restaurants opened in 2002 and a 0.6% same restaurant sales increase for the Stoney River concept, partially offset by a 0.1% same restaurant sales decline at our O’Charley’s restaurants. The overall check average for the O’Charley’s concept was $11.59 in 2002 compared to $11.28 in 2001. Customer visits at our O’Charley’s restaurants decreased approximately 2.6% during fiscal 2002. During the second quarter of 2001, we implemented a value menu promotion at O’Charley’s in response to the slowing economy, which lowered the price of certain entrees. We believe this promotion generated positive customer visits and lowered our average check in 2001. We believe our customer visits were lower in 2002, in part, as a result of not having a similar value promotion in 2002. During the third quarter of 2002, we increased menu prices by approximately 3.1% in approximately two-thirds of our O’Charley’s restaurants. During the fourth quarter of 2002, we introduced a new menu in all of our O’Charley’s restaurants that included a menu price increase of approximately 3.1% for the remaining one-third of our restaurants that had not taken the menu price increase during the third quarter of 2002. We believe the increase in our check average was the result of the combination of the menu price increase taken in 2002 and the absence of a value promotion in 2002 similar to the one in 2001. The increase in same restaurant sales at our Stoney River restaurants resulted from an increase in check average, partially offset by a decrease in customer visits.

During 2002, cost of food and beverage decreased as a percent of restaurant sales primarily related to an overall reduction in the cost of certain food items and continued improvements in operating efficiencies at our restaurants and commissary. We experienced lower costs in red meat, pork, poultry and dairy costs, partially offset by increases in certain produce costs.

Payroll and benefits expense in 2002 declined slightly as a percent of restaurant sales compared to 2001, due to lower restaurant level bonuses and workers compensation expenses, offset by a modest increase in hourly wage rates and increased salaries for restaurant management in 2002.

Restaurant operating costs remained relatively flat as a percent of restaurant sales in 2002. In 2002, we experienced higher overall restaurant occupancy and operating costs due primarily to increases in repair and maintenance cost, general liability insurance and credit card fees partially offset by lower utility costs compared to 2001. We also experienced a decrease in supervisory expenses in 2002 as a percentage of total restaurant sales due primarily to lower management training salaries.

Advertising expenditures increased 28.1% to $17.0 million in 2002 from $13.3 million in 2001 and, as a percentage of total revenues, increased to 3.4% in 2002 from 3.0% in 2001. The increase in advertising expenditures was in response to the continued weakness of the U.S. economy. An increase in television costs represented the primary share of the overall increase in advertising expenditures. General and administrative expenses increased 23.9% to $20.7 million in 2002 from $16.7 million in 2001, and as a percentage of total revenues increased to 4.1% in 2002 from 3.8% in 2001. The increase in general and administrative expenses was primarily due to increased bonus expenses and integration costs associated with the 2003 acquisition of Ninety Nine partially offset by lower legal costs.

As a percentage of total revenues, depreciation and amortization increased slightly in 2002, due primarily to new restaurants opened in 2002 and capital expenditures for improvements to existing restaurants, which offset the lack of goodwill amortization in 2002.

The decline in preopening costs in 2002 as a percent of total revenues was primarily attributable to lower average cost per restaurant opening in 2002 compared to 2001.

Interest expense decreased in 2002 as a result of overall lower interest rates. The weighted average interest rate on our revolving credit facility decreased to 3.7% in 2002 as compared with 5.2% in 2001 due to lower short-term LIBOR rates in 2002.

In 2002, we recorded a non-cash pre-tax charge of $9.9 million ($6.1 million net of tax or $0.31 per diluted share) as a cumulative effect of a change in accounting principle as a result of our evaluation of the goodwill carrying value of the Stoney River reporting unit.

The following is a summary of certain unaudited quarterly results of operations data for each of the last three fiscal years. For accounting purposes, the first quarter consists of 16 weeks and the second, third and fourth quarters each consist of 12 weeks. As a result, some of the variations reflected in the following table are attributable to the different lengths of the fiscal quarters.

Our primary sources of capital have historically been cash provided by operations, borrowings under our credit facilities, capitalized lease obligations and sales of common stock. Our principal capital needs have historically arisen from property and equipment additions, acquisitions, and payments on long-term debt and capitalized lease obligations. In addition, we lease a substantial number of our restaurants under operating leases, as described below, and have substantial operating lease obligations. Our working capital historically has had current liabilities in excess of current assets due to cash reinvestments in long-term assets, mostly property and equipment additions, which we do not believe indicates a lack of liquidity.

On January 27, 2003, we completed the acquisition of Ninety Nine Restaurant and Pub for $116.0 million in cash and approximately 2.34 million shares of our common stock, plus the assumption of certain liabilities of Ninety Nine. Of the stock portion of the purchase price, we delivered approximately 941,000 shares at closing, 390,586 shares on the first anniversary of the closing, and will deliver approximately 408,000 on each of the second and third anniversaries of the closing and 94,000 shares on each of the fourth and fifth anniversaries of the closing.

In conjunction with the acquisition of Ninety Nine, we entered into a $300 million senior secured credit facility, comprised of a $200 million revolving credit facility and a $100 million term loan, to fund the cash portion of the purchase price of Ninety Nine, repay the previous revolving credit facility and provide capital for future growth. This credit facility remained in place through the first four weeks of the fourth quarter of 2003 and was secured by all our tangible and intangible assets and the capital stock of our subsidiaries. The revolving credit facility had outstanding borrowings of $128.1 million at October 5, 2003, which accrued interest at a rate of LIBOR plus 2.75%. The term loan balance at the end of the third quarter of 2003 was $95.0 million, which accrued interest at a rate of LIBOR plus 4.0%. The weighted average interest rate on the outstanding borrowings under this credit facility at the end of the third quarter of 2003 was 5.8%, compared to 3.4% at the end of the same prior-year period.

In the fourth quarter of 2003, we amended and restated our credit facility and issued $125.0 million aggregate principal amount of unsecured, senior subordinated notes due 2013. The proceeds from the note offering were used to repay the term loan and to repay a portion of the revolving credit loan under our bank credit facility. Interest on the notes accrues at a fixed rate of 9.0% 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.

Our current bank credit facility consists of a revolving credit facility in a maximum principal amount of $125.0 million. 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 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 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 credit facility contains certain events of default, including an event of default resulting from certain changes in control. At December 28, 2003, the credit facility was secured by all of the tangible and intangible assets and capital stock of the Company as of the date of the credit agreement. The Company was in compliance with such covenants at December 28, 2003.

During the fourth quarter of 2003, we also completed two sale and lease-back 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 bank credit facility.

We may enter into an additional sale and lease-back transaction totaling aggregate gross proceeds of approximately $13.8 million in 2004. We plan to use the proceeds from these transactions, if completed, to reduce indebtedness under our credit facility. We cannot assure you that this proposed sale and lease-back transaction will be completed or, if we do complete this transaction, the terms will not differ, perhaps substantially, from those of the recently completed transactions described above.

From time to time, we have entered into interest rate swap agreements with certain financial institutions. These swap agreements may effectively convert some of our obligations that bear interest at variable rates into fixed rate obligations and may convert some of our obligations that bear interest at fixed rates into variable interest rate obligations. As of December 28, 2003, we had interest rate swap agreements with commercial banks, which effectively fixed the interest rate on $20.0 million of our outstanding variable-rate debt at a weighted-average interest rate of approximately 5.6%. The corresponding floating rates of interest received on those notional amounts are based on one month LIBOR rates and are typically reset on a monthly basis, which is intended to coincide with the pricing adjustments on our credit facility. The swap agreement with respect to $10.0 million of our indebtedness expired in January 2004. The swap agreement relating to the remaining $10.0 million of our indebtedness expires in January 2006. During the first quarter of 2004, we entered into additional interest rate swap agreements with a financial institution that effectively convert a portion of the fixed-rate indebtedness related to the senior subordinated notes due 2013 into variable-rate obligations. The total notional amount of these swaps was $100.0 million and is based on the six-month LIBOR rate in arrears plus a specified margin, the average of which is 3.9%. The terms and conditions of these swaps mirror the interest terms and conditions on our 9.0% senior subordinated notes due 2013. 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 bank credit facility.

Net cash flows used by investing activities in 2003 included approximately $114.3 million cash paid for the acquisition of Ninety Nine, net of cash acquired, capital expenditures incurred principally for building new restaurants, improvements to existing restaurants, a new USDA-inspected meat facility at our Nashville commissary and technological improvements at our home office. Capital expenditures were $67.6 million in 2003, excluding $20.0 million of new restaurant equipment financed through capitalized lease obligations, compared to $69.7 million in 2002 and $73.5 million in 2001. During 2003, we paid approximately $10.9 million in debt issuance costs, which will be amortized over the matching term of the related debt instrument. Our 2004 capital budget includes approximately $60 million to $65 million for capital expenditures, excluding new restaurant equipment financed through capitalized lease obligations. These expenditures are for an estimated 15 additional O’Charley’s restaurants, 12 to 14 additional Ninety Nine restaurants, up to two additional Stoney River restaurants, and improvements to existing restaurants and the commissary and home office additions. There can be no assurance that actual capital expenditures for 2004 will not vary significantly from budgeted amounts based upon a number of factors, including the timing of additional purchases of restaurant sites and the opening of new restaurants.

Payments on long-term debt were $198.0 million, $0.1 million, and $41.9 million in 2003, 2002, and 2001, respectively. Included in the 2003 long-term debt payments is $198.0 million associated with outstanding balances under credit facilities that were refinanced with the above-mentioned financing sources. Payments on capitalized lease obligations were $9.6 million, $7.5 million, and $7.7 million in 2003, 2002, and 2001, respectively.

The following tables set forth our capital structure and certain financial ratios and financial data at and for the fiscal years ended December 28, 2003 and December 29, 2002:

(2)

Adjusted total debt represents the sum of long-term debt and capitalized lease obligations, in each case including current portion, plus the product of (a) rent expense for the 52 weeks ended December 28, 2003 and December 29, 2002, respectively, multiplied by (b) eight. Adjusted total capitalization represents the sum of long-term debt and capitalized lease obligations, in each case including current portion, shareholders’ equity, plus the product of (a) rent expense for the 52 weeks ended December 28, 2003 and December 29, 2002, respectively, multiplied by (b) eight. Rent expense is multiplied by eight to provide a lease-debt equivalent which is the method used to calculate the Company’s financial covenants under its existing credit facility. The following table reconciles adjusted total debt and adjusted total capitalization, as described above, to the long-term debt and capitalized lease obligations, in each case including current portion, shareholders’ equity and rent expense as reflected in our consolidated balance sheets and the notes to the consolidated financial statements:

(3)

EBITDA represents earnings before cumulative effect of change in accounting principle before interest expense, income taxes, and depreciation and amortization. The following table reconciles EBITDA, as described above, to earnings before cumulative effect of change in accounting principle, and to cash flows provided by operating activities as reflected in our consolidated statement of earnings and consolidated statements of cash flows:

Based upon the current level of operations and anticipated growth, we believe that available cash flow from operations, combined with the available borrowings under our bank credit facility and capitalized lease arrangements, will be adequate to meet the anticipated future requirements for working capital and capital expenditures through at least the next 12 months. We have historically produced insufficient cash flow from operations to fund our working capital and capital expenditures and, accordingly, our ability to meet our anticipated capital needs is dependent on our ability to continue to access external financing, particularly borrowings under our credit facility. In addition, our growth strategy includes possible acquisitions or strategic joint ventures. Any acquisitions, joint ventures or other growth opportunities may require additional external financing. There can be no assurances that such sources of financing will be available to us or that any such financing would not negatively impact our earnings.

The following tables set forth our contractual obligations and commercial commitments at December 28, 2003.

	•		Property and equipment

	•		Excess of cost over fair value of net assets acquired (goodwill) and trademarks

	•		Impairment of long-lived assets

As discussed in Note 1 to the Consolidated Financial Statements, our property and equipment are stated at cost and depreciated on a straight-line method over the following estimated useful lives: building 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 capital leases is amortized to its expected value

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.

Inherent in the policies regarding property and equipment are certain significant management judgments and estimates, including useful life, residual value to which the asset is depreciated, the expected value at the end of the lease term for equipment under capital leases, and the determination as to what constitutes enhancing the value of or increasing the life of assets. These significant estimates and judgments, coupled with the fact that the ultimate useful life and economic value at the end of a lease are typically not known until the passage of time, through proper maintenance of the asset, or through continued development and maintenance of a given market in which a store operates can, under certain circumstances, produce distorted or inaccurate depreciation and amortization or, in some cases result in a write down of the value of the assets under Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. See Critical Accounting Policy “Impairment of Long-Lived Assets” below.

We believe that our accounting policy for property and equipment provides a reasonably accurate means by which the costs associated with an asset are recognized in expense as the cash flows associated with the asset’s use are realized.

Excess of Cost Over Fair Value of Net Assets Acquired (Goodwill) and Trademarks

As discussed in Note 1 to the Consolidated Financial Statements, as of December 29, 2002, we no longer amortize goodwill and other indefinite life intangible assets. Beginning in fiscal 2002, we adopted SFAS No. 142 Goodwill and Other Intangibles. 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 or Disposal of Long-Lived Assets.

At December 28, 2003, we have $93.1 million in goodwill and $25.9 million in indefinite life intangible assets shown in our consolidated balance sheet related to the acquisition of Ninety Nine Restaurant and Pub. The determination of the estimated useful lives and whether these assets are impaired involves significant judgments based upon short and long-term projections of future performance. Certain of these forecasts reflect assumptions regarding our ability to successfully integrate the Ninety Nine concept and to maintain the financial performance that this concept has experienced over its recent history. Changes in strategy, new accounting pronouncements and/or market conditions may result in adjustments to recorded asset balances. For example, we incurred an after-tax charge of $6.1 million, or $0.31 per diluted share, which was recorded as a cumulative effect of a change in accounting principle as of the beginning of fiscal 2002 associated with the adoption of SFAS No. 142. The charge was related to the goodwill associated with the Stoney River acquisition.

As discussed earlier, on January 27, 2003, we acquired Ninety Nine Restaurant and Pub for $116 million in cash and approximately 2.34 million shares of our common stock. We completed a valuation of the assets and liabilities of Ninety Nine and allocated the purchase price to the acquired tangible and intangible assets and liabilities, including $25.9 million related to trademarks, with the remaining amount of $93.1 million being allocated to goodwill. We selected the first day of each new fiscal year as the date on which we will test the goodwill and trademarks for impairment. We completed a valuation of the goodwill pursuant to SFAS No. 142 as of December 29, 2003, the first day of fiscal 2004 and our valuation showed that the fair value of the reporting unit exceeded its net book value and no impairment charge was needed.

As discussed in Note 1 to the Consolidated Financial Statements, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that long-lived assets and certain identifiable intangibles be 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 future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

The judgments made related to the ultimate expected useful life and our ability to realize undiscounted cash flows in excess of the carrying value of an asset are affected by such issues as ongoing maintenance of the asset, continued development of a given market within which a store operates, including the presence of traffic generating businesses in the area, and our ability to operate the store efficiently and effectively. We assess the projected cash flows and carrying values at the restaurant level, which is the level where identifiable cash flows are largely independent of the cash flows of other groups of assets, whenever events or changes in circumstances indicate that the long-lived assets associated with a restaurant may not be recoverable.

We believe that our accounting policy for impairment of long-lived assets provides reasonable assurance that any assets that are impaired are written down to their fair value and a charge is taken in earnings on a timely basis.

As discussed in Note 1 to our Consolidated Financial Statements, we account for our stock option plans in accordance with SFAS No. 123, Accounting for Stock-based Compensation. SFAS 123 encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, SFAS No. 123 also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principle Board Opinion No. 25 (“APB 25”), whereby compensation cost is the excess, if any, of the quoted market price of the stock on the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. We currently apply the provisions of APB 25 to account for our stock option plans. Stock options issued to-date pursuant to our stock options plans have had no intrinsic value at the grant date, and under Opinion No. 25, no compensation cost is recognized for them. We have provided in the notes to our Consolidated Financial Statements pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1999 and subsequent years as if the fair-value-based method defined in SFAS 123 had been applied. As of December 28, 2003, we had options to purchase approximately 3.7 million shares of common stock outstanding at an average exercise price of $16.54 per share.

The Financial Accounting Standards Board is considering changes to the accounting model for stock-based compensation. In the event that accounting rules associated with stock options were to change to require all entities to expense the fair value of stock options granted, our consolidated statement of earnings would be adversely impacted.

In April 2002,the Financial Accounting Standards Board (the “FASB”) issued SFAS No.145, Rescission of FASB Statements Nos. 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 and leaseback accounting for certain lease modifications that have economic effects similar to sale and leaseback transactions. The provisions of the Statement related to the rescission of Statement 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 Statement No.13 were effective for transactions occurring after May 15,2002, with early application encouraged. The adoption of SFAS No.145 did not have a material effect on our consolidated financial statements. We recognized a $1.8 million charge in the fourth quarter of 2003 related to our $125 million bank credit facility. The charge was reflected as a component of Other (Income) Expense in our consolidated statement of earnings.

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 application encouraged. The adoption of SFAS No.146 did not have a material effect on our 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 how a business enterprise should evaluate whether it has a controlling financial interest in any entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46. The Company will be required to apply FIN 46R to variable interests in variable interest entities (“VIEs”) created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference be between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. We continue to evaluate the impact, if any, that FIN 46R will have on our 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. The statement requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, the statement 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 ending after December 15,2003. We adopted the provisions of the statement on July 14, 2003. The adoption of SFAS No.150 did not have a material impact on our consolidated financial statements.

The impact of inflation on the cost of food, labor, equipment, land and construction costs could adversely affect our operations. A majority of our employees are paid hourly rates related to federal and state minimum wage laws. As a result of increased competition and the low unemployment rates in the markets in which our restaurants are located, we have continued to increase wages and benefits in order to attract and retain management personnel and hourly employees. In addition, most of our leases require us to pay taxes, insurance, maintenance, repairs and utility costs, and these costs are subject to inflationary pressures. We attempt to offset the effect of inflation through periodic menu price increases, economies of scale in purchasing and cost controls and efficiencies at our restaurants.

We are subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management activities. We currently utilize a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage our exposure to changes in interest rates. Our fixed-rate debt consists primarily of capitalized leases and our variable-rate debt consists of amounts outstanding under our revolving credit facility and term loan.

As an additional method of managing our interest rate exposure on our credit facility, at certain times we enter into interest rate swap agreements whereby we agree to pay over the life of the swaps a fixed interest rate payment on a notional amount and in exchange we receive a floating rate payment calculated on the same amount over the same time period. The fixed interest rates are dependent upon market levels at the time the swaps are consummated. The floating interest rates are generally based on the monthly LIBOR rate and rates are typically reset on a monthly basis, which is intended to coincide with the pricing adjustments on our revolving credit facility. As of December 28, 2003, we had in effect $20.0 million in swaps at an average fixed rate of 5.6%, $10.0 million of which matured in January 2004 and $10.0 million of which matures in January 2006.

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 $125.0 million Senior Subordinated Notes into variable-rate obligations. The total notional amount of these swaps was $100.0 million and is based on six-month LIBOR rates in arrears plus a specified margin, the average of which is 3.9%. The terms and conditions of these swaps mirror the interest terms and conditions on the notes. These swap agreements expire in January 2014.

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 28, 2003 and December 29, 2002, 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 28, 2003. 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 28, 2003 and December 29, 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 28, 2003, 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.

O’Charley’s Inc. (the “Company”) owns and operates 206 (at December 28, 2003) full-service restaurant facilities in 16 southeastern and midwestern states under the trade name of “O’Charley’s”, 87 full-service restaurant facilities in seven northeastern states under the trade name “Ninety Nine Restaurant and Pub”, 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. All fiscal years presented were comprised of 52 weeks. Certain reclassifications have been made to prior year amounts to conform to the current year presentation.

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 $6.4 million and $8.5 million at December 28, 2003 and December 29, 2002, 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 owned certain marketable securities that were accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) 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. During 2003, the Company sold all of these securities.

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.

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 fiscal year assuming no goodwill amortization was recognized during that time (in thousands).

On January 27, 2003, we acquired Ninety Nine Restaurant and Pub for $116 million in cash and approximately 2.34 million shares of our common stock. We completed a valuation of the assets and liabilities of Ninety Nine and allocated the purchase price to the acquired tangible and intangible assets and liabilities with the remaining amount being allocated to goodwill. We selected the first day of each new fiscal year as the date on which we will test the goodwill and trademarks for impairment. We completed a valuation of the goodwill pursuant to SFAS No. 142 as of December 29, 2003, the first day of fiscal 2004 and our valuation showed that the fair value of the reporting unit exceeded its net book value and no impairment charge was needed.

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 qualifies 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 consolidated 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.

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 2003,

2002 and 2001, totaled $24.4 million, $17.0 million, and $13.3 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, an 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.

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. Basic and diluted earnings per share also include the dilutive effect of shares issuable to the prior owners of Ninety Nine due to the fact that the timing of issuance is related solely to the passage of time.

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 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 28, 2003 and December 29, 2002. 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 income, net of tax, for 2003 was $412,000. The accumulated other comprehensive loss at December 28, 2003 is comprised of an unrealized loss on derivative financial instruments of $519,000, net of tax.

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

Recent Accounting Pronouncements. In April 2002,the Financial Accounting Standards Board issued SFAS No. 145, Rescission of FASB Statements Nos. 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 and leaseback accounting for certain lease modifications that have economic effects similar to sale and leaseback transactions. The provisions of the Statement related to the rescission of Statement 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 Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 did not have a material effect on our consolidated financial statements. We recognized a $1.8 million charge in the fourth quarter of 2003 related to the early extinguishment of our prior bank credit facility. The charge was reflected as a component of Other (Income) Expense in our consolidated statement of earnings.

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 application encouraged. The adoption of SFAS No. 146 did not have a material effect on our 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 how a business enterprise should evaluate whether it has a controlling financial interest in any entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46. The Company will be required to apply FIN 46R to variable interests in variable interest entities (“VIEs”) created after December 31, 2003. For variable interests in VIEs created before January 1, 2004, the Interpretation will be applied beginning January 1, 2005. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference be between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. The Company continues to evaluate the impact, if any, that FIN 46R will have on its 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. The statement requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. Generally, the statement 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 ending after December 15, 2003. We adopted the provisions of the statement on July 14, 2003. The adoption of SFAS No. 150 did not have a material impact on our consolidated financial statements.

On January 27, 2003, the Company acquired Ninety Nine Restaurant and Pub (“Ninety Nine”), a casual dining chain based in Woburn, Massachusetts, primarily to continue expanding its portfolio of quality restaurant concepts in becoming a multi-concept restaurant operation. The Company acquired Ninety Nine Restaurant and Pub for $116 million in cash and approximately 2.34 million shares of common stock, plus the assumption of certain liabilities. In addition to the purchase price, the Company 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 continue to be employed at the time of such payments. Of the stock portion of the purchase price, the Company delivered 941,176 shares at closing, and 390,586 shares in January 2004 and will deliver 407,843 on each of the second, and third anniversaries of the closing and 94,118 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 attributes the goodwill shown below to the long-term historical financial performance and the anticipated future performance of Ninety Nine. The allocation of the purchase price to the acquired net assets is as follows (in thousands).

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:

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. 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.

Depreciation and amortization of property and equipment was $36.4 million, $25.5 million and $21.6 million for the years ended December 28, 2003, December 29, 2002, and December 30, 2001, respectively. This excludes amortization of goodwill and intangible assets.

Amortization of goodwill was $544,000 for the year ended December 30, 2001. There was no amortization for the years ended December 28, 2003 and December 29, 2002.

The increase in the supplemental executive retirement plan asset shown above is primarily related to salary and bonus deferrals combined with the Company match and earnings on the accounts of the participants during 2003. See Note 14.

The deferred compensation shown above represents the amount yet to be recognized in expense under the payment plan to certain employees of Ninety Nine Restaurant and Pub discussed above in Note 2. The amounts are payable each January 1 in each of the next four years. The Company recognized compensation expense of $1.0 million plus accrued interest during 2003 related to this payment plan.

The increase in prepaid interest and finance costs shown above relates to the refinancing of our senior credit facility and the sale and leaseback transactions. These amounts will be amortized over the respective life of the commitment. See Notes 6 and 8.

In the fourth quarter of 2003, the Company amended and restated our credit facility and issued $125 million aggregate principal amount of the notes. 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, the Company 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. The Company 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 the Company’s 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 the Company sells certain assets (and generally do not use the proceeds of such sales for certain specified purposes) or experience specific kinds of changes in control, the Company 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 the Company’s bank credit facility. The Company’s current 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 credit facility imposes restrictions on the Company with respect to the incurrence of additional indebtedness, sales of assets, mergers and 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 and ratios relating to the Company’s senior secured leverage, maximum adjusted leverage, minimum fixed charge coverage, minimum asset coverage and maximum capital expenditures. The credit facility contains certain events of default, including an event of default resulting from certain changes in control. At December 28, 2003, the credit facility was secured by all of the tangible and intangible assets and capital stock of the Company as of the date of the credit agreement. The Company was in compliance with such covenants at December 28, 2003. During 2003, the Company paid commitment fees of approximately $298,000.

The secured mortgage note payable at December 28, 2003 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 $940,000 at December 28, 2003.

The annual maturities of long-term debt as of December 28, 2003 were: $19,000-2004; $21,000-2005; $23,000-2006; $40.0 million-2007; $28,000-2008; and $125.0 million thereafter.

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 28, 2003 and December 29, 2002, approximately $50.2 million and $36.3 million, respectively, 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%.

During the fourth quarter of 2003, we 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 entered into a third sale and leaseback transaction. This transaction, completed on December 30, 2003, involved the sale of six of our O’Charley’s restaurant properties 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.

The Company recognized a gain of approximately $16.9 million on the sale and leaseback transactions completed during 2003. This gain is being deferred and amortized over the 20 year term of the leases that were entered into under the transaction. The short-term portion of the gain is reflected in Accrued Expenses and the long-term portion is shown in Other Liabilities in the accompanying consolidated balance sheet. None of the gain amortization is reflected in the future minimum operating lease amounts shown above. Also, see Note 7.

The future minimum lease payments on the transaction completed in the first quarter 2004 are as follows: $895,000-2004, $943,000-2005, $991,000-2006, $1,040,000-2007, $1,088,000, 2008, and $16,322,000-thereafter. The deferred gain on the transaction completed in the first quarter 2004 was approximately $4.5 million.

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 28, 2003 and 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 matured in January 2004 and $10.0 million of which matures in January 2006. As of December 28, 2003, $519,000 of deferred losses, net of tax, on the swaps were included in accumulated other comprehensive income. During the first quarter of 2004, the Company entered into interest rate swap agreements with a financial institution that effectively converted a portion of the fixed-rate indebtedness related to our $125.0 million senior subordinated notes due 2013 into variable-rate obligations. The total notional amount of these swaps was $100.0 million and is based on six-month LIBOR rates in arrears plus a specified margin, the average of which is 3.9%. The terms and conditions of these swaps mirror the interest terms and conditions on the notes. These swap agreements expire in January 2014.

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

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:

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:

The Company has gross state net operating loss carry-forwards of $12.2 million to reduce future tax liabilities, which expire in 2008 and 2024. The federal general business tax credits of $624,000 will expire in 2024.

The Company has established a valuation allowance of $317,000 as of December 28, 2003 for state net operating loss carryforwards. 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 that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance.

In October 2003, the Company 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 the Company’s discretion. To date, the Company has not repurchased any shares of common stock under this authorization. Any repurchases will be funded with borrowings under the Company’s amended and restated bank credit facility.

The Company’s charter authorizes 100,000 shares of preferred stock which the Board of Directors may, without shareholder approval, issue with voting or conversion rights upon the occurrence of certain events. At December 28, 2003, 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 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.

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

For the fiscal years 2003, 2002, and 2001, the number of anti-dilutive shares excluded from the weighted average shares calculation were approximately 1,375,000, 233,000, and 73,000, respectively.

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. The Company has reserved 4,556,958 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 28, 2003, options to purchase 2,099,017 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 28, 2003, options to purchase 1,615,488 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 because no options have been granted at an exercise price less than the fair value of the stock on the date of the grant.

At the end of 2003, 2002, and 2001, the number of options exercisable was approximately 1,690,000, 2,180,000, and 2,267,000, respectively, and the weighted average exercise price of those options was $13.47, $9.81, and $8.82, respectively.

The following table summarizes information about stock options outstanding at December 28, 2003.

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 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. One-third of the units vested in 2002, while the one-third that was to vest in 2003 did not vest due to the vesting targets not being met.

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 28, 2003, 466,029 shares have been issued under this plan.

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 fiscal 2003 was approximately $470,000.

Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1999, 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:

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 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 2003, $500,000 in 2002, and $550,000 in 2001.

The Company maintains a supplemental executive retirement 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 approximately $230,000 in 2003, $203,000 in 2002, and $248,000 in 2001. The amount of the supplemental executive retirement plan liability payable to the participants at December 28, 2003 and December 29, 2002 was $6,658,000 and $3,096,000, respectively, and is recorded as Other Liabilities on the consolidated balance sheets.

At the beginning of 1999, 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. See Note 18.

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

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. During 2003, one of the officers paid off his loan. The remaining balance at December 28, 2003 was approximately $410,000.

During the third quarter of 2001, 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 28, 2003. The balance in the exit cost accrual at December 28, 2003 was approximately $220,000.

In September 2003, the Company became aware that customers and employees at one of its O’Charley’s restaurants located in Knoxville, Tennessee were exposed to the Hepatitis A virus, which resulted in a number of employees and customers becoming infected. The Company has worked closely with the Knox County Health Department and the Centers for Disease Control and Prevention since it became aware of this incident and has cooperated fully with their directives and recommendations. The Company is aware of 81 individuals who have contracted the Hepatitis A virus, most of whom have been linked to the Knoxville restaurant during the time of the outbreak. As of the date of this filing, the Company is also aware of 31 lawsuits that have been filed against it to date, 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 suits seek substantial damages, including treble damages under Tennessee consumer protection laws and punitive damages, and some of which seek to be certified as class actions. One of the lawsuits was filed by an individual who contracted Hepatitis A 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. Other plaintiffs have alleged significant health concerns, including ailments requiring hospitalization.

The Company is also aware of an outbreak of Hepatitis A linked to numerous independent restaurants and restaurant chains located in Georgia, including two of its O’Charley’s restaurants. The Company has 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 the 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 has 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 the Company intends to vigorously defend the litigation that has been filed against it, it is not able to predict the outcome of the litigation that has been filed against it or that may be filed against it in the future relating to the Hepatitis A outbreak or the amounts that it may be required to pay to settle that litigation or to satisfy any adverse judgments that may be rendered against it. The Company has liability insurance; however, it cannot assure you that its insurance carriers will reimburse it for any loss or liability it suffers in connection with this incident or that its insurance will be sufficient to cover any loss or liability. If the Company suffers losses or liabilities in excess of its insurance coverage or if its insurance does not cover those losses or liabilities, there could be a material adverse effect on its results of operations and financial condition.

In November 2000, the Company was sued by Two Mile Partners in the circuit court for Montgomery County, Tennessee. Two Mile Partners is a Tennessee general partnership whose partners were the late 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, who owns 25% of the partnership and is chairman of the board and chief executive officer of the Company. Prior to Mr. Wachtel’s death in November 2001, all decisions regarding the prosecution of this suit by Two Mile Partners were made by Mr. Wachtel in his capacity as managing partner. In the complaint, Two Mile Partners sought $1.5 million in damages, plus interest, attorneys’ fees and costs as a result of our alleged breach of a lease entered into in 1985 for a restaurant property owned by the partnership and located in Clarksville, Tennessee. Two Mile Partners alleged that the Company breached a continuous operation provision in the lease by vacating the property in July 2000 and opening another O’Charley’s restaurant in Clarksville, Tennessee.

In January 2002, the Company entered into a comprehensive settlement agreement with Two Mile Partners settling all litigation and business matters between the Company and Two Mile Partners. As a result of the settlement, (i) the Company purchased restaurant properties located in Goodlettsville, Murfreesboro and Clarksville, Tennessee that were leased from Two Mile Partners for $1.7 million, $1.6 million and $1.0 million, respectively, (ii) the Company terminated a lease with Two Mile Partners for a restaurant property located in Bowling Green, Kentucky on which the Company formerly operated the Bowling Green restaurant and sold Two Mile Partners an adjoining parcel of property used for parking for a payment of $300,000, and (iii) Two Mile Partners dismissed with prejudice the litigation pending against the Company in consideration of a payment by the Company of $200,000.

Mr. Burns recused himself from the discussions and considerations by the Company of any matters relating to the settlement. The Company believes that it terminated the Clarksville lease in accordance with its terms and denies the allegations contained in the complaint filed by Two Mile Partners. Nevertheless, a special committee of the Board of Directors comprised of disinterested directors approved the settlement and believed it was in the Company’s best interest to settle the litigation to avoid the expense, uncertainty and distraction of this litigation.

In addition, the Company is a defendant from time to time in various other legal proceedings arising in the ordinary course of its business, including claims relating to workplace and employment matters, discrimination and similar matters, claims resulting from “slip and fall’’ accidents and claims from customers and employees alleging illness, injury or other food quality, health or operational concerns. The Company does not believe that any of the other legal proceedings pending against it will have a material adverse effect on its financial condition. In addition, the Company may incur or accrue expenses relating to legal proceedings, which may materially adversely affect its results of operations.

19.

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 28, 2003 and December 29, 2002 and for each of the three years in the period ended December 28, 2003.

Condensed Consolidating Statement of Earnings
For the Year Ended December 28, 2003

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

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

Condensed Consolidating Statement of Cash Flows
For the Year Ended December 28, 2003

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

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

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Our Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures effectively and timely provide them with material information relating to us and our consolidated subsidiaries required to be disclosed in the reports we file or submit under the Exchange Act.

There were no changes in our internal control over financial reporting during our fiscal quarter ended December 28, 2003 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The Proxy Statement issued in connection with the shareholders meeting to be held on May 13, 2004, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the captions “Corporate Governance” and “Election of Directors” information required by Item 10 of Form 10-K as to directors and executive officers of the Company and is incorporated herein by reference. Pursuant to General Instruction G(3), certain information concerning executive officers of the Company is included in Part I of this Form 10-K, under the caption “Executive Officers of the Registrant.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The table below sets forth the following information as of December 28, 2003 with respect to the compensation plans (including individual compensation arrangements) under which the Company’s equity securities are authorized for issuance, aggregated by (i) all compensation plans previously approved by the Company’s security holders and (ii) all compensation plans not previously approved by the Company’s security holders:

	•		the number of securities to be issued upon the exercise of outstanding awards;

	•		the weighted-average exercise price of the outstanding awards; and

	•		the number of securities remaining available for future issuance under the plans.

All of the Company’s stock compensation plans have been approved by the company’s shareholders.

The Proxy Statement issued in connection with the shareholders meeting to be held on May 13, 2004, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the caption “Fees Billed to the Company by KPMG LLP During 2003 and 2002” information required by Item 14 of Form 10-K and is incorporated herein by reference.

	2.		Financial Statement Schedules: Not Applicable

	3.		Management Contracts and Compensatory Plans and Arrangements

	-		O’Charley’s Inc. 1990 Employee Stock Plan (included as Exhibit 10.7)

	-		First Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (included as Exhibit 10.8)

	-		Second Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (included as Exhibit 10.9)

	-		Third Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (included as Exhibit 10.10)

	-		Fourth Amendment to O’Charley’s Inc. 1990 Employee Stock Plan (included as Exhibit 10.11)

	-		O’Charley’s 1991 Stock Option Plan for Outside Directors, as amended (included as Exhibit 10.12)

	-		CHUX Ownership Plan, as amended (included as Exhibit 10.13)

	-		O’Charley’s 2000 Stock Incentive Plan (included as Exhibit 10.14)

	-		Severance Compensation Agreement, dated February 19, 2003, by and between O’Charley’s Inc. and Gregory L. Burns (included as Exhibit 10.15)

	-		Severance Compensation Agreement, dated as of February 11, 2004, by and between O’Charley’s Inc. and A. Chad Fitzhugh (included as Exhibit 10.16)

	-		Severance Compensation Agreement, dated as of February 11, 2004, by and between O’Charley’s Inc. and Steven J. Hislop (included as Exhibit 10.17)

	-		Severance Compensation Agreement, dated as of May 14, 2003, by and between O’Charley’s Inc. and William E. Hall, Jr. (included as Exhibit 10.18)

	-		Restricted Stock Unit Agreement, dated February 13, 2002, between O’Charley’s Inc. and Gregory L. Burns (included as Exhibit 10.19)

	-		Restricted Stock Unit Agreement, dated February 13, 2002, between O’Charley’s Inc. and Steven J. Hislop (included as Exhibit 10.20)

	-		Restricted Stock Unit Agreement, dated February 13, 2002, between O’Charley’s Inc. and William E. Hall, Jr. (included as Exhibit 10.21)

	-		Restricted Stock Unit Agreement, dated February 13, 2002, between O’Charley’s Inc. and Herman A. Moore, Jr. (included as Exhibit 10.22)

	-		Secured Promissory Note, dated February 13, 2002, by Gregory L. Burns, as maker, and O’Charley’s Inc., as payee (included as Exhibit 10.23)

	-		Secured Promissory Note, dated February 13, 2002, by Steven J. Hislop, as maker, and O’Charley’s Inc., as payee (included as Exhibit 10.24)

	-		Secured Promissory Note, dated February 13, 2002, by William E. Hall, Jr., as maker, and O’Charley’s Inc., as payee (included as Exhibit 10.25)

	-		Secured Promissory Note, dated February 13, 2002, by Herman A. Moore, Jr., as maker, and O’Charley’s Inc., as payee (included as Exhibit 10.26)

(b) On October 8, 2003, the Company furnished to the Securities and Exchange Commission a Current Report on Form 8-K (Items 9 and 12) which contained its press release announcing that it had revised its outlook for the third quarter of 2003.

On October 21, 2003, the Company furnished to the Securities and Exchange Commission a Current Report on Form 8-K (Item 9) which contained its press release announcing that the Company intended to offer, through a private placement, $125 million in aggregate principal amount of senior subordinated notes due 2013.

On October 21, 2003, the Company furnished to the Securities and Exchange Commission a Current Report on Form 8-K (Item 9) which contained its press release announcing the completion of a $50 million sale and leaseback transaction and the establishment of a $25 million share repurchase authorization and issuing sales and earnings guidance for the fourth fiscal quarter ending December 28, 2003.

On October 29, 2003, the Company furnished to the Securities and Exchange Commission a Current Report on Form 8-K (Item 9) which contained its press release providing an update on the Hepatitis A incident.

On October 30, 2003, the Company furnished to the Securities and Exchange Commission a Current Report on Form 8-K (Item 9) which contained its press release announcing that the Company had rescheduled its earnings conference call for the third fiscal quarter.

On October 30, 2003, the Company furnished to the Securities and Exchange Commission a Current Report on Form 8-K (Item 9) which contained its press release announcing that the Company intended to offer $125 million in aggregate principal amount of senior subordinated notes due 2013.

On October 31, 2003, the Company furnished to the Securities and Exchange Commission a Current Report on Form 8-K (Item 9) which contained its press release announcing the pricing of its offering of $125 million in aggregate principal amount of 9.0% senior subordinated notes due 2013 in an institutional private placement.

On October 31, 2003, the Company filed and furnished to the Securities and Exchange Commission a Current Report on Form 8-K (Items 5, 9 and 12) which contained its press release announcing the Company’s third quarter 2003 financial results and included certain financial information of the Company.

Notwithstanding the foregoing, information furnished under Item 9 and Item 12 of our Current Reports on Form 8-K, including the related exhibits, shall not be deemed to be filed for purposes of Section 18 of the Securities Exchange Act of 1934.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

78 EX-2.3 3 g87708exv2w3.txt EX-2.3 SETTLEMENT AGREEMENT EXHIBIT 2.3 SETTLEMENT AGREEMENT This Settlement Agreement (this "Settlement Agreement") is entered into as of December 11, 2003, in connection with (i) that certain Asset Purchase Agreement between O'Charley's Inc. and 99 Boston Inc., 99 Boston of Vermont, Inc., Doe Family II, LLC, William A. Doe, III, Dana G. Doe, and Charles F. Doe, Jr. dated October 28, 2002 (the "Asset Purchase Agreement") and (ii) that certain Merger Agreement among O'Charley's Inc., Volunteer Acquisition Corporation and 99 West, Inc., William A. Doe, III, Dana G. Doe and Charles F. Doe, Jr. dated October 28, 2002 (the "Merger Agreement"). All capitalized terms herein shall have the meanings ascribed to them in the Asset Purchase Agreement or the Merger Agreement, as applicable, unless otherwise defined herein. WHEREAS, in accordance with Section 2.8 of the Asset Purchase Agreement, Buyer prepared and delivered to Sellers the Closing Date Balance Sheet and calculation of the Consolidated Net Book Value of Sellers and 99 West as of the Closing Date, and Sellers duly provided written notice to Buyer of certain objections to such Closing Date Balance Sheet and calculation of the Consolidated Net Book Value of Sellers and 99 West as of the Closing Date; and WHEREAS, Sellers and Buyer engaged in negotiations regarding Sellers' objections to the Closing Date Balance Sheet, the calculation of Consolidated Net Book Value of Sellers and 99 West as of the Closing Date and other issues related to the Estimated Balance Sheet and the Financial Statements as presented by the Sellers and have reached an agreement to settle and resolve all outstanding issues of the adjustment of the Purchase Price under the Asset Purchase Agreement based upon the Consolidated Net Book Value of the Sellers and 99 West as of the Closing Date pursuant to the Asset Purchase Agreement and with respect to the Financial Statements presented by the Sellers pursuant to the Asset Purchase Agreement and the Merger Agreement. NOW, THEREFORE, in consideration of the foregoing, the transactions set forth in the Asset Purchase Agreement and the Merger Agreement and the terms and conditions of this Settlement Agreement, Buyer and Sellers hereby agree as follows: 1. SETTLEMENT. As settlement in full of any and all amounts owed by Buyer or Sellers with respect to the adjustment of the Purchase Price under the Asset Purchase Agreement based upon the Consolidated Net Book Value of the Sellers and 99 West as of the Closing Date pursuant to the Asset Purchase Agreement and in exchange for Buyer agreeing not to make any claims against any of the Sellers for loss, damages or indemnification with respect to, arising out of, or relating to, the Financial Statements (including but not limited to the manner of presentation of items set forth therein), Buyer and Sellers agree that the 101,961 shares of Buyer Common Stock which Buyer is obligated to deliver to Sellers on the first anniversary of the Closing Date as part of the Purchase Price shall be reduced by the number equal to the quotient obtained by dividing (A) 300,000 by (B) the average closing price of Buyer Common Stock on the Nasdaq Stock Market for the ten trading days ending on January 23, 2004. Each of Buyer and Sellers does hereby acknowledge that this Settlement Agreement constitutes full accord and satisfaction of all obligations of any of them with respect to the adjustment of the Purchase Price based upon the Consolidated Net Book Value of the Sellers and 99 West as of the Closing Date pursuant to the Asset Purchase Agreement and any claims Buyer may have with respect to, arising out of, or related to, the Financial Statements (including but not limited to the manner of presentation of items set forth therein) under the Asset Purchase Agreement or the Merger Agreement. 2. NO EFFECT ON SECTION 8.6. Buyer and Sellers agree that the settlement reached herein shall not be counted against the $250,000 threshold set forth in Section 8.6 of the Asset Purchase Agreement or Section 8.6 of the Merger Agreement. 3. CAPACITY AND AUTHORITY. Each signatory to this Settlement Agreement hereby represents and warrants that he, she or it has the full right, power, authority and capacity to enter into this Settlement Agreement, and that this Settlement Agreement constitutes a legal and binding agreement that is enforceable in accordance with its terms. 4. MERGER PROVISION/NO ORAL MODIFICATION. The parties understand and agree that this Settlement Agreement embodies and contains all the agreements and understandings between the parties pertaining to the subject matter herein. This Settlement Agreement constitutes the entire agreement between the parties regarding the subject matter herein, and it supersedes any and all prior or contemporaneous agreements and understandings between the parties in connection therewith. Any amendments to, or modifications of, this Settlement Agreement, or any waiver of its terms, shall not be enforceable unless in writing and signed by the party against whom enforcement is sought. 5. FUTURE INTERESTS. This Settlement Agreement shall be binding upon and shall inure to the benefit of Buyer and Sellers and their respective legal representatives, successors and assigns. 6. COUNTERPARTS. This Settlement Agreement may be executed in two (2) or more counterparts, each of which shall be deemed to be an original document and all of which, taken together, shall be deemed to constitute but a single original document. 7. RATIFICATION. Except to the extent amended hereby, all of the terms, conditions and provisions of the Asset Purchase Agreement and the Merger Agreement shall remain unmodified, and the Asset Purchase Agreement and the Merger Agreement, each as amended hereby, are ratified and confirmed as being in full force and effect. 2 IN WITNESS WHEREOF, each of the following parties has caused this Settlement Agreement to be executed as of the date first above written. O'CHARLEY'S INC. (as a party to the Asset Purchase Agreement and the Merger Agreement) By: /s/ Gregory L. Burns ----------------------------------- Name: Gregory L. Burns ----------------------------------- Title: CEO ----------------------------------- 99 BOSTON, INC. (as a party to the Asset Purchase Agreement) By: /s/ Charles F. Doe, Jr. ------------------------------------ Name: Charles F. Doe, Jr. ------------------------------------ Title: President ----------------------------------- DOE FAMILY II, LLC (as a party to the Asset Purchase Agreement) By: /s/ Charles F. Doe, Jr. ------------------------------------ Name: Charles F. Doe, Jr. ------------------------------------ Title: Manager ----------------------------------- 99 BOSTON OF VERMONT, INC. (as a party to the Asset Purchase Agreement) By: /s/ Charles F. Doe, Jr. ------------------------------------ Name: Charles F. Doe, Jr. ------------------------------------ Title: President ----------------------------------- /s/ William A. Doe, III ----------------------------------------- WILLIAM A. DOE, III (as a party to the Asset Purchase Agreement and the Merger Agreement) 3 /s/ Dana G. Doe --------------------------------------- DANA G. DOE (as a party to the Asset Purchase Agreement and the Merger Agreement) /s/ Charles F. Doe, Jr. --------------------------------------- CHARLES F. DOE, JR. (as a party to the Asset Purchase Agreement and the Merger Agreement) 99 WEST, INC. (as a party to the Merger Agreement) By: /s/ Charles F. Doe, Jr. ---------------------------------- Name: Charles F. Doe, Jr. ---------------------------------- Title: Vice President --------------------------------- 4 EX-10.16 4 g87708exv10w16.txt EX-10.16 SEVERANCE COMPENSATION AGREEMENT EXHIBIT 10.16 SEVERANCE COMPENSATION AGREEMENT dated as of February 11, 2004, between O'Charley's Inc., a Tennessee corporation (the "Company"), and A. Chad Fitzhugh (the "Executive"). The Company's Board of Directors has determined that it is appropriate to reinforce and encourage the continued attention and dedication of certain members of the Company's senior management, including the Executive, to their assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a change in control of the Company. This Agreement sets forth the severance compensation which the Company agrees it will pay to the Executive if the Executive's employment with the Company terminates under one of the circumstances described herein following a Change In Control of the Company (as defined herein). 1. TERM. This Agreement shall terminate, except to the extent that any obligation of the Company hereunder remains unpaid as of such time, upon the earliest of (i) three years from the date hereof if a Change in Control of the Company has not occurred prior to such date; (ii) the termination of the Executive's employment with the Company based on death, Disability (as defined in Section 3(b)), Retirement (as defined in Section 3(c)) or Cause (as defined in Section 3(d)) or by the Executive other than for Good Reason (as defined in Section 3(e)); and (iii) eighteen months from the date of a Change in Control of the Company if the Executive has not terminated his employment for Good Reason as of such time. 2. CHANGE IN CONTROL. No compensation shall be payable under this Agreement unless and until (a) there shall have been a Change in Control of the Company while the Executive is still an employee of the Company and (b) the Executive's employment by the Company thereafter shall have been terminated in accordance with Section 3. For purposes of this Agreement, a Change in Control means the happening of any of the following: (i) any person or entity, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, other than the Company, a wholly-owned subsidiary thereof, any employee benefit plan of the Company or any of its Subsidiaries becomes the beneficial owner of the Company's securities having 30% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business); or (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of the directors of the Company or such other corporation or entity after such transaction are held in the aggregate by the holders of the Company's securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; or (iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) If a Change in Control of the Company shall have occurred while the Executive is still an employee of the Company, the Executive shall be entitled to the compensation provided in Section 4 upon the subsequent termination of the Executive's employment with the Company by the Executive or by the Company within eighteen months of the Change in Control of the Company unless such termination is as a result of (i) the Executive's death; (ii) the Executive's Disability (as defined in Section (3)(b) below); (iii) the Executive's Retirement (as defined in Section 3(c) below); (iv) the Executive's termination by the Company for Cause (as defined in Section 3(d) below); or (v) the Executive's decision to terminate employment other than for Good Reason (as defined in Section 3(e) below). (b) DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties with the Company on a full-time basis for six months and within 30 days after written notice of termination is thereafter given by the Company the Executive shall not have returned to the full-time performance of the Executive's duties, the Company may terminate this Agreement for "Disability." (c) RETIREMENT. The term "Retirement" as used in this Agreement shall mean termination by the Company or the Executive of the Executive's employment based on the Executive's having reached age 65 or such other age as shall have been fixed in any arrangement established with the Executive's consent with respect to the Executive. (d) CAUSE. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement only, the Company shall have "Cause" to terminate the Executive's employment hereunder only on the basis of fraud, misappropriation or embezzlement on the part of the Executive. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the membership of the Company's Board of Directors (excluding the Executive if the Executive is then a member of the Board of Directors) at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth in the second sentence of this Section 3(d) and specifying the particulars thereof in detail. (e) GOOD REASON. The Executive may terminate the Executive's employment for Good Reason at any time during the term of this Agreement. For purposes of this Agreement "Good Reason" shall mean any of the following (without the Executive's express written consent): 2 (i) the assignment to the Executive by the Company of duties inconsistent with the Executive's position, duties, responsibilities and status with the Company immediately prior to a Change in Control of the Company, or a change in the Executive's titles or offices as in effect immediately prior to a Change in Control of the Company, or any removal of the Executive from or any failure to reelect the Executive to any of such positions, except in connection with the termination of his employment for Disability, Retirement or Cause or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) a reduction by the Company in the Executive's base salary as in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement; (iii) a relocation of the Company's principal executive offices to a location outside of Nashville, Tennessee, or the Executive's relocation to any place other than the location at which the Executive performed the Executive's duties prior to a Change in Control of the Company, except for required travel by the Executive on the Company's business to an extent substantially consistent with the Executive's business travel obligations at the time of a Change in Control of the Company; (iv) any material breach by the Company of any provision of this Agreement; (v) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(f), and for purposes of this Agreement, no such purported termination shall be effective. (f) NOTICE OF TERMINATION. Any termination by the Company pursuant to Section 3(b), 3(c) or 3(d) shall be communicated by a Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates those specific termination provisions in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provisions so indicated. For purposes of this Agreement, no such purported termination by the Company shall be effective without such Notice of Termination. (g) DATE OF TERMINATION. "Date of Termination" shall mean (a) if this Agreement is terminated by the Company for Disability, 30 days after Notice of Termination is given to the Executive (provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time basis during such 30-day period) or (b) if the Executive's employment is terminated by the Company for any other reason, the date on which a Notice of Termination is given. 4. SEVERANCE COMPENSATION UPON TERMINATION OF EMPLOYMENT. (a) If the Company shall terminate the Executive's employment within eighteen months following a 3 Change in Control other than pursuant to Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment within eighteen months following a Change in Control for Good Reason, then the Company shall pay to the Executive as severance pay in a lump sum, in cash, on the fifth day following the Date of Termination, an amount equal to the sum of (i) 150% of the average of the aggregate annual salary paid to the Executive by the Company during the three calendar years preceding the Change in Control of the Company and (ii) 150% of the highest bonus compensation paid to the Executive for any of the three calendar years preceding the Change in Control of the Company; provided, however, that if the lump sum severance payment under this Section 4, either alone or together with other payments which the Executive has the right to receive from the Company, would constitute a "parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), such lump sum severance payment shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Section 4 being subject to the excise tax imposed by Section 4999 of the Code. (b) In addition to the lump sum payment provided in Section 4(a), if the Company shall terminate the Executive's employment within eighteen months following a Change in Control other than pursuant to Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment within eighteen months following a Change in Control for Good Reason, then the Company shall provide to the Executive health insurance equivalent to that provided to the Executive immediately prior to termination until the earlier of: (i) eighteen months following the Date of Termination or (ii) such time as Executive is employed by another employer and is covered or permitted to be covered by benefit plans of another employer providing substantially similar coverage. 5. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL RIGHTS. (a) The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the Date of Termination, or otherwise. (b) The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any benefit plan, incentive plan or stock option plan, employment agreement or other contract, plan or arrangement. 6. SUCCESSOR TO THE COMPANY. (a) The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement and shall entitle the Executive to 4 terminate the Executive's employment for Good Reason. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. If at any time during the term of this Agreement the Executive is employed by any corporation, a majority of the voting securities of which is then owned by the Company, "Company" as used in Sections 3, 4, 11 and 12 hereof shall in addition include such employer. In such event, the Company agrees that it shall pay or shall cause such employer to pay any amounts owed to the Executive pursuant to Section 4 hereof. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 7. NOTICE. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: O'Charley's Inc. 3038 Sidco Drive Nashville, Tennessee 37204 Attention: President If to the Executive: A. Chad Fitzhugh 3038 Sidco Drive Nashville, Tennessee 37204 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 8. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by 5 either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. 9. VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. LEGAL FEES AND EXPENSES. In the event either party hereto shall institute litigation against the other party hereto relating to the interpretation or enforcement of this Agreement, the prevailing party in such litigation shall be entitled to recover from the other party any and all attorneys' and related fees and expenses incurred by the prevailing party in such litigation. 12. CONFIDENTIALITY. The Executive shall retain in confidence any and all confidential information known to the Executive concerning the Company and its business so long as such information is not otherwise publicly disclosed. The provisions of this Section 12 are not intended to restrict the ability of the Executive following termination of employment for any reason to engage in any business which is, directly or indirectly, competitive with the business conducted by the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. O'CHARLEY'S INC. By: /s/ Gregory L. Burns ---------------------------------- Name: Gregory L. Burns -------------------------------- Title: Chief Executive Officer ------------------------------- /s/ A. Chad Fitzhugh ------------------------------------- A. Chad Fitzhugh 6 EX-10.17 5 g87708exv10w17.txt EX-10.17 SEVERANCE COMPENSATION AGREEMENT EXHIBIT 10.17 SEVERANCE COMPENSATION AGREEMENT dated as of February 11, 2004, between O'Charley's Inc., a Tennessee corporation (the "Company"), and Steven J. Hislop (the "Executive"). The Company's Board of Directors has determined that it is appropriate to reinforce and encourage the continued attention and dedication of certain members of the Company's senior management, including the Executive, to their assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a change in control of the Company. This Agreement sets forth the severance compensation which the Company agrees it will pay to the Executive if the Executive's employment with the Company terminates under one of the circumstances described herein following a Change In Control of the Company (as defined herein). 1. TERM. This Agreement shall terminate, except to the extent that any obligation of the Company hereunder remains unpaid as of such time, upon the earliest of (i) three years from the date hereof if a Change in Control of the Company has not occurred prior to such date; (ii) the termination of the Executive's employment with the Company based on death, Disability (as defined in Section 3(b)), Retirement (as defined in Section 3(c)) or Cause (as defined in Section 3(d)) or by the Executive other than for Good Reason (as defined in Section 3(e)); and (iii) eighteen months from the date of a Change in Control of the Company if the Executive has not terminated his employment for Good Reason as of such time. 2. CHANGE IN CONTROL. No compensation shall be payable under this Agreement unless and until (a) there shall have been a Change in Control of the Company while the Executive is still an employee of the Company and (b) the Executive's employment by the Company thereafter shall have been terminated in accordance with Section 3. For purposes of this Agreement, a Change in Control means the happening of any of the following: (i) any person or entity, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, other than the Company, a wholly-owned subsidiary thereof, any employee benefit plan of the Company or any of its Subsidiaries becomes the beneficial owner of the Company's securities having 30% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business); or (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of the directors of the Company or such other corporation or entity after such transaction are held in the aggregate by the holders of the Company's securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; or (iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) If a Change in Control of the Company shall have occurred while the Executive is still an employee of the Company, the Executive shall be entitled to the compensation provided in Section 4 upon the subsequent termination of the Executive's employment with the Company by the Executive or by the Company within eighteen months of the Change in Control of the Company unless such termination is as a result of (i) the Executive's death; (ii) the Executive's Disability (as defined in Section (3)(b) below); (iii) the Executive's Retirement (as defined in Section 3(c) below); (iv) the Executive's termination by the Company for Cause (as defined in Section 3(d) below); or (v) the Executive's decision to terminate employment other than for Good Reason (as defined in Section 3(e) below). (b) DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties with the Company on a full-time basis for six months and within 30 days after written notice of termination is thereafter given by the Company the Executive shall not have returned to the full-time performance of the Executive's duties, the Company may terminate this Agreement for "Disability." (c) RETIREMENT. The term "Retirement" as used in this Agreement shall mean termination by the Company or the Executive of the Executive's employment based on the Executive's having reached age 65 or such other age as shall have been fixed in any arrangement established with the Executive's consent with respect to the Executive. (d) CAUSE. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement only, the Company shall have "Cause" to terminate the Executive's employment hereunder only on the basis of fraud, misappropriation or embezzlement on the part of the Executive. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the membership of the Company's Board of Directors (excluding the Executive if the Executive is then a member of the Board of Directors) at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth in the second sentence of this Section 3(d) and specifying the particulars thereof in detail. (e) GOOD REASON. The Executive may terminate the Executive's employment for Good Reason at any time during the term of this Agreement. For purposes of this Agreement "Good Reason" shall mean any of the following (without the Executive's express written consent): 2 (i) the assignment to the Executive by the Company of duties inconsistent with the Executive's position, duties, responsibilities and status with the Company immediately prior to a Change in Control of the Company, or a change in the Executive's titles or offices as in effect immediately prior to a Change in Control of the Company, or any removal of the Executive from or any failure to reelect the Executive to any of such positions, except in connection with the termination of his employment for Disability, Retirement or Cause or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) a reduction by the Company in the Executive's base salary as in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement; (iii) a relocation of the Company's principal executive offices to a location outside of Nashville, Tennessee, or the Executive's relocation to any place other than the location at which the Executive performed the Executive's duties prior to a Change in Control of the Company, except for required travel by the Executive on the Company's business to an extent substantially consistent with the Executive's business travel obligations at the time of a Change in Control of the Company; (iv) any material breach by the Company of any provision of this Agreement; (v) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(f), and for purposes of this Agreement, no such purported termination shall be effective. (f) NOTICE OF TERMINATION. Any termination by the Company pursuant to Section 3(b), 3(c) or 3(d) shall be communicated by a Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates those specific termination provisions in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provisions so indicated. For purposes of this Agreement, no such purported termination by the Company shall be effective without such Notice of Termination. (g) DATE OF TERMINATION. "Date of Termination" shall mean (a) if this Agreement is terminated by the Company for Disability, 30 days after Notice of Termination is given to the Executive (provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time basis during such 30-day period) or (b) if the Executive's employment is terminated by the Company for any other reason, the date on which a Notice of Termination is given. 4. SEVERANCE COMPENSATION UPON TERMINATION OF EMPLOYMENT. (a) If the Company shall terminate the Executive's employment within eighteen months following a 3 Change in Control other than pursuant to Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment within eighteen months following a Change in Control for Good Reason, then the Company shall pay to the Executive as severance pay in a lump sum, in cash, on the fifth day following the Date of Termination, an amount equal to the sum of (i) 150% of the average of the aggregate annual salary paid to the Executive by the Company during the three calendar years preceding the Change in Control of the Company and (ii) 150% of the highest bonus compensation paid to the Executive for any of the three calendar years preceding the Change in Control of the Company; provided, however, that if the lump sum severance payment under this Section 4, either alone or together with other payments which the Executive has the right to receive from the Company, would constitute a "parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), such lump sum severance payment shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Section 4 being subject to the excise tax imposed by Section 4999 of the Code. (b) In addition to the lump sum payment provided in Section 4(a), if the Company shall terminate the Executive's employment within eighteen months following a Change in Control other than pursuant to Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment within eighteen months following a Change in Control for Good Reason, then the Company shall provide to the Executive health insurance equivalent to that provided to the Executive immediately prior to termination until the earlier of: (i) eighteen months following the Date of Termination or (ii) such time as Executive is employed by another employer and is covered or permitted to be covered by benefit plans of another employer providing substantially similar coverage. 5. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL RIGHTS. (a) The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the Date of Termination, or otherwise. (b) The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any benefit plan, incentive plan or stock option plan, employment agreement or other contract, plan or arrangement. 6. SUCCESSOR TO THE COMPANY. (a) The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement and shall entitle the Executive to 4 terminate the Executive's employment for Good Reason. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. If at any time during the term of this Agreement the Executive is employed by any corporation, a majority of the voting securities of which is then owned by the Company, "Company" as used in Sections 3, 4, 11 and 12 hereof shall in addition include such employer. In such event, the Company agrees that it shall pay or shall cause such employer to pay any amounts owed to the Executive pursuant to Section 4 hereof. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 7. NOTICE. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: O'Charley's Inc. 3038 Sidco Drive Nashville, Tennessee 37204 Attention: President If to the Executive: Steven J. Hislop 3038 Sidco Drive Nashville, Tennessee 37204 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 8. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by 5 either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. 9. VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. LEGAL FEES AND EXPENSES. In the event either party hereto shall institute litigation against the other party hereto relating to the interpretation or enforcement of this Agreement, the prevailing party in such litigation shall be entitled to recover from the other party any and all attorneys' and related fees and expenses incurred by the prevailing party in such litigation. 12. CONFIDENTIALITY. The Executive shall retain in confidence any and all confidential information known to the Executive concerning the Company and its business so long as such information is not otherwise publicly disclosed. The provisions of this Section 12 are not intended to restrict the ability of the Executive following termination of employment for any reason to engage in any business which is, directly or indirectly, competitive with the business conducted by the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. O'CHARLEY'S INC. By: /s/ Gregory L. Burns ---------------------------------- Name: Gregory L. Burns -------------------------------- Title: Chief Executive Officer ------------------------------- /s/ Steven J. Hislop ------------------------------------- Steven J. Hislop 6 EX-10.18 6 g87708exv10w18.txt EX-10.18 SEVERANCE COMPENSATION AGREEMENT EXHIBIT 10.18 SEVERANCE COMPENSATION AGREEMENT dated as of May 14, 2003, between O'Charley's Inc., a Tennessee corporation (the "Company"), and William E. Hall, Jr. (the "Executive"). The Company's Board of Directors has determined that it is appropriate to reinforce and encourage the continued attention and dedication of certain members of the Company's senior management, including the Executive, to their assigned duties without distraction in potentially disturbing circumstances arising from the possibility of a change in control of the Company. This Agreement sets forth the severance compensation which the Company agrees it will pay to the Executive if the Executive's employment with the Company terminates under one of the circumstances described herein following a Change In Control of the Company (as defined herein). 1. TERM. This Agreement shall terminate, except to the extent that any obligation of the Company hereunder remains unpaid as of such time, upon the earliest of (i) three years from the date hereof if a Change in Control of the Company has not occurred prior to such date; (ii) the termination of the Executive's employment with the Company based on death, Disability (as defined in Section 3(b)), Retirement (as defined in Section 3(c)) or Cause (as defined in Section 3(d)) or by the Executive other than for Good Reason (as defined in Section 3(e)); and (iii) eighteen months from the date of a Change in Control of the Company if the Executive has not terminated his employment for Good Reason as of such time. 2. CHANGE IN CONTROL. No compensation shall be payable under this Agreement unless and until (a) there shall have been a Change in Control of the Company while the Executive is still an employee of the Company and (b) the Executive's employment by the Company thereafter shall have been terminated in accordance with Section 3. For purposes of this Agreement, a Change in Control means the happening of any of the following: (i) any person or entity, including a "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, other than the Company, a wholly-owned subsidiary thereof, any employee benefit plan of the Company or any of its Subsidiaries becomes the beneficial owner of the Company's securities having 30% or more of the combined voting power of the then outstanding securities of the Company that may be cast for the election of directors of the Company (other than as a result of an issuance of securities initiated by the Company in the ordinary course of business); or (ii) as the result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions, less than a majority of the combined voting power of the then outstanding securities of the Company or any successor corporation or entity entitled to vote generally in the election of the directors of the Company or such other corporation or entity after such transaction are held in the aggregate by the holders of the Company's securities entitled to vote generally in the election of directors of the Company immediately prior to such transaction; or (iii) during any period of two consecutive years, individuals who at the beginning of any such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each director of the Company first elected during such period was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors of the Company at the beginning of any such period. 3. TERMINATION FOLLOWING CHANGE IN CONTROL. (a) If a Change in Control of the Company shall have occurred while the Executive is still an employee of the Company, the Executive shall be entitled to the compensation provided in Section 4 upon the subsequent termination of the Executive's employment with the Company by the Executive or by the Company within eighteen months of the Change in Control of the Company unless such termination is as a result of (i) the Executive's death; (ii) the Executive's Disability (as defined in Section (3)(b) below); (iii) the Executive's Retirement (as defined in Section 3(c) below); (iv) the Executive's termination by the Company for Cause (as defined in Section 3(d) below); or (v) the Executive's decision to terminate employment other than for Good Reason (as defined in Section 3(e) below). (b) DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from his duties with the Company on a full-time basis for six months and within 30 days after written notice of termination is thereafter given by the Company the Executive shall not have returned to the full-time performance of the Executive's duties, the Company may terminate this Agreement for "Disability." (c) RETIREMENT. The term "Retirement" as used in this Agreement shall mean termination by the Company or the Executive of the Executive's employment based on the Executive's having reached age 65 or such other age as shall have been fixed in any arrangement established with the Executive's consent with respect to the Executive. (d) CAUSE. The Company may terminate the Executive's employment for Cause. For purposes of this Agreement only, the Company shall have "Cause" to terminate the Executive's employment hereunder only on the basis of fraud, misappropriation or embezzlement on the part of the Executive. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the membership of the Company's Board of Directors (excluding the Executive if the Executive is then a member of the Board of Directors) at a meeting of the Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that in the good faith opinion of the Board the Executive was guilty of conduct set forth in the second sentence of this Section 3(d) and specifying the particulars thereof in detail. (e) GOOD REASON. The Executive may terminate the Executive's employment for Good Reason at any time during the term of this Agreement. For purposes of this Agreement "Good Reason" shall mean any of the following (without the Executive's express written consent): 2 (i) the assignment to the Executive by the Company of duties inconsistent with the Executive's position, duties, responsibilities and status with the Company immediately prior to a Change in Control of the Company, or a change in the Executive's titles or offices as in effect immediately prior to a Change in Control of the Company, or any removal of the Executive from or any failure to reelect the Executive to any of such positions, except in connection with the termination of his employment for Disability, Retirement or Cause or as a result of the Executive's death or by the Executive other than for Good Reason; (ii) a reduction by the Company in the Executive's base salary as in effect on the date hereof or as the same may be increased from time to time during the term of this Agreement; (iii) a relocation of the Company's principal executive offices to a location outside of Nashville, Tennessee, or the Executive's relocation to any place other than the location at which the Executive performed the Executive's duties prior to a Change in Control of the Company, except for required travel by the Executive on the Company's business to an extent substantially consistent with the Executive's business travel obligations at the time of a Change in Control of the Company; (iv) any material breach by the Company of any provision of this Agreement; (v) any failure by the Company to obtain the assumption of this Agreement by any successor or assign of the Company; or (vi) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 3(f), and for purposes of this Agreement, no such purported termination shall be effective. (f) NOTICE OF TERMINATION. Any termination by the Company pursuant to Section 3(b), 3(c) or 3(d) shall be communicated by a Notice of Termination. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which indicates those specific termination provisions in this Agreement relied upon and which sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provisions so indicated. For purposes of this Agreement, no such purported termination by the Company shall be effective without such Notice of Termination. (g) DATE OF TERMINATION. "Date of Termination" shall mean (a) if this Agreement is terminated by the Company for Disability, 30 days after Notice of Termination is given to the Executive (provided that the Executive shall not have returned to the performance of the Executive's duties on a full-time basis during such 30-day period) or (b) if the Executive's employment is terminated by the Company for any other reason, the date on which a Notice of Termination is given. 4. SEVERANCE COMPENSATION UPON TERMINATION OF EMPLOYMENT. (a) If the Company shall terminate the Executive's employment within eighteen months following a 3 Change in Control other than pursuant to Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment within eighteen months following a Change in Control for Good Reason, then the Company shall pay to the Executive as severance pay in a lump sum, in cash, on the fifth day following the Date of Termination, an amount equal to the sum of (i) 150% of the average of the aggregate annual salary paid to the Executive by the Company during the three calendar years preceding the Change in Control of the Company and (ii) 150% of the highest bonus compensation paid to the Executive for any of the three calendar years preceding the Change in Control of the Company; provided, however, that if the lump sum severance payment under this Section 4, either alone or together with other payments which the Executive has the right to receive from the Company, would constitute a "parachute payment" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), such lump sum severance payment shall be reduced to the largest amount as will result in no portion of the lump sum severance payment under this Section 4 being subject to the excise tax imposed by Section 4999 of the Code. (b) In addition to the lump sum payment provided in Section 4(a), if the Company shall terminate the Executive's employment within eighteen months following a Change in Control other than pursuant to Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment within eighteen months following a Change in Control for Good Reason, then the Company shall provide to the Executive health insurance equivalent to that provided to the Executive immediately prior to termination until the earlier of: (i) eighteen months following the Date of Termination or (ii) such time as Executive is employed by another employer and is covered or permitted to be covered by benefit plans of another employer providing substantially similar coverage. 5. NO OBLIGATION TO MITIGATE DAMAGES; NO EFFECT ON OTHER CONTRACTUAL RIGHTS. (a) The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the Date of Termination, or otherwise. (b) The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any benefit plan, incentive plan or stock option plan, employment agreement or other contract, plan or arrangement. 6. SUCCESSOR TO THE COMPANY. (a) The Company will require any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly, absolutely and unconditionally to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. Any failure of the Company to obtain such agreement prior to the effectiveness of any such succession or assignment shall be a material breach of this Agreement and shall entitle the Executive to 4 terminate the Executive's employment for Good Reason. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor or assign to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this Section 6 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. If at any time during the term of this Agreement the Executive is employed by any corporation, a majority of the voting securities of which is then owned by the Company, "Company" as used in Sections 3, 4, 11 and 12 hereof shall in addition include such employer. In such event, the Company agrees that it shall pay or shall cause such employer to pay any amounts owed to the Executive pursuant to Section 4 hereof. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are still payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 7. NOTICE. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, as follows: If to the Company: O'Charley's Inc. 3038 Sidco Drive Nashville, Tennessee 37204 Attention: President If to the Executive: William E. Hall, Jr. 3038 Sidco Drive Nashville, Tennessee 37204 or such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 8. MISCELLANEOUS. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by 5 either party which are not set forth expressly in this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. 9. VALIDITY. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. LEGAL FEES AND EXPENSES. In the event either party hereto shall institute litigation against the other party hereto relating to the interpretation or enforcement of this Agreement, the prevailing party in such litigation shall be entitled to recover from the other party any and all attorneys' and related fees and expenses incurred by the prevailing party in such litigation. 12. CONFIDENTIALITY. The Executive shall retain in confidence any and all confidential information known to the Executive concerning the Company and its business so long as such information is not otherwise publicly disclosed. The provisions of this Section 12 are not intended to restrict the ability of the Executive following termination of employment for any reason to engage in any business which is, directly or indirectly, competitive with the business conducted by the Company. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. O'CHARLEY'S INC. By: /s/ Gregory L. Burns ---------------------------------- Name: Gregory L. Burns -------------------------------- Title: Chief Executive Officer ------------------------------- /s/ William E. Hall, Jr. ------------------------------------- William E. Hall, Jr. 6 EX-10.44 7 g87708exv10w44.txt EX-10.44 DEVELOPMENT AGREEMENT EXHIBIT 10.44 [O'CHARLEY'S LOGO] O'CHARLEY'S INC. DEVELOPMENT AGREEMENT . . . TABLE OF CONTENTS ARTICLE I GRANT..............................................................2 ARTICLE II FEES...............................................................4 ARTICLE III SCHEDULE AND MANNER FOR EXERCISING DEVELOPMENT RIGHTS..............5 ARTICLE IV PREREQUISITES TO OBTAINING LICENSES...............................12 ARTICLE V TERM..............................................................14 ARTICLE VI DUTIES OF DEVELOPER...............................................14 ARTICLE VII DEFAULT AND TERMINATION...........................................19 ARTICLE VIII TRANSFER OF INTEREST..............................................23 ARTICLE IX COVENANTS.........................................................29 ARTICLE X INDEPENDENT CONTRACTOR AND INDEMNIFICATION........................32 ARTICLE XI APPROVALS.........................................................33 ARTICLE XII NON-WAIVER AND REMEDIES...........................................33 ARTICLE XIII NOTICES...........................................................34 ARTICLE XIV SEVERABILITY AND CONSTRUCTION.....................................34 ARTICLE XV ENTIRE AGREEMENT; APPLICABLE LAW..................................35 ARTICLE XVI ACKNOWLEDGMENTS...................................................37 Attachment A Operating Agreement............................................A-1 Attachment B Lease Rider....................................................B-1 Attachment C Confidentiality And Non-Compete Agreement......................C-1 Attachment D Statement Of Ownership Interests and Principals................D-1 Attachment E Guaranty.......................................................E-1

i O'CHARLEY'S INC. DEVELOPMENT AGREEMENT THIS DEVELOPMENT AGREEMENT (the "Agreement") is made and entered into this 22nd day of December, 2003, by and among O'Charley's Inc., a Tennessee corporation ("Licensor"), OCM Development Company, LLC, a Michigan limited liability company d/b/a O'Charley's Development Company of Michigan ("Developer"), and Meritage Hospitality Group Inc., a Michigan corporation ("Controlling Principal"). WITNESSETH: WHEREAS, Licensor, as a result of the expenditure of time, skill, effort and money, has developed and owns the rights to develop and operate a unique system of full service varied menu casual dining restaurants which feature freshly prepared items such as hand-cut and aged steaks, fresh chicken, seafood, homemade yeast rolls and fresh-cut salads with special recipe dressings and which serve alcoholic beverages through a full-service bar all under the trademark O'Charley's(R) (the "System"); WHEREAS, the distinguishing characteristics of the System include, without limitation, distinctive exterior and interior design, decor, color schemes, awnings, neons and furnishings, special recipes and menu items, uniform standards, specifications and procedures for operations, quality and uniformity of products and services offered, procedures for inventory management and financial control, training and assistance, and advertising and promotional programs, all of which may be changed, improved and further developed by Licensor from time to time; WHEREAS, Licensor identifies the System by means of certain trade names, service marks, trademarks, emblems and indicia of origin, including, but not limited to, the mark O'Charley's(R) and such other trade names, service marks and trademarks as are now designated (and may hereafter be designated by Licensor in writing) for use in connection with the System (the "Proprietary Marks"); WHEREAS, Licensor continues to develop, use and control the use of such Proprietary Marks in order to identify for the public the source of services and products marketed thereunder and under the System, and to represent the System's high standards of quality, appearance and service; WHEREAS, the value of Licensor's Proprietary Marks is based upon: (a) the maintenance of uniform high quality standards in connection with the preparation and sale of Licensor-approved food and beverage products; (b) the uniform high standards of appearance of the individual restaurant units in the System; (c) the use of distinctive Proprietary Marks, building designs and advertising signs representing a uniformly high quality of products and services; and (d) the assumption by its franchisees of the obligation to maintain and enhance the goodwill and public acceptance of the System and of the Proprietary Marks by strict adherence to the high standards required by Licensor; and WHEREAS, Developer wishes to obtain certain development rights to operate one (1) or more full-service O'Charley's restaurants (each, a "Restaurant" or "Licensed Business," and together, the "Restaurants" or "Licensed Businesses") under the System in the territory described in this Development Agreement. NOW, THEREFORE, the parties, in consideration of the mutual representations, warranties, covenants and agreements set forth herein, and intending to be legally bound, hereby agree as follows: ARTICLE I GRANT A. In reliance on the representations, warranties, covenants and agreements of Developer and its Controlling Principals hereunder, Licensor hereby grants to Developer and Developer hereby accepts, pursuant to the terms and conditions of this Agreement, the right and obligation to develop the number of Restaurants described in the Development Schedule (as defined below) solely within the geographic area(s) described below (collectively the "Territory"). State of Michigan, except Lenawee County in Southeast Michigan ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Developer may be granted rights to develop additional Restaurants in Licensor's sole discretion. Any and all such rights to develop Restaurants are subject to Developer's full compliance with all conditions precedent to the grant of such rights outlined in this Agreement, and any such rights shall be exercised in accordance with Article III. B. Developer acknowledges and understands that the rights granted hereunder are for the development of full-service O'Charley's restaurants. Except as provided in this Agreement, and subject to Developer's full compliance with this Agreement and any other agreements among Developer, or any of its Affiliates and Licensor or any of its Affiliates, neither Licensor nor its Affiliates shall establish or authorize any other person or any other corporation, limited liability company, partnership, limited partnership, joint venture, association, trust, unincorporated association or any other business entity (each, an "Entity"), other than Developer, to establish a Restaurant in the Territory during the term of this Agreement. Notwithstanding the above, Developer acknowledges and agrees that Licensor and its Affiliates operate restaurants under the trademark O'Charley's(R) and further agrees and acknowledges that the rights granted hereby are only for the development and operation of one (1) or more full-service O'Charley's restaurants, and, therefore, Licensor and its Affiliates may conduct (or authorize one or more third parties to conduct) the following activities: (1) Licensor, its Affiliates, any O'Charley's developer or operator and any other authorized person or Entity shall have the right, at any time, to advertise and promote the System, and fill customer orders by providing catering and/or delivery services in the Territory. 2 (2) Licensor and its Affiliates may offer and sell (or may authorize others to offer and sell) collateral and ancillary products and services under the Proprietary Marks which may be similar to those offered by the Restaurants in the Territory if offered and sold other than through a full-service O'Charley's restaurant, such as pre-packaged food products, t-shirts and O'Charley's memorabilia. (3) Licensor and its Affiliates may offer and sell in the Territory (or may authorize others to offer and sell) such products and services under the Proprietary Marks through any permanent, temporary or seasonal food service facility (e.g., a kiosk, concession or multi-brand facility) that will provide a limited number or representative sample of the products and services normally offered by, and be located in a smaller facility than, a full-service O'Charley's restaurant ("Alternative Distribution Facilities"). (4) Licensor and its Affiliates may operate (or may authorize others to operate) a full-service O'Charley's restaurant or other similar food service facilities offering the same products and services offered by a full-service O'Charley's restaurant or an Alternative Distribution Facility in any area of retail sales establishments, food courts, transportation facilities (e.g., airports, train stations, bus terminals or port authorities), hospitals and other healthcare facilities, cafeterias, commissaries, schools, hotels, sports and entertainment facilities (e.g., stadiums, arenas, ball parks or convention centers) and other mass gathering locations or events designated by Licensor (each, an "Excluded Area"). Licensor may first offer to Developer the right to offer and sell the O'Charley's restaurant products in the Excluded Area within the Territory. Developer must meet each of the conditions outlined in Section IV(B), and any other criteria and qualifications deemed necessary by Licensor, or any other third party involved in the arrangement such as an airport or stadium authority, educational institution or other facilities operator ("Facilities Operator"), to offer and sell the O'Charley's restaurant products and services in the Excluded Area. If Developer does not meet all of the criteria and qualifications required by Licensor and the Facilities Operator, then Developer shall not be granted the right to offer and sell such products and services within the Excluded Area and Licensor may conduct such business, or authorize any other person or Entity to do so. If Developer meets all the conditions, criteria and qualifications, Licensor shall offer to Developer the right to offer and sell such products and services on such terms and conditions as such arrangements may be offered to third parties as determined by Licensor or such Facilities Operator, as applicable. Once such offer has been made to Developer by Licensor in writing, Developer shall have the right to accept such offer within thirty (30) days after receipt of such written notification. If Developer fails to notify Licensor in writing of Developer's intent to accept the offer within such thirty (30) day time period or Developer fails to meet any criteria or qualifications imposed by Licensor or the Facilities Operator, Licensor may conduct such business itself, or authorize any other person or Entity to do so. (5) Licensor and its Affiliates may offer and sell (or may authorize others to offer and sell) products and services under any other names and marks. (6) Licensor, its Affiliates, any O'Charley's restaurant developer or operator and any other authorized person or Entity may establish and operate a full-service O'Charley's restaurant anywhere outside of the Territory regardless of proximity to the Territory or the Location (as defined in the Operating Agreement) of any O'Charley's Restaurant operated by Developer. 3 C. This Agreement is not a franchise or license agreement and does not grant to Developer any right or license to operate a Restaurant, distribute goods or services, or any right to use or interest in the Proprietary Marks (such right and license being granted only pursuant to the Operating Agreement applicable to individual Restaurants as such Operating Agreement may be entered into and become effective pursuant to this Agreement and such Operating Agreement). D. After this Agreement expires or is terminated, Licensor shall have the complete and unrestricted right to operate or license other persons to operate one or more restaurants utilizing the System in the Territory (except at Locations for which Developer has a then outstanding and effective Operating Agreement). ARTICLE II FEES A. Developer shall pay Licensor an initial license fee of Fifty Thousand Dollars ($50,000) for each of the first two (2) Restaurants developed pursuant to this Agreement and Twenty-Five Thousand Dollars ($25,000) for each additional Restaurant developed pursuant to this Agreement. Simultaneously with the execution of this Agreement, Developer shall pay to Licensor one half (1/2) of the license fees for all Restaurants to be developed pursuant to this Agreement as a fee for such development. The remaining one half (1/2) of the license fee for each of the Restaurants to be developed during the Development Periods shall be paid by Developer upon the signing of an Operating Agreement for each Restaurant. B. Developer acknowledges that the portion of the license fees being paid to Licensor simultaneously with the execution of this Agreement is being paid in partial consideration of the administrative and other expenses incurred by Licensor in connection with the development rights granted hereunder and for its lost or deferred opportunity to grant such rights to any other party. Developer acknowledges that no part of such fees shall be refunded to Developer under any circumstances, even if no Restaurants are opened by Developer under this Agreement, and that Developer shall have no right to recover from Licensor, directly or indirectly, any of such portion of the license fees. C. Pursuant to its obligations hereunder and under the applicable Operating Agreements, Licensor will make various expenditures in connection with the development of prospective Restaurant sites by Developer, including expenditures for travel, lodging and meals. Developer shall promptly notify Licensor of a decision to cease development of a prospective Restaurant site. In the event that Developer fails to open a Restaurant at any such site, Developer shall reimburse Licensor for Licensor's expenditures with respect to that site. In such event, Licensor shall provide Developer with an itemized list of Licensor's expenditures with respect to that site within sixty (60) days after Licensor receives notice that Developer no longer intends to develop a Restaurant at that site, and Developer shall reimburse Licensor for such costs within thirty (30) days after receiving such list. D. Developer shall not be entitled to withhold payments due Licensor under this Agreement on grounds of alleged nonperformance by Licensor hereunder. Any payment not actually received by Licensor on or before the date due shall be deemed overdue. Time is of the essence with respect to all payments to be made by Developer to Licensor. All unpaid obligations under this Agreement shall bear interest from the date due until paid at the lesser of 4 (1) the prime commercial rate of interest as reported in the Wall Street Journal (Southeastern edition) from time to time or by any bank or financial institution designated from time to time by Licensor for short term unsecured loans to substantial and responsible commercial borrowers, plus three percent (3%), or (2) the maximum rate allowed by applicable law. Notwithstanding anything to the contrary contained herein, no provision of this Agreement shall require the payment or permit the collection of interest in excess of the maximum rate allowed by applicable law. If any excess of interest is provided for herein, or shall be adjudicated to be so provided in this Agreement, the provisions of this paragraph shall govern and prevail, and neither Developer nor its Principals shall be obligated to pay the excess amount of such interest. If for any reason interest in excess of the maximum rate allowed by applicable law shall be deemed charged, required or permitted, any such excess shall be applied as a payment and reduction of any other amounts which may be due and owing hereunder, and if no such amounts are due and owing hereunder then such excess shall be repaid to the party that paid such interest. E. Developer acknowledges that the Development Period extension fees in Article III and the transfer fee in Section VIII(B)(2)(j) may, in Licensor's sole discretion, be increased annually effective January 1 of each year beginning on January 1 of the year following the date of this Agreement, by an amount equal to the annual percentage increase during the preceding calendar year in the Consumer Price Index---All Consumers (All Items)---United States City Average, as compiled and published by the United States Department of Labor, or such comparable successor index as may be designated by Licensor from time to time. ARTICLE III SCHEDULE AND MANNER FOR EXERCISING DEVELOPMENT RIGHTS A. Developer shall enter into a separate Operating Agreement with Licensor for each Restaurant for which a development right is granted. The Operating Agreement to be executed for each Restaurant to be developed under this Agreement shall be in the form of the Operating Agreement attached hereto as Attachment A. B. (1) Acknowledging that time is of the essence, and subject to the requirements of Article IV, Developer agrees to exercise its development rights according to the development schedule below (the "Development Schedule"), which schedule designates the number of Restaurants in the Territory to be established and in operation by Developer upon the expiration of each of the designated development periods (the "Development Periods"). 5
CUMULATIVE TOTAL NUMBER OF RESTAURANTS LOCATED IN THE TERRITORY WHICH DEVELOPER SHALL HAVE OPEN AND DEVELOPMENT PERIOD EXPIRATION DATE OF DEVELOPMENT PERIOD IN OPERATION* - ------------------ ------------------------------------- ------------------------------------- One September 30, 2004 1 Two December 31, 2004 2 Three August 31, 2005 3 Four December 31, 2005 4 Five June 30, 2006 5 Six December 31, 2006 6 Seven June 30, 2007 7 Eight December 31, 2007 8 Nine June 30, 2008 9 Ten September 30, 2008 10 Eleven December 31, 2008 11 Twelve June 30, 2009 12 Thirteen September 30, 2009 13 Fourteen December 31, 2009 14 Fifteen June 30, 2010 15
*includes existing Restaurants, if any, purchased or acquired by Developer from Licensor. (a) Developer shall have the obligation to develop each Restaurant within the Territory during the Development Periods. If Developer has developed the Restaurant(s) required in the applicable Development Period in accordance with the Development Schedule and continues to meet the conditions set forth in Article IV, Developer shall have the right and obligation to develop the Restaurant(s) required during the next applicable Development Period. Developer acknowledges that compliance with its development obligations in each Development Period described above and continued compliance with Article IV is a condition precedent to the receipt of such additional development rights. If Developer fails to meet its development obligations or fails to comply with the Operational Approval, Financial Approval, Legal Approval and Ownership Approval requirements in Article IV, the conditions to the receipt of those further development rights shall not have been met, and Developer shall have no further rights to develop Restaurants hereunder. (b) During any of the Development Periods set forth above, subject to the terms and conditions of this Agreement, Developer, with Licensor's prior written consent (which consent may be withheld in Licensor's sole discretion), may develop more than the total minimum number of Restaurants which Developer is required to develop during that Development Period. Notwithstanding the above, Developer shall not open or operate more than the cumulative total number of Restaurants Developer is obligated to develop under this Agreement as set forth above in the Development Schedule without Licensor's consent, which may be withheld in Licensor's sole discretion. Any Restaurants developed during a Development Period in excess of the minimum number of Restaurants required to be developed upon expiration of that Development Period, shall be applied to satisfy Developer's development obligation during the next succeeding Development Period, if any. (2) If during the term of this Agreement, Developer ceases to operate any Restaurant developed under this Agreement for any reason, Developer shall develop a 6 replacement Restaurant to fulfill Developer's obligation to have open and in operation the required number of Restaurants upon the expiration of each Development Period. The replacement Restaurant shall be developed within the Territory and within a reasonable time to be determined by Licensor after Developer ceases to operate the Restaurant to be replaced. If during the term of this Agreement, Developer, in accordance with the terms of any Operating Agreement for a Restaurant developed under this Agreement, transfers its interest in such Restaurant, the transferred Restaurant shall continue to be counted in determining whether Developer has complied with the Development Schedule so long as it continues to be operated as an O'Charley's restaurant and the transfer of the Restaurant is made in accordance with Article VIII of this Agreement. If the transferred Restaurant ceases to be operated as an O'Charley's restaurant during the term of this Agreement, Developer shall develop a replacement Restaurant within the Territory and within a reasonable time to be determined by Licensor after the transferred Restaurant ceases to be operated as an O'Charley's restaurant. In either case, the reasonable time period shall apply to the development of the replacement Restaurant only. In Licensor's sole discretion, however, Licensor may extend the term of the applicable Development Period to the end of the mutually agreed upon time period for an extension fee of Five Thousand Dollars ($5,000) to be paid by Operator to Licensor; provided, however, that in no event shall such time period exceed three (3) months; and, provided, further, that such agreed time period shall not extend the term of this Agreement. In addition, Developer shall be required to pay to Licensor a lost revenue fee for any Restaurant that ceases to be operated as an O'Charley's restaurant. The lost revenue fee shall be an amount equal to the amount of revenue that Licensor would have received from Developer during the period between the closing of the Restaurant and the opening of the replacement Restaurant had the original Restaurant never closed. The lost revenue fee shall be determined by multiplying (x) by (y) where (x) equals the number of Accounting Periods (both complete and partial) between the closing of the Restaurant and the opening of the replacement Restaurant and (y) equals the greater of: (i) the closed Restaurant's Gross Sales (as that term is defined in the Operating Agreement) for its last full Accounting Period of operation, or (ii) the average of the Restaurant's last twelve (12) Accounting Periods (or such shorter period the Restaurant has been operating) of Gross Sales. For purposes of this Agreement, the term "Accounting Period" shall mean the accounting periods for the Restaurant as established by Licensor from time to time and described in the Manuals. (3) Developer shall open each Restaurant developed hereunder and shall commence business in accordance with the Development Schedule described in this Article III. (a) Developer may request in writing that Licensor extend the Development Period of any one Restaurant to permit Developer to complete construction and begin operation of such Restaurant. If Licensor determines, in its sole discretion, to grant any such request, the applicable Development Period shall be extended for a period of thirty (30) days (each such 30-day period being referred to as an "Extension Period"). Developer's written request for extension must be received by Licensor no later than sixty (60) days prior to the end of the Development Period for that Restaurant, and such written request must include a description of the reasons for Developer's failure to develop in a timely manner and the date that Developer expects to complete construction and opening of the Restaurant. (b) If Developer has agreed to develop five (5) or more Restaurants hereunder, unless otherwise agreed to by Licensor, in Licensor's sole and absolute discretion, Developer shall not be entitled to more than three (3) Extension Periods for any one Restaurant, 7 nor more than six (6) Extension Periods during the term of this Agreement. If Licensor permits a fourth (4th) Extension Period for any one Restaurant, Developer must pay Licensor an extension fee of Ten Thousand Dollars ($10,000) at the beginning of such Extension Period, plus another Ten Thousand Dollar ($10,000) extension fee at the beginning of each Extension Period Licensor approves thereafter until such Restaurant has begun operation. If Licensor permits a seventh (7th) Development Period, Developer must pay Licensor an extension fee of Ten Thousand Dollars ($10,000) at the beginning of such Extension Period, plus another Ten Thousand Dollar ($10,000) extension fee at the beginning of Extension Period Licensor approves thereafter until such Restaurant has begun operation. No extension of any Development Period will affect the duration of any Development Period for any other Restaurant or any of Developer's other development obligations hereunder. (c) If Developer has agreed to develop four (4) or fewer Restaurants hereunder, unless otherwise agreed to by Licensor, in Licensor's sole and absolute discretion, Developer will be permitted no more than three (3) Extension Periods during the term of this Agreement. If Licensor permits a fourth (4th) Extension Period, Developer must pay Licensor an extension fee of Ten Thousand Dollars ($10,000) at the beginning of such Extension Period, plus another Ten Thousand Dollar ($10,000) extension fee at the beginning of each Extension Period Licensor approves thereafter until such Restaurant has begun operation. No extension of any Development Period will affect the duration of any Development Period for any other Restaurant or any of Developer's other development obligations hereunder. C. Developer acknowledges that the projected opening dates ("Projected Opening Dates") for each Restaurant set forth below are reasonable and consistent with the requirements of the Development Schedule. Subject to Developer's compliance with Article IV hereof, Developer shall execute an Operating Agreement for each Restaurant no later than six (6) months prior to the Projected Opening Date for the applicable Restaurant.
RESTAURANT PROJECTED OPENING DATE ---------------- -------------------------- One September 30, 2004 Two December 31, 2004 Three August 31, 2005 Four December 31, 2005 Five June 30, 2006 Six December 31, 2006 Seven June 30, 2007 Eight December 31, 2007 Nine June 30, 2008 Ten September 30, 2008 Eleven December 31, 2008 Twelve June 30, 2009 Thirteen September 30, 2009 Fourteen December 31, 2009 Fifteen June 30, 2010
8 D. Developer assumes all cost, liability, expense and responsibility for locating, obtaining and developing sites for each Restaurant, and for constructing and equipping each Restaurant at each such site. Developer shall not make any binding commitment to a prospective vendor or lessor of real estate with respect to a site for a Restaurant unless the site is accepted as set forth below. Developer acknowledges that the location, selection, procurement and development of a site for each Restaurant is Developer's responsibility; that in discharging such responsibility Operator may consult with real estate and other professionals of Developer's choosing; and that Licensor's acceptance of a prospective site and the rendering of assistance in the selection of a site does not constitute a representation, promise, warranty or guarantee, express or implied, by Licensor that the Restaurant operated at that site will be profitable or otherwise successful. (1) In connection with the development of each Restaurant hereunder, Licensor shall do the following: (a) Licensor shall provide Developer with written site selection guidelines, which may be found within the Manuals or may otherwise be communicated to Developer, and such site selection assistance as Licensor may deem advisable. (b) Licensor shall provide such on-site evaluation as Licensor may deem necessary on its own initiative or in response to Developer's reasonable request for site acceptance; provided, however, that Licensor shall not provide an on-site evaluation for any proposed site prior to the receipt of all required information and materials concerning such site prepared pursuant to Section (III)(D)(2)(a). Licensor (or its designee) will provide at no additional charge to Developer one (1) on-site evaluation. Thereafter, if additional on-site evaluations are deemed appropriate by Licensor, or upon Developer's reasonable request, Licensor reserves the right to charge a fee for each such evaluation representing the reasonable expenses incurred by Licensor (or its designee) in connection with such on-site evaluation, including, without limitation, the cost of travel, lodging and meals. (c) Licensor shall loan to Developer a set of prototypical architectural and design plans and specifications for an O'Charley's Restaurant. (2) (a) Developer shall locate a site for the Restaurant that satisfies the Licensor's written site selection guidelines. Developer shall submit to Licensor, in the form specified by Licensor in the Manuals, a fully completed site selection acceptance request package which shall include a description of the site, evidence satisfactory to Licensor demonstrating that the site satisfies Licensor's current site selection guidelines and criteria, a letter of intent or other evidence satisfactory to Licensor which confirms Developer's favorable prospects for obtaining the site, together with such other information and materials as required in the Manuals or as Licensor may otherwise reasonably require. Recognizing that time is of the essence, Developer agrees that it will submit each such fully completed site selection acceptance request package and materials for the proposed site to Licensor for its acceptance at such time and in accordance with such procedures as are set forth in the Manuals, or which are otherwise 9 communicated to Developer by Licensor. Licensor shall have thirty (30) days after receipt of this information and materials to accept or reject, in its sole discretion, the proposed site as the location for the Restaurant. In the event Licensor rejects the proposed site, Licensor may submit to Operator a document outlining the reasons why Licensor rejected the proposed site. No site may be used for the location of the Restaurant unless it is first accepted in writing by Licensor. (b) After a location for the Restaurant is accepted by Licensor and acquired by Developer, the Location shall be described in Attachment A to the Operating Agreement that will be executed by Developer in connection with such Restaurant, which description shall be the legal description and/or street address of the site at which the Restaurant is to be located. (3) At least six (6) months prior to the Projected Opening Date for such Restaurant, Developer shall acquire by purchase or lease, at Developer's expense, the site for the Restaurant as set forth below. (a) If Developer intends to purchase the premises for the Restaurant, Developer shall submit a copy of the proposed contract of sale to Licensor for its written acceptance prior to Developer's execution of such contract and shall furnish to Licensor a copy of the executed contract of sale within ten (10) days after execution. If Developer intends to occupy the premises of the Restaurant under a lease, Developer shall submit a copy of the proposed lease to Licensor for Licensor's written acceptance prior to Developer's execution of such lease and shall furnish to Licensor a copy of the executed lease within ten (10) days after execution. No lease for the Restaurant premises shall be accepted by Licensor unless a rider to the lease, prepared by Licensor and executed by Licensor, Developer and the lessor, in substantially the form attached as Attachment B, is attached to the lease and incorporated therein. Licensor shall have thirty (30) days after receipt of the proposed lease or the proposed contract of sale to either accept, reject or propose amendments to such documentation prior to its execution. If Licensor fails to notify Developer of an objection to the proposed lease or the proposed contract of sale within this time period, Developer may use such lease or contract of sale; provided, however, the proposed contract or lease satisfies Licensor's then current criteria and requirements for contracts or leases outlined in the Manuals or as otherwise communicated to Developer by Licensor. These criteria and requirements may include financial requirements, specific lease requirements or other requirements that Licensor deems necessary. Licensor retains the right to vary from any requirement, add new requirements or make exceptions to any requirements in Licensor's sole discretion. (b) Developer shall be responsible for obtaining all zoning classifications and clearances which may be required by state or local laws, ordinances or regulations or which may be necessary as a result of any restrictive covenants relating to the Restaurant premises. Prior to beginning the construction of the Restaurant, Developer shall (i) obtain all permits, licenses and certifications (including licenses and permits to sell alcoholic beverages at the Restaurant) required for the lawful construction or remodeling and operation of the Restaurant, and (ii) certify in writing to Licensor that the insurance coverage specified in Article XIII of the Operating Agreement is in full force and effect and that all required approvals, clearances, permits and certifications (including alcoholic beverage licenses and permits) have been obtained. Upon request, Developer shall provide to Licensor additional copies of Developer's insurance policies or certificates of insurance and copies of all such approvals, clearances, permits and certifications. 10 (c) Developer must independently obtain any architectural, engineering and design services it deems necessary for the construction of the Restaurant at its own expense from an architectural design firm, which Licensor reserves the right to approve. Developer shall adapt the prototypical architectural and design plans and specifications for construction of the Restaurant provided to Developer by Licensor as necessary for the construction of the Restaurant and shall submit such adapted plans to Licensor for review. If Licensor determines, in its sole discretion, that any such plans do not satisfy Licensor's architectural or design standards and specifications for a full-service O'Charley's restaurant or are not consistent with the best interests of the System, Licensor may prohibit the implementation of such plans, and in this event will notify Developer of any objection(s) within thirty (30) days of receiving such plans or such other time period as may be specified in the Manuals. If Licensor fails to notify Developer of an objection to the plans within this time period, Developer may use such plans, provided such plans satisfy Licensor's then current architectural and design standards and specifications for a full-service O'Charley's restaurant. If Licensor objects to any such plans, it shall provide Developer with a reasonably detailed list of changes necessary to make the plans acceptable. Licensor shall, upon a resubmission of the plans with such changes, notify Developer within thirty (30) days of receiving the resubmitted plans whether the plans are acceptable. If such changes are not acceptable, Licensor shall notify Developer of such objections as described above, and Developer shall resubmit such plans in accordance with the procedures described above until such plans are accepted by Licensor. If Licensor fails to notify Developer of any objection within such time period, Developer may use the resubmitted plans. Developer acknowledges that acceptance by Licensor of such plans does not constitute a representation, warranty or guarantee, express or implied, by Licensor that such plans are free of architectural or any design errors and thus, Licensor shall have no liability to Developer or any other party with respect thereto. (d) Prior to commencement of construction, Developer must submit all requested information, including, but not limited to, architectural and design plans, construction schedules and current budgets in accordance with Licensor's request. As time is of the essence, Developer shall timely commence and diligently pursue construction of the Restaurant. Commencement of construction shall be defined as the time at which any site work is initiated by or on behalf of Developer at the Location accepted for the Restaurant. Site work includes, without limitation, paving of parking areas, installing outdoor lighting and sidewalks, extending utilities and demolishing of any existing premises, depending on whether the accepted Location for the Restaurant is freestanding. During the time of construction or remodeling, Developer shall provide Licensor with such periodic reports regarding the progress of the construction or remodeling as may be reasonably requested by Licensor or as required in the Manuals. In addition, Licensor shall make such on-site inspections as it may deem reasonably necessary to evaluate such progress. If during such inspections Licensor identifies instances where Developer's construction is inconsistent with, or does not meet, Licensor's standards, Licensor shall notify Developer in writing of such deficiencies, and Developer shall correct such deficiencies prior to opening the Restaurant. Developer shall notify Licensor of the scheduled date for completion of construction no later than sixty (60) days prior to such date. Within a reasonable time after the date of completion of construction, Licensor shall, at its option, conduct an inspection of the completed Restaurant. Developer acknowledges and agrees that Developer will not open the Restaurant for business without written authorization of Licensor and that 11 authorization to open shall be conditioned upon Developer's strict compliance with this Agreement. ARTICLE IV PREREQUISITES TO OBTAINING LICENSES A. Developer and the Controlling Principals understand and acknowledge that the rights and duties set forth in this Agreement are personal to Developer and its Controlling Principals (as applicable), are non-delegable and non-assignable, and that Licensor has granted such rights in reliance on the business skill, financial capacity and personal character of and expectations of performance of the duties hereunder by Developer and the Controlling Principals. Developer and the Controlling Principals have represented to Licensor that they have entered this Agreement for the purpose of fully complying and with the intention to fully comply with the Restaurant development obligations hereunder and not for the purpose of reselling the development rights granted herein. Developer and the Controlling Principals understand and agree that this Agreement does not confer upon Developer a right to develop or license to operate any Restaurant, but is intended by the parties to set forth the terms and conditions which, if fully satisfied by Developer, shall entitle Developer to obtain the right to develop and operate each Restaurant under an Operating Agreement within the Territory. B. In the event that Developer shall have obtained Licensor's acceptance of a particular proposed site for a Restaurant and shall have paid to Licensor all of the license fees due under this Agreement and the applicable Operating Agreement, and if Licensor, in the exercise of its sole and absolute discretion, has granted Developer, in writing, "Operational Approval," "Financial Approval," "Legal Approval" and "Ownership Approval" (collectively the "Conditions"), then Licensor will grant Developer a license to operate a Restaurant at the site in question. As used herein, Licensor will give Developer Operational Approval, Financial Approval, Legal Approval and Ownership Approval under the following circumstances: (1) Operational Approval will be granted if Licensor has determined, in the exercise of its sole discretion, that: (a) Developer is in compliance with the Development Schedule (including any extensions approved by Licensor in writing) and this Agreement and has opened each Restaurant as required under the Development Schedule (including any extensions approved by Licensor in writing); (b) Developer and its Affiliates are in compliance with any other agreement between Developer and its Affiliates and Licensor and its Affiliates; (c) Developer is conducting the operation of its existing Restaurants, if any, and is capable of conducting the operation of each proposed Restaurant required under the Development Schedule: (i) in accordance with the terms and conditions of the Agreement and any amendments thereto; (ii) in accordance with the provisions of the respective Operating Agreements and any amendments thereto; and 12 (iii) in accordance with the standards, specifications and procedures: (A) set forth and described in the Manuals (as defined in the Operating Agreement), as such Manuals may be amended from time to time; (B) as evaluated by Licensor, in its sole discretion, in accordance with the evaluation programs outlined in the Manuals; or (C) as otherwise set forth by Licensor in writing. (2) Developer acknowledges and agrees that it is vital to Licensor's interest that each of its operators be financially sound to avoid failure of an O'Charley's restaurant and that such failure would adversely affect the reputation and good name of Licensor and the System. In accordance with the foregoing criteria, Financial Approval will be granted if: (a) Developer and the Controlling Principals satisfy Licensor's then-current financial criteria for developers and controlling principals of O'Charley's restaurants with respect to Developer's operation of its existing Restaurants, if any, and the proposed Restaurant; (b) Developer and the Controlling Principals have been and are faithfully performing all terms and conditions under each of the existing Operating Agreements with Licensor, if any; (c) Developer is not in default, and has not been in default during the twelve (12) months preceding Developer's request for financial approval, of any monetary obligations owed to Licensor or its Affiliates under any Operating Agreement or other agreement between Developer or any of its Affiliates and Licensor or any of its Affiliates; and (d) Developer is not in default, and has not been in default during the twelve (12) months preceding the date of this Agreement, of any financial covenant or monetary obligation with any of its lenders or financing sources. (3) Legal Approval will be granted if Developer has executed and delivered to Licensor, in a timely manner, all information and documents requested by Licensor prior to and as a basis for the issuance of individual licenses or pursuant to any right granted to Developer by this Agreement or by any Operating Agreement between Developer and Licensor, has taken such additional actions in connection therewith as may be requested by Licensor from time to time. (4) Ownership Approval will be granted if: (a) neither Developer nor any of its Controlling Principals (as applicable) shall have transferred a Controlling Interest in Developer; and (b) Developer and the Controlling Principals upon whom Licensor has relied to perform the duties under this Agreement shall continue to own and exercise control over a Controlling Interest in Developer. C. (1) If Licensor determines, in its sole discretion, that Developer and the Controlling Principals: 13 (a) have met all of the Conditions prior to the grant of the right to establish each additional Restaurant, then Licensor shall grant to Developer the right to develop such additional Restaurants pursuant to the Development Schedule; or (b) have not met one (1) or more of the Conditions, Licensor may, (in addition to any other rights or remedies Licensor may have) suspend, without extending the term of this Agreement, Developer's right to develop Restaurants until the Conditions are satisfied in Licensor's sole discretion, and re-state the Development Schedule (which may include a reduction in the number of Restaurants and the number of Development Periods). (2) The Conditions described above shall survive the termination or expiration of this Agreement and shall apply with respect to any Operating Agreement executed pursuant to this Development Agreement. D. It is understood and agreed that the foregoing criteria apply to the operational, financial, legal and ownership aspects of any Restaurant franchised by Licensor in which Developer or any Controlling Principal has any legal or equitable interest. It is further understood and agreed that Developer and the Controlling Principals have an ongoing responsibility to operate each Restaurant in which Developer or any Controlling Principal has any legal or equitable interest in a manner which satisfies the foregoing requirements for Operational Approval, Financial Approval, Legal Approval and Ownership Approval. ARTICLE V TERM A. Unless sooner terminated in accordance with this Agreement, the term of this Agreement and all rights granted by Licensor under this Agreement shall expire on the date on which Developer successfully and in a timely manner has exercised all of the development rights and completed the development obligations under this Agreement in accordance with the Development Schedule (including, if applicable, any extension thereof under Section III(B)(3)). B. As set forth in Section VII(E)(3), upon such expiration, Licensor shall, subject to the terms of the Operating Agreements executed pursuant hereto, have the right to develop, or authorize any other person or Entity to develop, O'Charley's restaurants in the Territory and Developer shall have no further rights with respect to the development of O'Charley's restaurants in the Territory; provided, however, if an Operating Agreement is fully executed in accordance with Article III, prior to the expiration of the Development Schedule, Developer shall complete the development of such Restaurant subject to the Operating Agreement and shall open and operate such Restaurant as provided in the Operating Agreement. ARTICLE VI DUTIES OF DEVELOPER A. Developer and the Controlling Principals, as applicable, make the following representations, warranties and covenants and accept the following obligations: (1) If Developer is a corporation, limited liability company, partnership or other Entity, Developer make the following representations, warranties and covenants to Licensor: 14 (a) Developer is duly organized and validly existing under the state law of its formation. (b) Developer is duly qualified and is authorized to do business in each jurisdiction in which its business activities or the nature of the properties owned by it require such qualification. (c) Developer's corporate charter, written operating agreement or written partnership agreement shall at all times provide that the activities of Developer are confined exclusively to the development and operation of O'Charley's restaurants. Unless otherwise consented to by Licensor in writing, Developer shall not use the Proprietary Marks as part of its corporate or other legal name, and, in any event, shall obtain Licensor's approval of such corporate or other legal name prior to applying for or filing it with the applicable government authority. (d) The execution of this Agreement and the consummation of the transactions contemplated hereby are within Developer's corporate power, if Developer is a corporation, are permitted under Developer's articles of organization and written operating agreement and have been duly authorized by Developer, if Developer is a limited liability company, are permitted under Developer's written partnership agreement and have been duly authorized by Developer, if Developer is a partnership. (e) If Developer is a corporation, copies of Developer's Articles of Incorporation, Bylaws, other governing documents, any amendments thereto, resolutions of the Board of Directors authorizing entry into and performance of this Agreement and any certificates, buy-sell agreements or other documents restricting the sale or transfer of stock of the corporation, and any other documents as may be reasonably required by Licensor, shall have been furnished to Licensor prior to the execution of this Agreement; if Developer is a limited liability company, copies of Developer's articles of organization, operating agreement, any buy-sell agreements or other documents restricting the sale or transfer of interests in the limited liability company, and any other governing documents and any amendments thereto shall have been furnished to Licensor prior to the execution of this Agreement; or, if Developer is a partnership, copies of Developer's written partnership agreement, any buy-sell agreements or other documents restricting the sale or transfer of interests in the partnership, and any other governing documents and any amendments thereto shall be furnished to Licensor prior to the execution of this Agreement. Developer shall also provide to Licensor evidence of consent or approval of the entry into and performance of this Agreement by the requisite number or percentage of shareholders, members or partners, if such approval or consent is required by statute or by Developer's Articles of Incorporation, Bylaws, articles of organization, operating agreement, written partnership agreement or other governing documents, as applicable. (f) If Developer is a corporation, limited liability company or partnership, the ownership interests in Developer are accurately and completely described in Attachment D. Further, if Developer is a corporation, Developer shall maintain at all times a current list of all owners of record and all beneficial owners of any class of voting securities in Developer, if Developer is a limited liability company, Developer shall maintain at all times a current list of all owners of an interest in the limited liability company, or, if Developer is a partnership, Developer shall maintain at all times a current list of all owners of an interest in the partnership. Developer shall immediately provide a copy of the updated list to Licensor upon the 15 occurrence of any change of ownership and otherwise shall make its list of owners available to Licensor upon request. (g) If, after the execution of this Agreement, any person ceases to qualify as a Principal, or if any individual succeeds to or otherwise comes to occupy a position which would, upon designation by Licensor, qualify him as a Principal, Developer shall notify Licensor within five (5) days after any such change and, upon designation of such person by Licensor as a Principal, or as a Controlling Principal, as the case may be, such person shall execute such documents and instruments (including, as applicable, this Agreement) as may be required by Licensor to be executed by others in such positions. (h) If Developer is a corporation, Developer shall maintain stop-transfer instructions against the transfer on its records of any of its equity and voting securities and each certificate representing an equity or voting security of the corporation shall have conspicuously endorsed upon it a statement, in a form satisfactory to Licensor, that it is held subject to all restrictions imposed upon assignments by this Agreement; provided, however, that the requirements of this Section VI(A)(1)(h) shall not apply to the transfer of equity securities of a Publicly-Held Entity that is otherwise approved to be the Operator. If Developer is a limited liability company, its operating agreement shall provide that ownership of an interest in the limited liability company is held subject to all restrictions imposed upon assignments by this Agreement. If Developer is a partnership, its written partnership agreement shall provide that ownership of an interest in the partnership is held subject to all restrictions imposed upon assignments by this Agreement. (i) Developer and each of the Controlling Principals have provided Licensor with the most recent financial statements of Developer and each of the Controlling Principals. Developer shall provide an annual balance sheet, income statement, statement of shareholders' equity and statement of cash flows in the form prescribed by Licensor (which may be unaudited, unless otherwise requested or required by Licensor) within one hundred twenty (120) days after Developer's fiscal year end. Such financial statements present fairly the financial position of Developer and each of the Controlling Principals, as applicable, at the dates indicated therein and with respect to Developer, the results of its operations, cash flow and owners' equity for the years then ended. Developer agrees that it shall maintain at all times during the term of this Agreement, sufficient working capital to fulfill its obligations under this Agreement. Each of the financial statements mentioned above shall be certified as true, complete and correct by Developer's treasurer or chief financial officer (or by the applicable Controlling Principal, as appropriate) and shall have been prepared in conformity with generally accepted accounting principles consistently applied to all applicable periods involved. Developer's treasurer or chief financial officer shall deliver to Licensor, simultaneously with the financial statements mentioned above, a certificate certifying that Developer is not in default of any of Developer's financial covenants or monetary obligations with any of Developer's lenders or financing sources. No material liabilities, adverse claims, commitments or obligations of any nature exist as of the date of this Agreement, whether accrued, unliquidated, absolute, contingent or otherwise, which are not reflected as liabilities on the financial statements of Developer or such Controlling Principals or otherwise appropriately disclosed in the notes thereto. (j) Each of the Principals, except the Controlling Principals, shall execute and bind themselves to the confidentiality and non-competition covenants set forth in the Confidentiality and Non-Compete Agreement attached hereto as Attachment C to this 16 Agreement (see Sections IX(B)(2) and IX(I)). The Controlling Principals shall jointly and severally guarantee Developer's performance of all of Developer's obligations (including, but not limited to, the payment of fees), covenants and agreements described in this Agreement pursuant to the terms and conditions of the guaranty attached hereto as Attachment E, and do otherwise bind themselves to the terms of this Agreement as stated herein. (k) Developer and the Controlling Principals acknowledge and agree, jointly and severally, that the representations, warranties, covenants and agreements set forth above in Section VI(A)(l)(a)-(j) are continuing obligations of Developer and the Controlling Principals, as applicable. Developer and each Controlling Principal will cooperate with Licensor in any efforts made by Licensor to verify compliance with such representations, warranties, covenants and agreements. (2) Upon the execution of this Agreement, Developer shall designate and retain an individual to serve as Operating Principal of Developer ("Operating Principal"). If Developer is an individual, Developer shall perform all obligations of Operating Principal. Operating Principal shall, during the entire period he serves as such, meet the following qualifications: (a) Operating Principal may, at Operating Principal's option, and, subject to the approval of Licensor, designate an individual to perform the duties and obligations of Operating Principal described herein; provided, however that Operating Principal shall ensure that such designee meets all the requirements for an Operating Principal outlined below, conducts and fulfills all of the Operating Principal's obligations in accordance with the terms of this Agreement; provided, further, Operating Principal shall remain fully responsible for any such performance. (b) Operating Principal must maintain a direct ownership interest in the Developer satisfactory to Licensor. Except as may otherwise be provided in this Agreement, Operating Principal's interest in Developer shall be and shall remain free of any pledge, mortgage, hypothecation, lien, charge, encumbrance, voting agreement, proxy, security interest or purchase right or options. (c) Developer and Operating Principal (or his designee, as applicable) shall devote their full time and best efforts to the supervision and conduct of the business contemplated by this Agreement. Operating Principal shall execute this Agreement as one of the Controlling Principals, and shall be individually, jointly and severally with the Developer and the other Controlling Principals, bound by all obligations of Developer, the Operating Principal and the Controlling Principals hereunder. (d) Operating Principal (or his designee, as applicable) shall meet Licensor's standards and criteria for such individual (including, but not limited to, educational, financial and operational experience criteria prescribed by Licensor), as set forth in the Manuals (as defined in the Operating Agreement) or as otherwise communicated by Licensor to Operator from time to time. (e) If during the term of this Agreement Operating Principal (or any designee) is not able to continue to serve in the capacity of Operating Principal or no longer qualifies to act as such in accordance with this Section, Developer shall notify Licensor within ten (10) days and shall designate a replacement within sixty (60) days after Operating Principal 17 (or any designee) ceases to serve or be so qualified, such replacement being subject to the same qualifications and restrictions listed above. Developer shall provide for interim management of the activities contemplated under this Agreement until such replacement is so designated, such interim management is to be conducted in accordance with this Agreement. (3) Developer and the Controlling Principals understand that compliance by all developers and operators operating under the System with Licensor's training, development and operational requirements is an essential and material element of the System and that Licensor and developers and operators operating under the System consequently expend substantial time, effort and expense in training management personnel for the development and operation of their respective O'Charley's restaurants. Accordingly, Developer and the Controlling Principals agree that if during the term of this Agreement, Developer or any Controlling Principal shall designate or employ any individual who is at the time or was within the preceding three (3) months employed in a restaurant managerial position, a multi-restaurant supervisory position or home office staff position (e.g., officer or director level personnel, management information systems personnel or human resources and training personnel), by Licensor or any of its Affiliates, including, but not limited to, individuals employed by Licensor to work in its O'Charley's restaurants, or at Licensor's home office, or employed in a restaurant managerial position by any other developer or operator operating under the System (a "Covered Individual"), then such former employer of such Covered Individual shall be entitled to compensation for the reasonable costs and expenses, of whatever nature or kind, incurred by such employer in connection with the training of such Covered Individual. The parties hereto agree that such expenditures may be uncertain and difficult to ascertain and, therefore, agree that the compensation specified herein reasonably represents such expenditures and is not a penalty. The employing Developer or Controlling Principal shall pay to the former employer an amount equal to the salary of such Covered Individual for the six (6) month period prior to the termination of his employment with such former employer (or if the Covered Individual was employed less than six (6) months, that Covered Individual's projected salary had the Covered Individual been employed for the full six (6) months) for any restaurant level managerial personnel. For any Covered Individual employed in a multi-restaurant supervisory or home office staff position, the employing Developer or Controlling Principal shall pay to the former employer an amount equal to the salary of such Covered Individual for the twelve (12) month period immediately prior to the termination of his employment with such former employer (or if the Covered Individual was employed less than twelve (12) months, that Covered Individual's projected salary had the Covered Individual been employed for the full twelve (12) months). Such amount shall be paid by Developer, or the applicable Controlling Principal, as the case may be, within thirty (30) days after written notice, unless otherwise agreed with such former employer. The parties hereto expressly acknowledge and agree that no current or former employee of Licensor, its Affiliates, Developer, or of any other Entity operating under the System shall be a third party beneficiary of this Agreement or any provision hereof. Notwithstanding the above, solely for purposes of bringing an action to collect any payment due under this Section, such former employer shall be a third-party beneficiary of this Section VI(A)(3). Licensor hereby expressly disclaims any representations and warranties regarding the performance of any employee or former employee of Licensor or its Affiliates, or any developer or operator operating under the System, who is designated or employed by Developer or any Controlling Principal in any capacity, and Licensor shall not be liable for any losses, of any nature or kind, incurred by Developer or any Controlling Principal in connection therewith. 18 (4) Developer shall comply with all requirements of federal, state and local laws, rules, regulations and orders. (5) Developer shall obtain and maintain all appropriate licenses, permits and certificates for the operation of the Restaurant, including licenses and permits to sell alcoholic beverages in the Restaurant. (6) Developer and the Controlling Principals shall allow Licensor and its representatives to review any and all of Developer's and the Controlling Principals' documents and other materials relating to their financing arrangements or capital structure. B. Developer and the Controlling Principals represent, warrant, covenant and agree that they shall comply with all other requirements and perform such other obligations as provided in this Agreement and the Manuals. ARTICLE VII DEFAULT AND TERMINATION A. Developer shall be deemed to be materially in default under this Agreement and all rights granted herein shall automatically terminate without notice to Developer if: (1) Developer becomes insolvent or makes a general assignment for the benefit of creditors or files a voluntary petition under any section or chapter of federal bankruptcy laws or under any similar law or statute of the United States or any state thereof ("Bankruptcy Laws") or admits in writing its inability to pay its debts when due; (2) Developer is adjudicated bankrupt or insolvent in proceedings filed against Developer under any section or chapter of any Bankruptcy Law; (3) a bill in equity or other proceeding for the appointment of a receiver of Developer or other custodian for Developer's business or assets is filed and consented to by Developer, or if a receiver or other custodian (permanent or temporary) of Developer's assets or property, or any part thereof, is appointed by any court of competent jurisdiction; (4) proceedings for a composition with creditors under any state or federal law are instituted by or against Developer; (5) a final judgment against Developer remains unsatisfied or of record for thirty (30) days or longer (unless supersedeas bond is filed); (6) Developer is dissolved; (7) execution is levied against Developer's business or property; (8) suit to foreclose any lien or mortgage against the premises or equipment of any business operated hereunder or under any Operating Agreement is instituted and not dismissed within thirty (30) days; or (9) the real or personal property of any business operated hereunder or under any Operating Agreement shall be sold after levy thereupon by any sheriff, marshal or other government official. B. Developer shall be deemed to be in material default and Licensor may, at its option, terminate this Agreement and all rights granted hereunder, without affording Developer 19 any opportunity to cure the default except as specifically provided below, effective immediately upon notice to Developer, upon the occurrence of any of the following events of default: (1) Developer fails to comply with the Development Schedule (or any extension, if any, thereof approved by Licensor in writing), or Developer fails to develop a replacement Restaurant within any time period agreed upon by the parties under Section III(B)(2); (2) Developer fails to execute each Operating Agreement in accordance with Section III(C) (or any extension thereof approved by Licensor in writing); (3) Developer or any of the Controlling Principals is convicted of, or shall have entered a plea of nolo contendere to, a felony, a crime involving moral turpitude or any other crime or offense that Licensor believes is reasonably likely to have an adverse effect on the System, the Proprietary Marks, the goodwill associated therewith or Licensor's interest therein; (4) a threat or danger to public health or safety results from the construction, maintenance or operation of any Restaurant developed under this Agreement; (5) Developer fails to designate a qualified replacement Operating Principal or designee appointed by Operating Principal within sixty (60) days after any initial or successor Operating Principal or designee ceases to serve as such, all as required under Section VI(A)(2)(e); (6) Developer or any of the Controlling Principals breach any of the representations warranties and covenants in Article VI; (7) Developer or any of the Controlling Principals transfers or attempts to transfer any rights or obligations under this Agreement, any interest in Developer or the assets of Developer, without first obtaining Licensor's written consent pursuant to Section VIII(B) or offering Licensor a right of first refusal with respect to such transfer pursuant to Section VIII(D); (8) Developer or any of the Controlling Principals fails to comply with the covenants in Article IX or fails to obtain execution of the covenants and related agreements required under Article IX hereof within thirty (30) days after being requested to do so by Licensor; (9) an approved transfer upon death or Permanent Disability is not effected within the time period and in the manner prescribed by Section VIII(E); (10) Developer or any of the Controlling Principals misuses or makes any unauthorized use of the Proprietary Marks or otherwise materially impairs the goodwill associated therewith or with the System or Licensor's rights therein; (11) Developer, the Controlling Principals or any of their Affiliates fails, refuses or neglects promptly to pay when due any monetary obligation owing to Licensor or any of its Affiliates under this Agreement, any Operating Agreement or any other agreement (which shall include payments to lenders where Licensor has guaranteed the underlying indebtedness) and does not cure such default within five (5) days following notice from Licensor (or such other applicable cure period contained in such other agreement, unless no cure period is stated or such period is less than five (5) days, in which case the five (5) day cure period shall apply); 20 (12) Developer, the Controlling Principals or any of their Affiliates fails or refuses to comply with any term or condition of any sublease or related agreement, between Licensor or its Affiliates and Developer or its Affiliates, and does not cure such default within any notice and cure period provided for in such sublease or related agreement following notice from Licensor of such default (unless no cure period is specified in the sublease or other agreement), in which case the notice and cure period in Section VII(C) shall apply; or (13) Developer or any of the Controlling Principals repeatedly commits a material event of default under this Agreement, whether or not such defaults are of the same or different nature and whether or not such defaults have been cured by Developer after notice by Licensor. C. Except as provided above in Sections VII(A) and VII(B), if Developer fails to comply with any other term or condition imposed by this Agreement, any Operating Agreement or any other development or operating agreement between Developer and Licensor, as such may from time to time be amended, Licensor may terminate this Agreement only by giving written notice of termination stating the nature of such default to Developer at least thirty (30) days prior to the effective date of termination; provided, however, that Developer may avoid termination by immediately initiating a remedy to cure such default and curing it to Licensor's satisfaction within the thirty (30) day period and by promptly providing proof thereof to Licensor. Subject to Section VII(D), if any such default is not cured within the specified time, or such longer period as applicable law may require, Developer's rights under this Agreement shall terminate without further notice to Developer effective immediately upon the expiration of the thirty (30) day period or such longer period as applicable law may require, unless Licensor gives Developer notice of Licensor's intent to continue this Agreement. D. Upon default by Developer under Sections VII(B) or VII(C), Licensor has the option, in its sole discretion, in addition to exercising its option to terminate this Agreement as provided in Sections VII(B) and (C), to do any one or more of the following: (1) terminate or modify any territorial rights granted to Developer in Article I; (2) reduce the area of such territorial rights; (3) reduce the number of Restaurants which Developer may establish pursuant to Section III(B)(l); (4) accelerate the Development Schedule; (5) with respect to Section VII(B)(l), permit Developer to obtain an extension of the Development Schedule under Section III(B); (6) terminate or modify any right granted to Developer in Section I(B); or (7) pursue any other remedy Licensor may have at law or in equity; provided, however, that Licensor shall not be entitled to recover money damages for lost revenues or profits solely because of a failure of Developer to meet the Development Schedule set out herein so long as Developer shall demonstrate that such failure has occurred despite the exercise of all commercially reasonable efforts on Developer's part to meet such Development Schedule. E. (1) Upon the termination or expiration of this Agreement, Developer shall have no right to establish or operate any Restaurant: 21 (a) for which an Operating Agreement has not been executed by Licensor and delivered to Developer at the time of termination or expiration, or (b) with respect to which Developer has not satisfied the prerequisites for obtaining licenses as described in Article IV whether or not an Operating Agreement has been executed. (2) If Licensor elects to terminate the territorial rights granted to Developer in Article I or modify such territorial rights or reduce the area of territorial rights as provided in Section VII(D) above, Developer shall continue to develop Restaurants in accordance with the Development Schedule or Supplementary Development Schedule, to the extent that the number of Restaurants Developer is required to develop is reduced and/or the area in which such Restaurants are required to be developed is reduced by Licensor pursuant to Sections VII(D)(2) and (3). (3) If Licensor exercises any of its rights in Section VII(D) or if this Agreement otherwise expires or terminates, Licensor shall be entitled to establish, and to license others to establish, Restaurants in the Territory or in the portion thereof no longer part of the Territory or pursuant to any other modification of Developer's territorial rights, except as may be otherwise provided under any Operating Agreement which is then in effect between Licensor and Developer. F. Licensors exercise of any of its options under Section VII(D) shall not, in the event of a default, constitute a waiver by Licensor to exercise its option to terminate this Agreement at any time with respect to a subsequent event of default of a similar or different nature. G. No default under this Agreement shall constitute a default under any Operating Agreement between the parties hereto, unless the default is also a default under the terms of such Operating Agreement. H. Upon default of Developer and the early termination of this Agreement, Licensor shall have the right to purchase the assets of all of the Restaurants opened pursuant to Operating Agreements executed under the terms of this Agreement. The terms and conditions of the purchase transaction, including, but not limited to, the purchase price for the assets of such Restaurants, shall be determined in accordance with the provisions contained in the applicable Operating Agreement permitting the Licensor to purchase, at its option, such assets upon termination or expiration of the Operating Agreement. I. No right or remedy herein conferred upon or reserved to Licensor is exclusive of any other right or remedy provided or permitted by law or in equity. J. Upon termination or expiration of this Agreement, Developer and the Controlling Principals shall comply with the restrictions on confidential information and the covenants against competition contained in Article IX. Any other person required to execute similar covenants pursuant to Article IX shall also comply with such covenants. K. Developer acknowledges and agrees that each of the obligations of Developer and the Controlling Principals described in this Agreement is a material and essential obligation of Developer, that non-performance of such obligations will adversely and substantially effect the Licensor and the System, and that the exercise by Licensor of the rights and remedies set forth herein is appropriate and reasonable. 22 L. Any alleged default by Licensor of this Agreement shall be deemed waived unless: (1) Developer gives Licensor written notice of such alleged default within thirty (30) days of its occurrence; and (2) Licensor fails to initiate a remedy to such alleged default within sixty (60) days of having received written notice thereof. ARTICLE VIII TRANSFER OF INTEREST A. Licensor shall have the right to transfer or assign this Agreement and all or any part of its rights or obligations herein to any person or Entity without Developer's consent. Specifically, and without limitation to the foregoing, Developer and the Controlling Principals expressly affirm and agree that Licensor may sell its assets, the Proprietary Marks or the System to a third party; may offer its securities privately or publicly; may merge, spin-off, acquire other Entities, or be acquired by another Entity; may undertake a refinancing, recapitalization, leveraged buyout or other economic or financial restructuring; and, with regard to any or all of the above sales, assignments and dispositions, Developer and the Controlling Principals expressly and specifically waive any claims, demands or damages against Licensor arising from or related to the transfer of the Proprietary Marks (or any variation thereof) or its assets or the System (or any portion thereof) from Licensor to any other party. Upon such sale, assignment or disposition, Developer further agrees that Licensor shall have no further obligations arising out of or related to this Agreement so long as such obligations are assumed by the transferee. Nothing contained in this Agreement shall require Licensor to remain in the business of operating or licensing the operation of O'Charley's restaurants or other restaurant businesses or to offer any services or products, whether or not bearing the Proprietary Marks, to Developer, if Licensor exercises its rights hereunder to assign its rights in this Agreement. B. (1) Developer and the Controlling Principals understand and acknowledge that the rights and duties set forth in this Agreement are personal to Developer and the Controlling Principals and that Licensor has granted such rights in reliance on the business skill, financial capacity and personal character of Developer and the Controlling Principals and with the expectation that the duties and obligations contained in this Agreement will be performed by Developer and the Controlling Principals signing this Agreement. Accordingly, neither Developer nor any Controlling Principal, nor any successor or assign of Developer or any Controlling Principal, shall sell, assign, transfer, convey, give away, pledge, mortgage or otherwise dispose of or encumber any direct or indirect interest in this Agreement, in Developer or the assets of Developer, without the prior written consent of Licensor; provided, however, that Licensor's prior written consent shall not be required for a transfer of less than a five percent (5%) interest in a Publicly-Held Entity. Any purported assignment or transfer, by operation of law or otherwise, made in violation of this Agreement shall be null and void. (2) If Developer wishes to transfer all or part of its interest in this Agreement or if Developer or a Controlling Principal wishes to transfer any ownership interest in, or assets of, Developer, transferor and the proposed transferee shall apply to Licensor in writing for Licensor's consent, which may be withheld in Licensor's sole discretion. Without limiting the generality of the foregoing, Licensor may require that any or all of the following conditions be met prior to its approval of the transfer: 23 (a) All of the accrued monetary obligations of Developer and its Affiliates and all other outstanding obligations to Licensor and its Affiliates arising under this Agreement or any Operating Agreement or any other agreement shall have been satisfied in a timely manner and Developer shall have satisfied all trade accounts and other debts, of any nature or kind, in a timely manner. (b) Developer and its Affiliates are not in default of any provision of this Agreement, any amendment hereof or successor hereto, or any Operating Agreement or any other agreement between Developer or its Affiliates and Licensor or its Affiliates; and Developer shall have substantially and timely complied with all the terms and conditions of such agreements during the terms thereof. (c) The transferor and its principals, as applicable, shall have executed a general release, in a form satisfactory to Licensor, of any and all claims against Licensor, and its Affiliates, and each of such Entity's respective officers, directors, shareholders, partners, agents, representatives, independent contractors and employees, in their corporate and individual capacities, including, without limitation, claims arising under this Agreement, any Operating Agreement and any other agreement between Developer and Licensor or any of their Affiliates or under federal, state or local laws, rules, and regulations or orders. (d) The transferee shall enter into a written agreement, in a form satisfactory to Licensor, assuming full, unconditional, joint and several liability for and agreeing to perform from the date of the transfer, all obligations, covenants and agreements of Developer in this Agreement, and, if transferee is a corporation, limited liability company, partnership or other Entity, transferee's shareholders, members, partners or other investors, as applicable, shall also execute such agreement as transferee's principals, and guarantee the performance of all such obligations, covenants and agreements. (e) The transferee shall demonstrate to Licensor's satisfaction that transferee meets the criteria considered by Licensor when reviewing a prospective developer's application for development rights, including, but not limited to, Licensor's educational, managerial and business standards, transferee's good moral character, business reputation and credit rating, transferee's aptitude and ability to conduct the business contemplated hereunder (as may be evidenced by prior related business experience or otherwise), transferee's financial resources and capital for operation of the business and the geographic proximity of other territories with respect to which transferee has been granted development rights or of other O'Charley's restaurants operated by transferee, if any. (f) The transferee shall execute the standard form development agreement then being offered to new System developers or a revised form of this Agreement, as Licensor deems appropriate, and such other ancillary agreements as Licensor may require, which agreements shall supersede this Agreement and its ancillary documents in all respects and the terms of which agreements may differ from the terms of this Agreement, and if the transferee is a corporation, limited liability company, partnership or other Entity, transferee's shareholders, members, partners or other investors, as applicable, shall also execute such agreements as transferee's principals, and guarantee the performance of all such obligations, covenants and agreements. (g) The transferee, at its expense, shall renovate, modernize and otherwise upgrade the Restaurant and, if applicable, any Restaurant delivery vehicles to conform 24 to the then-current standards and specifications of the System, and shall complete the upgrading and other requirements within the time period reasonably specified by Licensor. (h) The transferor shall remain liable for all of the obligations to Licensor in connection with this Agreement incurred prior to the effective date of the transfer and shall execute any and all instruments reasonably requested by Licensor to evidence such liability. (i) At the transferee's expense, the transferee, the transferee's Operating Principal (or his authorized designee), and any other applicable Restaurant personnel shall complete any training programs then in effect for operators of O'Charley's restaurants upon such terms and conditions as Licensor may reasonably require. (j) Developer shall pay a transfer fee of Five Thousand Dollars ($5,000), or such greater amount as is necessary, to reimburse Licensor for its reasonable costs and expenses associated with reviewing the application to transfer, including, without limitation, legal and accounting fees. (k) If transferee is a corporation, limited liability company, partnership or other Entity, transferee shall make and will be bound by any or all of the representations, warranties and covenants in Article VI as Licensor requests. Transferee shall provide to Licensor evidence satisfactory to Licensor that the terms of Article VI have been satisfied and are true and correct on the date of transfer. (l) Developer shall have completed development of the Restaurants required to be developed during the first three (3) Development Periods of the Development Schedule. (3) Developer acknowledges and agrees that each condition which must be met by the transferee is reasonable and necessary to ensure such transferee's full performance of the obligations hereunder. C. In the event the proposed transfer is to a corporation formed solely for the convenience of ownership, Licensor's consent may be conditioned upon any of the requirements in Section VIII(B)(2)(a), (b), (d), (h), (i) and (k). With respect to a transfer to a corporation formed for the convenience of ownership, Developer shall be the owner of all the voting stock or interest of the corporation, and if Developer is owned by more than one individual, each such individual shall have the same proportionate ownership interest in the corporation as he had in Developer prior to the transfer. D. (1) If Developer wishes to transfer all or part of its interest in the assets of a Restaurant or this Agreement, or if Developer or a Controlling Principal wishes to transfer any ownership interest in Developer pursuant to an offer received from a third party to purchase such interest, then such proposed seller shall promptly notify Licensor in writing of each such offer, shall certify that such offer is bona fide and shall provide and shall certify in writing as to the accuracy of such information and documentation relating to the offer as Licensor may require. Licensor shall have the right and option, exercisable within thirty (30) days after receipt of such written notification and copies of all documentation requested by Licensor describing the terms of such offer, to send written notice to the proposed seller that Licensor intends to purchase the proposed seller's interest on the same terms and conditions offered by the third party. In the event that Licensor elects to purchase the proposed seller's interest, closing on such purchase 25 must occur within the later of sixty (60) days from the date of notice to the proposed seller of the election to purchase by Licensor, sixty (60) days after the date Licensor receives and obtains all necessary permits and approvals to complete such purchase or such other date the parties mutually agree upon in writing. Any material change in the terms of any offer prior to closing shall constitute a new offer subject to the same right of first refusal by Licensor as in the case of an initial offer. Failure of Licensor to exercise the option afforded by this Section VIII(D) shall not constitute a waiver of any other provision of this Agreement, including the consent provisions of Section VIII(B) and all of the other requirements of this Article VIII relating to a proposed transfer. (2) If the offer from a third party provides for payment of consideration other than cash or involves certain non-cash items or intangible benefits, Licensor may elect to purchase the interest proposed to be sold for the reasonable equivalent in cash of such non-cash item or intangible benefit (the "Cash Equivalent"). If the parties cannot agree within thirty (30) days on the reasonable equivalent in cash of the non-cash part of the offer, then the Cash Equivalent will be determined by one (1) or more professional appraisers or independent certified public accountants who are qualified by experience and ability to appraise (each, a "Qualified Appraiser"), selected under the procedures in this Section. If the Cash Equivalent is to be determined by Qualified Appraisers, Licensor and Developer will each have the opportunity to appoint, at their own expense, a Qualified Appraiser, within five (5) days following the expiration of the thirty (30) day period within which Licensor and Developer could not mutually agree on the Cash Equivalent. If either party shall fail to appoint a Qualified Appraiser within this five (5) day period, the other Qualified Appraiser shall unilaterally establish the Cash Equivalent by a written opinion and the cost of such Qualified Appraiser shall be split between the two parties equally. If both parties appoint Qualified Appraisers within this five (5) day period, the two (2) Qualified Appraisers shall establish the Cash Equivalent in a single written opinion agreed to by both of them. If the two (2) Qualified Appraisers cannot agree on the Cash Equivalent within ten (10) days of the appointment of the latter of them, the two (2) Qualified Appraisers shall together appoint a third Qualified Appraiser whose written opinion shall establish a Cash Equivalent between the Cash Equivalents established by the first two (2) Qualified Appraisers. In the event of such appraisal, each party shall bear its own legal and other costs. In the event that Licensor exercises its right of first refusal herein provided, it shall have the right to set off (i) all amounts due from Developer for the Qualified Appraisers' fees and appraisal costs, and (ii) all amounts due from Developer or any of its Affiliates, against any payment therefor. E. (1) Upon the death of Developer (if Developer is a natural person) or any Controlling Principal who is a natural person (the "Deceased"), the executor, administrator or other personal representative of the Deceased shall transfer such interest to a third party in accordance with the conditions described in this Section VIII(E) within twelve (12) months after the death. If no personal representative is designated or appointed or no probate proceedings are instituted with respect to the estate of the Deceased, then the distributee of such interest must be approved by Licensor. If the distributee is not approved by Licensor, then the distributee shall transfer such interest to a third party approved by Licensor within twelve (12) months after the death of the Deceased. (2) Upon the Permanent Disability of Developer (if Developer is a natural person) or any Controlling Principal who is a natural person, Licensor may, in its sole discretion, 26 require such interest to be transferred to a third party approved by Licensor within six (6) months after notice to Developer of such Permanent Disability. "Permanent Disability" shall mean any physical, emotional or mental injury, illness or incapacity which would prevent a person from performing the obligations set forth in this Agreement or in the guaranty made part of this Agreement for at least ninety (90) consecutive days. Permanent Disability shall be determined upon examination of the person by a licensed practicing physician selected by Licensor; or, if the person refuses to submit to an examination, then such person shall be automatically deemed permanently disabled as of the date of such refusal for the purpose of this Section VIII(E). The costs of any examination required by this Section shall be paid by Licensor. (3) Upon the death or claim of Permanent Disability of Developer or any Controlling Principal, Developer or a representative of Developer, must promptly notify Licensor of such death or claim of Permanent Disability within fifteen (15) days of its occurrence. Any transfer upon death or Permanent Disability shall be subject to the same terms and conditions as described in this Article VIII for any inter vivos transfer. Developer and each Controlling Principal shall have the right to seek approval of a transfer of their respective interest to a proposed successor prior to the death or claim of Permanent Disability by Developer or the Controlling Principal, as applicable. If Developer or any Controlling Principal, as applicable, desires to obtain approval of any proposed successor in interest prior to the death or claim of Permanent Disability, Developer or the Controlling Principal, as applicable, shall submit to Licensor such information and documentation concerning such proposed successor required by Licensor in the Manuals or other written directives. Further, as a condition to approval, Licensor may, in its sole discretion, require compliance with any of the terms and conditions described in this Section for any inter vivos transfer. F. Licensor's consent to a transfer of any interest in Developer or in this Agreement described herein shall not constitute a waiver of any claims it may have against the transferring party, nor shall it be deemed a waiver of Licensor's right to demand exact compliance with any of the terms of this Agreement by the transferee. G. Securities of, or other Entity ownership interests in, Developer may be offered to prospective investors, including existing investors, by private offering or otherwise, only with the prior written consent of Licensor. All materials required for such offering by federal or state law shall be submitted to Licensor for a limited review, as discussed below prior to being filed with any governmental agency; and any materials to be used in any exempt offering shall be submitted to Licensor for such review prior to their use. No offering by Developer shall imply (by use of the Proprietary Marks or otherwise) that Licensor is participating in an underwriting, issuance or offering of Developer's securities or other Entity ownership interests or the securities or other Entity ownership interests of any subsidiary or Affiliate of Licensor; and Licensor's review of any offering materials shall be limited solely to the subject of the relationship between Developer and Licensor and their Affiliates. Licensor may, at its option, require Developer's offering materials to contain a written statement prescribed by Licensor concerning the limitations described in the preceding sentence. Developer, its Principals and the other participants in the offering must prior to the commencement of such offering, agree in writing to fully indemnify Licensor, Licensor's Affiliates and each of such Entity's respective officers, directors, shareholders, members, partners, agents, representatives, independent contractors and employees in connection with the offering. For each proposed offering, Developer shall reimburse Licensor for its reasonable costs and expenses associated with reviewing the proposed 27 offering materials, including, without limitation, legal and accounting fees. Developer shall give Licensor written notice at least ninety (90) days prior to the date of commencement of any offering or other transaction covered by this Section. H. Developer and each of its Controlling Principals, as applicable, may transfer, sell or assign their respective interests in Developer, by and among themselves only with Licensor's prior written consent; provided, however, such transfer, sale or assignment shall not result in a change in the Controlling Interest in Developer. Licensor's consent may be conditioned on compliance with Section VIII(B)(2)(a), (b), (d), (h), (i), (k) and (l). For the purpose of this Agreement, "Controlling Interest" shall mean: (a) if Developer is a corporation, that the Controlling Principals, either individually or cumulatively, (i) directly or indirectly own at least fifty-one percent (51%) of the shares of each class of Developer's issued and outstanding capital stock and (ii) are entitled, under its governing documents and under any agreements among the shareholders, to cast a sufficient number of votes to elect a majority of the members of the board of directors or to require such corporation to take or omit to take any action which such corporation is required to take or omit to take under this Agreement; (b) if Developer is a limited liability company, that the Controlling Principals (i) own at least fifty-one percent (51%) of the outstanding units of membership interest in the limited liability company, and (ii) are entitled under its operating agreement to act on behalf of the limited liability company without the approval or consent of any other member or be able to cast a sufficient number of votes to require the limited liability company to take or omit to take any action which the limited liability company is required to take or omit to take under this Agreement; or (c) if Developer is a partnership, that the Controlling Principals (i) own at least a fifty-one percent (51 %) interest in the operating profits and operating losses of the partnership as well as at least a fifty-one percent (51%) ownership interest in the partnership (and at least a fifty-one percent (51%) interest in the shares of each class of capital stock or other ownership interest of any direct or indirect corporate or other Entity general partner) and (ii) are entitled under its partnership agreement or other Entity organizational documents or applicable law to act on behalf of the partnership without the approval or consent of any other partner or owner or be able to cast a sufficient number of votes to require the partnership or other Entity to take or omit to take any action which the partnership or other Entity is required to take or omit to take under this Agreement. I. If any person holding an interest in Developer (other than Developer or a Controlling Principal, which parties shall be subject to the provisions set forth in Section VIII(B) above) transfers such interest, then Developer shall promptly notify Licensor of such proposed transfer in writing and shall provide such information relative thereto as Licensor may reasonably request prior to such transfer. Such transferee must have good moral character a good business reputation, an acceptable credit rating and may not be one of Licensor's competitors. Such transferee will be a Developer's Principal and as such shall execute a confidentiality and non-compete agreement in the form then required by Licensor, which form shall be in substantially the same form attached hereto as Attachment C (see Sections IX(B)(2) and IX(I)). Licensor also reserves the right to designate the transferee as one of the Controlling Principals. 28 ARTICLE IX COVENANTS A. Developer and Operating Principal covenant that during the term of this Agreement (except as otherwise approved in writing by Licensor) Developer and Operating Principal (and any approved designee for Operating Principal) shall devote their full time, energy and best efforts to the management and operation of the development activities contemplated under this Agreement. B. (1) Neither Developer nor any of the Controlling Principals shall, during the term of this Agreement and thereafter, communicate or divulge to, or use for the benefit of, any other person, persons or Entity and following the termination or expiration of this Agreement, shall not use for their own benefit, any confidential information, knowledge or know-how concerning the methods of development and operation of the Restaurants which may be communicated to Developer or any of the Controlling Principals or of which they may be apprised under this Agreement. Developer and each of the Controlling Principals shall disclose such confidential information only to the Controlling Principals and Developer's personnel who must have access to it in connection with their employment with Developer. Any and all information, knowledge, know-how, techniques and any materials used in or related to the System which Licensor provides to Developer in connection with this Agreement shall be deemed confidential for the purposes of this Agreement. Neither Developer nor the Controlling Principals shall at any time, without Licensor's prior written consent, copy, duplicate, record or otherwise reproduce such materials or information, in whole or in part, nor otherwise make the same available to any unauthorized person. The covenants in this Section shall survive the expiration, termination or transfer of this Agreement or any interest herein and shall be perpetually binding upon Developer and each of the Controlling Principals; provided, however, if the jurisdiction in which this covenant is sought to be enforced does not allow perpetual binding, then the maximum amount of time allowed under the applicable law. (2) Developer shall require and obtain execution of covenants similar to those set forth in Section IX(B)(1) from each of its Principals who are not required to sign this Agreement as a Controlling Principal or as Operating Principal. Such covenants shall be substantially in the form contained in Attachment C. Developer shall provide Licensor with executed copies of all such agreements ten (10) days after they are executed. C. Developer and the Controlling Principals specifically acknowledge that, pursuant to this Agreement, Developer and the Controlling Principals will receive valuable training, trade secrets and confidential information which are beyond the present skills and experience of Developer and the Controlling Principals and Developer's managers and employees and that Developer has the right and the obligation, arising from this Agreement, to develop the Territory for the benefit of the System. Developer and the Controlling Principals acknowledge that such specialized training, trade secrets and confidential information provide a competitive advantage and will be valuable to them in the development and operation of the Restaurants and that gaining access to such specialized training, trade secrets and confidential information is, therefore, a primary reason for entering into this Agreement. In consideration of such specialized training, trade secrets, confidential information and rights, Developer and the Controlling Principals covenant that, during the term of this Agreement, except as otherwise approved in writing by Licensor, neither Developer nor any of the Controlling Principals shall, 29 either directly or indirectly, for themselves, through, on behalf of or in conjunction with any person, persons or Entity: (1) divert, or attempt to divert, any business or customer of the business described hereunder to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with the Proprietary Marks and the System; or (2) own, maintain, operate, engage in or have any financial or beneficial interest in (including through any interest in an Entity that conducts such activities), advise, assist or make loans to, any business that operates a full service, varied menu, casual dining restaurant that features freshly prepared items such as steaks, seafood, homemade baked goods and fresh cut salads, and that serves alcoholic beverages through a full-service bar, and which business is located within the United States, its territories or commonwealths, or any other country, province, state or geographic area in which Licensor has used, sought registration of or registered the same or similar Proprietary Marks or operates or licenses others to operate a business under the same or similar Proprietary Marks. D. With respect to Developer, and for a continuous uninterrupted period commencing upon the expiration or termination of (regardless of the cause for termination), or transfer of all of the Controlling Interest in, this Agreement (or with respect to each of the Controlling Principals, commencing upon the earlier of: (i) the expiration, termination of, or transfer of all of the Controlling Interest in this Agreement or (ii) the time such individual or Entity ceases to satisfy the definition of Principal as described in this Agreement), and continuing for two (2) years thereafter, except as otherwise approved in writing by Licensor, neither Developer nor any of the Controlling Principals shall, either directly or indirectly, for themselves or through, on behalf of, or in conjunction with any person, persons or Entity: (1) divert, or attempt to divert, any business or customer of the business described hereunder to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with Licensor's Proprietary Marks and the System; (2) employ, or seek to employ, any person who is at that time, or has been within the preceding six (6) months, employed by Licensor or any of its Affiliates or by any other developer or operator of Licensor, or otherwise directly or indirectly induce such person to leave that person's employment; provided, however, that Developer may employ such person in a managerial position with respect to Developer's operation of an O'Charley's restaurant pursuant to the terms of the Operating Agreement applicable to such O'Charley's restaurant; or (3) own, maintain, operate, engage in or have any financial or beneficial interest in (including through any interest in an Entity that conducts such activities), advise, assist or make loans or provide guarantees with respect to loans to, any business that operates a full service, varied menu, casual dining restaurant that features freshly prepared items such as steaks, seafood, homemade baked goods and fresh cut salads, and that serves alcoholic beverages through a full-service bar, which business is, or is intended to be, located within the Territory or within a fifteen (15) mile radius of the location of any O'Charley's restaurant or food service facility in existence or under construction (or where land has been purchased or a lease has been executed for the construction of an O'Charley's restaurant or other food service facility) as of the earlier of: (a) the expiration or termination of, or the transfer of all of Developer's interest in, this 30 Agreement; or (b) the time the Controlling Principal ceases to satisfy the definition of Developer's Principal, as applicable. E. Sections IX(C)(2) and (D)(3) shall not apply to ownership of less than a five percent (5%) beneficial interest in the outstanding equity securities of any Publicly-Held Entity. F. The parties acknowledge and agree that each of the covenants contained herein are reasonable limitations as to time, geographical area and scope of activity to be restrained and do not impose a greater restraint than is necessary to protect the goodwill or other business interests of Licensor. The parties agree that each of the above covenants shall be construed as independent of any other covenant or provision of this Agreement. If all or any portion of a covenant in this Article IX is held unreasonable or unenforceable by a court or agency having valid jurisdiction in an unappealed or unappealable final decision to which Licensor is a party, Developer and the Controlling Principals expressly agree to be bound by any lesser covenant subsumed within the terms of such covenant that imposes the maximum duty permitted by law as if the resulting covenant were separately stated in and made a part of this Section. G. Developer and the Controlling Principals understand and acknowledge that Licensor shall have the right, in its sole discretion, to reduce the scope of any covenant set forth in Section IX(B), or any portion thereof, without their consent, effective immediately upon notice to Developer. Developer and the Controlling Principals agree that they shall immediately comply with any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Section XV(A). H. Developer and the Controlling Principals expressly agree that the existence of any claims they may have against Licensor whether or not arising from this Agreement, shall not constitute a defense to the enforcement by Licensor of the covenants in this Article IX. Developer and the Controlling Principals agree to pay all costs and expenses (including reasonable attorneys' fees) incurred by Licensor in connection with the enforcement of this Section. I. Developer shall require and obtain the execution of covenants similar to those set forth in Sections IX(C) and (D) (including covenants applicable upon the termination of a person's employment with Developer) from each of Principal who is not required to sign this Agreement as a Controlling Principal. Such covenants shall be substantially in the form set forth in Attachment C. Licensor reserves the right, in its sole discretion, to decrease the period of time or geographic scope of the non-competition covenant set forth in Attachment C or eliminate such non-competition covenant altogether for any party that is required to execute such agreement under this Article IX. J. Developer and the Controlling Principals acknowledge that a violation of this Section would result in irreparable injury to Licensor for which no adequate remedy at law may be available, and Developer and the Controlling Principals accordingly consent to the issuance of an injunction prohibiting any conduct by Developer or the Controlling Principals in violation of the terms of this Section. Developer and the Controlling Principals agree to pay all court costs and reasonable legal fees incurred by Licensor in obtaining specific performance, injunctive relief or any other remedy available to Licensor for any violation of the requirements of this Section. 31 K. Notwithstanding anything else in this Article IX to the contrary, if there is a state specific non-competition and/or non-solicitation addendum attached to this Agreement, the terms of such addendum shall supersede the terms of this Article IX to the extent they are inconsistent with one another. ARTICLE X INDEPENDENT CONTRACTOR AND INDEMNIFICATION A. The parties acknowledge and agree that this Agreement does not create a fiduciary relationship between them, that Developer shall be an independent contractor and that nothing in this Agreement is intended to constitute either party an agent, legal representative, subsidiary, Affiliate, joint venturer, partner, employee, joint employer or servant of the other for any purpose. B. During the term of this Agreement, Developer shall hold itself out to the public as an independent contractor conducting its development operations pursuant to development rights granted by Licensor. Developer agrees to take such action as shall be necessary to that end, including, without limitation, exhibiting a notice of that fact in a conspicuous place in any Restaurant established under any Operating Agreement for the purposes hereunder, the content and form of which Licensor reserves the right to specify in writing. C. Developer understands and agrees that nothing in this Agreement authorizes Developer or any of the Controlling Principals to make any contract, agreement, warranty or representation on Licensor's behalf, or to incur any debt or other obligation in Licensor's name and that Licensor shall in no event assume liability for, or be deemed liable under this Agreement as a result of any such action or for any act or omission of Developer or any of the Controlling Principals, or any claim or judgment arising therefrom. D. (1) Developer and each of the Controlling Principals shall indemnify and hold harmless Licensor and its Affiliates and their officers, directors, shareholders, employees, managers, members, agents and representatives from any and all claims, demands, suits, proceedings, fines, losses, liabilities damages, costs and expenses (including reasonable attorneys' fees) suffered or incurred, directly or indirectly, by any one or more of them (collectively, "Damages") as a result of (a) any breach or other failure by Developer, Operating Principal or any Controlling Principal to perform its or his obligations hereunder or under any other instrument or agreement executed in connection herewith, or (b) any other action or inaction by Developer, Operating Principal, any Controlling Principal or any other person resulting from or in connection with the operation of any Restaurant; provided, however, that neither Developer, Operating Principal nor any Controlling Principal shall be liable for Damages resulting from Licensor's or its Affiliates' gross negligence or willful misconduct. (2) Developer and each of the Controlling Principals agree to give Licensor immediate notice of any such action, suit, proceeding, claim, demand, inquiry or investigation. Licensor shall have the option, in its sole discretion, to defend any action seeking Damages as a result of any action or inaction by Developer or any other person resulting from or in connection with the operation of the Restaurant or to allow Developer to defend such action with counsel satisfactory to Licensor. 32 (3) Developer and the Controlling Principals expressly agree that the terms of this Section X(D) shall survive the termination, expiration or transfer of this Agreement or any interest herein. ARTICLE XI APPROVALS A. Whenever this Agreement requires the prior approval or consent of Licensor, Developer shall make a timely written request to Licensor and such approval or consent shall be obtained in writing. B. Licensor makes no warranties or guarantees upon which Developer may rely and assumes no liability or obligation to Developer or any third party to which it would not otherwise be subject, by providing any waiver, approval, advice, consent or suggestion to Developer in connection with this Agreement or the construction of restaurants, or by reason of any neglect, delay or denial of any request therefor. ARTICLE XII NON-WAIVER AND REMEDIES A. No delay, waiver, omission or forbearance on the part of Licensor to exercise any right, option, duty or power arising out of any breach or default by Developer or the Controlling Principals under this Agreement shall constitute a waiver by Licensor to enforce any such right, option, duty or power against Developer or the Controlling Principals, or as to a subsequent breach or default by Developer or the Controlling Principals. Acceptance by Licensor of any payments due to it hereunder subsequent to the time at which such payments are due shall not be deemed to be a waiver by Licensor of any preceding breach by Developer or the Controlling Principals of any terms, provisions, covenants or conditions of this Agreement. B. All rights and remedies of the parties to this Agreement shall be cumulative and not alternative, in addition to and not exclusive of any other rights or remedies which are provided for herein or which may be available at law or in equity in case of any breach, failure or default or threatened breach, failure or default of any term, provision or condition of this Agreement or any other agreement between Developer, or its Affiliates, and Licensor or its Affiliates. The rights and remedies of the parties to this Agreement shall be continuing and shall not be exhausted by any one or more uses thereof and may be exercised at any time or from time to time as often as may be expedient. Any option or election to enforce any such right or remedy may be exercised or taken at any time and from time to time. The expiration, earlier termination or exercise of Licensor's rights pursuant to Article VII of this Agreement shall not discharge or release Developer or any of the Controlling Principals from any liability or obligation then accrued, or any liability or obligation continuing beyond, or arising out of, the expiration, the earlier termination or the exercise of such rights under this Agreement. Additionally, Developer and the Controlling Principals shall pay all court costs and attorneys' fees incurred by Licensor in obtaining any remedy available to Licensor for any violation of this Agreement. 33 ARTICLE XIII NOTICES All notices and other communications required or permitted to be given hereunder shall be deemed given when delivered in person, by overnight courier service, facsimile transmission or mailed by registered or certified mail addressed to the recipient at the address set forth below, unless that party shall have given written notice of change of address to the sending party, in which event the new address so specified shall be used. Notices to Licensor: O'Charley's Inc. 3038 Sidco Drive Nashville, Tennessee 37204 Attention: Director of Franchising Facsimile: (615) 782-5043 Notices to Developer and the Controlling Principals: c/o Meritage Hospitality Group Inc. 1971 E. Beltline, NE Suite 200 Grand Rapids, Michigan 49525 Attention: Robert E. Schermer, Jr. Facsimile: (616) 776-2776 ARTICLE XIV SEVERABILITY AND CONSTRUCTION A. Except as expressly provided to the contrary herein, each portion, section, part, term and provision of this Agreement shall be considered severable. If for any reason any portion, section, part, term or provision is determined to be invalid and contrary to, or in conflict with, any existing or future law or regulation by a court or agency having valid jurisdiction, this shall not impair the operation of, or have any other effect upon, the other portions, sections, parts, terms or provisions of this Agreement that may remain otherwise intelligible, and the latter shall continue to be given full force and effect and bind the parties. The invalid portions, sections, parts, terms or provisions shall be deemed not to be part of this Agreement and there shall be automatically added such portion, section, part, term or provision as similar as possible to that which was severed which shall be valid and not contrary to or in conflict with any law or regulation. B. Except as expressly provided to the contrary herein, nothing in this Agreement is intended, nor shall be deemed to, confer upon any person or legal Entity other than Developer and Licensor, Licensor's officers, directors and personnel and such of Developers and Licensors respective successors and assigns as may be contemplated (and, as to Developer, authorized by Article VIII), any rights or remedies under or as a result of this Agreement. C. All captions in this Agreement are intended solely for the convenience of the parties and shall not affect the meaning or construction of any provision of this Agreement. D. All references to the masculine, neuter or singular shall be construed to include the masculine, feminine, neuter or plural, where applicable. Without limiting the obligations individually undertaken by the Controlling Principals under this Agreement, all 34 acknowledgments, promises, covenants, agreements and obligations made or undertaken by Developer in this Agreement shall be deemed, jointly and severally, undertaken by all of the Controlling Principals. E. The term "Principals" shall mean, collectively and individually, Developer's spouse, if Developer is an individual; all officers and directors of Developer (including the officers and directors of any general partner of Developer) whom Licensor designates as Principals and all holders of an ownership interest in Developer and of any Entity directly or indirectly controlling Developer, and any other person or Entity controlling, controlled by or under common control with Developer. Each Principal as of the date of this Agreement is listed on Attachment D. F. For purposes of this Agreement, the term "Publicly-Held Entity" means any Entity with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or an Entity subject to the requirements of Section 15(d) of such Act. Further, for purposes of this Agreement, an "Affiliate" of a person or Entity is any person or Entity that is controlled by, controlling or under common control with such person or Entity. G. This Agreement may be executed in counterparts and each copy so executed shall be deemed an original. H. This Agreement shall not become effective until signed by an authorized officer of Licensor. I. The word "including" when used herein shall mean "including without limitation." ARTICLE XV ENTIRE AGREEMENT; APPLICABLE LAW A. This Agreement, the documents referred to herein and the Attachments hereto, constitute the entire, full and complete agreement between Licensor, Developer and the Controlling Principals concerning the subject matter hereof and shall supersede all prior related agreements between Licensor, Developer and the Controlling Principals. Except for those permitted to be made unilaterally by Licensor hereunder, no amendment, change or variance from this Agreement shall be binding on either party unless mutually agreed to by the parties and executed by' their authorized officers or agents in writing. B. Developer and the Controlling Principals hereby irrevocably submit themselves to the jurisdiction of the state and the federal district courts located in the state, county or judicial district in which the Licensor's principal place of business is located at the time such proceeding is commenced. Developer and the Controlling Principals hereby waive all questions of personal jurisdiction at the time such proceeding is commenced for the purpose of carrying out this provision. Developer and the Controlling Principals hereby agree that service of process may be made upon any of them in any proceeding relating to or arising out of this Agreement or the relationship created by this Agreement by any means allowed by applicable state or federal law. Developer and the Controlling Principals further agree that venue for any proceeding relating to or arising out of this Agreement shall be the county or judicial district in which Licensor's principal place of business is located at the time such proceeding is commenced; provided, however, with respect to any action (1) for monies owed, (2) for injunctive or other extraordinary 35 relief or (3) involving possession or disposition of, or other relief relating to, the Restaurant premises, Licensor may bring such action in any state or federal district court which has jurisdiction. With respect to all claims, controversies, disputes or actions related to this Agreement or the relationship created thereby. This Agreement and any such related claims, controversies, disputes or actions, shall be governed, enforced and interpreted under the law of the state where Licensor's principal place of business is located at the time any claim, controversy, dispute, or action (without regard to choice of law rules) arose. C. Developer, the Controlling Principals and Licensor acknowledge that each party's agreement regarding applicable state law and forum set forth in Section XV(B) above provides each of the parties with the mutual benefit of uniform interpretation of this Agreement and any dispute arising out of this Agreement or the parties' relationship created by this Agreement. Each of Developer, the Controlling Principals and Licensor further acknowledges the receipt and sufficiency of mutual consideration for such benefit, and that each party's agreement regarding applicable state law and choice of forum have been negotiated in good faith and are part of the benefit of the bargain reflected by this Agreement. D. Developer, the Controlling Principals and Licensor acknowledge that the execution of this Agreement and acceptance of the terms by the parties occurred at Licensor's principal place of business, and further acknowledge that the performance of certain obligations of Developer arising under this Agreement, including, but not limited to, the payment of monies due hereunder, shall occur where Licensor's principal place of business is located at the time such obligation is due. E. Without limiting any of the foregoing, Developer and each of the Controlling Principals acknowledge and agree that Licensor has the right, at any time, to create a dispute resolution program and related specifications, standards, procedures and rules for the implementation thereof to be administered by Licensor or its designees for the benefit of all developers and developers conducting business under the System. The standards, specifications, procedures and rules for such dispute resolution program shall be made part of the Manuals, and Developer and the Controlling Principals shall comply with all such standards, specifications, procedures and rules in seeking resolution of any claims, controversies or disputes with or involving Licensor or other developers or operators, if applicable under the program. If Licensor, in its sole discretion, makes such dispute resolution program mandatory, then Developer, the Controlling Principals and Licensor hereby agree to submit any claims, controversies or disputes arising out of or relating to this Agreement or the relationship created by this Agreement for resolution in accordance with such dispute resolution program, or if such claim, controversy or dispute relates to another developer or operator, Developer and the Controlling Principals agree to participate in the program and submit any such claims, controversies or disputes in accordance with the program's standards, specifications, procedures and rules, prior to seeking resolution of such claim by any other judicial or legally available means. F. Developer and the Controlling Principals hereby waive, to the fullest extent permitted by law, any right to or claim of any punitive, exemplary, incidental, indirect, special, consequential or other damages (including, without limitation, loss of profits) against Licensor, its Affiliates, and their respective officers, directors, shareholders, members, partners, agents, representatives, independent contractors, servants and employees, in their corporate and individual capacities, arising out of any cause whatsoever (whether such cause be based in 36 contract, negligence, strict liability, other tort or otherwise) and agree that in the event of a dispute, Developer and the Controlling Principals shall be limited to the recovery of any actual damages sustained by them. If any other term of this Agreement is found or determined to be unconscionable or unenforceable for any reason, the foregoing provisions of waiver by agreement of punitive, exemplary, incidental, indirect, special, consequential or other damages (including, without limitation, loss of profits) shall continue in full force and effect. G. Licensor, Developer and the Controlling Principals hereby agree that no form of proceeding permitted hereby will be maintained by any party to enforce any liability or obligation of the other party, whether arising from this Agreement or otherwise, unless brought before the expiration of the later of: (i) one (1) year after the date of discovery of the facts resulting in such liability or obligation; or (ii) two (2) years after the date of the first act or omission giving rise to the alleged liability or obligation, except that where state or federal law mandate or make possible by notice or otherwise a shorter period, such shorter period shall apply. H. Any obligation of Developer or the Controlling Principals that contemplates performance of such obligation after termination or expiration of this Agreement or the transfer of any interest of Developer or the Controlling Principals therein, shall be deemed to survive such termination, expiration or transfer, including the provisions of this Article XV. I. Developer, the Controlling Principals and Licensor acknowledge that various provisions of this Agreement specify certain matters that are within the discretion or judgment of Licensor or are otherwise to be determined unilaterally by Licensor. If the exercise of Licensor's discretion or judgment as to any such matter is subsequently challenged, the parties to this Agreement expressly direct the trier of fact that Licensor's reliance on a business reason in the exercise of its discretion or judgment is to be viewed as a reasonable and proper exercise of such discretion or judgment, without regard to whether other reasons for its decision may exist and without regard to whether the trier of fact would independently accord the same weight to the business reason. ARTICLE XVI ACKNOWLEDGMENTS A. Developer acknowledges that it has conducted an independent investigation of the business venture contemplated by this Agreement and recognizes that the success of this business venture involves substantial business risks and will largely depend upon the ability of Developer. Licensor expressly disclaims making, and Developer acknowledges that it has not received or relied on, any warranty or guarantee, express or implied, as to the potential volume, profits or success of the business venture contemplated by this Agreement. B. Developer acknowledges that Developer has received, read and understands this Agreement and the related Attachments and Agreements and that Licensor has afforded Developer sufficient time and opportunity to consult with advisors selected by Developer about the potential benefits and risks of entering into this Agreement. C. Developer acknowledges that it received a complete copy of this Agreement and all related Attachments and Agreements at least five (5) business days prior to the date on which this Agreement was executed. Developer further acknowledges that it has received the disclosure document required by the Trade Regulation Rule of the Federal Trade Commission 37 entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" at least ten (10) business days prior to the date on which this Agreement was executed. (remainder of page intentionally left blank) 38 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement on the day and year first above written. LICENSOR: O'CHARLEY'S INC., a Tennessee corporation By: /s/ Edward C. Hastings ----------------------------------------- Edward C. Hastings Director of Franchising DEVELOPER: OCM DEVELOPMENT, LLC, a Michigan limited liability company By: /s/ Robert E. Schermer, Jr. ----------------------------------------- Robert E. Schermer, Jr.* Chief Executive Officer CONTROLLING PRINCIPAL: MERITAGE HOSPITALITY GROUP, INC., a Michigan corporation By: /s/ Robert E. Schermer, Jr. ----------------------------------------- Robert E. Schermer, Jr. Chief Executive Officer * Denotes individual who is Developer's Operating Principal 39 ATTACHMENT A TO DEVELOPMENT AGREEMENT O'CHARLEY'S INC. OPERATING AGREEMENT A-1 [O'CHARLEY'S LOGO] O'CHARLEY'S INC. OPERATING AGREEMENT TABLE OF CONTENTS ARTICLE I Grant.........................................................................................2 ARTICLE II Construction; Opening.........................................................................4 ARTICLE III Prerequisites To License Effectiveness........................................................4 ARTICLE IV Term And Renewal..............................................................................6 ARTICLE V Fees..........................................................................................8 ARTICLE VI Licensor's Obligations.......................................................................11 ARTICLE VII Operator's Agreements, Representations, Warranties And Covenants.............................13 ARTICLE VIII Restaurant Operations........................................................................20 ARTICLE IX Advertising And Related Fees.................................................................25 ARTICLE X Proprietary Marks............................................................................30 ARTICLE XI Confidentiality And Non-competition Covenants................................................32 ARTICLE XII Books And Records............................................................................37 ARTICLE XIII Insurance....................................................................................38 ARTICLE XIV Debts and Taxes..............................................................................40 ARTICLE XV Transfer of Interest.........................................................................41 ARTICLE XVI Indemnification..............................................................................47 ARTICLE XVII Relationship Of The Parties..................................................................48 ARTICLE XVIII Termination..................................................................................48 ARTICLE XIX Post-Termination.............................................................................52 ARTICLE XX Miscellaneous................................................................................56 ARTICLE XXI Acknowledgments..............................................................................60 Attachment A Location and Opening Date.................................................................A-1 Attachment B Statement of Ownership Interests and Principals...........................................B-1 Attachment C Confidentiality and Non-Compete Agreement.................................................C-1 Attachment D Software License Agreement................................................................D-1 Attachment E Electronic Fund Transfer Authorization....................................................E-1 Attachment F Guaranty..................................................................................F-1

2 O'CHARLEY'S INC. OPERATING AGREEMENT THIS OPERATING AGREEMENT (the "Agreement") is made and entered into this _____ day of ________________, 20___, by and among O'Charley's Inc., a Tennessee corporation ("Licensor"), _________________________ ("Operator"), ____________________, ___________________________ and _______________________ (each a "Controlling Principal;" collectively the "Controlling Principals"). WITNESSETH: WHEREAS, Licensor, as a result of the expenditure of time, skill, effort and money, has developed and owns the rights to develop and operate a unique system of full service varied menu casual dining restaurants which feature freshly prepared items such as hand-cut and aged steaks, fresh chicken, seafood, homemade yeast rolls and fresh-cut salads with special recipe dressings and which serve alcoholic beverages through a full-service bar all under the trademark O'Charley's(R) (the "System"); WHEREAS, the distinguishing characteristics of the System include, without limitation, distinctive exterior and interior design, decor, color schemes, awnings, neons and furnishings, special recipes and menu items, uniform standards, specifications and procedures for operations, quality and uniformity of products and services offered, procedures for inventory management and financial control, training and assistance, and advertising and promotional programs, all of which may be changed, improved and further developed by Licensor from time to time; WHEREAS, Licensor identifies the System by means of certain trade names, service marks, trademarks, emblems and indicia of origin, including, but not limited to, the mark O'Charley's(R) and such other trade names, service marks and trademarks as are now designated (and may hereafter be designated by Licensor in writing) for use in connection with the System (the "Proprietary Marks"); WHEREAS, Licensor continues to develop, use and control the use of such Proprietary Marks in order to identify for the public the source of services and products marketed thereunder and under the System, and to represent the System's high standards of quality, appearance and service; WHEREAS, the value of Licensor's Proprietary Marks is based upon: (a) the maintenance of uniform high quality standards in connection with the preparation and sale of Licensor-approved food and beverage products; (b) the uniform high standards of appearance of the individual restaurant units in the System; (c) the use of distinctive Proprietary Marks, building designs and advertising signs representing a uniformly high quality of products and services; and (d) the assumption by its franchisees of the obligation to maintain and enhance the goodwill and public acceptance of the System and of the Proprietary Marks by strict adherence to the high standards required by Licensor; WHEREAS, Licensor, Operator and the Controlling Principals have entered into a Development Agreement dated as of __________ _____, 20__ (the "Development Agreement"), relating to the development by Operator of O'Charley's restaurants; WHEREAS, Operator desires to use the System in connection with the operation of a full-service O'Charley's restaurant at the location specified in Attachment A hereto, as well as to receive the training and other assistance provided by Licensor in connection therewith; and WHEREAS, the license granted pursuant to this Agreement is for the __________ Restaurant developed under the Development Agreement. NOW, THEREFORE, the parties, in consideration of the mutual representations, warranties, covenants and agreements set forth herein, and intending to be legally bound, hereby agree as follows: ARTICLE I GRANT A. In reliance on the representations, warranties covenants and agreements of Operator and its Controlling Principals hereunder, Licensor hereby grants to Operator, upon the terms and conditions in this Agreement, the right, license and obligation, and Operator hereby accepts the right, license and obligation, to operate, during the term of this Agreement, a full-service O'Charley's restaurant under the Proprietary Marks and the System in accordance with this Agreement (the "Restaurant" or "Licensed Business"). B. The specific street address of the Restaurant location accepted by Licensor shall be set forth in Attachment A (the "Location"). Operator shall not relocate the Restaurant without the express prior written consent of Licensor. This Agreement does not grant to Operator the right or license to operate the Restaurant or to offer or sell any products or services described in this Agreement at or from any other location. C. If Operator is unable to continue the operation of the Restaurant at the accepted Location because of the occurrence of a Force Majeure event, then Operator may request approval of Licensor to relocate the Restaurant to another location. Any other request to relocate the Restaurant shall also be subject to the same procedures. If Licensor elects to grant Operator the right to relocate the Restaurant, then Operator shall comply with the site selection and construction procedures set forth in the Development Agreement. D. Except as provided in this Agreement, and subject to Operator's full compliance with this Agreement and any other agreement among Operator and any of its Affiliates and Licensor or any of its Affiliates, neither Licensor nor any Affiliate shall establish or authorize any other person or any other corporation, limited liability company, partnership, limited partnership, joint venture, association, trust, unincorporated association or other business organization (each, an "Entity"), other than Operator, to establish a full-service Restaurant within the radius of the Location set forth on Attachment A hereto. Notwithstanding the foregoing, Operator acknowledges and agrees that Licensor and its Affiliates may (or may authorize a third party to) conduct any of the following activities, regardless of proximity to the Location or the Restaurant: 2 (1) Licensor, its Affiliates, any O'Charley's developer or operator and any other authorized person or Entity shall have the right, at any time, to advertise and promote the System, and fill customer orders by providing catering and/or delivery services. (2) Licensor and its Affiliates may offer and sell (or may authorize others to offer and sell) collateral and ancillary products and services under the Proprietary Marks which may be similar to those offered by the Restaurant if offered and sold other than through a full-service O'Charley's restaurant, such as pre-packaged food products, T-shirts and O'Charley's memorabilia. (3) Licensor and its Affiliates may offer and sell (or may authorize others to offer and sell) such products and services under the Proprietary Marks through any permanent, temporary or seasonal food service facility (e.g., a kiosk, concession or multi-brand facility) that will provide a limited number or representative sample of the products and services normally offered by, and be located in a smaller facility than, a full-service O'Charley's restaurant ("Alternative Distribution Facilities"). (4) Licensor and its Affiliates may operate (or may authorize others to operate) a full-service O'Charley's restaurant or other similar food service facilities offering the same products and services offered by a full-service O'Charley's restaurant or an Alternative Distribution Facility in any area of retail sales establishments, food courts, transportation facilities (e.g., airports, train stations, bus terminals, port authorities), hospitals and other health care facilities, cafeterias, commissaries, schools, hotels, sports and entertainment facilities (e.g., stadiums, arenas, ballparks, convention centers) and other mass gathering locations or events designated by Licensor (each, an "Excluded Area"). Licensor may first offer to Operator the right to offer and sell the O'Charley's restaurant products in the Excluded Area within the Territory. Operator must meet each of the conditions outlined in Section III(A), and any other criteria and qualifications deemed necessary by Licensor, or any other third party involved in the arrangement, such as an airport or stadium authority, educational institution or other facilities operator ("Facilities Operator"), to offer for sale and sell the O'Charley's restaurant products and services in the Excluded Area. If Operator does not meet all of the criteria and qualifications required by Licensor and the Facilities Operator, then Operator shall not be granted the right to offer for sale and sell such products and services within the Excluded Area and Licensor may conduct such business itself, or authorize any other person or Entity to do so. If Operator meets all the conditions, criteria and qualifications, Licensor shall offer to Operator the right to offer for sale and sell such products and services on such terms and conditions as such arrangements may be offered to third parties as determined by Licensor or such Facilities Operator, as applicable. Once such offer has been made to Operator by Licensor in writing, Operator shall have the right to accept such offer within thirty (30) days after receipt of such written notification. If Operator fails to notify Licensor in writing of Operator's intent to accept the offer within such thirty (30) day time period or Operator fails to meet any criteria or qualifications imposed by Licensor or the Facilities Operator, Licensor may conduct such business itself, or authorize any other person or Entity to do so. (5) Licensor and its Affiliates may offer and sell (or may authorize others to offer and sell) products and services under any other names and marks. 3 E. After Operator's selection of an accepted Location for the Restaurant, Operator shall make all commercially reasonable efforts to advertise and promote the Licensed Business in accordance with Article IX. F. After this Agreement expires or is terminated, Licensor shall have the complete and unrestricted right to operate or license other persons to operate a restaurant utilizing the System at the Location. ARTICLE II CONSTRUCTION; OPENING A. Operator assumes all cost, liability, expense and responsibility for locating, obtaining and developing a site for the Restaurant within the Location and for constructing and equipping the Restaurant at such site in accordance with the terms of the Development Agreement and this Agreement. Operator acknowledges that the location, selection, procurement and development of a site for the Restaurant is Operator's responsibility; that in discharging such responsibility Operator may consult with real estate and other professionals of Operator's choosing; and that Licensor's acceptance of a prospective site and the rendering of assistance in the selection of a site does not constitute a representation, promise, warranty or guarantee, express or implied, by Licensor that the Restaurant operated at that site will be profitable or otherwise successful. B. The Location of the Restaurant shall be described in Attachment A, which description shall be the legal description and/or street address of the site owned or leased by Operator at which the Restaurant is to be located. C. Operator acknowledges that time is of the essence. Subject to Operator's compliance with the conditions stated below, Operator shall open the Restaurant and commence business on or before __________ _____, 20__, as such date may be extended or amended under the Development Agreement. The date the Restaurant opens for business to the public as provided herein ("Opening Date") shall be set forth in Attachment A, as such date may be extended or amended under the Development Agreement. Prior to opening, Operator shall complete all exterior and interior preparations for the Restaurant, including installation of equipment, fixtures, awnings, furnishings, neons and signs, pursuant to the plans and specifications approved by Licensor, and shall comply with all other pre-opening obligations of Operator, including, but not limited to, those obligations described in Article VII and in the Manuals, to Licensor's satisfaction. If Operator fails to comply with any of such obligations, Licensor shall have the right to prohibit Operator from opening the Restaurant and commencing business. ARTICLE III PREREQUISITES TO LICENSE EFFECTIVENESS A. In the event that Operator shall have obtained Licensor's acceptance of a particular proposed site for the Restaurant pursuant to the provisions of the Development Agreement and shall have paid to Licensor all of the license fees due under this Agreement and the Development Agreement, and if Licensor, in the exercise of its sole and absolute discretion, 4 has granted Operator, in writing, "Operational Approval," "Financial Approval," "Legal Approval" and "Ownership Approval" approval, then the license granted to Operator to operate the Restaurant under Article I shall become effective. Licensor will give Operator Operational Approval, Financial Approval, Legal Approval and Ownership Approval if the conditions under the following subsections are met. (1) Operational Approval will be granted if Licensor has determined, in the exercise of its sole discretion, that: (a) Operator is in compliance with the Development Schedule (as that term is defined in the Development Agreement, and including any extensions approved by Licensor in writing) and this Agreement and has opened the Restaurant as required under the Development Schedule (including any extensions approved by Licensor in writing); (b) Operator and its Affiliates are in compliance with any other agreement between Operator and its Affiliates and Licensor and its Affiliates; (c) Operator is conducting the operation of its existing Restaurants, if any, and is capable of conducting the operation of the Restaurant to be opened under this Agreement and required under the Development Schedule: (i) in accordance with the terms and conditions of the Development Agreement and any amendments thereto; (ii) in accordance with the provisions of the respective Operating Agreement(s) and any amendments thereto; and (iii) in accordance with the standards, specifications and procedures: (A) set forth and described in the Manuals, as such Manuals may be amended from time to time; (B) as evaluated by Licensor, in its sole discretion, in accordance with the evaluation programs outlined in the Manuals; and (C) as otherwise set forth by the Licensor in writing. (2) Operator acknowledges and agrees that it is vital to Licensor's interest that each of its operators be financially sound to avoid failure of an O'Charley's restaurant and that such failure would adversely affect the reputation and good name of Licensor and the System. In accordance with the foregoing criteria, Financial Approval will be granted if: (a) Operator and the Controlling Principals satisfy Licensor's current financial criteria for operators and controlling principals of O'Charley's restaurants with respect to Operator's operation of its existing Restaurants, if any, and the proposed Restaurant; 5 (b) Operator and the Controlling Principals have been and are faithfully performing all terms and conditions under each of the existing Operating Agreements with Licensor, if any; (c) Operator is not in default, and has not been in default during the twelve (12) months preceding Operator's request for financial approval, of any monetary obligations owed to Licensor or its Affiliates under any Operating Agreement or any other agreement between Operator or any of its Affiliates and Licensor or any of its Affiliates; and (d) Operator is not in default, and has not been in default during the twelve (12) months preceding the date of this Agreement, of any financial covenant or monetary obligation with any of its lenders or financing sources. (3) Legal Approval will be granted if Operator has executed and delivered to Licensor, in a timely manner, all information and documents requested by Licensor prior to and as a basis for the issuance of the individual license for the proposed Restaurant or pursuant to any right granted to Operator by the Development Agreement or by the Operating Agreement between Operator and Licensor, and has taken such additional actions in connection therewith as may be requested by Licensor from time to time. (4) Ownership Approval will be granted if: (a) neither Operator nor any of its Controlling Principals (as applicable) shall have transferred a Controlling Interest in Operator; and (b) Operator and the Controlling Principals upon whom Licensor has relied to perform the duties under this Agreement shall continue to own and exercise control over a Controlling Interest in Operator. B. It is understood and agreed that the foregoing criteria apply to the operational, financial, legal and ownership aspects of any Restaurant franchised by Licensor in which Operator or any Controlling Principal has any legal or equitable interest. It is further understood and agreed that Operator and the Controlling Principals have an ongoing responsibility to operate the Restaurant in a manner which satisfies the foregoing requirements for Operational Approval, Financial Approval, Legal Approval and Ownership Approval. ARTICLE IV TERM AND RENEWAL A. Unless sooner terminated as provided in Article XVIII hereof, the term of this Agreement shall continue from the date stated on the first page hereof until the earlier of (1) fifteen (15) years from Opening Date or (2) the expiration or termination of Operator's right to possess the Restaurant premises. B. Operator may, at its option, renew the rights under this Agreement for one additional term of fifteen (15) years, and thereafter for additional terms of five (5) years (in each case, provided that the applicable renewal term shall automatically terminate upon the expiration or termination of Operator's right to possess the Restaurant premises), subject to any or all of the 6 following conditions which must, as determined in Licensor's sole discretion, be met prior to and at the time of renewal: (1) Operator shall give Licensor written notice of Operator's election to renew not less than twelve (12) months nor more than eighteen (18) months prior to the end of the initial term, or the first renewal term, as applicable; (2) Operator shall repair or replace, at Operator's cost and expense, equipment (including electronic cash register or computer hardware, or software systems, updates or upgrades, including any software licensed to Operator pursuant to the Software License Agreement required to be executed under Section VIII(F)), signs, awnings, neons, interior and exterior decor items, fixtures, furnishings, delivery vehicles, if applicable, supplies and other products and materials required for the operation of the Restaurant as Licensor may reasonably require and shall obtain, at Operator's cost and expense, any new or additional equipment, fixtures, supplies and other products and materials which may be reasonably required by Licensor for Operator to offer and sell new menu items from the Restaurant and shall otherwise modernize the Restaurant premises, equipment (including electronic cash register or computer hardware and software systems, including updates or upgrades), signs, awnings, neons, interior and exterior decor items, fixtures, furnishings, delivery vehicles, if applicable, supplies and other products and materials required for the operation of the Restaurant, as reasonably required by Licensor to reflect the then-current standards and image of the System as contained in the Manuals or otherwise provided in writing by Licensor; (3) Operator and its Affiliates shall not be in default of any provision of this Agreement, any amendment hereof or successor hereto, any other agreement between Operator, or any of its Affiliates and Licensor or any of its Affiliates or the Manuals; and Operator and its Affiliates shall have substantially and timely complied with all the terms and conditions of such agreements and Manuals during the terms thereof; (4) Operator and its Affiliates shall have satisfied all monetary obligations owed by Operator and its Affiliates to Licensor and its Affiliates under this Agreement and any other agreement between Operator, and any of its Affiliates and Licensor or its Affiliates and shall have substantially and timely met those obligations throughout the terms thereof; (5) Operator shall present satisfactory evidence that Operator has the right to remain in possession of the Restaurant premises or obtains Licensor's acceptance of a new site for the operation of the Restaurant for the duration of the renewal term of this Agreement; (6) Operator shall execute Licensor's then-current form of renewal operating agreement, which agreement shall supersede this Agreement in all respects and the terms of which may differ from the terms of this Agreement, including, without limitation, a higher percentage royalty fee, marketing fee, advertising contribution or expenditure requirement; and any and all other documents Licensor may then require for renewal; provided, however, that Operator shall pay to Licensor, in lieu of an initial license fee, a renewal fee representing one half (1/2) of Licensor's then-current initial license fee for operators who have opened more than two (2) restaurants; 7 (7) Operator and the Controlling Principals shall execute a general release of any and all claims against Licensor and its Affiliates, and each such Entity's respective officers, directors, shareholders, partners, agents, representatives, independent contractors, servants and employees, in their corporate and individual capacities, including, without limitation, claims arising under this Agreement or under federal, state or local laws, rules, regulations or orders; and (8) Operator shall meet Licensor's then-current financial, organizational, training, certification, staffing and other qualification requirements. ARTICLE V FEES A. (1) If Operator is licensing the first or second Restaurant developed under a Development Agreement, Operator shall pay to Licensor a license fee of Fifty Thousand Dollars ($50,000), one half (1/2) of which was paid as a fee for development upon execution of the Development Agreement, and the remaining one half (1/2) of which will be paid upon execution of this Agreement. (2) If Operator is licensing the third or any subsequent Restaurant developed under a Development Agreement, Operator shall pay to Licensor a license fee of Twenty-Five Thousand Dollars ($25,000), one half (1/2) of which was paid as a fee for development upon execution of the Development Agreement, and the remaining one half (1/2) of which will be paid upon execution of this Agreement. (3) The portion of the license fee paid in connection with this Agreement shall be deemed fully earned and non-refundable in partial consideration of the administrative and other expenses incurred by Licensor in granting the license hereunder and for its lost or deferred opportunity to grant such license to any other party. B. (1) During the term of this Agreement, Operator shall pay to Licensor, in partial consideration for the rights herein granted, a continuing royalty fee of four percent (4%) of Gross Sales as defined under Section V(C). Such royalty fee and any other fee required by this Agreement shall be due and payable on the tenth (10th) day of each Accounting Period based on the Gross Sales for the preceding Accounting Period (the first such Accounting Period beginning on the date established by Licensor). Such payment shall be delivered by Operator to Licensor by electronic funds transfer ("EFT") to the account designated by Licensor, in writing, so that it is received by Licensor on the tenth (10th) day of the applicable Accounting Period, provided that such day is a Business Day. A "Business Day" for the purpose of this Agreement means any day other than Saturday, Sunday or the following national holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving and Christmas. If the date on which such payment would otherwise be due is not a Business Day, then payment shall be due on the next Business Day. For purposes of this Agreement, the term "Accounting Periods" shall mean the accounting periods for the Restaurant as established by Licensor and described in the Manuals from time to time. 8 (2) Each such royalty fee payment shall be preceded or accompanied by a report ("Royalty Report"), in the form prescribed in the Manuals, itemizing the Gross Sales for the preceding Accounting Period as well as any other reports as may be required by Licensor. Notwithstanding the foregoing, Operator shall provide Licensor with such Gross Sales information on the tenth (10th) day of each Accounting Period by electronic data communication, facsimile transmission or, if either of the foregoing means is not available, by telephone, or such other method Licensor may reasonably direct. Operator also shall provide Licensor with a weekly Gross Sales report (covering the period from Monday through Sunday), in the form prescribed in the Manuals, by Tuesday of each week for the preceding week's Gross Sales by facsimile transmission, telephone, data communication or such other method of delivery as Licensor may reasonably direct. (3) By executing this Agreement, Operator agrees that Licensor has the right to withdraw funds from Operator's designated bank account each Accounting Period by EFT in the amount of the royalty fee plus any other amounts due to Licensor. With respect to royalty fees, provided such day is a Business Day (and if not a Business Day, on the next succeeding Business Day), such withdrawals shall be made on the tenth (10th) day after the end of each Accounting Period for the amount of the royalty fee due based on Operator's Gross Sales for the preceding Accounting Period, as evidenced by the Royalty Report. If the Royalty Report has not been received and the royalty fee has not been paid within the time period required by this Agreement, then Licensor may process, in its sole discretion, an EFT for the royalty fee for the Accounting Period in which the Royalty Report is not received or royalty fee paid. If the Royalty Report is not received, the amount of the Accounting Period royalty fee shall be based on, at Licensor's option, (a) information regarding Operator's Gross Sales for the preceding Accounting Period obtained by Licensor in the manner contemplated by Section VIII(E)(10) of this Agreement, (b) the weekly and Accounting Period Gross Sales reports transmitted to Licensor by Operator pursuant to Section V(B)(2), or (c) the most recent Royalty Report provided to Licensor by Operator; provided that if a Royalty Report for the subject Accounting Period is subsequently received and reflects (i) that the actual amount of the royalty fee due was more than the amount of the EFT by Licensor, then Licensor shall be entitled to withdraw additional funds representing the amount of the difference from Operator's designated bank account by EFT; or (ii) that the actual amount of the royalty due was less than the amount of the EFT by Licensor, then Licensor shall credit the excess amount to the payment of Operator's future royalty fee obligations. For any other monetary obligation not paid when due, Licensor shall have the right to withdraw such amounts due five (5) days after such amount becomes past due, provided such day is a Business Day (and if not a Business Day, on the next succeeding Business Day). Operator shall, upon execution of this Agreement or at any time thereafter at Licensor's request, execute such documents or forms as Licensor determines are necessary for Licensor to process EFTs from Operator's designated bank account for the payments due hereunder, including Attachment E to this Agreement. Operator agrees that it shall be responsible for (x) any EFT transfer fee or similar charge imposed by the bank, and (y) should any EFT not be honored by Operator's bank for any reason, for that payment plus any service charge applied by Licensor and/or the bank. If royalty fees and other payments are not received when due, interest may be charged by Licensor in accordance with Section V(B)(4) below. Upon written notice by Licensor to Operator, Operator shall execute such other documents that Licensor or Operator's bank may require to implement the foregoing procedure. 9 (4) Operator shall not be entitled to withhold payments due Licensor under this Agreement on grounds of alleged nonperformance by Licensor hereunder. Any payment or report not actually received by Licensor on or before the applicable due date shall be deemed overdue. Time is of the essence with respect to all payments to be made by Operator to Licensor. All unpaid obligations under this Agreement shall bear interest from the date due until paid at the lesser of (a) the prime commercial rate of interest as reported in the Wall Street Journal (Southeastern edition) from time to time or by any bank or financial institution designated from time to time by Licensor for short term unsecured, substantial and responsible commercial borrowers, plus three percent (3%), or (b) the maximum rate allowed by applicable law. Notwithstanding anything to the contrary contained herein, no provision of this Agreement shall require the payment or permit the collection of interest in excess of the maximum rate allowed by applicable law. If any excess of interest in such respect is herein provided for, or shall be adjudicated to be so provided in this Agreement, the provisions of this paragraph shall govern and prevail, and neither Operator nor its Controlling Principals shall be obligated to pay the excess amount of such interest. If for any reason interest in excess of the maximum rate allowed by applicable law shall be deemed charged, required or permitted, any such excess shall be applied as a payment and reduction of any other amounts which may be due and owing hereunder, and if no such amounts are due and owing hereunder then such excess shall be repaid to the party that paid such interest. C. For the purposes of determining the royalties to be paid hereunder, "Gross Sales" shall mean all receipts (cash, cash equivalents or credit) or revenues from sales from all business conducted upon or from the Restaurant premises, whether evidenced by check, cash, credit, charge account, exchange or otherwise, including, but not limited to, amounts received from the sale of goods, wares and merchandise (including sales of food, beverages and tangible property of every kind and nature, promotional or otherwise), from all services performed from or at the Restaurant premises, and from all orders taken or received at the Restaurant premises, regardless of where such orders are filled. All proceeds from the sale by Operator of O'Charley's Gift Cards issued by Licensor shall not be included in Gross Sales, however, the full value of any O'Charley's Gift Card issued by Licensor once redeemed by Operator shall be included within Gross Sales during the Accounting Period in which such O'Charley's Gift Card is submitted to Licensor for redemption. Gross Sales shall not be reduced by any deductions for cash shortages incurred in connection with the transaction of business with customers, credit card company charges or theft. Each charge or sale upon installment or credit shall be treated as a sale for the full price in the Accounting Period during which such charge or sale shall be first made, irrespective of the time when Operator shall receive payment (whether full or partial) therefor. (1) Gross Sales shall, however, expressly exclude the following: (a) receipts from the operation of any public telephone installed in the Restaurant, and sales from vending or gaming machines located at the Restaurant from which Operator derives no revenue; (b) sums representing sales taxes, based upon present or future laws of federal, state or local governments, collected directly from customers by Operator in the operation of the Restaurant, and any other tax, excise or duty charged to customers which is levied or assessed against Operator by any federal, state, municipal or local authority, based on 10 sales of specific merchandise sold at or from the Restaurant, provided that such taxes are actually transmitted to the appropriate taxing authority; (c) tips or gratuities paid directly by Restaurant customers to employees of Operator or paid to Operator and then turned over to such employees by Operator in lieu of direct tips or gratuities; (d) the sale of previously refunded or returned merchandise if the sales of such merchandise shall have been previously included in Gross Sales; (e) proceeds from isolated sales of trade fixtures not constituting any part of Operator's products and services offered at the Restaurant nor having any material effect upon the ongoing operation of the Restaurant; (f) the full value of discounts generally provided to employees for meals furnished as an incident to their employment; and (g) the full value of any complimentary and promotional food dispensed from the Restaurant to the extent such are dispensed in accordance with Licensor's standards for such programs, as set forth in the Manuals. (2) In addition, Licensor may, from time to time, authorize certain other items to be included or excluded from Gross Sales. Any such permission may be revoked or withdraw at any time in writing by Licensor in its discretion. (3) Operator acknowledges that the listing of items or transactions in this Section V(C) as constituting or giving rise to Gross Sales does not constitute the grant of a license or other authorization for Operator to provide or deliver any product or service not explicitly authorized elsewhere under this Agreement. D. Operator shall pay such other fees or amounts described in this Agreement. E. Operator acknowledges that the General Manager replacement fee in Section VII(D) and the transfer fee in Section XV(B)(2)(j) may, in Licensor's sole discretion, be increased annually effective January 1 of each year beginning on January 1 of the year following the date of this Agreement, by an amount equal to the annual percentage increase during the preceding calendar year in the Consumer Price Index---All Consumers (All Items)---United States City Average, as compiled and published by the United States Department of Labor, or such comparable successor index as may be designated by Licensor from time to time. ARTICLE VI LICENSOR'S OBLIGATIONS Licensor agrees to provide the services described below with regard to the Restaurant. A. Licensor shall loan to Operator one (1) set of confidential operations manuals (which currently include the Real Estate Manual, the Marketing and Recipe Manual, the Training and Operations Manual, the Human Resources Manual, the New Store Opening Manual and the 11 Financial Manual) and such other manuals and written materials as Licensor shall have developed for use in the Licensed Business (as the same may be revised by Licensor from time to time) (collectively, the "Manuals"). Licensor may provide the Manuals to Operator in electronic format. B. Licensor shall license to Operator certain computer software to be used in the operation of the Restaurant pursuant to Article VIII. Licensor shall also make available to Operator at a reasonable cost (as determined by Licensor) any upgrades, enhancements or replacements to the software that are developed from time to time by or on behalf of Licensor. C. Licensor shall visit the Restaurant and evaluate of the products sold and services rendered therein from time to time as reasonably determined by Licensor, as more fully described in Section VIII(E)(6). D. Licensor shall provide Operator with certain advertising and promotional materials and information developed by Licensor from time to time for use by Operator in marketing and conducting local advertising for the Restaurant. Licensor shall have the right to review and approve or disapprove all advertising and promotional materials that Operator proposes to use, pursuant to Article IX. E. Licensor shall provide Operator with advice and written materials concerning techniques of managing and operating the Restaurant from time to time developed by Licensor and deemed by Licensor, in its sole discretion, to be appropriate for use by Operator at the Restaurant, including new developments and improvements in restaurant equipment and food products, source specifications and the packaging and preparation thereof. F. From time to time at Licensor's discretion, Licensor may, at a reasonable cost determined by Licensor, make available for resale to Operator's customers certain merchandise identifying the System, such as T-shirts, sweatshirts and caps. G. Licensor shall provide to Operator lists of approved suppliers as described in Section VIII(D) from time to time as Licensor deems appropriate. H. Licensor shall conduct an initial training program for Operator's Operating Principal (or designee), General Manager, Kitchen Manager and three (3) selected Restaurant management personnel (or such other number of managers specified in the Manuals) as well as other training programs in accordance with the provisions of Section VII(E). I. Licensor shall provide on-site pre-opening and post-opening assistance at the Restaurant in accordance with the provisions of Section VII(E)(3) and the Manuals. J. Licensor shall establish and administer advertising funds and/or advertising cooperatives and approval of Yellow Pages(TM) and/or other business listing advertising at Licensor's discretion in accordance with Article IX. 12 ARTICLE VII OPERATOR'S AGREEMENTS, REPRESENTATIONS, WARRANTIES AND COVENANTS A. Operator and each of the Controlling Principals covenant and agree that each shall make all commercially reasonable efforts to operate the Restaurant so as to achieve optimum sales. B. If Operator is a corporation, limited liability company, partnership or other Entity, Operator and the Controlling Principals, as applicable, make the following representations and warranties to Licensor: (1) Operator is duly organized and validly existing under the state law of its formation. (2) Operator is duly qualified and is authorized to do business in each jurisdiction in which its business activities or the nature of the properties owned by it require such qualification. (3) Operator's corporate charter, articles of organization and operating agreement, or written partnership agreement shall at all times provide that the activities of Operator are confined exclusively to the operation of the Restaurant or other Restaurants under license from Licensor. Unless otherwise consented to in writing by Licensor, Operator shall not use the Proprietary Marks as part of its corporate or other legal name, and shall, in any event, obtain Licensor's approval of such corporate or other legal name prior to applying for or filing it with the applicable government authority. (4) The execution of this Agreement and the consummation of the transactions contemplated hereby are within Operator's corporate power, if Operator is a corporation, are permitted under Operator's articles of organization and operating agreement, if Operator is a limited liability company, and are permitted under Operator's written partnership agreement, if Operator is a partnership, and have been duly authorized by Operator. (5) If Operator is a corporation, copies of Operator's Articles of Incorporation, Bylaws, other governing documents, any amendments thereto, resolutions of the Board of Directors authorizing entry into and performance of this Agreement and any certificates, buy-sell agreements or other documents restricting the sale or transfer of stock of the corporation, and any other documents as may be reasonably required by Licensor shall have been furnished to Licensor prior to the execution of this Agreement; if Operator is a limited liability company, copies of Operator's articles of organization, operating agreement, any buy-sell agreements or other documents restricting the sale or transfer of interests in the limited liability company, and any other governing documents and any amendments thereto shall have been furnished to Licensor prior to the execution of this Agreement; or, if Operator is a partnership, copies of Operator's written partnership agreement, any buy-sell agreements or other documents restricting the sale or transfer of interests in the partnership, and any other governing documents and any amendments thereto shall be furnished to Licensor prior to the execution of this Agreement. Operator shall also provide to Licensor evidence of consent or approval of the entry into and performance of this Agreement by the requisite number or percentage of shareholders, 13 members or partners, if such approval or consent is required by statute or by Operator's Articles of Incorporation, Bylaws, articles of organization, operating agreement, written partnership agreement or other governing documents, as applicable. (6) If Operator is a corporation, limited liability company or partnership, the ownership interests in Operator are accurately and completely described in Attachment B. Further, if Operator is a corporation, Operator shall maintain at all times a current list of all owners of record and all beneficial owners of any class of voting securities in Operator, if Operator is a limited liability company, Operator shall maintain at all times a current list of all owners of an interest in the limited liability company, or, if Operator is a partnership, Operator shall maintain at all times a current list of all owners of an interest in the partnership. Operator shall immediately provide a copy of the updated list to Licensor upon the occurrence of any change of ownership and otherwise shall make its list of owners available to Licensor upon request. (7) If Operator is a corporation, Operator shall maintain stop-transfer instructions against the transfer on its records of any of its equity and voting securities and each certificate representing an equity or voting security of the corporation shall have conspicuously endorsed upon it a statement in a form satisfactory to Licensor that it is held subject to all restrictions imposed upon assignments by this Agreement; provided, however, that the requirements of this Section VII(B)(7) shall not apply to the transfer of equity securities of a Publicly-Held Entity that is otherwise approved to be the Operator. If Operator is a limited liability company, its operating agreement shall provide that ownership of an interest in the limited liability company is held subject to all restrictions imposed upon assignments by this Agreement. If Operator is a partnership, its written partnership agreement shall provide that ownership of an interest in the partnership is held subject to all restrictions imposed upon assignments by this Agreement. (8) Operator and each of the Controlling Principals have provided Licensor with the most recent audited financial statements of Operator and each of the Controlling Principals. Such financial statements present fairly the financial position of Operator and each of the Controlling Principals, as applicable, at the dates indicated therein and with respect to Operator, the results of its operations, its cash flow and owners' equity for the years then ended. Operator agrees that it shall maintain at all times, during the term of this Agreement, sufficient working capital to fulfill its obligations under this Agreement. Each of the financial statements mentioned above shall be certified as true, complete and correct by Operator's treasurer or chief financial officer (or by the applicable Controlling Principal), and shall have been prepared in conformity with generally accepted accounting principles ("GAAP") consistently applied to all applicable periods involved. No material liabilities, adverse claims, commitments or obligations of any nature exist as of the date of this Agreement, whether accrued, unliquidated, absolute, contingent or otherwise, which are not reflected as liabilities on the financial statements of Operator or the Controlling Principals or otherwise appropriately disclosed in the notes thereto. (9) No Principal may pledge, transfer or hypothecate its interest in Operator except in accordance to this Agreement. If after the execution of this Agreement any person ceases to qualify as a Principal, or if any individual succeeds to or otherwise comes to occupy a position which would, upon designation by Licensor, qualify him as a Principal, Operator shall 14 notify Licensor within five (5) days after any such change and, upon designation of such person by Licensor as a Principal, or as a Controlling Principal, as the case may be, such person shall execute such documents and instruments (including, as applicable, this Agreement) as may be required by Licensor to be executed by others in such positions. (10) Each Principal, except the Controlling Principals, shall execute and bind themselves to the confidentiality and non-competition covenants set forth in the Confidentiality and Non-Compete Agreement attached hereto as Attachment C (see Sections XI(B)(2) and XI(C)(4)). The Controlling Principals shall jointly and severally guarantee Operator's performance of all of Operator's obligations (including, but not limited to, the payment of fees), covenants and agreements described in this Agreement pursuant to the terms and conditions of the guaranty, attached hereto as Attachment F, and do otherwise bind themselves to the terms of this Agreement as stated herein. (11) Operator and the Controlling Principals acknowledge and agree, jointly and severally, that the representations, warranties, covenants and agreements set forth above in Sections VII(B)(l)-(10) are continuing obligations of Operator and the Controlling Principals, as applicable. Operator and each Controlling Principal will cooperate with Licensor in any efforts made by Licensor to verify compliance with such representations, warranties, covenants and agreements. C. Upon the execution of this Agreement, Operator shall designate and retain an individual to serve as the Operating Principal of the Restaurant (the "Operating Principal"). If Operator is an individual, Operator shall perform all obligations of the Operating Principal. The Operating Principal shall, during the entire period he serves as such, meet the following qualifications: (1) The Operating Principal must at Operating Principal's option, either serve as the General Manager or, subject to the approval of Licensor, designate another individual to serve as the General Manager of the Restaurant. Any individual designated by the Operating Principal to serve as the General Manager also may, subject to Licensor's consent, perform the duties and obligations of the Operating Principal, provided, that the Operating Principal shall take all necessary action to ensure that such designee conducts and fulfills all of such obligations in accordance with the terms of this Agreement and that the Operating Principal shall remain fully responsible for such performance. (2) The Operating Principal must maintain a direct ownership interest in Operator satisfactory to Licensor. Except as may otherwise be provided in this Agreement, the Operating Principal's interest in Operator shall be and shall remain free of any pledge, mortgage, hypothecation, lien, charge, encumbrance, voting agreement, proxy, security interest or purchase right or options. The Operating Principal shall execute this Agreement as one of the Controlling Principals, and shall be individually, jointly and severally with the Operator and the other Controlling Principals, bound by all obligations of Operator, the Operating Principal and the Controlling Principals hereunder. (3) Operator and the Operating Principal (or his designee, as applicable) shall devote their full time and best efforts to the supervision and conduct of the Licensed Business. 15 (4) The Operating Principal (or his designee, as applicable) shall meet Licensor's standards and criteria for such individual, as set forth in the Manuals, as set forth herein or as otherwise communicated by Licensor from time to time. (5) If during the term of this Agreement the Operating Principal (or any designee) is not able to continue to serve in the capacity of the Operating Principal or no longer qualifies to act as such in accordance with this Section, Operator shall notify Licensor within ten (10) days and shall designate a replacement within sixty (60) days after the Operating Principal (or any designee) ceases to serve or be so qualified, such replacement being subject to the same qualifications and restrictions listed above. Operator shall provide for interim management of the activities contemplated under this Agreement until such replacement is so designated, such interim management to be conducted in accordance with this Agreement. D. Operator shall designate and retain at all times a general manager (the "General Manager") and a kitchen manager (the "Kitchen Manager") and such other personnel as Licensor, in its sole discretion, deems necessary for the operation and management of the Restaurant. Operator shall designate its General Manager and Kitchen Manager at least ninety (90) days prior to the Opening Date, or by such later date as Licensor may determine. The General Manager shall be responsible for the daily operation of the Restaurant. The Kitchen Manager shall be responsible for the daily operation of the Restaurant's kitchen. The General Manager and Kitchen Manager may, but need not, each be one of the Controlling Principals (including the Operating Principal). The General Manager and Kitchen Manager shall, during the entire period they serve as the General Manager and Kitchen Manager, respectively, meet the following qualifications, as applicable: (1) The General Manager and the Kitchen Manager shall each satisfy Licensor's educational and business experience criteria as set forth in the Manuals, as set forth herein or as otherwise communicated by Licensor from time to time. (2) The General Manager shall devote his full time and best efforts to the supervision and management of the Restaurant and the Kitchen Manager shall devote his full time and best efforts to the supervision and management of the Restaurant's kitchen. (3) The General Manager and Kitchen Manager shall be individuals acceptable to and approved by Licensor. (4) The General Manager and Kitchen Manager shall satisfy the training requirements set forth in Section VII(E). If during the term of this Agreement the General Manager or the Kitchen Manager is not able to continue to serve in such capacity or no longer qualifies to act as such in accordance with this Section, Operator shall promptly notify Licensor and shall designate a replacement within sixty (60) days after the General Manager or the Kitchen Manager ceases to serve, such replacement being subject to the same qualifications and approvals as listed above. Operator shall provide for interim management of the Restaurant until such replacement is so designated, such interim management to be conducted in accordance with the terms of this Agreement. In the event that Operator fails to designate a replacement General Manager within such sixty (60) day time period Licensor may, in its sole discretion, designate an individual to serve as General Manager of the Restaurant. If Licensor designates such a 16 replacement General Manager, Operator shall pay to Licensor a fee of Six Thousand Five Hundred Dollars ($6,500) plus any expenses incurred by Licensor as a result of having designated a replacement General Manager (including, but not limited to, such replacement General Manager's per diem, travel, lodging and meals) for each month such replacement General Manager operates the Restaurant. E. Operator agrees that it is necessary to the continued operation of the System and the Restaurant that Operator, the Operating Principal, the General Manager, the Kitchen Manager and other personnel receive such training as Licensor may require, and accordingly agrees as follows: (1) (a) Licensor shall provide to Operator, at no additional cost for the first three (3) Restaurants that Operator or an Affiliate of Operator (it being the intention that the 3-Restaurant maximum on free training be used up by the first 3 Restaurants developed within an Affiliated group) develops, the initial training for Operator's Operating Principal (or his designee), General Manager, the Kitchen Manager and three (3) additional managers selected by Operator (the "Secondary Managers"), or such other number of managers as specified in the Manuals. The Operating Principal (or his designee), the General Manager, the Kitchen Manager and the Secondary Managers shall attend, and complete to Licensor's satisfaction, Licensor's initial training program. Such persons must complete the initial training not less than two (2) but no more than five (5) weeks prior to the date the Restaurant commences operations as an O'Charley's restaurant. Exactly when during this time period an individual has to complete the initial training is outlined in the Manuals and will vary depending on whether the individual is an Operating Principal, a General Manager, a Kitchen Manager or a Secondary Manager. A portion of the initial training must be conducted in Licensor's home office, which is currently in Nashville, Tennessee and the remaining portion must be conducted on-site at an O'Charley's restaurant. All on-site training must be conducted in an O'Charley's restaurant approved by Licensor. If Licensor has not approved any restaurant operated by Operator for training, then the training of the Operating Principal (or his designee), the General Manager, the Kitchen Manager and the Secondary Managers must be conducted in an approved restaurant that is operated by Licensor or by another licensee of Licensor. Licensor shall determine, in its sole discretion, whether the Operating Principal (or his designee), the General Manager, the Kitchen Manager and the Secondary Managers have satisfactorily completed the initial training. Licensor shall provide instructors and training materials for the initial training of such persons at no additional charge to Operator. (b) If the initial training program is not satisfactorily completed by the Operating Principal (or his designee), the General Manager, the Kitchen Manager or any Secondary Manager or if Licensor in its reasonable business judgment based upon the performance of the Operating Principal (or his designee), the General Manager, the Kitchen Manager or any Secondary Manager determines that the training program cannot be satisfactorily completed by such person(s), Operator shall designate a replacement(s) to satisfactorily complete such training. Operator shall be responsible for any and all expenses incurred by Operator, the Operating Principal (or his designee), the General Manager, the Kitchen Manager and the Secondary Managers in connection with any initial training program, including, without limitation, costs of travel, lodging, meals, wages and benefits. 17 (2) The Operating Principal, the General Manager, the Kitchen Manager and the Secondary Managers and such other Restaurant personnel as Licensor shall designate shall attend such additional training programs and seminars as Licensor may offer from time to time. For all such programs and seminars, Licensor will provide the instructors and training materials. However, Licensor reserves the right to impose a reasonable fee determined by Licensor for such additional training programs and seminars. Operator shall be responsible for any and all expenses incurred by Operator, the Operating Principal, the General Manager, the Kitchen Manager, the Secondary Managers and any other Restaurant personnel in connection with such additional training, including, without limitation, costs of travel, lodging, meals, wages and benefits. (3) (a) If Operator is developing a single Restaurant or if Operator is developing the first or second Restaurant under a Development Agreement, Licensor shall provide Operator with an opening team composed of two (2) store opening coordinators and up to sixteen (16) trainers, as determined by Licensor. (b) If Operator is developing the third Restaurant under a Development Agreement, Licensor shall provide Operator with an opening team composed of two (2) store opening coordinators and up to eight (8) trainers; provided, however, if Licensor determines, in Licensor's sole discretion, that Operator requires additional trainers, Operator shall supply such additional certified trainers (at Operator's expense) up to an additional eight (8) trainers. (c) If Operator is developing the fourth or any subsequent Restaurant under a Development Agreement, Licensor shall provide Operator with an opening team composed of up to two (2) store opening coordinators, unless Licensor determines, in its sole discretion, that Operator does not require Opening Team assistance. (d) Any store opening coordinators or trainers provided by Licensor to Operator shall be collectively referred to as the ("Opening Team"). The Opening Team will provide on-site pre-opening, opening and post-opening training supervision assistance to Operator for a period of time ranging from three (3) to six (6) weeks. Licensor reserves the right to require such Opening Team to remain on-site longer than six (6) weeks, in its sole discretion. The number of Opening Team members and the time period in which the Opening Team will provide assistance shall be determined by Licensor, in its sole discretion, based upon Licensor's assessment of Operator's operational requirements. With respect to the Opening Team assistance described above and any such assistance provided to a replacement O'Charley's Restaurant established by Operator, Operator shall pay to Licensor the per diem fee then being charged to operators generally for opening team assistance, including payment of any expenses incurred by such Opening Team, such as costs of travel and lodging. (4) Upon the reasonable request of Operator, and as Licensor shall deem appropriate, Licensor shall, during the term hereof, subject to the availability of personnel, provide Operator with additional trained representatives who shall provide on-site remedial training to Operator's Restaurant personnel. Operator shall pay the per diem fee then being charged to operators under the System for the services of such trained representatives, plus their costs of travel, lodging and meals. 18 F. Operator and the Controlling Principals understand that compliance by all operators and developers operating under the System with Licensor's training, development and operational requirements is an essential and material element of the System and that Licensor and operators and developers operating under the System consequently expend substantial time, effort and expense in training management personnel for the development and operation of their respective O'Charley's restaurants. Accordingly, Operator and the Controlling Principals agree that if during the term of this Agreement, Operator or any Controlling Principal shall designate or employ any individual who is at the time or was within the preceding three (3) months employed in a restaurant managerial position, a multi-restaurant supervisory position or home office staff position (e.g., officer or director level personnel, management information systems personnel or human resources and training personnel), by Licensor or any of its Affiliates, including, but not limited to, individuals employed by Licensor to work in its O'Charley's restaurants, or at Licensor's home office, or employed in a restaurant managerial position by any other developer or operator operating under the System (a "Covered Individual"), then such former employer of such Covered Individual shall be entitled to compensation for the reasonable costs and expenses, of whatever nature or kind, incurred by such employer in connection with the training of such Covered Individual. The parties hereto agree that such expenditures may be uncertain and difficult to ascertain and, therefore, agree that the compensation specified herein reasonably represents such expenditures and is not a penalty. The employing Operator or Controlling Principal shall pay to the former employer an amount equal to the salary of such Covered Individual for the six (6) month period prior to the termination of his employment with such former employer (or if the Covered Individual was employed less than six (6) months, that Covered Individual's projected salary had the Covered Individual been employed for the full six (6) months) for any restaurant level managerial personnel. For any Covered Individual employed in a multi-restaurant supervisory or home office staff position, the employing Operator or Controlling Principal shall pay to the former employer an amount equal to the salary of such Covered Individual for the twelve (12) month period immediately prior to the termination of his employment with such former employer (or if the Covered Individual was employed less than twelve (12) months, that Covered Individual's projected salary had the Covered Individual been employed for the full twelve (12) months). Such amount shall be paid by Operator, or the applicable Controlling Principal, as the case may be, within thirty (30) days after written notice, unless otherwise agreed with such former employer. The parties hereto expressly acknowledge and agree that no current or former employee of Licensor, its Affiliates, Operator, or of any other Entity operating under the System shall be a third party beneficiary of this Agreement or any provision hereof. Notwithstanding the above, solely for purposes of bringing an action to collect any payment due under this Section, such former employer shall be a third-party beneficiary of this Section VII(F). Licensor hereby expressly disclaims any representations and warranties regarding the performance of any employee or former employee of Licensor, or its Affiliates or any developer or operator operating under the System, who is designated or employed by Operator or any Controlling Principal in any capacity, and Licensor shall not be liable for any losses, of any nature or kind, incurred by Operator or any Controlling Principal in connection therewith. G. Operator shall comply with all requirements of federal, state and local laws, rules, regulations and orders. Licensor's Manuals may encompass some of Licensor's human relations and employment policies and procedures. Operator is free to adopt Licensor's employment policies if Operator so chooses. However, Operator is not required to adopt Licensor's 19 employment policies and Operator may develop and implement its own employment policies so long as such policies comply with all federal, state and local laws, regulations and orders. H. Operator shall obtain and maintain all appropriate licenses, permits and certifications for the operation of the Restaurant, including licenses and permits to sell alcoholic beverages in the Restaurant. I. Operator and the Controlling Principals shall allow Licensor and its representatives to review any and all of Operator's and the Controlling Principals' documents and other materials relating to their financing arrangements or capital structure. J. Operator and the Controlling Principals represent, warrant, covenant and agree that they shall comply with all other requirements and perform such other obligations as provided in this Agreement and the Manuals. ARTICLE VIII RESTAURANT OPERATIONS A. Operator understands the importance of maintaining uniformity among all of the O'Charley's restaurants and the importance of complying with all of Licensor's standards and specifications relating to the operation of the Restaurant. B. Operator shall maintain the Restaurant in a high degree of sanitation, repair and condition, and in connection therewith shall make such additions, alterations, repairs and replacements thereto (but no others without Licensor's prior written consent) as may be required for that purpose or as may be reasonably requested by Licensor, including, without limitation, such periodic repainting or replacement of obsolete signs, neons, furnishings, awnings, equipment (including, but not limited to, electronic cash register or computer hardware and software systems, including updates or upgrades), and decor as Licensor may reasonably direct, at Operator's cost and expense. Operator shall also obtain, at its expense, any new or additional equipment (including electronic cash register or computer hardware and software systems, including updates and upgrades), fixtures, supplies and other products and materials which may be reasonably required by Licensor for Operator to offer and sell new menu items from the Restaurant or to provide the Restaurant's services by alternative means, such as through carry-out or such other manner specified by Licensor. Except as may be expressly provided in the Manuals, no alterations or improvements or changes of any kind in design, equipment, signs, neons, interior or exterior decor items, fixtures, awnings or furnishings shall be made in or about the Restaurant or its premises without the prior written approval of Licensor. C. To assure the continued success of the Restaurant, Operator shall, upon the request of Licensor, make other improvements to modernize the Restaurant premises, equipment (including, without limitation, electronic cash register or computer hardware and software systems, including any updates and upgrades), signs, neons, interior and exterior decor items, fixtures, awnings, furnishings, supplies and other products and materials required for the operation of the Restaurant, to Licensor's then-current standards and specifications. Operator agrees that it will make such capital improvements or modifications described in this Section VIII(C) at the earlier of: (i) seven (7) years after the execution of this Agreement by Licensor; or 20 (ii) such time that a majority of the O'Charley's restaurants then operated by Licensor or its Affiliates have made or are utilizing best efforts to make such improvements or modifications. D. Operator shall comply with all of Licensor's standards and specifications (including brand specifications) relating to the purchase of all food and beverage items (including soft drinks), ingredients, supplies, materials, signs, neons, fixtures, awnings, furnishings, equipment (including electronic cash register or computer hardware and software systems, including any updates or upgrades) and other products used or offered for sale at the Restaurant. Except as provided in Section VIII(F) and Section VIII(G), Operator shall obtain such items from suppliers (including manufacturers, distributors and other sources) who continue to demonstrate the ability to meet Licensor's then-current standards and specifications for food and beverage items, ingredients, supplies, materials, signs, neons, fixtures, awnings, furnishings, equipment and other items used or offered for sale at O'Charley's restaurants and who possess adequate quality controls and capacity to supply Operator's needs promptly and reliably and who have been approved in writing by Licensor prior to any purchases by Operator from any such supplier and who have not thereafter been disapproved by Licensor. If Operator desires to purchase, lease or use any food and beverage items (including soft drinks), ingredients, supplies, materials, signs, neons, fixtures, awnings, furnishings, equipment (including electronic cash register or computer hardware and software systems, including any updates or upgrades) and other products used or offered for sale at the Restaurant from an unapproved supplier, Operator shall submit to Licensor a written request for such approval, or shall request the supplier itself to do so in accordance with the Manuals. Operator shall not purchase or lease from any supplier until and unless such supplier has been approved in writing by Licensor. Licensor shall have the right to require that its representatives be permitted to inspect the supplier's facilities, and that samples from the supplier be delivered, either to Licensor or to an independent laboratory designated by Licensor for testing. Licensor reserves the right to charge a reasonable fee associated with approving a supplier. In addition, all cost associated with such inspections and tests (including Licensor's out-of-pocket expenses) shall be paid by Operator or the proposed supplier. Licensor reserves the right, at its option, to re-inspect from time to time the facilities and products of any such approved supplier and to revoke its approval upon the, supplier's failure to continue to meet any of Licensor's then-current criteria. Nothing in the foregoing shall be construed to require Licensor to approve any particular supplier. E. To ensure that the highest degree of quality and service is maintained, Operator shall operate the Restaurant in strict conformity with such methods, standards and specifications of Licensor set forth in the Manuals and as may from time to time otherwise be prescribed by Licensor in writing. In particular, Operator also agrees to: (1) sell or offer for sale all menu items, products and services required by Licensor and in the manner and style prescribed by Licensor, including, but not limited to, dining-in and carry-out, as expressly authorized by Licensor in the Manuals or otherwise in writing, to operate the Restaurant only during the hours and on the days Licensor specifies in the Manuals or otherwise in writing, to comply with Licensor's policies and procedures for selling and redeeming O'Charley's Gift Cards as set forth in the Manuals and to execute such documents or instruments that Licensor may deem necessary to facilitate the providing of such services; 21 (2) sell and offer for sale only the menu items, products and services that have been expressly approved for sale in writing by Licensor, to refrain from deviating from Licensor's standards and specifications without Licensor's prior written consent; and to discontinue selling and offering for sale any menu items, products or services, or providing such menu items, products or services in any manner or through any method of distribution, which Licensor may, in its sole discretion, disapprove in writing at any time; (3) maintain in sufficient supply and to use and sell at all times only such food and beverage items (including soft drinks), ingredients, products, materials, supplies and paper goods that conform to Licensor's standards and specifications (including products specified by name, brand or other approved source); to prepare all menu items in accordance with Licensor's recipes and procedures for preparation contained in the Manuals or other written directives, including, but not limited to, the prescribed measurements of ingredients; and to refrain from deviating from Licensor's standards and specifications by the use or offer of non-conforming items or differing amounts of any items, without Licensor's prior written consent; (4) permit Licensor or its agents, at any reasonable time, to remove a reasonable number of samples of food or non-food items from Operator's inventory, or from the Restaurant premises, without payment therefor in amounts reasonably necessary for testing by Licensor or an independent laboratory to determine whether such samples meet Licensor's then-current standards and specifications, and to bear the cost of such testing if the supplier of the item has not previously been approved by Licensor or if the sample fails to conform with Licensor's specifications; (5) purchase or lease and install, and maintain at Operator's expense all fixtures, awnings, furnishings, equipment (including electronic cash register or computer hardware and software systems, including updates and upgrades), decor items, signs, neons, delivery vehicles (if applicable), and related items as Licensor may reasonably direct from time to time in the Manuals or otherwise in writing; refrain from installing or permitting to be installed on or about the Restaurant premises, without Licensor's prior written consent, any fixtures, awnings, furnishings, equipment, delivery vehicles (if applicable), decor items, signs, neons, games, vending machines or other items not previously approved as meeting Licensor's standards and specifications; and refrain from leasing any of the property described above from a third party without first obtaining Licensor's written approval, which shall be conditioned upon, among other things, such lease containing a provision which permits any interest of Operator in the lease to be assigned to Licensor upon the termination or expiration of this Agreement and which prohibits the lessor from imposing an assignment or related fee upon Licensor in connection with such assignment; (6) grant Licensor and its agents the right to enter upon the Restaurant premises and any Restaurant delivery motor vehicles (if applicable) at any time for the purpose of conducting inspections; to cooperate with Licensor's representatives in such inspections by rendering such assistance as they may reasonably request; take such steps, upon notice from Licensor or its agents and without limiting Licensor's other rights under this Agreement, as may be necessary to correct immediately any deficiencies detected during any such inspection; and permit Licensor to correct such deficiencies and charge a reasonable fee, as determined by 22 Licensor, for Licensor's expenses in so acting, should Operator for any reason fail to correct such deficiencies within a reasonable time as determined by Licensor; (7) execute and maintain a high level of customer service, to maintain a competent, conscientious and well trained staff (including hiring at least the minimum number of hourly staff outlined in the Manuals) and take such steps as are necessary to ensure that its employees preserve good customer relations and comply with such dress code, all as Licensor may prescribe in the Manuals or otherwise in writing, as well as comply with all federal, state and local laws, regulations and orders; (8) maintain in sufficient supply and prominently display and make available such customer satisfaction forms as Licensor may require and to forward all completed customer satisfaction forms to Licensor or to Licensor's designee at such times as Licensor may direct; (9) play in the Restaurant such recorded or programmed music as Licensor may from time to time require in the Manuals or otherwise in writing and to obtain such copyright licenses as may be necessary to authorize the playing of such recorded music; (10) install and maintain such equipment, make such arrangements and follow such procedures as Licensor may require in the Manuals or otherwise in writing (including, without limitation, the establishment and maintenance of Internet, intranet or extranet access or such other means of electronic communication, as specified by Licensor from time to time) to permit Licensor to access, download and retrieve electronically, by telecommunication or other designated method, any information stored in Operator's electronic cash registers or on Operator's computer systems, including, without limitation, information concerning the Gross Sales of the Restaurant; permit Licensor to upload and for Operator to receive and download information from Licensor; afford Licensor access to such information at the times and in the manner that Licensor may specify from time to time; permit Licensor to assess Operator a reasonable monetary charge for failure to make such information accessible, unless such failure is not the fault of Operator; and refrain from establishing any website or listing on the Internet or World Wide Web without the express written consent of Licensor. (11) pay to Licensor by EFT its then-current fee for providing support (including the cost of any help desk support, if such is provided by Licensor and any system maintenance fee) for any electronic cash register or computer system on the tenth (10th) day of each Accounting Period during the term of this Agreement, which fee shall be prorated for any partial period; provided, however, that Licensor reserves the right to change the amount of such fees, the billing cycle for such fees and/or the time period for which these fees are charged in January of each calendar year, and will provide to Operator thirty (30) day's prior written notice of any such change; (12) from time to time, at Operator's option, request Licensor to make individual changes or alterations (as provided in the Manuals) in the suggested retail pricing information and other information stored and provided through the electronic cash register or computer system for the Restaurant, in which case Operator shall pay Licensor's reasonable then-current fees and charges for making such changes or alterations to the electronic cash register or computer system; and 23 (13) permit, at least three (3) times during each Accounting Period and at such other times as Operator may request, Licensor or Licensor's agents to enter the Restaurant's premises and conduct, at Operator's expense, an evaluation report evaluating the atmosphere, cleanliness, service, hospitality and food of the Restaurant. F. Operator shall enter into a software license agreement with Licensor in substantially the form attached hereto as Attachment D for the license of certain proprietary computer software provided by Licensor for the operation of the Restaurant. Licensor retains the right to require Operator to enter into a separate license agreement for the Operator's use of the Proprietary Marks in any website or Internet postings or marketing. G. Operator acknowledges and agrees that Licensor has and may continue to develop for use in the System certain products, including products which are prepared from highly confidential secret recipes and which are trade secrets of Licensor. Because of the importance of quality and uniformity of production and the significance of such products in the System, it is to the mutual benefit of the parties that Licensor closely control the production and distribution of such products. Accordingly, Operator agrees that Operator shall sell any such products using only Licensor's secret recipe and other, proprietary products, and shall purchase solely from Licensor or from a source designated by Licensor all of Operator's requirements for such products. Operator further agrees to purchase from Licensor for resale to Operator's customers certain promotional merchandise identifying the System as Licensor shall require such as T-shirts, sweatshirts and caps, in amounts sufficient to satisfy Operator's customer demand. H. Operator shall require all advertising and promotional materials, signs, decorations, paper goods (including menus and all forms and stationery used in the Licensed Business), and other items which may be designated by Licensor to bear the Proprietary Marks in the form, color, location and manner prescribed by Licensor. Licensor must approve in writing and in advance the content and design of Operator's website advertising or Internet postings or marketing and such use must be in accordance with Licensor's then current policies. I. Operator shall process and handle all consumer complaints connected with or relating to the Restaurant, and shall notify Licensor by telephone and in writing within forty-eight (48) hours of all of the following complaints: (1) food related illnesses; (2) safety or health violations; (3) claims exceeding One Thousand Dollars ($1,000.00); (4) dram shop violations; (5) liquor license violations; and (6) any other material claims against or losses suffered by Operator. Operator shall maintain for Licensor's inspection any inspection reports affecting the Restaurant or equipment located in the Restaurant during the term of this Agreement and for six (6) months after the expiration or earlier termination hereof. J. Upon the execution of this Agreement or at any time thereafter, Operator shall, at the option of Licensor, execute such forms and documents as Licensor deems necessary to appoint Licensor its true and lawful attorney-in-fact with full power and authority for the sole purpose of assigning to Licensor all rights to: (1) the telephone numbers of the Restaurant and any related and other business listings; and (2) all e-mail addresses, URLs, domain names, Internet listings and Internet accounts related to the Restaurant upon the termination or expiration of this Agreement as required under Section XIX(M). 24 K. Operator may submit a written request to Licensor requesting authorization to provide delivery services from the Restaurant. Such written request shall be in the form and manner specified in Manuals and shall include Operator's name, the Restaurant location, a description of the proposed delivery area and a description of the proposed delivery vehicle(s). Licensor, in its sole discretion, may authorize Operator to provide Restaurant delivery services. If Licensor so authorizes Operator, any vehicle used by Operator to deliver Restaurant products and services to customers shall meet Licensor's standards with respect to appearance and ability to satisfy the requirements imposed on Operator hereunder and in the Manuals. Operator shall place such signs and decor items on the vehicle as Licensor requires and shall at all times keep such vehicle clean and in good working order. Operator shall not engage or utilize any individual in the operation of a motor vehicle in connection with providing services hereunder who is under the age of eighteen (18) years and who does not possess a valid driver's license under the laws of the state in which Operator provides such services. Operator shall require each such individual to comply with all laws, regulations and rules of the road and to use due care and caution in the operation and maintenance of motor vehicles. Except as noted above and in the Manuals, Licensor does not set forth any standards or exercise control over any motor vehicle utilized by Operator. ARTICLE IX ADVERTISING AND RELATED FEES Recognizing the value of advertising and the importance of the standardization of advertising programs to the furtherance of the goodwill and public image of the System, the parties agree as follows: A. Licensor may from time to time develop and administer advertising and sales promotion programs designed to promote and enhance the collective success of all restaurants operating under the System. Operator shall participate in all such advertising and sales promotion programs in accordance with the terms and conditions established by Licensor for each program. In all aspects of these programs, including, without limitation, the type, quantity, timing, placement and choice of media, market areas and advertising agencies, the standards and specifications established by Licensor shall be final and binding upon Operator. B. (1) Licensor shall establish and administer an advertising production fund for the purpose of producing and creating advertising materials for the System (the "Production Fund"). Operator agrees to contribute one percent (1%) of each Accounting Period's Gross Sales to the Production Fund (the "Production Fund Fee"), such Production Fund Fee to be paid by EFT in the manner set forth in Section V(B). Operator agrees and acknowledges that Licensor shall maintain and administer the Production Fund in Licensor's sole and absolute discretion, including using the Production Fund Fee to purchase and pay for any and all costs of maintaining, administering, directing and preparing advertising (including, without limitation, the cost of preparing television, radio, magazine, newspaper, direct mail and outdoor billboard advertising campaigns, menus, public relations activities, employing advertising agencies to assist therein, and all of Licensor's departmental costs for advertising that is internally administered or prepared by Licensor). 25 (2) Operator agrees and acknowledges that the Production Fund is established to create advertising materials which are intended to maximize the general public recognition and acceptance of the Proprietary Marks and enhance the collective success of all restaurants operating under the System. The Production Fund Fees will be used for the development and creation of advertising, but will not be used to pay for the actual placement of advertising materials. Licensor shall, with respect to O'Charley's restaurants operated by Licensor, contribute to the Production Fund generally on the same basis as Operator contributes to the Production Fund. In administering the Production Fund, Licensor and its designee undertake no obligation to make expenditures for Operator which are equivalent or proportionate to Operator's contribution or to ensure that any particular operator benefits directly or pro rata from the creation of advertising. The Production Fund and its earnings shall not inure to the benefit of Operator. The Production Fund is operated solely as a conduit for collecting and expending the Production Fund Fees. Licensor shall prepare an annual statement of the Production Fund's expenditures within one hundred twenty (120) days of Licensor's fiscal year end. Such annual statement shall be made available to Operator upon written request. Operator and the Controlling Principals agree and acknowledge that Licensor has no fiduciary duty whatsoever to Operator, or any other operators, or their respective controlling principals with regard to the operation or administration of the Production Fund. C. In addition to the ongoing advertising contributions set forth herein, Operator shall spend during each year throughout the term of this Agreement, two percent (2%) of the Gross Sales of the Restaurant (the "Local Advertising Expenditure") on local advertising for the Restaurant ("Local Advertising"). Although the Local Advertising Expenditure is a yearly requirement, each Accounting Period Operator is required to submit to Licensor an advertising expenditure report accurately reflecting that Accounting Period's Local Advertising expenditures at the same time as the report itemizing Gross Sales described in Section V(B)(2). In addition to the restrictions set forth in Section IX(I) below, costs and expenditures incurred by Operator in connection with any of the following shall not be included in Operator's expenditures on Local Advertising for purposes of this Section, unless approved in advance by Licensor in writing: (1) incentive programs for employees or agents of Operator, including the cost of honoring any coupons distributed in connection with such programs; (2) research expenditures; (3) food costs incurred in any promotion; (4) salaries and expenses of any employees of Operator, including salaries or expenses for attendance at advertising meeting or activities; (5) charitable, political or other contributions or donations; (6) press parties or other expenses of publicity; (7) in-store materials consisting of menus, fixtures or equipment; (8) seminar and educational costs and expenses of employees of Operator; 26 (9) pre-opening procedures and grand opening promotions; and (10) specialty items such as T-shirts, premiums, pins and awards, unless such items are part of a market-wide advertising program and then only to the extent that the cost of such items is not recovered by the promotion. D. Operator agrees that Licensor shall have the right, in its sole discretion, to designate any geographic area in which two (2) or more O'Charley's restaurants are located as a region for purposes of establishing an advertising cooperative (a "Cooperative"). If such a Cooperative is established, the members of the Cooperative for any area shall, at a minimum, consist of all full-service O'Charley's restaurants within that area. Each Cooperative shall be organized and governed in a form and manner, and shall commence operation on a date determined in advance by Licensor in its sole discretion. Each Cooperative shall be organized for the exclusive purposes of administering advertising programs and developing, subject to Licensor's approval pursuant to Section IX(I), promotional materials for use by the members of the Cooperative in Local Advertising. The approved advertising media for Cooperative advertising is limited to television and radio. If at the time of the execution of this Agreement a Cooperative has been established for a geographic area that encompasses the Restaurant, or if any such Cooperative is established during the term of this Agreement, Operator shall execute such documents as are required by Licensor immediately upon the request of Licensor and shall become a member of the Cooperative pursuant to the terms of those documents. Operator shall participate in the Cooperative as follows: (1) Operator shall contribute to the Cooperative such amounts required by the documents governing the Cooperative; provided, however, Operator will not be required to contribute more than two percent (2%) of each Accounting Period's Gross Sales to the Cooperative unless, subject to Licensor's approval, the members of the Cooperative agree to the payment of a larger fee (the "Cooperative Fee"). (2) Operator shall submit to the Cooperative and to Licensor such statements and reports as may be required by Licensor or by the Cooperative. All contributions to the Cooperative shall be maintained and administered in accordance with the documents governing the Cooperative. The Cooperative shall be operated solely as a conduit for the collection and expenditure of the Cooperative Fee for the purposes outlined above. (3) No advertising or promotional plans or materials may be used by the Cooperative or furnished to its members without the prior written approval of Licensor. All such plans and materials shall be submitted to Licensor in accordance with the procedure set forth in Section IX(I). E. Operator agrees that Licensor shall have the right, in its sole discretion, to establish and administer a national and/or regional advertising fund (the "National Fund"). If such a National Fund is established by Licensor, Operator agrees to contribute up to two percent (2%) of each Accounting Period's Gross Sales to the National Fund (the "National Fund Fee"), such National Fund Fee to be paid by EFT in the manner set forth in Section V(B). 27 F. If Licensor establishes a Cooperative under Section IX(D) applicable to the Restaurant and/or a National Fund under Section IX(E), the total required contribution by Operator to the Local Advertising Expenditure, the Cooperative Fee (if applicable) and the National Fund Fee (if applicable) shall not exceed three percent (3%) of the Restaurant's Gross Sales. However, if the sum of the Local Advertising Expenditure, the Cooperative Fee (if applicable) and the National Fund Fee (if applicable) when added together would exceed three percent (3%) of the Restaurant's Gross Sales, then such advertising fees shall be allocated and, where applicable, reduced as follows: (1) the Local Advertising Expenditure shall be reduced to one percent (1%) of the Restaurant's Gross Sales; and (2) the remaining two percent (2%) of such advertising fees shall be allocated among the Local Advertising Expenditure, the Cooperative Fee (if applicable) and the National Fund Fee (if applicable) in such amounts and in such proportions as Licensor, in Licensor's sole discretion, deems appropriate. G. Operator shall plan and carry out the pre-opening procedures in accordance with the standards and specifications outlined in the Manuals. In addition to the pre-opening procedures outlined in the Manuals, Licensor may require Operator to plan and carry out a grand opening promotion relating to the opening of the Restaurant in accordance with the Manuals. Any advertising items and methods used by Operator in connection with such pre-opening procedures and any required grand opening promotions must be approved by Licensor in accordance with Section IX(I). Any such amount paid by Operator for the initial pre-opening procedures and any required grand opening promotions shall not be credited toward any other obligation of Operator in this Article IX. H. Operator shall also pay its pro rata share of the cost of Yellow Pages(TM) and/or other business listing advertising placed by Licensor on behalf of all O'Charley's restaurants in the Restaurant's local market area. If Operator operates the only O'Charley's restaurant under the System in the local market area, Operator shall be responsible for full payment of the Yellow Pages(TM) advertising and/or other business listing costs, unless Licensor determines, in its sole discretion, that placement of Yellow Pages(TM) and/or other business listing advertising for such local market area is not economically justified. Any amount paid by Operator for such Yellow Pages(TM) and/or other business listing advertising may be applied by Operator toward satisfaction of its Local Advertising requirement. I. (1) Nothing in the foregoing sections shall be deemed to prohibit Operator from making additional expenditures for local advertising. All of Operator's advertising and promotional activities shall utilize Approved Advertising Media. "Approved Advertising Media" are limited to the following: (a) newspapers, magazines and other such periodicals; (b) radio and television; (c) outdoor advertising by signs displayed on billboards or buildings; 28 (d) handbills, flyers, door-hangers and direct mail; (e) Internet advertising; (f) Yellow Pages(TM) advertising; and (g) such other media which Licensor approves in writing. In the event Operator wants to use a form of advertising medium not set forth above, Operator shall submit a description of such medium and advertising to Licensor. Licensor shall notify Operator whether it approves the use of such medium within thirty (30) days of Operator's request. Failure by Licensor to so notify Operator within that period shall be deemed to constitute Licensor's approval of such request unless such advertising medium is in violation of this Section IX(I). Guidelines for advertising are contained in the Manuals. (2) All advertising copy and other materials employed by Operator in advertising shall be in strict accordance and conformity with the standards, formats and specimens contained in the Manuals and shall receive the prior written approval of Licensor. In the event Operator wishes to deviate from the materials contained in the Manuals, Operator shall submit, in each instance, the proposed advertising copy and materials to Licensor for approval in advance of publication. Licensor shall notify Operator in writing, within thirty (30) days of such submission, whether Licensor disapproves of such advertising copy and materials. Failure by Licensor to so notify Operator within that period shall be deemed to constitute Licensor's approval of such advertising copy and materials unless, such advertising copy or materials is in violation of this Section IX(I). In no event shall Operator's advertising contain any statement or material which may be considered: (a) in bad taste or offensive to the public or to any group of persons; (b) defamatory of any person or an attack on any competitor; (c) to infringe upon the use, without permission, of any other person's trade name, trademark, trade dress, service mark or identification; or (d) inconsistent with the public image of Licensor or the System. J. In reviewing whether or not to establish a Cooperative and/or a National Fund and any fees applicable thereto, Licensor shall endeavor to, but shall not be liable for any omission to, consider such factors as media costs, available marketing resources, population changes, changes in market conditions, the degree of market penetration of the System, the level of advertising expenditures by O'Charley's restaurants operated by Licensor or its Affiliates, advertising expenditures by competitors of the System, as well as such other factors as Licensor deems relevant. K. With respect to the offer and sale of all menu and beverage items and other products and services, Licensor may from time to time offer guidance concerning what it believes to be the optimum selling price for such goods, products and services. In addition, Licensor may from time to time establish maximum prices for such goods, products and services. 29 Such maximum prices, or the methods for determining such maximum prices, shall be outlined in the Manuals from time to time. Except for maximum prices Licensor establishes, Operator shall have the right to offer and sell its goods, products and services at any prices Operator may determine, and shall in no way be bound by any price which may be recommended or suggested by Licensor. Operator may not sell the goods, products and services above any maximum prices for such goods, products or services as may be outlined, from time to time, in the Manuals. Operator shall not exceed the maximum price established by Licensor, but Operator at all times shall remain free to charge any price below the maximum price established by Licensor. Operator shall execute any instruments or other writings required by Licensor to facilitate the provision of such goods, products and services. If Operator elects to sell any or all of its goods, products or services at any price recommended by Licensor, Operator acknowledges that Licensor has made no guarantee or warranty that offering such goods, products or services at the recommended price will enhance Operator's sales or profits. ARTICLE X PROPRIETARY MARKS A. Licensor grants Operator the right to use the Proprietary Marks during the term of this Agreement in accordance with the System and its related standards and specifications. B. Operator expressly understands and acknowledges the following: (1) O'Charley's Management Company, Inc., a Tennessee corporation and wholly owned subsidiary of Licensor ("OMC"), is the owner of all right, title and interest in and to the Proprietary Marks and the goodwill associated with and symbolized by them. OMC has granted to Licensor an exclusive license to use and sublicense the Proprietary Marks. (2) Neither Operator nor the Controlling Principals shall take any action that would prejudice or interfere with the validity of OMC's or Licensor's rights with respect to the Proprietary Marks. Nothing in this Agreement shall give the Operator any right, title or interest in or to any of the Proprietary Marks or to any of OMC's or Licensor's service marks, trademarks, trade names, trade dress, logos, copyrights or proprietary materials, except the right to use the Proprietary Marks and the System in accordance with the terms and conditions of this Agreement for the operation of the Restaurant and only at or from its accepted Location or in approved advertising related to the Restaurant. Operator shall have no right to use the Proprietary Marks in any manner that has not been expressly authorized by Licensor in writing (including, any use of, or association with, the Proprietary Marks and any website, URL or other listing or use on the Internet). (3) Operator understands and agrees that any and all goodwill arising from Operator's use of the Proprietary Marks and the System shall inure solely and exclusively to the benefit of OMC and Licensor, and upon expiration or termination of this Agreement and the license herein granted, no monetary amount shall be assigned as attributable to any goodwill associated with Operator's use of the Proprietary Marks. 30 (4) Operator shall not contest the validity of OMC's or Licensor's interest in the Proprietary Marks or assist others to contest the validity of OMC's or Licensor's interest in the Proprietary Marks. (5) Operator acknowledges that any unauthorized use of the Proprietary Marks shall constitute an infringement of OMC's and Licensor's rights in the Proprietary Marks. Operator agrees that it shall provide Licensor with all assignments, affidavits, documents, information and assistance Licensor reasonably requests to fully vest in OMC and Licensor all such rights, title and interest in and to the Proprietary Marks, including all such items as are reasonably requested by OMC or Licensor to register, maintain and enforce such rights in the Proprietary Marks. (6) OMC and Licensor reserve the right to substitute different Proprietary Marks for use in identifying the System and the Restaurant if the current Proprietary Marks no longer can be used, or if OMC or Licensor, in their sole discretion, determine that substitution of different Proprietary Marks will be beneficial to the System. In such event OMC or Licensor may require Operator, at Operator's expense, to discontinue or modify Operator's use of any of the Proprietary Marks or to use one or more additional or substitute Proprietary Marks. C. With respect to Operator's licensed use of the Proprietary Marks pursuant to this Agreement, Operator further agrees as follows: (1) Unless otherwise authorized or required by Licensor, Operator shall operate and advertise the Restaurant only under the name "O'Charley's" without prefix or suffix. Operator shall not use the Proprietary Marks as part of its corporate or other legal name, and shall obtain Licensor's approval of such corporate or other legal name prior to applying for or filing it with the applicable government authority. (2) During the term of this Agreement and any renewal hereof, Operator shall identify itself as the owner of the Restaurant and an operator of Licensor in conjunction with any use of the Proprietary Marks, including, but not limited to, uses on invoices, order forms, receipts and contracts, as well as the display of a notice in such content and form and at such conspicuous locations on the premises of the Restaurant or any Restaurant delivery vehicle (if applicable) as Licensor may designate in writing. (3) Operator shall not use the Proprietary Marks to incur any obligation or indebtedness on behalf of OMC, Licensor or any of their Affiliates. (4) Operator shall comply with OMC's or Licensor's instructions in filing and maintaining the requisite trade name or fictitious name registrations, and shall execute any documents deemed necessary by OMC or Licensor or their counsel to obtain protection of the Proprietary Marks or to maintain their continued validity and enforceability. D. Operator shall notify Licensor immediately by telephone, and thereafter in writing, of any alleged infringement of or challenge to Operator's use of any Proprietary Mark, of any claim by any person of any rights in any Proprietary Mark, and Operator and the Controlling Principals shall not communicate with any person other than Licensor or any designated affiliate thereof, their counsel and Operator's counsel in connection with any such 31 alleged infringement, challenge or claim. OMC and Licensor shall have complete discretion to take such action as they deem appropriate in connection with the foregoing, and the right to control exclusively, or to delegate control to any of their Affiliates of, any settlement, litigation or Patent and Trademark Office proceeding or any other proceeding arising out of any such alleged infringement, challenge or claim or otherwise relating to any Proprietary Mark. Operator agrees to execute any and all instruments and documents, render such assistance, and do such acts or things as may, in the opinion of OMC or Licensor, reasonably be necessary or advisable to protect and maintain the interests of OMC and Licensor or any affiliate or any other franchisee in any litigation or other proceeding or to otherwise protect and maintain the interests of OMC or Licensor or any other interested parties in the Proprietary Marks. Licensor will indemnify Operator against and reimburse Operator for all costs (including court costs and attorneys' fees) and damages for which Operator is held liable in any proceeding arising out of any claim that the Proprietary Marks violate or infringe upon the intellectual property of any third party, provided that the conduct of Operator and the Controlling Principals with respect to such proceeding and use of the Proprietary Marks is in full compliance with the terms of this Agreement. E. The right and license of the Proprietary Marks granted hereunder to Operator is nonexclusive and Licensor thus has and retains certain rights in the Proprietary Marks including, but not limited to, the following: (1) to grant other licenses for use of the Proprietary Marks, in addition to those licenses already granted to existing operators; (2) to develop and establish other systems using the Proprietary Marks or other names or marks and to grant licenses thereto without providing any rights to Operator; and (3) to engage, directly or indirectly, through its employees, representatives, licensees, assigns, agents and others, at wholesale, retail or otherwise, in (a) the production, distribution, license and sale of products and services, and (b) the use in connection with such production, distribution and sale, of the Proprietary Marks and any and all trademarks, trade names, service marks, logos, insignia, slogans, emblems, symbols, designs and other identifying characteristics as may be developed or used from time to time by Licensor. ARTICLE XI CONFIDENTIALITY AND NON-COMPETITION COVENANTS A. (1) To protect the reputation and goodwill of Licensor and to maintain high standards of operation under Licensor's Proprietary Marks, Operator shall conduct its business in accordance with the Manuals, other written directives which Licensor may issue to Operator from time to time whether or not such directives are included in the Manuals, and any other manuals and materials created or approved for use in the operation of the Licensed Business. (2) Operator and the Controlling Principals shall at all times treat the Manuals, any written directives of Licensor, and any other manuals and materials, and the information contained therein, as confidential and shall maintain such information as trade secrets and confidential in accordance with this Article XI. Operator and the Controlling Principals shall use all reasonable efforts to maintain this information as secret and confidential, 32 and Operator and the Controlling Principals shall divulge and make such materials available only to such of Operator's employees as must have access to it in order to operate the Restaurant, or to such other persons authorized by Licensor in writing. Operator and the Controlling Principals shall not at any time copy, duplicate, record or otherwise reproduce these materials, in whole or in part, or otherwise make the same available to any person other than those authorized above. (3) The Manuals, written directives, other manuals and materials and any other confidential communications provided or approved by Licensor shall at all times remain the sole property of Licensor, shall at all times be kept in a secure place on the Restaurant premises, and shall be returned to Licensor immediately upon request or upon termination or expiration of this Agreement. (4) The Manuals, any written directives, and any other manuals and materials issued by Licensor and any modifications to such materials shall supplement this Agreement. (5) Licensor may from time to time revise the contents of the Manuals and the contents of any other manuals and materials created or approved for use in the operation of the Licensed Business. Operator expressly agrees to comply with each new or changed standard. (6) Operator shall at all times ensure that the Manuals are kept current and up-to-date. In the event of any dispute as to the contents of the Manuals, the terms of the master copy of the Manuals maintained by Licensor at Licensor's home office shall control. (7) Operator shall promptly reimburse Licensor for Licensor's cost of producing any replacement Manual requested by Operator. B. (1) Neither Operator nor any of the Controlling Principals shall, during the term of this Agreement or thereafter, communicate, divulge or use for the benefit of any other person, persons or Entity and, following the expiration or termination of this Agreement, they shall not use for their own benefit, any confidential information, knowledge or know-how concerning the methods of operation of the Licensed Business which may be communicated to Operator or the Controlling Principals or of which they may be apprised in connection with the operation of the Restaurant under the terms of this Agreement. Operator and the Controlling Principals shall divulge such confidential information only to such of Operator's employees as must have access to it in order to operate the Restaurant. Any and all information, knowledge, know-how, techniques and any materials used in or related to the System which Licensor provides to Operator in connection with this Agreement including, but not limited to, the Manuals, plans and specifications, marketing information and strategies and site evaluation and selection guidelines and techniques, recipes, and other information communicated in writing and through other means, including electronic media (e.g., CD ROM, DVD, computer disk or video and audio tape) shall be deemed confidential for purposes of this Agreement. Neither Operator nor the Controlling Principals shall at any time, without Licensor's prior written consent, copy, duplicate, record or otherwise reproduce such materials or information, in whole or in part, nor otherwise make the same available to any unauthorized person. The covenants in this Section shall survive the expiration, termination or transfer of this Agreement or any interest herein and shall be perpetually binding upon Operator and each of the Controlling Principals; provided, 33 however, if the jurisdiction in which this covenant is sought to be enforced does not allow perpetual binding, then the maximum amount of time allowed under the applicable law. (2) Operator shall require and obtain the execution of covenants similar to those set forth in Section XI(B)(l) from its General Manager and Kitchen Manager. Such covenants shall be set forth in an agreement substantially in the form of Attachment C attached hereto. Each Principal not required to sign this Agreement as a Controlling Principal also must execute such covenants. Operator shall provide Licensor executed copies of all such agreements ten (10) days after they are executed. (3) If Operator or the Controlling Principals develop any new concept, product, recipe, process or improvement in the operation or promotion of the Restaurant, Operator is required to promptly notify and assign to Licensor all of Operator's rights therein and to provide Licensor all information necessary to effectuate the assignment to Licensor, without compensation. Operator and the Controlling Principals acknowledge that any such concept pertaining thereto, process or improvement will become the property of Licensor, and Licensor may itself use or disclose such information to other operators or developers for their use as Licensor determines to be appropriate. C. (1) Operator and the Controlling Principals specifically acknowledge that, pursuant to this Agreement, Operator and the Controlling Principals will receive valuable training, trade secrets and confidential information, including, without limitation, information regarding the operational, sales, promotional and marketing methods and techniques of Licensor and the System which are beyond the present skills and experience of Operator and the Controlling Principal's and Operator's managers and employees. Operator and the Controlling Principals acknowledge that such specialized training, trade secrets and confidential information provide a competitive advantage and will be valuable to them in the development and operation of the Restaurant, and that gaining access to such specialized training, trade secrets and confidential information is, therefore, a primary reason why they are entering into this Agreement. In consideration of such specialized training, trade secrets and confidential information and rights, Operator and the Controlling Principals covenant that, during the term of this Agreement, except as otherwise approved in writing by Licensor, neither Operator nor any of the Controlling Principals shall, either directly or indirectly, for themselves or through, on behalf of or in conjunction with any person, persons or Entity: (a) divert, or attempt to divert, any business or customer of the Licensed Business to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with the Proprietary Marks and the System; or (b) own, maintain, operate, engage in, or have any financial or beneficial interest in (including through any interest in an Entity that conducts such activities), advise, assist or make loans to, any business that operates a full service, varied menu, casual dining restaurant that features freshly prepared items such as steaks, seafood, homemade baked goods and fresh cut salads, and that serves alcoholic beverages through a full-service bar, and which business is located within the United States, its territories or commonwealths, or any other country, province, state or geographic area in which Licensor has used, sought registration of or 34 registered the same or similar Proprietary Marks or operates or licenses others to operate a business under the same or similar Proprietary Marks. (2) With respect to Operator, and for a continuous uninterrupted period commencing upon the expiration, termination of (regardless of the cause for termination), or transfer of all of Operator's interest in, this Agreement (or, with respect to each of the Controlling Principals, commencing upon the earlier of: (a) the expiration, termination of, or transfer of all of Operator's interest in, this Agreement; or (b) the time such individual or Entity ceases to satisfy the definition of the "Controlling Principals") and continuing for two (2) years thereafter, except as otherwise approved in writing by Licensor, neither Operator, nor any of the Controlling Principals shall, directly or indirectly, for themselves, or through, on behalf of or in conjunction with any person, persons or Entity: (a) divert, or attempt to divert, any business or customer of the Licensed Business hereunder to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with the Proprietary Marks and the System; (b) employ, or seek to employ, any person who is at that time, or has been within the preceding six (6) months, employed by Licensor or any of its Affiliates or by any other operator or developer of Licensor, or otherwise directly or indirectly induce such person to leave that person's employment, except as may be permitted under any existing development agreement or operating agreement between Licensor and Operator; or (c) own, maintain, operate, engage in, or have any financial or beneficial interest in (including through any interest in an Entity that conducts such activities), advise, assist or make loans to or provide guarantees with respect to such loans to, any business that is of a character and concept similar to the Restaurant, including, without limitation, a full service varied menu casual dining restaurant which serves alcoholic beverages through a full-service bar, which business is, or is intended to be located within the Location or within a fifteen (15) mile radius of any O'Charley's restaurant or other food service facility in existence or under construction (or where land has been purchased or a lease has been executed for the construction of an O'Charley's restaurant or other food service facility) as of the earlier of: (i) the expiration or termination of, or the transfer of all of Operator's interest in, this Agreement; or (ii) the time the Controlling Principal ceases to satisfy the definition of Principal, as applicable. (3) The parties acknowledge and agree that each of the covenants contained herein are reasonable limitations as to time, geographical area, and scope of activity to be restrained and do not impose a greater restraint than is necessary to protect the goodwill or other business interests of Licensor. The parties agree that each of the covenants herein shall be construed as independent of any other covenant or provision of this Agreement. If all or any portion of a covenant in this Section is held unreasonable or unenforceable by a court or agency having valid jurisdiction in an unappealed or unappealable final decision to which Licensor is a party, Operator and the Controlling Principals expressly agree to be bound by any lesser covenant subsumed within the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Section. 35 Sections XI(C)(1)(b) and (2)(c) shall not apply to the ownership of less than a five percent (5%) beneficial interest in the outstanding equity securities of any Publicly-Held Entity. (a) Operator and the Controlling Principals understand and acknowledge that Licensor shall have the right, in its sole discretion, to reduce the scope of any covenant set forth in this Section XI(C) in this Agreement, or any portion thereof, without their consent, effective immediately upon notice to Operator; and Operator and the Controlling Principals agree that they shall immediately comply forthwith with any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Section XX(B) hereof. (b) Operator and the Controlling Principals expressly agree that the existence of any claims they may have against Licensor, whether or not arising from this Agreement, shall not constitute a defense to the enforcement by Licensor of the covenants in this Section. (4) Operator shall require and obtain the execution of covenants similar to those set forth in this Section XI(C) (including covenants applicable upon the termination of a person's employment with Operator) from its General Manager and its Kitchen Manager. At Licensor's request, Operator shall require and obtain execution of covenants similar to those set forth in this Section XI(C) (including covenants applicable upon the termination of a person's employment with Operator) from any personnel of Operator who have received or will have access to training from Licensor. Any such covenants shall be substantially in the form set forth in Attachment C. (5) Each Principal not required to sign this Agreement as a Controlling Principal also must execute such covenants. Notwithstanding the foregoing, Licensor reserves the right, in its sole discretion, to decrease the period of time or geographic scope of the non-competition covenant set forth in Attachment C or eliminate such non-competition covenant altogether for any party that is required to execute such agreement under this Section XI(C)(5). D. Operator and the Controlling Principals acknowledge that a violation of the terms of this Section would result in irreparable injury to Licensor for which no adequate remedy at law may be available, and Operator and the Controlling Principals accordingly consent to the issuance of an injunction prohibiting any conduct by Operator or the Controlling Principals in violation of the terms of this Section. Operator and the Controlling Principals agree to pay all court costs and reasonable attorney's fees incurred by Licensor in connection with the enforcement of this Section, including payment of all costs and expenses for obtaining specific performance of, or an injunction against violation of, the requirements of such Section. E. Notwithstanding anything else in this Article XI to the contrary, if there is a state specific non-competition and/or non-solicitation addendum attached to this Agreement, the terms of such addendum shall supersede the terms of this Article XI to the extent they are inconsistent with one another. 36 ARTICLE XII BOOKS AND RECORDS A. Operator shall maintain during the term of this Agreement, and shall preserve for at least five (5) years from the dates of their preparation, full, complete and accurate books, records and accounts, including, but not limited to, sales slips, coupons, purchase orders, credit card transmission records, payroll records, employee meal records, check stubs, bank statements, deposit slips, sales tax records and returns, cash receipts and disbursements, journals and ledgers, records of EFT transactions, and backup or archived records of information maintained on any computer system, all in accordance with GAAP, as applicable, and in the form and manner prescribed by Licensor from time to time in the Manuals or otherwise in writing. B. In addition to the remittance reports required by Articles V and IX hereof, Operator shall comply with the following reporting obligations: (1) Operator shall, at Operator's expense, submit to Licensor, in the form prescribed by Licensor, a quarterly profit and loss statement (which may be unaudited) for Operator within thirty (30) days after the end of each quarter during the term hereof. Each such statement shall be certified by Operator's treasurer or chief financial officer attesting that it is true, complete and correct. (2) Operator shall, at its expense, provide to Licensor complete audited annual financial statements for Operator prepared by an independent certified public accountant satisfactory to Licensor, within one hundred twenty (120) days after the end of each fiscal year of Operator during the term hereof, showing the financial position, results of operations, cash flows and owners' equity of Operator during such fiscal year. Such financial statements shall be prepared in accordance with GAAP, and shall be certified by Operator's treasurer or chief financial officer attesting that they are true, complete and correct. (3) Operator shall also submit to Licensor, for review or auditing, such other forms, reports, records, information and data as Licensor may reasonably designate, in the form and at the times and places reasonably required by Licensor, upon request and as specified from time to time in writing. C. Licensor or its designees shall have the right at all reasonable times to review, audit, examine and copy any or all books and records of Operator as Licensor may require. Operator shall make such books and records available to Licensor or its designees immediately upon request. If any required royalty payments, marketing fees, advertising contributions or any other payments to Licensor are delinquent, or if any inspection should reveal that such payments have been understated in any report to Licensor, then Operator shall immediately pay to Licensor the amount overdue or understated upon demand with interest determined in accordance with the provisions of Section V(B)(4). If an inspection discloses an understatement in any report of two percent (2%) or more, Operator shall, in addition, reimburse Licensor for all costs and expenses connected with the inspection (including, without limitation, reasonable accounting and attorney's fees). These remedies shall be in addition to any other remedies Licensor may have at law or in equity. 37 D. Operator understands and agrees that the receipt or acceptance by Licensor of any of the statements furnished or fees paid to Licensor (or the cashing of any royalty checks, or processing of electronic fund transfers) shall not preclude Licensor from questioning the correctness thereof at any time and, in the event that any inconsistencies or mistakes are discovered in such statements or payments, they shall immediately be rectified by the Operator and the appropriate payment shall be made by the Operator. E. Operator hereby authorizes (and agrees to execute any other documents deemed necessary to effect such authorization) all banks, financial institutions, businesses, suppliers, manufacturers, contractors, vendors and other persons or entities with which Operator does business to disclose to Licensor any requested financial information in their possession relating to Operator or the Restaurant. Operator authorizes Licensor to disclose data from Operator's reports, if Licensor determines, in its sole discretion, that such disclosure is necessary or advisable, which disclosure may include disclosure to prospective or existing operators or other third parties. F. Operator hereby appoints Licensor its true and lawful attorney-in-fact with full power and authority, for the sole purpose of obtaining any and all returns and reports filed by Operator with any state and/or federal taxing authority. This power of attorney shall survive the expiration or termination of this Agreement. Operator shall execute such additional documents as Licensor shall require in connection with such appointment G. In addition to the information, books, records and reports Operator must provide with respect to the Restaurant and Operator described above, the Controlling Principals shall each provide to Licensor his or her unaudited annual financial statements within one hundred twenty (120) days after the end of Operator's fiscal year. Such financial statements shall be prepared in accordance with GAAP, and shall be certified as true and correct by the applicable Controlling Principal. ARTICLE XIII INSURANCE A. Operator shall procure, upon execution of this Agreement, and shall maintain in full force and effect at all times during the term of this Agreement at Operator's expense, an insurance policy or policies protecting Operator and Licensor and its Affiliates and their respective Affiliates, successors and assigns and each such Entity's respective officers, directors, shareholders, partners, agents, representatives, independent contractors and employees against any demand or claim with respect to personal injury, death or property damage, or any loss, liability or expense whatsoever arising or occurring upon or in connection with the Restaurant. B. (1) Such policy or policies shall be written by a responsible carrier or carriers reasonably acceptable to Licensor and shall include, at a minimum (except as additional coverages and higher policy limits may reasonably be specified by Licensor from time to time in accordance with standards and specifications set forth in writing), the following: (a) Comprehensive General Liability Insurance, including broad form contractual liability, broad form property damage, personal injury, advertising injury, completed 38 operations, products liability and fire damage coverage, in the amount of One Million Dollars ($1,000,000) combined single limit; (b) Liquor Legal Liability Insurance in the amount of One Million Dollars ($1,000,000) combined single limit; (c) "All Risks" coverage (including earthquake and flood, if the Restaurant is located in a designated earthquake or flood zone) for the full cost of replacement of the Restaurant premises and all other property in which Licensor may have an interest with no coinsurance clause; (d) An "umbrella" policy providing excess coverage with limits of not less than Ten Million Dollars ($10,000,000); (e) Automobile liability coverage, including coverage of owned, non-owned and hired vehicles, with coverage in amounts not less than One Million Dollars ($1,000,000) combined single limit; (f) Workers' compensation insurance in amounts provided or described by applicable laws and statutes; and (g) Such other insurance as may be required by the state or locality in which the Restaurant is located and operated. (2) Operator may, with the prior written consent of Licensor, elect to have reasonable deductibles in connection with the coverage required under Sections XIII(B)(1)(a)-(g) hereof. Such policies shall also include a waiver of subrogation in favor of Licensor and its directors, officers, shareholders, partners, employees, representatives, independent contractors and agents. C. In connection with any construction, renovation, refurbishment or remodeling of the Restaurant, Operator shall maintain Builder's Risks insurance and performance and completion bonds in forms and amounts, and written by a carrier or carriers, reasonably satisfactory to Licensor. D. Operator's obligation to obtain and maintain the foregoing policy or policies in the amounts specified shall not be limited in any way by reason of any insurance which may be maintained by Licensor, nor shall Operator's performance of that obligation relieve it of liability under the indemnity provisions set forth in Article XVI of this Agreement. E. All public liability and property damage policies shall contain a provision that Licensor and its Affiliates and their respective directors, officers, shareholders, partners, employees, representatives, independent contractors and agents, although named as insureds, shall nevertheless be entitled to recover under such policies on any loss occasioned to Licensor or its servants, agents or employees by reason of the negligence of Operator or its servants, agents or employees. 39 F. Upon execution of this Agreement, and thereafter as required by Licensor and thirty (30) days prior to the expiration of any such policy, Operator shall deliver to Licensor Certificates of Insurance evidencing the existence and continuation of proper coverage with limits not less than those required hereunder. In addition, if requested by Licensor, Operator shall deliver to Licensor a copy of the insurance policy or policies required hereunder. All insurance policies required hereunder, with the exception of workers' compensation, shall name Licensor and any parent or affiliate, and their respective directors, officers, shareholders, partners, employees, representatives, independent contractors and agents, as additional insureds, and shall expressly provide that any interest of same therein shall not be affected by any breach by Operator of any policy provisions. Further, all insurance policies required hereunder shall expressly provide that no less than thirty (30) days prior written notice shall be given to Licensor in the event of a material alteration to or cancellation of the policies. G. Should Operator, for any reason, fail to procure or maintain the insurance required by this Agreement, as such requirements may be revised from time to time by Licensor in writing, Licensor shall have the right and authority (without, however, any obligation to do so) immediately to procure such insurance and to charge same to Operator, which charges, together with a reasonable fee for Licensor's expenses in so acting, shall be payable by Operator immediately upon notice. The foregoing remedies shall be in addition to any other remedies Licensor may have at law or in equity. ARTICLE XIV DEBTS AND TAXES A. Operator shall promptly pay when due all Taxes levied or assessed, and all accounts and other indebtedness of every kind incurred by Operator in the conduct of the Licensed Business under this Agreement. Without limiting the provisions of Article XVI, Operator shall be solely liable for the payment of all Taxes and shall indemnify Licensor for the full amount of all such Taxes imposed on Licensor, and for any liability (including penalties, interest and expenses) arising from or concerning the payment of Taxes, whether Taxes were correctly or legally asserted or not. B. Each payment to be made to Licensor hereunder shall be made free and clear and without deduction for any Taxes. The term "Taxes" means any present or future taxes, levies, imposts, duties or other charges of whatever nature, including any interest or penalties thereon, imposed by any government or political subdivision of such government on or relating to the operation of the Licensed Business, the payment of monies, or the exercise of rights granted pursuant to this Agreement. C. If any Taxes (other than income taxes) are directly or indirectly imposed on Licensor with respect to any payments to Licensor required under this Agreement, Operator shall pay an amount to Licensor equal to the Tax. D. In the event of any bona fide dispute as to Operator's liability for taxes assessed or other indebtedness, Operator may contest the validity or the amount of the tax or indebtedness in accordance with the procedures of the taxing authority or applicable law. However, in no event shall Operator permit a tax sale or seizure by levy of execution or similar writ or warrant or 40 attachment by a creditor, to occur against the premises of the Licensed Business or any improvements or other property thereon. E. Operator shall comply with all federal, state and local laws, rules and regulations and shall timely obtain any and all permits, certificates or licenses necessary for the full and proper conduct of the Licensed Business, including, without limitation, licenses to do business, fictitious name registrations, licenses and permits to sell alcoholic beverages in the Restaurant, sales tax permits, fire clearances, health and safety permits and certificates of occupancy, and any permits, certificates or licenses required by any environmental law, rule, or regulation. F. Operator shall immediately notify Licensor in writing of the commencement of any action, suit or proceeding and of the issuance of any order, writ, injunction, award or decree of any court, agency or other governmental instrumentality, which may adversely affect the operation or financial condition of the Licensed Business. ARTICLE XV TRANSFER OF INTEREST A. Licensor shall have the right to transfer or assign this Agreement and all or any part of its rights or obligations herein to any person or Entity without Operator's consent. Specifically, and without limitation to the foregoing, Operator and the Controlling Principals agree that Licensor may sell its assets, the Proprietary Marks or the System to a third party; may offer its securities privately or publicly; may merge, spin-off, acquire other Entities or be acquired by another Entity; may undertake a refinancing, recapitalization, leveraged buyout or other economic or financial restructuring; and with regard to any or all of the above sales, assignments and dispositions, Operator and the Controlling Principals expressly and specifically waive any claims, demands, or damages against Licensor arising from or related to the transfer of the Proprietary Marks (or any variation thereof) or its assets or the System (or any portion thereof) from Licensor to any other party. Upon such sale, assignment or disposition, Operator further agrees that Licensor shall have no further obligations arising out of or related to this Agreement so long as such obligations are assumed by the transferee. Nothing contained in this Agreement shall require Licensor to remain in the business of operating or licensing the operation of O'Charley's restaurants or other restaurant businesses or to offer any services or products, whether or not bearing the Proprietary Marks, to Operator if Licensor assigns its rights in this Agreement. B. (1) Operator and the Controlling Principals understand and acknowledge that the rights and duties set forth in this Agreement are personal to Operator and the Controlling Principals, and that Licensor has granted rights under this Agreement in reliance on the business skill, financial capacity and personal character of Operator and the Controlling Principals and with the expectation that the duties and obligations contained in this Agreement will be performed by Operator and the Controlling Principals signing this Agreement. Accordingly, neither Operator nor any Controlling Principal, nor any successor or assign of Operator or any Controlling Principal shall sell, assign, transfer, convey, give away, pledge, mortgage or otherwise dispose of or encumber any direct or indirect interest in this Agreement, in the assets of the Restaurant or in Operator without the prior written consent of Licensor; provided, however, that such prior written consent shall not be required for a transfer of less than a five 41 percent (5%) interest in a Publicly-Held Entity. Any purported assignment or transfer, by operation of law or otherwise, not having the written consent of Licensor shall be null and void. (2) If Operator wishes to transfer all or part of its interest in the assets of the Restaurant or in this Agreement or if Operator or a Controlling Principal wishes to transfer any ownership interest in Operator, the transferor and the proposed transferee shall apply to Licensor in writing for Licensor's consent, which may be withheld in Licensor's sole discretion. Without limiting the generality of the foregoing, Licensor may require that all of the following conditions be met prior to its approval of that transfer: (a) All of the accrued monetary obligations of Operator and its Affiliates and all other outstanding obligations to Licensor and its Affiliates arising under this Agreement or any other agreement shall have been satisfied in a timely manner and Operator shall have satisfied all trade accounts and other debts of whatever nature or kind, in a timely manner. (b) Operator, or its Affiliates, are not in default of any provision of this Agreement, any amendment hereof or successor hereto, or any other agreement between Operator, or its Affiliates and Licensor, or its Affiliates, and Operator shall have substantially and timely complied with all the terms and conditions of such agreements during the terms thereof. (c) The transferor and its principals (if applicable) shall have executed a general release, in a form satisfactory to Licensor, of any and all claims against Licensor, its Affiliates and each such Entity's respective officers, directors, shareholders, partners, agents, representatives, independent contractors and employees, in their corporate and individual capacities, including, without limitation, claims arising under this Agreement, any other agreement between Licensor and Operator and federal, state and local laws, rules and regulations. (d) The transferee shall enter into a written agreement, in a form satisfactory to Licensor, assuming full, unconditional, joint and several liability for, and agreeing to perform from the date of the transfer, all obligations, covenants and agreements contained in this Agreement, and, if transferee is a corporation, limited liability company, partnership or other Entity, transferee's shareholders, members, partners or other investors, as applicable, shall execute such agreement as transferee's principals and guarantee the performance of all such obligations, covenants and agreements. (e) The transferee shall demonstrate to Licensor's satisfaction that transferee meets the criteria considered by Licensor when reviewing a prospective operator's application for a license, including, but not limited to, Licensor's educational, managerial and business standards; transferee's good moral character, business reputation and credit rating; transferee's aptitude and ability to conduct the business licensed herein (as may be evidenced by prior related business experience or otherwise); transferee's financial resources and capital for operation of the business; and the geographic proximity and number of other O'Charley's restaurants owned or operated by transferee. 42 (f) The transferee shall execute, for a term ending on the expiration date of this Agreement and with such renewal terms as may be provided by this Agreement, the standard form operating agreement then being offered to new System operators and other ancillary agreements as Licensor may require for the Restaurant, which agreements shall supersede this Agreement and its ancillary documents in all respects and the terms of which agreements may differ from the terms of this Agreement, including, without limitation, a higher percentage royalty fee, marketing fee, advertising contribution or expenditure requirement; and, if transferee is a corporation, limited liability company, partnership or other Entity, transferee's shareholders, members, partners or other investors, as applicable, shall execute such agreement as transferee's principals and guarantee the performance of all such obligations, covenants and agreements. (g) The transferee, at its expense, shall renovate, modernize and otherwise upgrade the Restaurant and, if applicable, any Restaurant delivery vehicles to conform to the then-current standards and specifications of the System, and shall complete the upgrading and other requirements within the time period reasonably specified by Licensor. (h) The transferor shall remain liable for all of the obligations to Licensor in connection with the Restaurant incurred prior to the effective date of the transfer and shall execute any and all instruments reasonably requested by Licensor to evidence such liability. (i) At the transferee's expense, the transferee, the transferee's General Manager and the transferee's Operating Principal (or his authorized designee), and any other applicable Restaurant personnel shall complete any training programs then in effect for operators of O'Charley's restaurants upon such terms and conditions as Licensor may reasonably require. (j) Operator shall pay a transfer fee of Five Thousand Dollars ($5,000) to Licensor, or such greater amount as is necessary to reimburse Licensor for its reasonable costs and expenses associated with reviewing the application to transfer, including, without limitation, legal and accounting fees prior to the approval of transfer. (k) If the transferee is a corporation, limited liability company, partnership or other Entity, the transferee shall make and will be bound by any or all of the representations, warranties and covenants set forth at Article VII as Licensor requests. Transferee shall provide to Licensor evidence satisfactory to Licensor that the terms of such Section have been satisfied and are true and correct on the date of transfer. (l) Operator shall have completed its obligations to construct and open the Restaurant under Article II of this Agreement and the terms of the Development Agreement. (3) Operator shall not grant a security interest in the Restaurant or in any of Operator's assets without Licensor's prior written consent. In connection therewith, the secured party will be required by Licensor to agree that in the event of any default by Operator under any documents related to the security interest, Licensor shall have the right and option to be substituted as obligor to the secured party and/or to cure any default of Operator. 43 (4) Operator acknowledges and agrees that each condition which must be met by the transferee is reasonable and necessary to ensure such transferee's full performance of the obligations hereunder. C. If the proposed transfer is to a corporation formed solely for the convenience of ownership, Licensor's consent may be conditioned upon any of the requirements set forth at Section XV(B)(2)(a), (b), (d), (h), (i) and (k). With respect to a transfer to a corporation formed for the convenience of ownership, Operator shall be the owner of all of the voting stock or interest of the corporation and if Operator is owned by more than one individual, each such individual shall have the same proportionate ownership interest in the corporation as he had in Operator prior to the transfer. D. (1) If Operator wishes to transfer all or part of its interest in the assets of the Restaurant or this Agreement or if Operator or a Controlling Principal wishes to transfer any ownership interest in Operator pursuant to an offer received from a third party to purchase such interest, then such proposed seller shall promptly notify Licensor in writing of each such offer, shall certify that such offer is bona fide and shall provide and shall certify in writing as to the accuracy of such information and documentation relating to the offer as Licensor may require. Licensor shall have the right and option, exercisable within thirty (30) days after receipt of such written notification and copies of all documentation requested by Licensor describing the terms of such offer, to send written notice to the proposed seller that Licensor intends to purchase the proposed seller's interest on the same terms and conditions offered by the third party. In the event that Licensor elects to purchase the proposed seller's interest, closing on such purchase must occur within the later of sixty (60) days from the date of notice to the proposed seller of the election to purchase by Licensor, sixty (60) days after the date Licensor receives and obtains all necessary permits and approvals, or such other date as the parties agree upon in writing. Any material change in the terms of any offer prior to closing shall constitute a new offer subject to the same right of first refusal by Licensor as in the case of an initial offer. Failure of Licensor to exercise the option afforded by this Section XV(D) shall not constitute a waiver of any other provision of this Agreement, including the consent provisions of Section XV(B) and all of the other requirements of Article XV, with respect to a proposed transfer. (2) In the event an offer from a third party provides for payment of consideration other than cash or involves certain non-cash items or intangible benefits, Licensor may elect to purchase the interest proposed to be sold for the reasonable cash equivalent of such items or benefits (the "Cash Equivalent"). If the parties cannot agree within thirty (30) days on the reasonable cash equivalent of the non-cash part of the offer, then the Cash Equivalent will be determined by one (1) or more professional appraisers or independent certified public accountants who are qualified by experience and ability to appraise (each, a "Qualified Appraiser"), selected under the procedures in this Section. If the Cash Equivalent is to be determined by Qualified Appraisers, Licensor and Operator will each have the opportunity to appoint, at their own expense, a Qualified Appraiser, within five (5) days following the expiration of the thirty (30) day period within which Licensor and Operator could not mutually agree on the Cash Equivalent. If either party shall fail to appoint a Qualified Appraiser within this five (5) day period, the other Qualified Appraiser shall unilaterally establish the Cash Equivalent by a written opinion and the cost of such Qualified Appraiser shall be split between the two parties equally. If both parties appoint Qualified Appraisers within this five (5) day 44 period, the two (2) Qualified Appraisers shall establish the Cash Equivalent in a single written opinion agreed to by both of them. If the two (2) Qualified Appraisers cannot agree on the Cash Equivalent within ten (10) days of the appointment of the latter of them, the two (2) Qualified Appraisers shall together appoint a third Qualified Appraiser whose sole written opinion shall establish the Cash Equivalent. In the event of such appraisal, each party shall bear its own legal and other costs. In the event that Licensor exercises its right of first refusal herein provided, it shall have the right to set off (a) all fees for any such Qualified Appraiser due from Operator hereunder, and (b) all amounts due from Operator or any of its Affiliates against any payment therefor. E. (1) Upon the death of Operator (if a natural person) or any Controlling Principal who is a natural person (the "Deceased"), the executor, administrator or other personal representative of the Deceased shall transfer such interest to a third party approved by Licensor within twelve (12) months after the death of the Deceased. If no personal representative is designated or appointed or no probate proceedings are instituted with respect to the estate of the Deceased, then the distributee of such interest must be approved by Licensor. If the distributee is not approved by Licensor, then the distributee shall transfer such interest to a third party approved by Licensor within twelve (12) months after the death of the Deceased. (2) Upon the Permanent Disability of Operator (if a natural person) or any Controlling Principal who is a natural person, Licensor may, in its sole discretion, require such interest to be transferred to a third party in accordance with the conditions described in this Article XV within six (6) months after notice to Operator of such Permanent Disability. "Permanent Disability" shall mean any physical, emotional or mental injury, illness or incapacity which would prevent a person from performing the obligations set forth in this Agreement or in the guaranty made part of this Agreement for at least ninety (90) consecutive days. Permanent Disability shall be determined by a licensed practicing physician selected by Licensor, upon examination of the person, or if the person refuses to submit to an examination, then such person automatically shall be deemed permanently disabled as of the date of such refusal for the purpose of this Section XV(E). The costs of any examination required by this Section shall be paid by Licensor. (3) In the event of the death or Permanent Disability of Operator (if a natural person), the Operating Principal or any Controlling Principal who is a natural person and who has a twenty-five percent (25%) or more interest in this Agreement, the Restaurant or in Operator, Licensor at its option may elect to operate (or appoint a designee to operate) the Licensed Business during the interim twelve (12) months following such death or the interim six (6) months following such Permanent Disability, as applicable, until the interest of such person is transferred in accordance with this Article XV. As compensation for managing the Restaurant, Licensor will charge a management fee of five percent (5%) of Operator's Gross Sales for each Accounting Period. Operator will execute any agreements or other documents required by Licensor to effect the foregoing and shall remain responsible for payment of employee salaries, taxes, rent, utilities, supplies and all other costs and expenses associated with the operation of the Restaurant. Licensor shall exercise its commercially reasonable efforts in managing the Licensed Business, but shall not be liable for any losses incurred by the Licensed Business during the time of such management and thereafter. 45 (4) Upon the death or claim of Permanent Disability of Operator or any Controlling Principal, Operator or a representative of Operator must promptly notify Licensor of such death or claim of Permanent Disability within fifteen (15) days of its occurrence. Any transfer upon death or Permanent Disability shall be subject to the same terms and conditions as described in this Section for any inter vivos transfer. Operator and each Controlling Principal shall have the right to seek approval of a transfer of their respective interest to a proposed successor prior to the death or claim of Permanent Disability by Operator or the Controlling Principal, as applicable. If Operator or any Controlling Principal, as applicable, desires to obtain approval of any proposed successor in interest prior to the death or claim of Permanent Disability, Operator or the Controlling Principal, as applicable, shall submit to Licensor such information and documentation concerning such proposed successor required by Licensor in the Manuals or other written directives. Further, as a condition to approval, Licensor may, in its sole discretion, require compliance with any of the terms and conditions described in this Section for any inter vivos transfer. F. Licensor's consent to a transfer of any interest described herein shall not constitute a waiver of any claims which Licensor may have against the transferring party, nor shall it be deemed a waiver of Licensor's right to demand exact compliance with any of the terms of this Agreement by the transferee. G. Securities or other Entity ownership interests in Operator may be offered to prospective investors, including existing investors, by private offering or otherwise, only with the prior written consent of Licensor. All materials required for such offering by federal or state law shall be submitted to Licensor for a limited review as discussed below prior to being filed with any governmental agency and any materials to be used in any exempt offering shall be submitted to Licensor for such review prior to their use. No Operator offering shall imply (by use of the Proprietary Marks or otherwise) that Licensor is participating in an underwriting, issuance or offering of securities or other Entity ownership interest of Operator, and Licensor's review of any offering materials shall be limited solely to the subject of the relationship between Operator and Licensor and their Affiliates. Licensor may, at its option, require Operator's offering materials to contain a written statement prescribed by Licensor concerning the limitations described in the preceding sentence. Operator, its Principals and the other participants in the offering must prior to the commencement of such offering, agree in writing to fully indemnify Licensor and Licensor's Affiliates, and each of such Entity's respective officers, directors, shareholders, members, partners, agents, representatives, independent contractors and employees in connection with the offering. For each proposed offering, Operator shall reimburse Licensor for its reasonable costs and expenses associated with reviewing the proposed offering, including, without limitation, legal and accounting fees. Operator shall give Licensor written notice at least ninety (90) days prior to the date of commencement of any offering or other transaction covered by this Section XV(G). H. Operator and each of its Controlling Principals, as applicable, may transfer, sell or assign their respective interests in Operator, by and among themselves only with Licensor's prior written consent; provided, however, such transfer, sale or assignment, shall not result in a change in the Controlling Interest in Operator. Licensor's consent may be conditioned on compliance with Section XV(B)(2)(a), (b), (d), (f), (h), (i), (k) and (l). For the purpose of this Agreement, "Controlling Interest" shall mean: 46 (1) if Operator is a corporation, that the Controlling Principals, either individually or cumulatively, (a) directly or indirectly own at least fifty-one percent (51%) of the shares of each class of Operator's issued and outstanding capital stock and (b) are entitled, under its governing documents and under any agreements among the shareholders, to cast a sufficient number of votes to elect a majority of the board if directors or to require such corporation to take or omit to take any action which such corporation is required to take or omit to take under this Agreement; (2) if Operator is a limited liability company, that the Controlling Principals (a) own at least fifty-one percent (51%) of the outstanding units of membership interest in the limited liability company, and (b) are entitled under its operating agreement to act on behalf of the limited liability company without the approval or consent of any other member or be able to cast a sufficient number of votes to require the limited liability company to take or omit to take any action which the limited liability company is required to take or omit to take under this Agreement; or (3) if Operator is a partnership or other Entity, that the Controlling Principals (a) own at least a fifty-one percent (51%) interest in the operating profits and operating losses of the partnership as well as at least a fifty-one percent (51%) ownership interest in the partnership (and at least a fifty-one percent (51%) interest in the shares of each class of capital stock or other ownership interests of any direct or indirect corporate or other Entity general partner) and (b) are entitled under its partnership agreement or other Entity organizational documents or applicable law to act on behalf of the partnership without the approval or consent of any other partner or owner or be able to cast a sufficient number of votes to require the partnership or other Entity to take or omit to take any action which the partnership or other Entity is required to take or omit to take under this Agreement. I. If any person holding an interest in Operator (other than Operator or a Controlling Principal, which parties shall be subject to Section XV(B) above) transfers such interest, then Operator shall promptly notify Licensor of such proposed transfer in writing and shall provide such information relative thereto as Licensor may reasonably request prior to such transfer. Such transferee must have good moral character and business reputation, have an acceptable credit rating, and may not be one of Licensor's competitors. Such transferee will be a Principal and as such shall execute a confidentiality and non-compete agreement in the form then required by Licensor, which form shall be in substantially the same form attached hereto as Attachment C (see Sections XI(B)(2) and XI(C)(4)). Licensor also reserves the right to designate the transferee as one of the Controlling Principals. ARTICLE XVI INDEMNIFICATION A. Operator and each of the Controlling Principals shall indemnify and hold harmless Licensor and its Affiliates and their officers, directors, shareholders, employees, managers, members, agents and representatives from any and all claims, demands, suits, proceedings, fines, losses, liabilities damages, costs and expenses (including reasonable attorneys' fees) suffered or incurred, directly or indirectly, by any one or more of them (collectively, "Damages") as a result of (1) any breach or other failure by Operator, Operating 47 Principal or any Controlling Principal to perform its or his obligations hereunder or under any other instrument or agreement executed in connection herewith, or (2) any other action or inaction by Operator, Operating Principal, any Controlling Principal or any other person resulting from or in connection with the operation of the Restaurant; provided, however, that neither Operator, Operating Principal nor any Controlling Principal shall be liable for Damages resulting from Licensor's or its Affiliates' gross negligence or willful misconduct. B. Operator and each of the Controlling Principals agree to give Licensor immediate notice of any such action, suit, proceeding, claim, demand, inquiry or investigation. Licensor shall have the option, in its sole discretion, to defend any action seeking Damages as a result of any action or inaction by Operator or any other person resulting from or in connection with the operation of the Restaurant or to allow Operator to defend such action with counsel satisfactory to Licensor. C. Operator and the Controlling Principals expressly agree that the terms of this Article XVI shall survive the termination, expiration or transfer of this Agreement or any interest herein. ARTICLE XVII RELATIONSHIP OF THE PARTIES A. The parties acknowledge and agree that this Agreement does not create a fiduciary relationship between them, that Operator shall be an independent contractor and that nothing in this Agreement is intended to constitute either party an agent, legal representative, subsidiary, affiliate, joint venturer, partner, employee, joint employer or servant of the other for any purpose. B. During the term of this Agreement, Operator shall hold itself out to the public as an independent contractor conducting its Restaurant operations pursuant to the rights granted by Licensor. Operator agrees to take such action as shall be necessary to that end, including, without limitation, exhibiting a notice of that fact in a conspicuous place on the Restaurant premises established for the purposes hereunder, on any Restaurant delivery vehicle, and on all letterhead, business cards, forms, and as further described in the Manuals, the content and form of which Licensor reserves the right to specify in writing. C. Operator understands and agrees that nothing in this Agreement authorizes Operator or any of the Controlling Principals to make any contract, agreement, warranty or representation on Licensor's behalf, or to incur any debt or other obligation in Licensor's name, and that Licensor shall in no event assume liability for, or be deemed liable under, this Agreement as a result of any such action, or for any act or omission of Operator or any of the Controlling Principals or any claim or judgment arising therefrom. ARTICLE XVIII TERMINATION A. (1) Operator acknowledges and agrees that each of Operator's obligations described in this Agreement is a material and essential obligation of Operator, that nonperformance of such obligations will adversely and substantially affect the Licensor and the 48 System, and that the exercise by Licensor of the rights and remedies set forth herein is appropriate and reasonable. (2) Operator shall be deemed to be in material default under this Agreement and all rights granted herein shall automatically terminate without notice to Operator if: (a) Operator becomes insolvent or makes a general assignment for the benefit of creditors; (b) Operator files a voluntary petition under any section or chapter of federal bankruptcy law or under any similar law or statute of the United States or any state thereof ("Bankruptcy Laws") or admits in writing its inability to pay its debts when due; (c) Operator is adjudicated bankrupt or insolvent in proceedings filed against Operator under any section or chapter of any Bankruptcy Laws, or if a bill in equity or other proceeding for the appointment of a receiver of Operator or other custodian for Operator's business or assets is filed and consented to by Operator; or if a receiver or other custodian (permanent or temporary) of Operator's assets or property, or any part thereof, is appointed by any court of competent jurisdiction; (d) proceedings for a composition with creditors under any state or federal law are instituted by or against Operator, (e) a final judgment remains unsatisfied or of record for thirty (30) days or longer (unless supersedeas bond is filed); (f) Operator is dissolved; (g) execution is levied against Operator's business or property; (h) suit to foreclose any lien or mortgage against the Restaurant premises or equipment is instituted against Operator and not dismissed within thirty (30) days; or (i) the real or personal property of Operator's Restaurant shall be sold after levy thereupon by any sheriff, marshal or other government official. (3) Operator shall be deemed to be in material default and Licensor may, at its option, terminate this Agreement and all rights granted hereunder, without affording Operator any opportunity to cure the default, effective immediately upon notice to Operator, upon the occurrence of any of the following events: (a) Operator operates the Restaurant or sells any products or services authorized by Licensor for sale at the Restaurant at a location which has not been accepted by Licensor; (b) Operator fails to acquire an accepted location for the Restaurant within the time and in the manner specified in Article II; 49 (c) Operator fails to construct or remodel the Restaurant in accordance with the plans and specifications provided to Operator under Section VI(C) as such plans may be adapted with Licensor's approval in accordance with Section II(F); (d) Operator fails to open the Restaurant for business as a full-service O'Charley's restaurant within the period specified in Section II(H) hereof; (e) Operator at any time ceases to operate or otherwise abandons the Restaurant, or loses the right to possession of the premises, or otherwise forfeits the right to do or transact business in the jurisdiction where the Restaurant is located; provided, however, that this provision shall not apply in cases of Force Majeure, if, through no fault of Operator, the premises are damaged or destroyed by an event as described above, provided that Operator applies within thirty (30) days after such event for Licensor's approval to relocate or reconstruct the premises and Operator diligently pursues such reconstruction or relocation; (f) Operator or any of the Controlling Principals is convicted of, or has entered a plea of nolo contendere to, a felony, a crime involving moral turpitude or any other crime or offense that Licensor believes is reasonably likely to have an adverse effect on the System, the Proprietary Marks, the goodwill associated therewith or Licensor's interest therein; (g) a threat or danger to public health or safety results from the construction, maintenance or operation of the Restaurant; (h) Operator fails to propose a qualified replacement or successor Operating Principal (or his designee, as applicable) or the General Manager within the time required under Sections VII(C)(5) and VII(D)(4) hereof, respectively; (i) Operator or any of the Controlling Principals purports to transfer any rights or obligations under this Agreement or any interest in Operator or the assets of the Restaurant to any third party without Licensor's prior written consent or without offering Licensor a right of first refusal with respect to such transfer, contrary to the terms of Article XV of this Agreement; (j) Operator or any of its Affiliates fails, refuses or neglects promptly to pay any monetary obligation owing to Licensor or its Affiliates, when due under this Agreement or any other agreement (which shall include payments to lenders where Licensor has guaranteed the underlying indebtedness), or to submit the financial or other information required by Licensor under this Agreement and does not cure such default within five (5) days following notice from Licensor (or such other cure period specified in such other agreement, unless no cure period is specified or such period is less than five (5) days, in which case the five (5) day cure shall apply); (k) Operator or any of the Controlling Principals fails to comply with the covenants in Section XI(C) hereof or Operator fails to obtain execution of the covenants and related agreements required under Section XI(C)(4) hereof within thirty (30) days after being requested to do so by Licensor; 50 (l) contrary to the terms of Section XI(B)(1) hereof, Operator or any of the Controlling Principals discloses or divulges any confidential information provided to Operator or the Controlling Principals by Licensor, or fails to obtain execution of covenants and related agreements required under Section XI(B)(2) hereof within thirty (30) days after being requested to do so by Licensor; (m) a transfer upon death or Permanent Disability is not transferred in accordance with Article XV within the time periods therein; (n) Operator knowingly maintains false books or records, or submits any false reports to Licensor; (o) Operator or any of the Controlling Principals breaches any of the covenants in any material respect set forth in Article VII or has falsely made any of the representations or warranties set forth in Article VII; (p) Operator fails to procure and maintain such insurance policies as required by Article XIII and Operator fails to cure such default within five (5) days following notice from Licensor; (q) Operator misuses or makes any unauthorized use of the Proprietary Marks or otherwise materially impairs the goodwill associated therewith or Licensor's rights therein; (r) Operator fails to comply with the requirements in the software license agreement executed pursuant to Section VIII(F) and the software license is terminated by Licensor; (s) Operator fails to obtain, install and maintain the hardware, software and communication lines required pursuant to Section VIII(E)(l0), and Operator fails to cure such default within twenty-four (24) hours following notice from Licensor; (t) Operator, or any of the Controlling Principals repeatedly commits a material event of default under this Agreement, whether or not such defaults are of the same or different nature and whether or not such defaults have been cured by Operator after notice by Licensor; or (u) Operator or any of its Affiliates fails or refuses to comply with any term or condition of any sublease, or related agreement, between Licensor or its Affiliates and Operator or its Affiliates, and does not cure such default within any notice and cure period provided for in such sublease or related agreement following notice from Licensor of such default (unless no cure period is specified in the sublease or other agreement, in which case the notice and cure period provided in Section XVIII(B) shall apply). (v) Operator or any Controlling Principal commits any other act, or any other event occurs or any other condition comes into existence that is identified in this Agreement as a material event of default. 51 B. Except as provided in Sections XVIII(A)(2) and (3) of this Agreement, if Operator fails to comply with any other term or condition imposed by this Agreement, Licensor may terminate this Agreement by giving written notice stating the nature of such default to Operator at least thirty (30) days prior to the effective date of termination. However, Operator may avoid termination by immediately initiating a remedy to cure such default and curing it to Licensor's satisfaction within the thirty-day period and by promptly providing proof thereof to Licensor. If any such default is not cured within the specified time, or such longer period as applicable law may require, this Agreement shall terminate without further notice to Operator effective immediately upon the expiration of the thirty (30) day period or such longer period as applicable law may require unless Licensor gives Operator notice of Licensor's intent to continue this Agreement. Defaults which are susceptible of cure hereunder may include, but are not limited to the following illustrative events: (1) Operator fails to comply with any of the requirements imposed by this Agreement, as it may from time to time be amended or reasonably be supplemented by Licensor, or fails to carry out the terms of this Agreement in good faith; (2) Operator fails to maintain or observe any of the standards, specifications or procedures prescribed by Licensor in this Agreement or otherwise in writing; or (3) Operator fails, refuses or neglects to obtain Licensor's prior written approval or consent as required by this Agreement. C. Any alleged default by Licensor of this Agreement shall be deemed waived by Operator and the Controlling Principals unless: (i) Operator gives Licensor written notice of such alleged default within thirty (30) days of its occurrence; and (ii) Licensor fails to initiate a remedy to such alleged default within sixty (60) days of having received written notice thereof. ARTICLE XIX POST-TERMINATION Upon termination or expiration of this Agreement all rights granted hereunder to Operator shall forthwith terminate, and: A. Operator shall immediately cease to operate the Restaurant under this Agreement and shall not thereafter, directly or indirectly, represent itself to the public or hold itself out as a present operator of Licensor. B. Operator shall immediately and permanently cease to use, in any manner whatsoever, any confidential methods, computer software, procedures and techniques associated with the System, the mark "O'Charley's", and all other Proprietary Marks and distinctive forms, slogans, signs, symbols and devices associated with the System. In particular, Operator shall cease to use, without limitation, all signs, neons, advertising materials, displays, stationery, forms and any other articles which display the Proprietary Marks. C. Operator shall take such action as may be necessary to cancel any assumed name or equivalent registration which contains the mark "O'Charley's" or any other service mark or trademark of Licensor, and Operator shall furnish Licensor with evidence satisfactory to 52 Licensor of compliance with this obligation within five (5) days after termination or expiration of this Agreement. D. Operator agrees, in the event it continues to operate or subsequently begins to operate any other business, not to use any reproduction, counterfeit, copy or colorable imitation of the Proprietary Marks, either in connection with such other business or the promotion thereof, which is likely to cause confusion, mistake or deception, or which is likely to dilute Licensor's rights in and to the Proprietary Marks, and further agrees not to utilize any designation of origin or description or representation which falsely suggests or represents an association or connection with Licensor constituting unfair competition. E. Operator and the Controlling Principals shall promptly pay all sums owing to Licensor and its Affiliates. Such sums shall include all damages, costs and expenses, including reasonable attorneys' fees, incurred by Licensor as a result of any default by Operator, which obligation shall give rise to and remain, until paid in full, a lien in favor of Licensor against any and all of the personal property, furnishings, equipment, signs, fixtures and inventory owned by Operator and on the premises operated hereunder at the time of default. F. Operator and the Controlling Principals shall pay to Licensor all damages, costs and expenses, including reasonable attorneys' fees, incurred by Licensor in connection with obtaining any remedy available to Licensor for any violation of this Agreement and subsequent to the termination or expiration of this Agreement in obtaining injunctive or other relief for the enforcement of any provisions of this Article XIX. G. Operator shall immediately deliver to Licensor all Manuals, records, files, instructions, correspondence, any computer software licensed by Licensor, all materials related to operating the Restaurant, including, without limitation, agreements, invoices and any and all other materials relating to the operation of the Restaurant in Operator's possession or control, and all copies thereof (all of which are acknowledged to be Licensor's property), and shall retain no copy or record of any of the foregoing, except Operator's copy of this Agreement and of any correspondence between the parties and any other documents which Operator reasonably needs for compliance with any provision of law. H. Operator and the Controlling Principals shall comply with the non-competition covenants and the restrictions on confidential information contained in Article XI of this Agreement. Any other person required to execute similar covenants pursuant to Article XI shall also comply with such covenants. I. Operator shall also immediately furnish Licensor an itemized list of all advertising and sales promotion materials bearing the Proprietary Marks or any of Licensor's distinctive markings, designs, labels or other marks thereon, whether located on Operator's premises or under Operator's control at any other location. Licensor shall have the right to inspect these materials. Licensor shall have the option, exercisable within thirty (30) days after such inspection, to purchase any or all of the materials at Operator's cost, or to require Operator to destroy or properly dispose of such materials. Materials not purchased by Licensor shall not be utilized by Operator or any other party for any purpose unless authorized in writing by Licensor. 53 J. If Operator operates the Restaurant under a lease for the Restaurant premises with a third party or, with respect to any lease for equipment used in the operation of the Licensed Business, Operator shall, at Licensor's option, assign to Licensor any interest which Operator has in any lease or sublease for the premises of the Restaurant or any equipment related thereto. Licensor may exercise such option at or within thirty (30) days after either termination or (subject to any existing right to renew) expiration of this Agreement. In the event Licensor does not elect to exercise its option to acquire the lease or sublease for the Restaurant premises, Operator shall make such modifications or alterations to the Restaurant premises as are necessary to distinguish the appearance of the Restaurant from that of other restaurants operating under the System and shall make such specific additional changes as Licensor may reasonably request. If Operator fails or refuses to comply with the requirements of this Section XIX(J), Licensor shall have the right to enter upon the premises of the Licensed Business, without being guilty of trespass or any other crime or tort, to make or cause to be made such changes as may be required, at the expense of Operator, which expense Operator agrees to pay upon demand. K. (1) Except as provided in Section XIX(J), Licensor shall have the option, to be exercised within thirty (30) days after termination or expiration of this Agreement, to purchase from Operator any or all of the furnishings, equipment (including any electronic cash register or computer hardware and software systems not licensed by Licensor), signs, neons, fixtures, awnings, motor vehicles, supplies, and inventory of Operator related to the operation of the Restaurant, at Operator's cost or fair market value, whichever is less. Licensor shall purchase Operator's assets only and shall assume no liabilities whatsoever, unless otherwise agreed to in writing by the parties. If the parties cannot agree on the fair market value within thirty (30) days of Licensor's exercise of its option, the fair market value will be determined by one (1) or more Qualified Appraisers, selected under the procedures in this Section. If the fair market value is to be determined by Qualified Appraisers, Licensor and Operator will each have the opportunity to appoint, at their own expense, a Qualified Appraiser, within five (5) days following the expiration of the thirty (30) day period within which Licensor and Operator could not mutually agree on the fair market value. If either party shall fail to appoint a Qualified Appraiser within this five (5) day period, the other Qualified Appraiser shall unilaterally establish the fair market value by a written opinion and the cost of such Qualified Appraiser shall be split between the two parties equally. If both parties appoint Qualified Appraisers with this five (5) day period, the two (2) Qualified Appraisers shall establish the fair market value in a single written opinion agreed to by both of them. If the two (2) Qualified Appraisers cannot agree on the fair market value within ten (10) days of the appointment of the latter of them, the two (2) appointed Qualified Appraisers shall together appoint a third Qualified Appraiser whose written opinion shall establish a fair market value between those values established by the first two (2) Qualified Appraisers. In the event of such appraisal, each party shall bear its own legal and other costs. If Licensor elects to exercise any option to purchase herein provided, it shall have the right to set off all amounts due from Operator or any Controlling Principal to Licensor or any of its Affiliates (including any costs for the appraisal) and any costs incurred in connection with any escrow arrangement (including reasonable legal fees) against any payment therefor and shall pay the remaining amount in cash. (2) In addition to the options described above and if Operator owns the Restaurant premises, Licensor shall have the option, to be exercised at or within thirty (30) days after termination or expiration of this Agreement, to purchase the Restaurant premises including 54 any building thereon, if applicable, for the fair market value of the land and building, and any or all of the furnishings, equipment, signs, neons, fixtures, awnings, vehicles, supplies and inventory therein at Operator's cost or fair market value, whichever is less. Licensor shall purchase assets only and shall assume no liabilities whatsoever, unless otherwise agreed to in writing by the parties. If Operator does not own the land on which the Restaurant is operated and Licensor exercises its option for an assignment of the lease, Licensor may exercise this option for the purpose of purchasing the building if owned by Operator and related assets as described above. If the parties cannot agree on fair market value within thirty (30) days of Licensor's exercise of its Option, fair market value shall be determined in accordance with the appraisal procedure described above. (3) With respect to the options described in Sections XIX(J) and (K)(1) and (2), Operator shall deliver to Licensor, in a form satisfactory to Licensor, such warranties, deeds, releases of lien, bills of sale, assignments and such other documents and instruments which Licensor deems necessary in order to perfect Licensor's title and possession in and to the properties being purchased or assigned and to meet the requirements of all tax and government authorities. If, at the time of closing, Operator has not obtained all of these certificates and other documents, Licensor may, in its sole discretion, place the purchase price or rent in escrow pending issuance of and required certificates or documents. (4) The time for closing of the purchase and sale of the properties described in Section XIX(K)(l) and (2) shall be a date not later than sixty (60) days after the purchase price is determined by the parties or the determination of the appraisers, or such date Licensor receives and obtains all necessary permits and approvals, whichever is later, unless the parties mutually agree to designate another date. The time for closing on the assignment of the lease described in Section XIX(J) shall be a date no later than ten (10) days after Licensor's exercise of its option thereunder unless Licensor is exercising its options under either Section XIX(K)(1) or (2), in which case the date of the closing shall be on the same closing date prescribed for such option. Closing shall take place at Licensor's home office or at such other location as Licensor may designate. L. Licensor shall be entitled to assign any and all of its options in this Section to any other party without the consent of Operator. M. Operator, at the option of Licensor, shall assign to Licensor all rights to: (i) the telephone numbers of the Restaurant and any related Yellow Pages(TM) and/or other business listing advertising; and (ii) all e-mail addresses, URLs, domain names, Internet listings and Internet accounts related to the Restaurant. Operator shall execute all forms and documents required by Licensor and any telephone company or any Internet service provider at any time to transfer such service and numbers to Licensor. Notwithstanding any forms and documents which may have been executed by Licensor under Section VIII(J), Operator hereby appoints Licensor its true and lawful agent and attorney-in-fact with full power and authority for the sole purpose of taking such action as is necessary to complete such assignment. This power of attorney shall survive the expiration or termination of this Agreement. Operator shall thereafter use different telephone numbers, e-mail addresses or listings at or in connection with any subsequent business conducted by Operator. 55 ARTICLE XX MISCELLANEOUS A. All notices and other communications required or permitted to be given hereunder shall be deemed given when delivered in person, by overnight courier service, facsimile transmission or mailed by registered or certified mail addressed to the recipient at the address set forth below, unless that party shall have given written notice of change of address to the sending party, in which event the new address so specified shall be used. Notices to Licensor: O'Charley's Inc. 3038 Sidco Drive Nashville, Tennessee 37204 Attention: Director of Franchising Facsimile: (615) 782-5043 Notices to Operator and the Controlling Principals: ----------------------------------0 ----------------------------------- ----------------------------------- Attention: ------------------------- Facsimile: ------------------------- B. This Agreement, the documents referred to herein and the Attachments hereto, constitute the entire, full and complete agreement between Licensor and Operator, the Controlling Principals concerning the subject matter hereof and shall supersede all prior related agreements between Licensor, Operator and the Controlling Principals. Except for those permitted to be made unilaterally by Licensor hereunder, no amendment, change or variance from this Agreement shall be binding on either party unless mutually agreed to by the parties and executed by their authorized officers or agents in writing. C. No delay, waiver, omission or forbearance on the part of Licensor to exercise any right, option, duty or power arising out of any breach or default by Operator or the Controlling Principals under this Agreement shall constitute a waiver by Licensor to enforce any such right, option, duty or power against Operator or the Controlling Principals, or as to a subsequent breach or default by Operator or the Controlling Principals. Acceptance by Licensor of any payments due to it hereunder subsequent to the time at which such payments are due shall not be deemed to be a waiver by Licensor of any preceding breach by Operator or the Controlling Principals of any terms, provisions, covenants or conditions of this Agreement. D. Whenever this Agreement requires the prior approval or consent of Licensor, Operator shall make a timely written request to Licensor and such approval or consent shall be obtained in writing. E. Licensor makes no warranties or guarantees upon which Operator may rely and assumes no liability or obligation to Operator or any third party to which it would not otherwise be subject, by providing any waiver, approval, advice, consent or suggestion to Operator in connection with this Agreement or the operation of the Restaurant, or by reason of any neglect, delay or denial of any request therefor. 56 F. As used in this Agreement, the term "Force Majeure" shall mean any act of God, terrorism, strike, lock-out or other industrial disturbance, war (declared or undeclared), riot, epidemic, fire or other catastrophe, act of any government and any other similar cause not within the control of the party affected thereby. If a Force Majeure event shall occur, then Operator shall continue to be obligated to pay to Licensor any and all amounts that it shall have duly become obligated to pay in accordance with the terms of this Agreement prior to the occurrence of any Force Majeure event, and the Indemnitees shall continue to be indemnified and held harmless by Operator in accordance with Article XVI. Except as provided in the immediately preceding sentence, none of the parties hereto shall be held liable for a failure to comply with any terms and conditions of this Agreement when such failure is caused by an event of Force Majeure. Upon the occurrence of any event of the type referred to herein, the party affected thereby shall give prompt notice thereof to the other parties, together with a description of the event, the duration for which the party expects its ability to comply with the previsions of the Agreement to be affected thereby and a plan for resuming operation under the Agreement, which the party shall promptly undertake and maintain with due diligence. Such affected party shall be liable for failure to give timely notice only to the extent of damage actually caused. G. Operator and the Controlling Principals hereby irrevocably submit themselves to the jurisdiction of the state and the federal district courts located in the state, county or judicial district in which the Licensor's principal place of business is located at the time such proceeding is commended. Operator and the Controlling Principals hereby waive all questions of personal jurisdiction for the purpose of carrying out this provision. Operator and the Controlling Principals hereby agree that service of process may be made upon any of them in any proceeding relating to or arising out of this Agreement or the relationship created by this Agreement by any means allowed by applicable state or federal law. Operator and the Controlling Principals further agree that venue for any proceeding relating to or arising out of this Agreement shall be the county or judicial district in which the Licensor's principal place of business is located at the time such proceeding is commenced: provided, however, with respect to any action (1) for monies owed, (2) for injunctive or other extraordinary relief or (3) involving possession or disposition of, or other relief relating to, the Restaurant premises, Licensor may bring such action in any state or federal district court which has jurisdiction. With respect to all claims, controversies, disputes or actions related to this Agreement or the relationship created thereby, this Agreement and any such related claims, controversies, disputes or actions, shall be governed, enforced and interpreted under the law of the state where Licensor's principal place of business is located at the time any claim, controversy, dispute, or action (without regard to choice of law rules) arose. H. Operator, the Controlling Principals and Licensor acknowledge that each party's agreement regarding applicable state law and forum set forth in Section XX(G) above provide each of the parties with the mutual benefit of uniform interpretation of this Agreement and any dispute arising out of this Agreement or the parties relationship created by this Agreement. Each of Operator, the Controlling Principals and Licensor further acknowledges the receipt and sufficiency of mutual consideration for such benefit, and that each party's agreement regarding applicable state law and choice of forum have been negotiated for in good faith and are part of the benefit of the bargain reflected by this Agreement. 57 I. Operator, the Controlling Principals and Licensor acknowledge that the execution of this Agreement and acceptance of the terms by the parties occurred at Licensor's principal place of business, and further acknowledge that the performance of certain obligations of Operator arising under this Agreement, including, but not limited to, the payment of monies due hereunder and the satisfaction of certain training requirements of Licensor, shall occur where Licensor's principal place of business is located at the time such obligation is due. J. Without limiting any of the foregoing, Operator and each of the Controlling Principals acknowledge and agree that Licensor has the right, at any time, to create a dispute resolution program and related specifications, standards, procedures and rules for the implementation thereof to be administered by Licensor or its designees for the benefit of all developers and operators conducting business under the System. The standards, specifications, procedures and rules for such dispute resolution program shall be made part of the Manuals, and Operator and the Controlling Principals shall comply with all such standards, specifications, procedures and rules in seeking resolution of any claims, controversies or disputes with or involving Licensor or other developers or operators, if applicable under the program. If Licensor, in its sole discretion, makes such dispute resolution program mandatory, then Operator, the Controlling Principals and Licensor hereby agree to submit any claims, controversies or disputes arising out of or relating to this Agreement or the relationship created by this Agreement for resolution in accordance with such dispute resolution program, or if such claim, controversy or dispute relates to another developer or operator, Operator and the Controlling Principals agree to participate in the program and submit any such claims, controversies or disputes in accordance with the program's standards, specifications, procedures and rules, prior to seeking resolution of such claim by any other judicial or legally available means. K. Operator and the Controlling Principals hereby waive, to the fullest extent permitted by law, any right to or claim of any punitive, exemplary, incidental, indirect, special, consequential or other damages (including, without limitation, loss of profits) against Licensor, its Affiliates, and their respective officers, directors, shareholders, members, partners, agents, representatives, independent contractors, servants and employees, in their corporate and individual capacities, arising out of any cause whatsoever (whether such cause be based in contract, negligence, strict liability, other tort or otherwise) and agree that in the event of a dispute, Operator and the Controlling Principals shall be limited to the recovery of any actual damages sustained by them. If any other term of this Agreement is found or determined to be unconscionable or unenforceable for any reason, the foregoing provisions of waiver by agreement of punitive, exemplary, incidental, indirect, special consequential or other damages (including, without limitation, loss of profits) shall continue in full force and effect. L. Licensor, Operator and the Controlling Principals hereby agree that no form of proceeding permitted hereby will be maintained by any party to enforce any liability or obligation of the other party, whether arising from this Agreement or otherwise, unless brought before the expiration of the later of: (i) one (1) year after the date of discovery of the facts resulting in such liability or obligation, or (ii) two (2) years after the date of the first act or omission giving rise to the alleged liability or obligation, except that where state or federal law mandate or make possible by notice or otherwise a shorter period, such shorter period shall apply. 58 M. This Agreement may be executed in multiple counterparts, each of which when so executed shall be an original, and all of which shall constitute one and the same instrument. N. The captions used in connection with the sections and subsections of this Agreement are inserted only for purpose of reference. Such captions shall not be deemed to govern, limit, modify or in any other manner affect the scope, meaning or intent of the provisions of this Agreement or any part thereof nor shall such captions otherwise be given any legal effect. O. Any obligation of Operator or the Controlling Principals that contemplates performance of such obligation after termination or expiration of this Agreement or the transfer of any interest of Operator or the Controlling Principals therein, shall be deemed to survive such termination, expiration or transfer, including the provisions of this Article XX. P. Except as expressly provided to the contrary herein, each portion, section, part, term and provision of this Agreement shall be considered severable and if, for any reason, any portion, section, part, term or provision is determined to be invalid and contrary to, or in conflict with, any existing or future law or regulation by a court or agency having valid jurisdiction, this shall not impair the operation of, or have any other effect upon, the other portions, sections, parts, terms or provisions of this Agreement that may remain otherwise intelligible, and the latter shall continue to be given full force and effect and bind the parties. The invalid portions, sections, parts, terms or provisions shall be deemed not to be part of this Agreement; and there shall be automatically added such portion, section, part, term or provision as similar as possible to that which was severed which shall be valid and not contrary to or in conflict with any law or regulation. Q. All references herein to the masculine, neuter or singular shall be construed to include the masculine, feminine, neuter or plural, where applicable. Without limiting the obligations individually undertaken by the Controlling Principals under this Agreement, all acknowledgments, promises, covenants, agreements and obligations made or undertaken by Operator in this Agreement shall be deemed, jointly and severally, undertaken by all of the Controlling Principals. R. All rights and remedies of the parties to this Agreement shall be cumulative and not alternative, in addition to and not exclusive of, any other rights or remedies which are provided for herein or which may be available at law or in equity in case of any breach, failure or default or threatened breach, failure or default of any term, provision or condition of this Agreement or any other agreement between Operator, and its Affiliates, and Licensor or its Affiliates. The rights and remedies of the parties to this Agreement shall be continuing and shall not be exhausted by any one or more uses thereof, and may be exercised at any time or from time to time as often as may be expedient, and any option or election to enforce any such right or remedy may be exercised or taken at any time and from time to time. The expiration, earlier termination or exercise of Licensor's rights pursuant to Article XV of this Agreement shall not discharge or release Operator or any of the Controlling Principals from any liability or obligation then accrued, or any liability or obligation continuing beyond, or arising out of, the expiration, the earlier termination or the exercise of such rights under this Agreement. Additionally, Operator and the Controlling Principals shall pay all court costs and attorneys fees incurred by Licensor in obtaining any remedy available to Licensor for any violation of this Agreement. 59 S. The term "Principals" shall mean, collectively and individually, Operator's spouse, if Operator is an individual, all officers and directors of Operator (including the officers and directors of any general partner of Operator) whom Licensor designates as Principals, all holders of an ownership interest in Operator and in any Entity directly or indirectly controlling Operator, and any other person or Entity controlling, controlled by, or under common control with Operator. Each Principal as of the date of this Agreement is listed on Attachment B. T. For purposes of this Agreement, the term "Publicly-Held Entity" means any Entity with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or an Entity subject to the requirements of Section 15(d) of such Act. Further, for purposes of this Agreement, an "Affiliate" of a person or Entity is any Entity that is controlled by, controlling or under common control with such person or Entity. U. The word "including" when used herein shall mean "including without limitation." V. Except as expressly provided to the contrary herein, nothing in this Agreement is intended, nor shall be deemed, to confer upon any person or legal Entity other than Operator, Licensor, Licensor's officers, directors and personnel and such of Operator's and Licensor's respective successors and assigns as may be contemplated (and, as to Operator, authorized by Article XV), any rights or remedies under or as a result of this Agreement. W. This Agreement shall not become effective until signed by an authorized officer of Licensor. X. Operator, the Controlling Principals and Licensor acknowledge that various provisions of this Agreement specify certain matters that are within the discretion or judgment of Licensor or are otherwise to be determined unilaterally by Licensor. If the exercise of Licensor's discretion or judgment as to any such matter is subsequently challenged, the parties to this Agreement expressly direct the trier of fact that Licensor's reliance on a business reason in the exercise of its discretion or judgment is to be viewed as a reasonable and proper exercise of such discretion or judgment, without regard to whether other reasons for its decision may exist and without regard to whether the trier of fact would independently accord the same weight to the business reason. ARTICLE XXI ACKNOWLEDGMENTS A. Operator acknowledges that it has conducted an independent investigation of the business venture contemplated by this Agreement and recognizes that the success of this business venture involves substantial business risks and will largely depend upon the ability of Operator. Licensor expressly disclaims making, and Operator acknowledges that it has not received or relied on, any warranty or guarantee, express or implied, as to the potential volume, profits or success of the business venture contemplated by this Agreement. B. Operator acknowledges that Operator has received, read and understands this Agreement and the related Attachments and agreements and that Licensor has afforded Operator 60 sufficient time and opportunity to consult with advisors selected by Operator about the potential benefits and risks of entering into this Agreement. C. Operator acknowledges that it received a complete copy of this Agreement and all related Attachments and agreements at least five (5) business days prior to the date on which this Agreement was executed. Operator further acknowledges that it has received the disclosure document required by the Trade Regulation Rule of the Federal Trade Commission entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" at least ten (10) business days prior to the date on which this Agreement was executed. [The following page is the signature page.] 61 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized representative as of the date first above written. LICENSOR: O'CHARLEY'S INC., a Tennessee corporation By: -------------------------------------- Name: --------------------------------- Title: -------------------------------- OPERATOR: ----------------------------------------- By: -------------------------------------- Name: --------------------------------- Title: -------------------------------- CONTROLLING PRINCIPALS: ----------------------------------------- *Name: ----------------------------------- ----------------------------------------- Name: ------------------------------------ ----------------------------------------- Name: ------------------------------------ *Denotes individual who is Operator's Operating Principal 62 ATTACHMENT A TO OPERATING AGREEMENT LOCATION AND OPENING DATE 1. LOCATION Pursuant to Section I(B) and II(B)(2) of the Operating Agreement, the Restaurant shall be located at the following Location: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2. OPENING DATE Pursuant to Section II(H) of the Operating Agreement, the Opening Date of the Restaurant is ______________, 20___. 2. RADIUS Pursuant to Section I(D) of the Operating Agreement, the radius shall be a distance of _____ miles. A-1 ATTACHMENT B TO OPERATING AGREEMENT STATEMENT OF OWNERSHIP INTERESTS AND PRINCIPALS A. The following is a list of stockholders, partners, members or other investors in Operator, including all investors who own or hold a direct or indirect interest in Operator, and a description of the nature of their interest:
Name Percentage of Ownership/Nature of Interest ---- ------------------------------------------
B. The following is a list of each Principal described in and designated pursuant to Section XX(U) of the Operating Agreement, except those who have been designated as Controlling Principals, each of whom shall execute the Confidentiality and Non-Compete Agreement substantially in the form set forth in Attachment C (see Sections XI(B)(2) and XI(C)(4) of the Operating Agreement): C. The following is a list of all of Operator's Controlling Principals described in and designated pursuant to Section XX(U) of the Operating Agreement:
Name ----
B-1 ATTACHMENT C TO OPERATING AGREEMENT CONFIDENTIALITY AND NON-COMPETE AGREEMENT This Agreement is made and entered into this ____ day of ___________, 20__, between O'Charley's Inc., a Tennessee corporation ("Licensor"), _____________________ ("Operator") and _________________________ ("Employee"). RECITALS WHEREAS, Licensor, as a result of the expenditure of time, skill, effort and money, has developed and owns the rights to develop and operate a unique system (the "System") of full service varied menu casual dining restaurants ("Restaurants") which feature freshly prepared items such as hand-cut and aged steaks, fresh chicken, seafood, homemade yeast rolls and fresh-cut salads with special recipe dressings and which serve alcoholic beverages through a full-service bar all under the trademark O'Charley's(R); WHEREAS, the System includes, but is not limited to, certain trade names, service marks, trademarks, symbols, logos, emblems and indicia of origin, including, but not limited to, the mark O'Charley's(R) and such other trade names, service marks, trademarks, symbols, logos, emblems and indicia of origin as Licensor may develop in the future to identify for the public the source of services and products marketed under such marks ("Marks") and under the System; WHEREAS, the Marks represent the System's high standards of quality, appearance and service; distinctive exterior and interior design, decor, color scheme and furnishings; special recipes and menu items; uniform standards, specifications and procedures for operations; quality and uniformity of products and services offered; procedures for inventory and management and financial control; training and assistance; and advertising and promotional programs; all of which may be changed, improved and further developed by Licensor from time to time and are used by Licensor in connection with the operation of the System ("Trade Secrets"); WHEREAS, the Marks and Trade Secrets provide economic advantages to Licensor and are not generally known to, and are not readily ascertainable by proper means by, Licensor's competitors who could obtain economic value from knowledge and use of the Marks and Trade Secrets; WHEREAS, Licensor has taken and intends to take all reasonable steps to maintain the confidentiality and secrecy of the Trade Secrets; WHEREAS, Licensor has granted Operator the limited right to operate a Restaurant using the System, the Marks and the Trade Secrets for the period defined in the operating agreement made and entered into as of __________________, 20___ ("Operating Agreement"), by and among Licensor, Operator and Operator's Controlling Principals; WHEREAS, Licensor and Operator have agreed in the Operating Agreement on the importance to Licensor and to Operator and other licensed users of the System of restricting the use, access and dissemination of the Trade Secrets; C-1 WHEREAS, it will be necessary for certain employees, agents, independent contractors, officers, directors and interest holders of Operator, or any Entity having an interest in Operator ("Covenantor") to have access to and to use some or all of the Trade Secrets in the management and operation of Operator's business using the System; WHEREAS, Operator has agreed to obtain from those Covenantors prior written agreements protecting the Trade Secrets and the System against unfair competition; WHEREAS, Covenantor wishes to remain with, to become employed by or associated with Operator; WHEREAS, Covenantor wishes and needs to receive and use the Trade Secrets in the course of Covenantor's employment or association in order to effectively perform Covenantor's services for Operator; and WHEREAS, Covenantor acknowledges that receipt of and the right to use the Trade Secrets constitutes independent valuable consideration for the representations, promises and covenants made by Covenantor herein. NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein, and other good and valuable consideration, the receipt and sufficiency are hereby acknowledged, the parties intending to be legally bound hereby agree as follows: 1. Confidentiality Agreement 1.1 Licensor and/or Operator may disclose to Covenantor some or all of the Trade Secrets relating to the System. All information and materials, including, without limitation, any manuals, drawings, specifications, techniques and compilations of data which Licensor provides to Operator and/or Covenantor shall be deemed confidential Trade Secrets for the purposes of this Agreement. 1.2 Covenantor shall receive the Trade Secrets in confidence and shall, at all times, maintain them in confidence, and use them only in the course of Covenantor's employment by or association with Operator and then only in connection with the development and/or operation by Operator of a Restaurant using the System for so long as Operator is licensed by Licensor to use the System. 1.3 Covenantor shall not at any time make copies of any documents or compilations containing some or all of the Trade Secrets without Licensor's prior written consent. 1.4 Covenantor shall not at any time disclose or permit the disclosure of the Trade Secrets except to other employees of Operator and then only to the limited extent necessary to train or assist other employees of Operator in the development or operation of a Restaurant using the System. 1.5 Covenantor shall immediately surrender any material containing some or all of Licensor's Trade Secrets to Licensor, upon request, or upon termination of employment by or C-2 association with Operator, or upon conclusion of the use for which such information or material may have been furnished to Covenantor. 1.6 Covenantor shall not at any time, directly or indirectly, do any act or omit to do any act that would or would likely be injurious or prejudicial to the goodwill associated with the Trade Secrets and the System. 1.7 All manuals are loaned by Licensor to Operator for limited purposes only and remain the property of Licensor and may not be reproduced, in whole or in part, without Licensor's prior written consent. 2. Covenants Not to Compete 2.1 In order to protect the goodwill and unique qualities of the System and the confidentiality and value of the Trade Secrets, and in consideration for the disclosure to Covenantor of the Trade Secrets, Covenantor further agrees and covenants that while employed by Operator Covenantor will not: a. divert, or attempt to divert, directly or indirectly, any business, business opportunity or customer of the Operator's Restaurant to any competitor; b. employ, or seek to employ, any person who is at the time (or has been within the preceding six (6) months) employed by Licensor, or any of its Affiliates, or any operator or developer of Licensor, or otherwise directly or indirectly induce such person to leave that person's employment except as may occur in connection with Operator's employment of such person if permitted under the Operating Agreement; or c. except with respect to the Restaurant described in the Operating Agreement and other restaurants operated under operating agreements between Operator and its Affiliates, and Licensor or its Affiliates, directly or indirectly, for Covenantor or through, on behalf of, or in conjunction with any person, persons, partnership, limited liability company, association, corporation, trust, unincorporated association, joint venture or other Entity, without the prior written consent of Licensor, own, maintain, operate, engage in or have any financial or beneficial interest in (including any interest in corporations, partnerships, limited liability companies, associations, trusts, unincorporated associations, joint ventures or other entities), advise, assist or make loans to, any restaurant business that is of a character and concept similar to the Restaurant, including, without limitation, a full service varied menu casual dining restaurant which serves alcoholic beverages through a full-service bar, and which business is located within the United States, its territories or commonwealths, or any other country, province, state or geographic area in which Licensor has used, sought registration of or registered the same or similar Marks or operates or licenses others to operate a business under the same or similar Marks. 2.2 In further consideration for the disclosure to Covenantor of the Trade Secrets and to protect the uniqueness of the System, Covenantor agrees and covenants that for one (1) year following the earlier of the expiration, termination or transfer of all of Operator's interest in the Operating Agreement or the termination of Covenantor's employment by or association with Operator, Covenantor will not without the prior written consent of Licensor: C-3 a. divert or attempt to divert, directly or indirectly, any business, business opportunity or customer of the Restaurant to any competitor; b. employ, or seek to employ, any person who is at the time (or has been within the preceding six (6) months) employed by Licensor or any of its Affiliates, or any operator or developer of Licensor, or otherwise directly or indirectly induce such persons to leave that person's employment; or c. except with respect to other restaurants operated under operating agreements between Operator and its Affiliates, and Licensor or its Affiliates, directly or indirectly, for Covenantor or through, on behalf of or in conjunction with any person, persons, partnership, limited liability company, association, corporation, trust, unincorporated association, joint venture or other Entity own, maintain, operate, engage in or have any financial or beneficial interest in (including any interest in corporations, partnerships, limited liability companies, associations, trusts, unincorporated associations, joint ventures or other entities), advise, assist or make loans to, any restaurant business that is of a character and concept similar to the Restaurant, including, without limitation, a full service varied menu casual dining restaurant which serves alcoholic beverages through a full-service bar, which business is, or is intended to be, located within the Location, as such term is defined in the Operating Agreement (and as described in an attachment thereto), or within a fifteen (15)-mile radius of the location of any O'Charley's restaurant or food service facility in existence or under construction (or where land has been purchased or a lease executed for the construction of an O'Charley's restaurant or other food service facility) as of the earlier of (i) the expiration or termination of, or the transfer of all of Operator's interest in the Operating Agreement; or (ii) the time Covenantor ceases to be employed by or associated with Operator, as applicable. 3. Miscellaneous 3.1 Operator shall make all commercially reasonable efforts to ensure that Covenantor acts as required by this Agreement. 3.2 Covenantor agrees that in the event of a breach of this Agreement, Licensor would be irreparably injured and be without an adequate remedy at law. Therefore, in the event of such a breach, or threatened or attempted breach of any of the provisions hereof, Licensor shall be entitled to enforce the provisions of this Agreement and shall be entitled, in addition to any other remedies which are made available to it at law or in equity, including the right to terminate the Operating Agreement, to a temporary and/or permanent injunction and a decree for the specific performance of the terms of this Agreement, without the necessity of showing actual or threatened harm and without being required to furnish a bond or other security. 3.3 Covenantor agrees to pay all expenses (including court costs and reasonable attorneys' fees) incurred by Licensor and Operator in enforcing this Agreement. 3.4 Any failure by Licensor or the Operator to object to or take action with respect to any breach of any provision of this Agreement by Covenantor shall not operate or be construed as a waiver of or consent to that breach or any subsequent breach by Covenantor. C-4 3.5 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE LICENSOR'S PRINCIPAL PLACE OF BUSINESS IS LOCATED AT THE TIME SUCH PROCEEDING IS COMMENCED WITHOUT REFERENCE TO CHOICE OF LAW PRINCIPLES. COVENANTOR HEREBY IRREVOCABLY SUBMITS HIMSELF TO THE JURISDICTION OF THE STATE AND THE FEDERAL DISTRICT COURTS LOCATED IN THE STATE, COUNTY OR JUDICIAL DISTRICT IN WHICH THE LICENSOR'S PRINCIPAL PLACE OF BUSINESS IS LOCATED. COVENANTOR HEREBY WAIVES ALL QUESTIONS OF PERSONAL JURISDICTION OR VENUE FOR THE PURPOSE OF CARRYING OUT THIS PROVISION. COVENANTOR HEREBY AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON HIM IN ANY PROCEEDING RELATING TO OR ARISING UNDER THIS AGREEMENT OR THE RELATIONSHIP CREATED BY THIS AGREEMENT BY ANY MEANS ALLOWED BY APPLICABLE STATE OR FEDERAL LAW. COVENANTOR FURTHER AGREES THAT VENUE FOR ANY PROCEEDING RELATING TO OR ARISING OUT OF THIS AGREEMENT SHALL BE THE COUNTY OR JUDICIAL DISTRICT IN WHICH THE LICENSOR'S PRINCIPAL PLACE OF BUSINESS IS LOCATED AT THE TIME SUCH PROCEEDING IS COMMENCED; PROVIDED, HOWEVER, WITH RESPECT TO ANY ACTION WHICH INCLUDES INJUNCTIVE RELIEF OR OTHER EXTRAORDINARY RELIEF, LICENSOR OR OPERATOR MAY BRING SUCH ACTION IN ANY COURT IN ANY STATE WHICH HAS JURISDICTION. 3.6 The parties acknowledge and agree that each of the covenants contained herein are reasonable limitations as to time, geographical area, and scope of activity to be restrained and do not impose a greater restraint than is necessary to protect the goodwill or other business interests of Licensor. The parties agree that each of the foregoing covenants shall be construed as independent of any other covenant or provision of this Agreement. If all or any portion of a covenant in this Agreement is held unreasonable or unenforceable by a court or agency having valid jurisdiction in any unappealed final decision to which Licensor is a party, Covenantor expressly agrees to be bound by any lesser covenant subsumed within the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Agreement. 3.7 This Agreement contains the entire agreement of the parties regarding the subject matter hereof. This Agreement may be modified only by a duly authorized writing executed by all parties. 3.8 All notices and demands required to be given hereunder shall be in writing and shall be sent by personal delivery, expedited delivery service, certified or registered mail, return receipt requested, first-class postage prepaid, facsimile, telegram or telex (provided that the sender confirms the facsimile, telegram or telex by sending an original confirmation copy by certified or registered mail or expedited delivery service within three (3) business days after transmission), to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other parties. C-5 If directed to Licensor, the notice shall be addressed to: O'Charley's Inc. 3038 Sidco Drive Nashville, Tennessee 37204 Attention: Director of Franchising Facsimile: (615) 782-5043 If directed to Operator, the notice shall be addressed to: -------------------------------------------- -------------------------------------------- -------------------------------------------- Attention: ---------------------------------- Facsimile: ---------------------------------- If directed to Covenantor, the notice shall be addressed to: -------------------------------------------- -------------------------------------------- -------------------------------------------- Attention: ---------------------------------- Facsimile: ---------------------------------- Any notices sent by personal delivery shall be deemed given upon receipt. Any notices given by telex or facsimile shall be deemed given upon transmission, provided confirmation is made as provided above. Any notice sent by expedited delivery service or registered or certified mail shall be deemed given three (3) business days after the time of mailing. Any change in the foregoing addresses shall be effected by giving fifteen (15) days written notice of such change to the other parties. Business days for the purpose of this Agreement excludes Saturday, Sunday and the following national holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas. 3.9 The rights and remedies of Licensor under this Agreement are fully assignable and transferable and shall inure to the benefit of its respective Affiliates, successors and assigns. The respective obligations of Operator and Covenantor hereunder may not be assigned by Operator or Covenantor, without the prior written consent of Licensor. (remainder of page intentionally left blank) C-6 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as witnessed by their signatures below. LICENSOR: O'Charley's Inc., a Tennessee corporation By: -------------------------------------- Name: --------------------------------- Title: -------------------------------- OPERATOR: ---------------------------------------- By: -------------------------------------- Name: --------------------------------- Title: -------------------------------- COVENANTOR: ----------------------------------------- Name: ------------------------------------ C-7 ATTACHMENT D TO OPERATING AGREEMENT SOFTWARE LICENSE AND SUPPORT AGREEMENT THIS SOFTWARE LICENSE AND SUPPORT AGREEMENT ("License") is entered into as of the _____ day of __________, 20__ between O'CHARLEY'S INC. ("Licensor") and __________________________________ ("Operator") (collectively, the "Parties") pursuant to a Franchise Offering Circular dated ________________, 20___, and Operating Agreement dated ________________, 20___ ("Operating Agreement") under which Operator will operate a full-service O'Charley's restaurant (the "Restaurant") located at _______________________________________ ________________________________________. In consideration of the mutual promises and upon the terms and conditions set forth in this License and subject to the Operating Agreement, the parties agree as follows: 1. Grant of License. Licensor grants to Operator a limited, nonexclusive, nontransferable, nonassignable license to use the computer program, in object code form, listed in Schedule A to this License (the "Software"). Licensor shall have sole and exclusive ownership of all right, title, and interest in and to the Software, Modifications (as defined below), and all trade secrets and copyrights pertaining thereto. No right or license is being conveyed to Operator for use of the Software at any other location, and a separate license is required for each additional Restaurant at which the Software will be used. Schedule A to this License may be updated from time to time by Licensor to include enhancements, bug fixes, upgrades or replacements to the Software, which Licensor will make available to Operator from time to time at a reasonable cost to be determined by Licensor in its sole discretion. In no event shall Licensor be obligated to provide Operator a copy of any commercial release version of the Software in connection with this License. Any copies of the Software that Operator is expressly permitted to make under Section 2.1(b), including any modifications, suggestions, solutions, improvements, corrections, derivatives or otherwise ("Modifications"), developed by Licensor in conjunction with Operator, are and shall be the sole and exclusive property of Licensor during and after the term of this License. Operator shall immediately provide to Licensor a paid-up, nonexclusive, irrevocable, worldwide right and license to all Modifications, along with a source code copy of all such Modifications, to use, reproduce, prepare derivative works and distribute without accounting. Operator acknowledges and agrees that Licensor may secure all or any part of the Software from third parties. Operator agrees to execute and deliver to Licensor any further contracts, agreements or other documents reasonably required by Licensor in order to secure its compliance with any agreement with such other parties. 2. License Restrictions 2.1 Operator agrees that it will not itself, or through any affiliate, agent or other third party: D-1 (a) use the Software at any other location other than in the operation of the Restaurant written above; (b) modify, copy, prepare derivatives of or otherwise reproduce, in any form, all or any part of the Software without the prior written consent of Licensor, and in the event that Licensor grants consent, solely to the extent required for use of the Software in the operation of the Restaurant; (c) decompile, disassemble, or reverse engineer the Software, in whole or in part; (d) write or develop any derivative software or any other software program based upon the Software or any Modification thereto; (e) sell, lease, license or sublicense the Software, or otherwise allow access to the Software by any third party not employed by the Operator; (f) provide, disclose, divulge or make available to, or permit use of the Software or Modification thereto by any third party without Licensor's prior written consent. 3. Help Desk Support 3.1 Help Desk. As part of the Support (as defined in Section 3.2), Licensor will maintain a Help Desk accessible through a toll-free telephone number capable of providing assistance with respect to the Software and use thereof. Such telephone assistance shall be available from 8:00 AM to 5:00 PM CT, on a Monday through Friday basis, subject to national holidays and uncontrolled interruptions. The Help Desk also will be available to receive reports of technical difficulties associated with the Software. 3.2 Support Fees. For so long as Operator is current in the payment of all Information System Maintenance Charge and Help Desk Support Fees ("Support Fee"), as set forth in Schedule A to this License, Operator will be entitled to support through the Help Desk ("Support"). Support Fees and payment terms set forth in Schedule A to this License may be adjusted or modified by Licensor in January of each calendar year. Licensor shall provide Operator with thirty (30) days' prior written notice of any such adjustment or modification 3.3 Taxes. Operator agrees to pay or reimburse Licensor for all federal, state, or local sales, use, personal property, VAT, excise, duties, and any other taxes or levies, other than taxes on the net income of Licensor, arising out of this License. 3.4 Causes Which Are Not Attributable to Licensor. Support will not include services requested as a result of, or with respect to causes which are not attributable to Licensor. These services will be billed to Operator at Licensor's then-current rates. Causes which are not attributable to Licensor include but are not limited to: D-2 (a) accident; unusual physical, electrical or electromagnetic stress; neglect; misuse; failure or fluctuation of electric power, air conditioning or humidity control; excessive heating; fire and smoke damage; operation of the Software with other software and hardware; or causes other than ordinary use; or (b) modification, alteration or addition or attempted modification, alteration or addition of the Software undertaken by persons other than Licensor or Licensor's authorized representatives. 3.5 Responsibilities of Operator. Licensor's provision of Support to Operator is subject to the prompt documentation and report of all errors or malfunctions of the Software to Licensor. Operator shall take all steps necessary to carry out procedures for the rectification of errors or malfunctions within a reasonable time after such procedures have been received from Licensor. Operator shall maintain a current backup copy of all programs and data. Operator shall properly train its personnel in the use and application of the Software. 4. Term and Termination. Licensor's provision of Support to Operator will commence on the date the Restaurant opens to the public and will continue for an initial term of one (1) year. Support will automatically renew at the end of the initial term and any subsequent term for a renewal term of one (1) year unless either party has provided the other party with a written termination notice of its intention not to renew the Support at least ninety (90) days prior to the expiration of the then-current term. Termination of Support upon failure to renew will not affect the license of the Software. 5. Limitation of Liability 5.1 Disclaimer. LICENSOR MAKES NO WARRANTIES, WHETHER EXPRESS, IMPLIED, OR STATUTORY REGARDING OR RELATING TO THE SOFTWARE OR ANY UPDATES OR UPGRADES THERETO, OR ANY MATERIALS OR SERVICES FURNISHED OR PROVIDED TO OPERATOR UNDER THIS AGREEMENT, INCLUDING MAINTENANCE AND SUPPORT. LICENSOR EXPRESSLY AND SPECIFICALLY DISCLAIMS ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, RESULTS, WORKMANLIKE EFFORT, COURSE OF DEALING AND TITLE, AND NONINFRINGEMENT WITH RESPECT TO THE SOFTWARE AND SAID OTHER MATERIALS AND SERVICES, AND WITH RESPECT TO THE USE OF ANY OF THE FOREGOING. ALSO, THERE IS NO WARRANTY, DUTY OR CONDITION OF TITLE, QUIET ENJOYMENT, QUIET POSSESSION, CORRESPONDENCE TO DESCRIPTION OR NONINFRINGEMENT. ALL SUCH WARRANTIES ARE EXPRESSLY AND SPECIFICALLY DISCLAIMED. 5.2 Limitation of Liability. IN NO EVENT WILL LICENSOR BE LIABLE FOR ANY LOSS OF PROFITS, LOSS OF USE, BUSINESS INTERRUPTION, LOSS OF DATA, COST OF COVER OR INDIRECT, SPECIAL, INCIDENTAL OR D-3 CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR: LOSS OF PROFITS, LOSS OF CONFIDENTIAL OR OTHER INFORMATION, BUSINESS INTERRUPTION, PERSONAL INJURY, LOSS OF PRIVACY, FAILURE TO MEET ANY DUTY (INCLUDING OF GOOD FAITH OR OF REASONABLE CARE), NEGLIGENCE, AND ANY OTHER PECUNIARY OR OTHER LOSS WHATSOEVER), ARISING OUT OR IN ANY WAY RELATED TO THE FURNISHING, PERFORMANCE OR USE OF THE SOFTWARE, SERVICES PERFORMED HEREUNDER, THE PROVISION OF OR FAILURE TO PROVIDE SUPPORT SERVICES, WHETHER ALLEGED AS A BREACH OF CONTRACT OR TORTIOUS CONDUCT, INCLUDING NEGLIGENCE, EVEN IF LICENSOR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN ADDITION, LICENSOR WILL NOT BE LIABLE FOR ANY DAMAGES CAUSED BY DELAY IN DELIVERY OR FURNISHING THE SOFTWARE OR SAID SERVICES. LICENSOR'S LIABILITY UNDER THIS AGREEMENT FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING, WITHOUT LIMITATION, RESTITUTION, WILL NOT, IN ANY EVENT, EXCEED THE SUPPORT FEES PAID BY OPERATOR TO LICENSOR UNDER THIS AGREEMENT. THE FOREGOING LIMITATIONS, EXCLUSIONS AND DISCLAIMERS SHALL APPLY TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, EVEN IF ANY REMEDY FAILS ITS ESSENTIAL PURPOSE. 5.3 Operator Indemnity. Operator shall indemnify and hold Licensor harmless from and against any costs, losses, liabilities and expenses (including reasonable attorneys fees) arising out of third party claims related to Operator's use of the Software under this License. 5.4 No Other Warranty. No employee, agent, representative or affiliate of Licensor has authority to bind Licensor to any oral representations or warranty concerning the Software. Any written representation or warranty not expressly contained in this License will not be enforceable. 6. Indemnification for Infringement 6.1 Indemnity. Licensor shall, at its expense, defend or settle any claim, action or allegation brought against Operator that the Software infringes any United States patent, copyright or trade secret of any third party and shall pay any final judgments awarded or settlements entered into; provided that, Operator gives prompt written notice to Licensor of any such claim, action or allegation of infringement and gives Licensor the authority to proceed as contemplated herein. Licensor will have the exclusive right to defend any such claim, action or allegation and make settlements thereof at its own discretion, and Operator may not settle or compromise such claim, action or allegation, except with prior written consent of Licensor. Operator shall give such assistance and information as Licensor may reasonably require to D-4 settle or oppose such claims. In the event any such infringement, claim, action or allegation is brought or threatened, Licensor may, at its sole option and expense: (a) procure for Operator the right to continue use of the Software or infringing part thereof; or (b) modify or amend the Software or infringing part thereof, or replace the Software or infringing part thereof with other software having substantially the same or better capabilities; or, if neither of the foregoing is commercially practicable, (c) terminate this License. 6.2 Exclusions. The foregoing obligations shall not apply to the extent the infringement arises as a result of (a) modifications to the Software made by any party other than Licensor or Licensor's authorized representative, (b) use of other than the latest release of the Software, or (c) the combination or use of the Software with materials not furnished by Licensor. 6.3 Sole Obligation. The foregoing states the entire liability of Licensor with respect to infringement of any patent, copyright, trade secret or other proprietary right. 7. Confidential Information 7.1 Obligations of Confidentiality. Each party acknowledges that the Software and any Modifications constitute valuable trade secrets and confidential information of the Licensor, and Operator agrees that it shall use the Software, Modifications and any related documentation solely in accordance with the provisions of this License and will not disclose, or permit to be disclosed, the same, directly or indirectly, to any third party without Licensor's prior written consent. Operator agrees to exercise due care in protecting the Software, Modifications, and related documentation from unauthorized use and disclosure, including at a minimum, giving instructions to Operator's "need-to-know" employees who may have access to the Software, Modifications or related documentation that the same are proprietary to, and the trade secrets of, Licensor. At Licensor's request, Operator shall require and obtain execution of covenants concerning the confidentiality of the Software from any persons employed by Operator who have access to the Software. These covenants shall be in a form substantially similar to the confidential covenants contained in Attachment D to the Operating Agreement. 7.2 Injunctive Relief. The parties agree that in the event of actual or threatened breach of the provisions of Section 7.1 by Operator, Licensor will have no adequate remedy at law and will be entitled to immediate and injunctive and other equitable relief, without bond and without the necessity of showing actual money damages. D-5 8. Term and Termination 8.1 Term. The Term of this License shall be co-extensive with the term of the Operating Agreement, including any renewal of the Operating Agreement. Expiration or termination of the Operating Agreement for whatever reason shall automatically terminate this License and the right to use the Software, without notice to Operator. In addition, Licensor may, in its sole discretion, immediately terminate this License upon the failure by Operator to comply with any of the terms and conditions herein. 8.2 Effect of Termination. Upon expiration or termination of this License or upon the expiration or termination of the Operating Agreement, whichever shall occur earlier, Operator shall immediately deliver to Licensor all copies of the Software, any Modifications thereto, and any related documentation then in Operator's possession or control, erase the software from Operator's computer system, and shall immediately cease to use the Software. Sections 5-10 will survive termination of this License for any reason. Termination of this License will not affect the terms of the Operating Agreement, Operator's duties or obligations under Section 7 of this License, provisions relating to the payment of amounts due, or provisions limiting or disclaiming Licensor's liability, which provisions will survive termination of this License. 9. Non-assignment/Binding Agreement. Neither this License nor any rights under this License may be assigned or otherwise transferred by Operator, in whole or in part, whether voluntary or by operation of law, without the prior written consent of Licensor, and any purported transfer shall be null and void. Subject to the foregoing, this License will be binding upon and will inure to the benefit of the parties and their respective successors and assigns. 10. Miscellaneous 10.1 Force Majeure. Neither party will incur any liability to the other party on account of any loss or damage resulting from any delay or failure to perform all or any part of this License if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control and without negligence of the parties. Such events, occurrences, or causes will include, without limitation, acts of God, strikes, lockouts, riots, acts of war, terrorism, earthquakes, fire and explosions, but the inability to meet financial obligations is expressly excluded. 10.2 Waiver. Any waiver of the provisions of this License or of a party's rights or remedies under this License must be in writing to be effective. Failure, neglect, or delay by a party to enforce the provisions of this License or its rights or remedies at any time, will not be construed and will not be deemed to be a waiver of such party's rights under this License and will not in any way affect the validity of the whole or any part of this License or prejudice such party's right to take subsequent action. Except as expressly stated in this License, no exercise or enforcement by either party of any right or remedy under this License will D-6 preclude the enforcement by such party of any other right or remedy under this License or that such party is entitled by law to enforce. 10.3 Severability. If any term, condition, or provision in this License is found to be invalid, unlawful or unenforceable to any extent, the parties shall endeavor in good faith to agree to such amendments that will preserve, as far as possible, the intentions expressed in this License. If the parties fail to agree on such an amendment, such invalid term, condition or provision will be severed from the remaining terms, conditions and provisions, which will continue to be valid and enforceable to the fullest extent permitted by law. 10.4 Counterparts. This License may be executed in counterparts, each of which so executed will be deemed to be an original and such counterparts together will constitute one and the same agreement . 10.5 Applicable Law; Jurisdiction. This License will be interpreted and construed in accordance with the laws of the State of Tennessee and the United States of America, without regard to conflict of law principles. All disputes arising out of this License shall be subject to the exclusive jurisdiction and venue of the state and federal courts of Davidson County, Nashville, Tennessee, and the parties consent to the exclusive and personal jurisdiction of these courts. 10.6 Headings. Section and Schedule headings are for ease of reference only and do not form part of this License. 10.7 Notices. Any notice required or permitted under the terms of this License or required by law must be in writing and properly posted to the appropriate address set forth in the Operating Agreement. 10.8 Entire Agreement. This License and any Schedule attached hereto contain the entire agreement of the parties with respect to the subject matter of this License and supersede all previous communications, representations, understandings and agreements, either oral or written, between the parties with respect to said subject matter. This License may not be amended, except by a writing signed by both parties. (remainder of page intentionally left blank) D-7 IN WITNESS WHEREOF, the parties have executed this License. LICENSOR: O'Charley's Inc., a Tennessee corporation By: -------------------------------------- Name: --------------------------------- Title: -------------------------------- OPERATOR: ----------------------------------------- By: -------------------------------------- Name: --------------------------------- Title: -------------------------------- D-8 SCHEDULE A TO SOFTWARE LICENSE AND SUPPORT AGREEMENT SUPPORT AND MAINTENANCE Operator is receiving ____ copy or copies of the Chux Operations Assistant ("COA") software. The Support Fee for the COA Software shall be included in the $6,300 per year Information System Maintenance Charge and Help Desk Support Fee, as set forth in the Franchise Offering Circular. The Support fee will be due and payable on the tenth (10th) day of each month, said payment to be made in full through electronic funds transfer. The Help Desk and Support Fees specified in this Schedule A are subject to change, at Licensor's sole discretion, in January of each calendar year. Licensor shall provide Operator with thirty (30) days' prior written notice of any such change. D-9 ATTACHMENT E TO OPERATING AGREEMENT ELECTRONIC FUND TRANSFER AUTHORIZATION Authorization To Honor Charges Drawn By And Payable To O'Charley's Inc. ("Licensor") Depositor hereby authorizes and requests _____________________________ (the "Depository") to initiate debit and credit entries to Depositor's checking account/savings account (select one) indicated below drawn by and payable to the order of Licensor by Electronic Fund Transfer provided there are sufficient funds in said account to pay the amount upon presentation. Depositor agrees that the Depository's rights with respect to each such charge shall be the same as if it were a check drawn on the Depository and signed by Depositor. Depositor further agrees that if any such charge is dishonored, whether with or without cause and whether intentionally or inadvertently, the Depository shall be under no liability whatsoever. Depository Name: City: State: Zip Code: -------------------------- ------------- --------------- Transit/ABA Number: Account Number: --------------------- ---------------------- This authority is to remain in full force and effect until Licensor and Depository have received at least thirty (30) days written notification from Depositor of its termination to afford Licensor and Depository a reasonable opportunity to act on such request. Depositor: (Please Print) - ------------------------------------------- - ------------------------------------------- - ------------------------------------------- Date Signed - ------------------------------------------- - ------------------------------------------- Signature(s) of Depositor, as Printed Above Please attach a voided blank check, for purpose of setting up Bank and Transit Numbers E-1 ATTACHMENT F TO OPERATING AGREEMENT GUARANTY Each of the undersigned acknowledges and agrees as follows: (1) Each has read the terms and conditions of the Operating Agreement dated as of ____________, 20___, by and among O'Charley's Inc., a Tennessee corporation, ____________ and each of the undersigned (the "Operating Agreement") and acknowledges that the execution of this guaranty and the undertakings of the Controlling Principals in the Operating Agreement are in partial consideration for, and a condition to, the granting of the license under the Operating Agreement, and that Licensor would not have granted this license without the execution of this guaranty and such undertakings by each of the undersigned; (2) Each is included in the term the "Controlling Principals" as described in Section XX(U) of the Operating Agreement; (3) Each individually, jointly and severally, makes all of the representations, warranties, covenants and agreements of the Controlling Principals set forth in the Operating Agreement and is obligated to perform thereunder; and (4) Each individually, jointly and severally, unconditionally and irrevocably guarantees to Licensor and its successors and assigns that all of Operator's obligations under the Operating Agreement will be punctually paid and performed. Upon default by Operator or upon notice from Licensor, each will immediately make each payment and perform each obligation required of Operator under the Operating Agreement. Without affecting the obligations of any of the Controlling Principals under this guaranty, Licensor may, without notice to the Controlling Principals, waive, renew, extend, modify, amend or release any indebtedness or obligation of Operator or settle, adjust or compromise any claims that Licensor may have against Operator. Each of the Controlling Principals waives all demands and notices of every kind with respect to the enforcement of this guaranty, including, without limitation, notice of presentment, demand for payment or performance by Operator, any default by Operator or any guarantor and any release of any guarantor or other security for this guaranty or the obligations of Operator. Licensor may pursue its rights against any of the Controlling Principals without first exhausting its remedies against Operator and without joining any other guarantor hereto and no delay on the part of Licensor in the exercise of any right or remedy shall operate as a waiver of such right or remedy, and no single or partial exercise by Licensor of any right or remedy shall preclude the further exercise of such right or remedy. Upon receipt by Licensor of notice of the death of any of the Controlling Principals, the estate of the deceased will be bound by the foregoing guaranty, but only for defaults and obligations under the Operating Agreement existing at the time of death, and in such event, the obligations of the remaining Controlling Principals shall continue in full force and effect. Additionally, with respect to the individual designated as the Operating Principal, the Operating Principal acknowledges that the undertakings by the Operating Principal under this guaranty are made and given in partial consideration of, and as a condition to, Licensor's grant of F-1 rights to operate the Restaurant as described herein. The Operating Principal individually jointly and severally, makes all of the covenants, representations and agreements of Operator and the Operating Principal set forth in the Operating Agreement and is obligated to perform hereunder. THE CONTROLLING PRINCIPALS: ----------------------------------------- *Name: ----------------------------------- ----------------------------------------- Name: ------------------------------------ ----------------------------------------- Name: ------------------------------------ *Denotes individual who is Operator's Operating Principal F-2 ATTACHMENT B TO DEVELOPMENT AGREEMENT LEASE RIDER This Lease Rider is made and entered into this ____ day of ____________, 20___ by and between O'CHARLEY'S INC., a Tennessee corporation ("Licensor"), _________________ ("Operator") and ____________________("Landlord"). WHEREAS, Licensor and Operator are parties to that certain Development Agreement dated as of _____________, 20___ ("Development Agreement"); WHEREAS, Operator and Landlord desire to enter into a lease (the "Lease") pursuant to which Operator will occupy the premises located at ___________________________________ (the "Premises") for a full-service O'Charley's restaurant (the "Restaurant") licensed under the Development Agreement and an Operating Agreement to be executed between Licensor and Operator prior to the opening of the Restaurant (the "Operating Agreement"); and WHEREAS, as a condition to entering into the Lease, the Operator is required under the Operating Agreement to execute this Lease Rider along with the Landlord and Licensor; NOW, THEREFORE, in consideration of the mutual undertakings and commitments set forth herein, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: (1) During the term of the Operating Agreement, the Premises shall be used only for the operation of the Restaurant. (2) Landlord consents to Operator's use of such proprietary marks ("Proprietary Marks") and signs, neons, interior and exterior decor items, color schemes, plans, specifications and related components of the O'Charley's restaurant system ("System") as Licensor has prescribed, and may in the future prescribe, for the Restaurant. (3) Landlord agrees to send Licensor copies of any and all letters and notices sent to Operator pertaining to the Lease and the Premises at the same time that such letters and notices are sent to Operator. (4) Licensor shall have the right to enter the Premises to make any modification or alteration necessary to protect the O'Charley's Restaurant, the System and Proprietary Marks or to cure any default under the Operating Agreement or any development agreement entered into between Licensor and Operator or under the Lease, without being guilty of trespass or any other crime or tort. (5) In the event of Operator's default under the terms of the Lease, Licensor may, but is not required, to cure the default and may assume the lease in Licensor's name. Licensor shall make this determination within thirty (30) days after Licensor receives notice of the default. If Licensor elects to cure the default, Licensor shall cure the default within thirty (30) days of such B-1 election or, if the default cannot be reasonably cured within such thirty (30) day period, then Licensor shall commence and proceed to cure the default within such time as is reasonably necessary to cure the default. If Licensor also elects to assume the Lease, Landlord agrees to recognize Licensor as the Tenant under the Lease and Operator shall no longer have any rights thereunder. (6) Operator shall be permitted to assign the Lease to Licensor or to Licensor's assignees upon the expiration or earlier termination of the Operating Agreement and the Landlord hereby consents to such assignment and agrees not to impose or assess any assignment fee or similar charge or increase or accelerate rent under the Lease in connection with such assignment, or require Licensor to pay any past due rent or other financial obligation of Operator to Landlord, it being understood that Landlord shall look solely to the Operator for any rents or other financial obligations owed to Landlord prior to such assignment. Landlord and Operator acknowledge that Licensor is not a party to the Lease and shall have no liability under the Lease, unless and until the Lease is assigned to, and assumed by, Licensor. (7) Except for the Operator's obligations to Landlord for rents and other financial obligations accrued prior to the assignment of the Lease, in the event of such assignment, Licensor or any assignee designated by Licensor will agree to assume from the date of assignment all obligations of Operator remaining under the Lease, and in such event Licensor or any affiliate shall assume Operator's occupancy rights, Operator's rights under any renewal or purchase options, and the right to sublease the Premises, for the remainder of the term of the Lease including any applicable renewal periods. (8) Notwithstanding anything contained in this Lease Rider and in the Lease, Licensor is expressly authorized, without the consent of the Landlord, to sublet the Leased Premises to an authorized franchisee, provided such subletting is specifically subject to the terms of this Lease and further provided the franchisee expressly assumes all obligations of the Lease. Licensor agrees to notify Landlord as to the name of the franchisee within then (10) days after such subletting. (9) Operator shall not assign the Lease or renew or extend the term thereof without the prior written consent of Licensor. (10) Landlord and Operator shall not amend or otherwise modify the Lease in any manner that could materially affect any of the foregoing requirements without the prior written consent of Licensor. (11) The terms of this Lease Rider will supersede any conflicting terms of the Lease. [remainder of page intentionally left blank] B-2 IN WITNESS WHEREOF, the parties have executed this Lease Rider as of the date first above written. O'CHARLEY'S INC. a Tennessee corporation By: ---------------------------------------- Name: --------------------------------- Title: ------------------------------- OPERATOR: ------------------------------------------- By: ---------------------------------------- Name: ----------------------------------- Title: ---------------------------------- LANDLORD: ------------------------------------------- By: ---------------------------------------- Name: ----------------------------------- Title: ---------------------------------- B-3 ATTACHMENT C TO DEVELOPMENT AGREEMENT CONFIDENTIALITY AND NON-COMPETE AGREEMENT This Agreement is made and entered into this 22nd day of December, 2003, between O'Charley's Inc., a Tennessee corporation ("Licensor"), OCM Development, LLC, a Michigan limited liability company d/b/a O'Charley's Development Company of Michigan ("Developer"), and Robert E. Schermer, Jr. ("Covenantor"). RECITALS: WHEREAS, Licensor, as a result of the expenditure of time, skill, effort and money, has developed and owns the rights to develop and operate a unique system (the "System") of full service varied menu casual dining restaurants ("Restaurants") which feature freshly prepared items such as hand-cut and aged steaks, fresh chicken, seafood, homemade yeast rolls and fresh-cut salads with special recipe dressings and which serve alcoholic beverages through a full-service bar all under the trademark O'Charley's(R); WHEREAS, the System includes, but is not limited to, certain trade names, service marks, trademarks, symbols, logos, emblems and indicia of origin, including, but not limited to, the mark O'Charley's(R) and such other trade names, service marks, trademarks, symbols, logos, emblems and indicia of origin as Licensor may develop in the future to identify for the public the source of services and products marketed under such marks ("Marks") and under the System; WHEREAS, the Marks represent the System's high standards of quality, appearance and service; distinctive exterior and interior design, decor, color scheme and furnishings; special recipes and menu items; uniform standards, specifications and procedures for operations; quality and uniformity of products and services offered; procedures for inventory and management and financial control; training and assistance; and advertising and promotional programs; all of which may be changed, improved and further developed by Licensor from time to time and are used by Licensor in connection with the operation of the System ("Trade Secrets"); WHEREAS, the Marks and Trade Secrets provide economic advantages to Licensor and are not generally known to, and are not readily ascertainable by proper means by, Licensor's competitors who could obtain economic value from knowledge and use of the Marks and Trade Secrets; WHEREAS, Licensor has taken and intends to take all reasonable steps to maintain the confidentiality and secrecy of the Trade Secrets; WHEREAS, Licensor has granted Developer the limited right to develop Restaurants using the System, the Marks and the Trade Secrets for the period defined in the development agreement made and entered into as of December 22, 2003 ("Development Agreement"), by and among Licensor, Developer and Developer's Controlling Principals; C-1 WHEREAS, Licensor and Developer have agreed in the Development Agreement on the importance to Licensor and to Developer and other licensed users of the System of restricting the use, access and dissemination of the Trade Secrets; WHEREAS, it will be necessary for certain employees, agents, independent contractors, officers, directors and interest holders of Developer, or any Entity having an interest in Developer ("Covenantor") to have access to and to use some or all of the Trade Secrets in the management and operation of Developer's business using the System; WHEREAS, Developer has agreed to obtain from those Covenantors prior written agreements protecting the Trade Secrets and the System against unfair competition; WHEREAS, Covenantor wishes to remain with, to become employed by or associated with Developer; WHEREAS, Covenantor wishes and needs to receive and use the Trade Secrets in the course of Covenantor's employment or association in order to effectively perform Covenantor's services for Developer; and WHEREAS, Covenantor acknowledges that receipt of and the right to use the Trade Secrets constitutes independent valuable consideration for the representations, promises and covenants made by Covenantor herein. NOW, THEREFORE, in consideration of the mutual covenants and obligations contained herein, and other good and valuable consideration, the receipt and sufficiency are hereby acknowledged, the parties intending to be legally bound hereby agree as follows: 1. Confidentiality Agreement 1.1 Licensor and/or Developer may disclose to Covenantor some or all of the Trade Secrets relating to the System. All information and materials, including, without limitation, any manuals, drawings, specifications, techniques and compilations of data which Licensor provides to Developer and/or Covenantor shall be deemed confidential Trade Secrets for the purposes of this Agreement. 1.2 Covenantor shall receive the Trade Secrets in confidence and shall, at all times, maintain them in confidence, and use them only in the course of Covenantor's employment by or association with Developer and then only in connection with the development and/or operation by Developer of Restaurants using the System for so long as Developer is licensed by Licensor to use the System. 1.3 Covenantor shall not at any time make copies of any documents or compilations containing some or all of the Trade Secrets without Licensor's prior written consent. 1.4 Covenantor shall not at any time disclose or permit the disclosure of the Trade Secrets except to other employees of Developer and then only to the limited extent necessary to train or assist other employees of Developer in the development or operation of a Restaurant using the System. C-2 1.5 Covenantor shall immediately surrender any material containing some or all of Licensor's Trade Secrets to Licensor, upon request, or upon termination of employment by or association with Developer, or upon conclusion of the use for which such information or material may have been furnished to Covenantor. 1.6 Covenantor shall not at any time, directly or indirectly, do any act or omit to do any act that would or would likely be injurious or prejudicial to the goodwill associated with the Trade Secrets and the System. 1.7 All manuals are loaned by Licensor to Developer for limited purposes only and remain the property of Licensor and may not be reproduced, in whole or in part, without Licensor's prior written consent. 2. Covenants Not to Compete 2.1 In order to protect the goodwill and unique qualities of the System and the confidentiality and value of the Trade Secrets, and in consideration for the disclosure to Covenantor of the Trade Secrets, Covenantor further agrees and covenants that while employed by Developer Covenantor will not: a. Divert, or attempt to divert, directly or indirectly, any business, business opportunity or customer of the Restaurants to any competitor. b. Employ, or seek to employ, any person who is at the time (or has been within the preceding six (6) months) employed by Licensor, or any of its Affiliates, or any operator or developer of Licensor, or otherwise directly or indirectly induce such person to leave that person's employment, except as may occur in connection with Developer's employment of such person if permitted under the Development Agreement. c. Except with respect to Restaurants described in the Development Agreement and other restaurants operated under operating agreements between Developer and its Affiliates, and Licensor or its Affiliates, directly or indirectly, for Covenantor or through, on behalf of, or in conjunction with any person, persons, partnership, corporation, limited liability company, association, trust, unincorporated association, joint venture or other Entity, without the prior written consent of Licensor, own, maintain, operate, engage in or have any financial or beneficial interest in (including any interest in corporations, partnerships, limited liability companies, associations, trusts, unincorporated associations, joint ventures or other entities), advise, assist or make loans to, any business that operates a full service, varied menu, casual dining restaurant that features freshly prepared items such as steaks, seafood, homemade baked goods and fresh cut salads, and that serves alcoholic beverages through a full-service bar, and which business is located within the United States, its territories or commonwealths, or any other country, province, state or geographic area in which Licensor has used, sought registration of or registered the same or similar Marks or operates or licenses others to operate a business under the same or similar Marks. 2.2 In further consideration for the disclosure to Covenantor of the Trade Secrets and to protect the uniqueness of the System, Covenantor agrees and covenants that for one (1) year following the earlier of the expiration, termination or transfer of all of Developer's interest in the C-3 Development Agreement or the termination of Covenantor's employment by or association with Developer, Covenantor will not without the prior written consent of Licensor: a. Divert or attempt to divert, directly or indirectly, any business, business opportunity or customer of the Restaurants to any competitor. b. Employ or seek to employ any person who is at the time (or has been within the preceding six (6) months) employed by Licensor, or any of its Affiliates, or any operator or developer of Licensor, or otherwise directly or indirectly induce such persons to leave that person's employment. c. Except with respect to other restaurants operated under operating agreements between Developer and its Affiliates, and Licensor or its Affiliates, directly or indirectly, for Covenantor or through, on behalf of or in conjunction with any person, persons, partnership, corporation, limited liability company, association, trust, unincorporated association, joint venture or other Entity own, maintain, operate, engage in or have any financial or beneficial interest in (including any interest in corporations, partnerships, limited liability companies, associations, trusts, unincorporated associations, joint ventures or other entities), advise, assist or make loans to, any business that operates a full service, varied menu, casual dining restaurant that features freshly prepared items such as steaks, seafood, homemade baked goods and fresh cut salads, and that serves alcoholic beverages through a full-service bar, which business is, or is intended to be, located within the Territory, as such term is defined in the Development Agreement (and as described in an attachment thereto), or within a fifteen (15)-mile radius of the location of any O'Charley's restaurant or food service facility in existence or under construction (or where land has been purchased or a lease executed for the construction of an O'Charley's restaurant or other food service facility) as of the earlier of (i) the expiration or termination of, or the transfer of all of Developer's interest in, the Development Agreement; or (ii) the time Covenantor ceases to be employed by or associated with Developer, as applicable. 3. Miscellaneous 3.1 Developer shall make all commercially reasonable efforts to ensure that Covenantor acts as required by this Agreement. 3.2 Covenantor agrees that in the event of a breach of this Agreement, Licensor would be irreparably injured and be without an adequate remedy at law. Therefore, in the event of such a breach, or threatened or attempted breach of any of the provisions hereof, Licensor shall be entitled to enforce the provisions of this Agreement and shall be entitled, in addition to any other remedies which are made available to it at law or in equity (including any right to terminate the Development Agreement or any operating agreement, as provided therein), to a temporary and/or permanent injunction and a decree for the specific performance of the terms of this Agreement, without the necessity of showing actual or threatened harm and without being required to furnish a bond or other security. 3.3 Covenantor agrees to pay all expenses (including court costs and reasonable attorneys' fees) incurred by Licensor and Developer in enforcing this Agreement. C-4 3.4 Any failure by Licensor or the Developer to object to or take action with respect to any breach of any provision of this Agreement by Covenantor shall not operate or be construed as a waiver of or consent to that breach or any subsequent breach by Covenantor. 3.5 THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE WHERE LICENSOR'S PRINCIPAL PLACE OF BUSINESS IS LOCATED AT THE TIME SUCH PROCEEDING IS COMMENCED WITHOUT REFERENCE TO CHOICE OF LAW PRINCIPLES. COVENANTOR HEREBY IRREVOCABLY SUBMITS HIMSELF TO THE JURISDICTION OF THE STATE AND THE FEDERAL DISTRICT COURTS LOCATED IN THE STATE, COUNTY OR JUDICIAL DISTRICT IN WHICH THE LICENSOR'S PRINCIPAL PLACE OF BUSINESS IS LOCATED. COVENANTOR HEREBY WAIVES ALL QUESTIONS OF PERSONAL JURISDICTION OR VENUE FOR THE PURPOSE OF CARRYING OUT THIS PROVISION. COVENANTOR HEREBY AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON HIM IN ANY PROCEEDING RELATING TO OR ARISING UNDER THIS AGREEMENT OR THE RELATIONSHIP CREATED BY THIS AGREEMENT BY ANY MEANS ALLOWED BY APPLICABLE STATE OR FEDERAL LAW. COVENANTOR FURTHER AGREES THAT VENUE FOR ANY PROCEEDING RELATING TO OR ARISING OUT OF THIS AGREEMENT SHALL BE THE COUNTY OR JUDICIAL DISTRICT IN WHICH LICENSOR'S PRINCIPAL PLACE OF BUSINESS IS LOCATED AT THE TIME SUCH PROCEEDING IS COMMENCED; PROVIDED, HOWEVER, WITH RESPECT TO ANY ACTION WHICH INCLUDES INJUNCTIVE RELIEF OR OTHER EXTRAORDINARY RELIEF, LICENSOR OR DEVELOPER MAY BRING SUCH ACTION IN ANY COURT IN ANY STATE WHICH HAS JURISDICTION. 3.6 The parties acknowledge and agree that each of the covenants contained herein are reasonable limitations as to time, geographical area, and scope of activity to be restrained and do not impose a greater restraint than is necessary to protect the goodwill or other business interests of Licensor. The parties agree that each of the foregoing covenants shall be construed as independent of any other covenant or provision of this Agreement. If all or any portion of a covenant in this Agreement is held unreasonable or unenforceable by a court or agency having valid jurisdiction in any unappealed final decision to which Licensor is a party, Covenantor expressly agrees to be bound by any lesser covenant subsumed within the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this Agreement. 3.7 This Agreement contains the entire agreement of the parties regarding the subject matter hereof. This Agreement may be modified only by a duly authorized writing executed by all parties. 3.8 All notices and demands required to be given hereunder shall be in writing and shall be sent by personal delivery, expedited delivery service, certified or registered mail, return receipt requested, first-class postage prepaid, facsimile, telegram or telex (provided that the sender confirms the facsimile, telegram or telex by sending an original confirmation copy by certified or registered mail or expedited delivery service within three (3) business days after transmission), to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other parties. C-5 If directed to Licensor, the notice shall be addressed to: O'Charley's Inc. 3038 Sidco Drive Nashville, TN 37204 Attention: Director of Franchising Facsimile: (615) 782-5043 If directed to Developer, the notice shall be addressed to: OCM Development, LLC c/o Meritage Hospitality Group, Inc. 1971 E. Beltline, NE Suite 200 Grand Rapids, MI 49525 Attention: Robert E. Schermer, Jr. Facsimile: (616) 776-2776 If directed to Covenantor, the notice shall be addressed to: Robert E. Schermer, Jr. c/o Meritage Hospitality Group, Inc. 1971 E. Beltline, NE Suite 200 Grand Rapids, MI 49525 Facsimile: (616) 776-2776 Any notices sent by personal delivery shall be deemed given upon receipt. Any notices given by telex or facsimile shall be deemed given upon transmission, provided confirmation is made as provided above. Any notice sent by expedited delivery service or registered or certified mail shall be deemed given three (3) business days after the time of mailing. Any change in the foregoing addresses shall be effected by giving fifteen (15) days written notice of such change to the other parties. Business days for the purpose of this Agreement excludes Saturday, Sunday and the following national holidays: New Year's Day, Martin Luther King Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving and Christmas. 3.9 The, rights and remedies of Licensor under this Agreement are fully assignable and transferable and shall inure to the benefit of its respective Affiliates, successors and assigns. The respective obligations of Developer and Covenantor hereunder may not be assigned by Developer or Covenantor, without the prior written consent of Licensor. (remainder of page intentionally left blank) C-6 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as witnessed by their signatures LICENSOR: O'CHARLEY'S INC., a Tennessee corporation By: /s/ Edward C. Hastings ---------------------------------------- Edward C. Hastings Director of Franchising DEVELOPER: OCM DEVELOPMENT, LLC, a Michigan limited liability company By: /s/ Robert E. Schermer, Jr. ----------------------------------------- Robert E. Schermer, Jr. Chief Executive Officer COVENANTOR: /s/ Robert E. Schermer, Jr. -------------------------------------------- Robert E. Schermer, Jr. C-7 ATTACHMENT D TO DEVELOPMENT AGREEMENT STATEMENT OF OWNERSHIP INTERESTS AND PRINCIPALS A. The following is a list of stockholders, members, partners or other investors in Developer, including, all investors who own or hold a direct or indirect interest in Developer, and a description of the nature of their interest:
Name Percentage of Ownership/Nature of Interest ----- ------------------------------------------ ~~Meritage Hospitality Group Inc. 100% / Parent Company of Developer~~
A. The following is a list of all Principals described in and designated pursuant to Section XIV(E) of the Development Agreement, each of whom shall execute the Confidentiality and Non-Compete Agreement substantially in the form set forth in Attachment C (see Sections IX(B)(2) and IX(I) of the Development Agreement): Name Robert E. Schermer, Jr. B. The following is a list of all of Developer's Controlling Principals described in and designated pursuant to Section XIV(E) of the Development Agreement. Name Meritage Hospitality Group Inc. D-1 ATTACHMENT E TO DEVELOPMENT AGREEMENT GUARANTY Each of the undersigned acknowledges and agrees as follows: (1) Each has read the terms and conditions of the Development Agreement (the "Development Agreement"), dated as of December 22, 2003, by and among O'Charley's Inc., a Tennessee corporation ("Licensor"), OCM Development, LLC, a Michigan limited liability company d/b/a O'Charley's Development Company of Michigan ("Developer"), and Meritage Hospitality Group Inc., a Michigan corporation (the "Controlling Principals") and acknowledges that the execution of this guaranty and the undertakings of the Controlling Principals in the Development Agreement are in partial consideration for, and a condition to, the granting of the development rights in the Development Agreement, and that Licensor would not have granted such rights without the execution of this guaranty and such undertakings by each of the undersigned; (2) Each is included in the term "Controlling Principals" as described in Section XIV(E) of the Development Agreement; (3) Each individually, jointly and severally, makes all of the representations, warranties, covenants and agreements of the Controlling Principals set forth in the Development Agreement and is obligated to perform thereunder; and (4) Each individually, jointly and severally, unconditionally and irrevocably guarantees to Licensor and its successors and assigns that all of Developer's obligations under the Development Agreement will be punctually paid and performed. Upon default by Developer or upon notice from Licensor, each will immediately make each payment and perform each obligation required of Developer under the Development Agreement. Without affecting the obligations of any of the Controlling Principals under this guaranty, Licensor may, without notice to the Controlling Principals, waive, renew, extend, modify, amend or release any indebtedness or obligation of Developer, or settle, adjust or compromise any claims that Licensor may have against Developer. Each of the Controlling Principals waives all demands and notices of every kind with respect to the enforcement of this guaranty, including, without limitation, notice of presentment, demand for payment or performance by Developer, any default by Developer or any guarantor and any release of any guarantor or other security for this guaranty or the obligations of Developer. Licensor may pursue its rights against any of the Controlling Principals without first exhausting its remedies against Developer and without joining any other guarantor hereto and no delay on the part of Licensor in the exercise of any right or remedy shall operate as a waiver of such right or remedy, and no single or partial exercise by Licensor of any right or remedy shall preclude the further exercise of such right or remedy. Upon receipt by Licensor of notice of the death of any of the Controlling Principals, the estate of the deceased will be bound by the foregoing guaranty, but only for defaults and obligations under the Development Agreement existing at the time of death, and in such event, the obligations of the remaining Controlling Principals shall continue in full force and effect. E-1 Additionally, with respect to the individual designated as the Operating Principal, the Operating Principal acknowledges that the undertakings by the Operating Principal under this guaranty are made and given in partial consideration of, and as a condition to, Licensor's grant of rights to develop Restaurants as described herein. The Operating Principal individually, jointly and severally, makes all of the covenants, representations and agreements of Developer and the Operating Principal set forth in the Development Agreement and is obligated to perform hereunder. THE CONTROLLING PRINCIPALS: MERITAGE HOSPITALITY GROUP INC. By: /s/ Robert E. Schermer, Jr. ----------------------------------------- Robert E. Schermer, Jr.* Chief Executive Officer *Denotes individual who is Developer's Operating Principal E-2 EX-14 8 g87708exv14.txt EX-14 CODE OF CONDUCT AND BUSINESS ETHICS POLICY EXHIBIT 14 O'CHARLEY'S INC. CODE OF CONDUCT AND BUSINESS ETHICS POLICY TABLE OF CONTENTS GENERAL POLICY..................................................................... 1 BUSINESS CONDUCT................................................................... 1 EMPLOYEE CONDUCT.......................................................... 1 CONFIDENTIALITY........................................................... 1 USE OF ELECTRONIC MAIL.................................................... 2 INTEGRITY OF RECORDS, STATEMENTS AND REPORTS AND COMPLIANCE WITH ACCOUNTING PROCEDURES................................. 2 POLITICAL CONTRIBUTIONS................................................... 4 BRIBERY AND KICKBACKS..................................................... 4 GIFTS AND CONTRIBUTIONS................................................... 4 GOVERNMENT REQUESTS................................................................ 5 CONFLICTS OF INTEREST.............................................................. 5 OUTSIDE ACTIVITIES........................................................ 5 PERSONAL FINANCIAL INTEREST............................................... 5 PROTECTION AND USE OF COMPANY PERSONNEL OR PROPERTY....................... 5 BUYING OR SELLING STOCK WHILE POSSESSING INSIDE INFORMATION............... 6 FAIR EMPLOYMENT PRACTICES.......................................................... 6 RACE, COLOR, RELIGION, NATIONAL ORIGIN, SEX, AGE AND DISABILITY........... 6 HARASSMENT................................................................ 7 MISAPPROPRIATION OF PROPRIETARY INFORMATION........................................ 7 SAFETY AND QUALITY OF FOOD AND OTHER PRODUCTS...................................... 8 ENVIRONMENTAL COMPLIANCE........................................................... 8 PURCHASING......................................................................... 8 CODE IMPLEMENTATION................................................................ 8 COMPLIANCE OFFICER........................................................ 10 WAIVER.................................................................... 10

RESERVATION OF RIGHTS.............................................................. 10 EMPLOYEE-AT-WILL................................................................... 11 COMPANY POLICIES................................................................... 12

ii GENERAL POLICY O'Charley's Inc. (the "Company") is committed to achieving high standards of workplace conduct and business, personal and ethical conduct. Through performance in accordance with these standards, the Company and all of its employees will merit and enjoy the respect of one another, our shareholders, our customers, our suppliers and the public. It is the personal responsibility of all employees who are required to sign this agreement to acquaint themselves with all legal and policy standards and restrictions applicable to their assigned duties and responsibilities, and to conduct themselves accordingly. Over and above the strictly legal aspects involved, all Company personnel are expected to observe high standards of business and personal ethics in the discharge of their assigned duties. This Code of Conduct (the "Code") is designed to help ensure that these things occur. This Code is not meant to cover all situations. Any doubts as to the appropriateness of a particular situation, whether or not described in this Code, should be submitted either to your immediate supervisor or the Company's Compliance Officer whose role is discussed later in this document. BUSINESS CONDUCT Employee Conduct. Each employee of the Company must exercise the highest standards of personal conduct in such employee's dealings with the Company, its customers and suppliers, government officials and other employees. Employees must comply fully with the letter and spirit of all applicable statutes and regulations. Disregard of the law may result in severe penalties to the Company and to the employee. Confidentiality. Employees frequently have access to confidential information concerning the Company's business. Safeguarding confidential information is essential to the conduct of the Company. Caution and discretion must be exercised in the use of such information, which should be shared only with those who have a clear and legitimate need and right to know. Employees should be careful to guard against accidental disclosure of confidential information through conversations that may be overheard in public places such as restaurants, airplanes and elevators. Salary, benefits and other personal information relating to employees shall be treated as confidential. Personnel files, payroll information, disciplinary matters and similar information shall be maintained in a manner designed to ensure confidentiality in accordance with applicable laws. Employees will exercise due care to prevent the release or sharing of information beyond those persons who may need such information to fulfill their job function. Any requests for information arising through a legal process (e.g., subpoena or court order) must be processed through the designated avenues within the Company. All requests related to the Company's financial records must first be referred to the Chief Financial Officer before the release of the information can occur. All news inquiries should be directed to either the concept President, Vice-President of Human Resources Support Services, Vice-President of Marketing, Chief Support Officer, Chief Financial Officer, Chief Operating Officer or Chief Executive Officer. Use of Electronic and Voice Mail. All electronic and telephonic communications and stored information transmitted, received or archived in O'Charley's, Inc. electronic or telephonic communication systems or computers are the property of the company. While O'Charley's, Inc. reserves the right, employee's should not attempt to enter, monitor, access, retrieve or disclose information from another's email, voice mail, or computer files without the express permission of the Chief Information Officer, Vice-President of Human Resources Support Services or a Vice-President of Operations. Access to the disclosure of e-mail, voice mail and information on computer systems should be limited to authorized employees who, for company business purposes, have a need to know. E-mail or voice mail shall not be used to transmit vulgar, profane, insulting or offensive messages. Among those which are considered to be offensive are any messages which contain sexual implications, racial slurs, gender specific comments, or any other comment that offensively addresses someone's age, sexual orientation, religious or political beliefs, national origin, or disability. Integrity of Records, Statements and Reports and Compliance with Accounting Procedures. Accuracy and reliability in the preparation of all business records, financial statements and reports to regulatory and other government agencies is of critical importance to the business decision-making process and to the proper discharge of the Company's financial, legal and reporting obligations. To this end, the Company shall: - comply with generally accepted accounting principles at all times; - maintain a system of internal accounting controls that will provide reasonable assurances to management that all transactions are properly recorded; - maintain books and records that accurately and fairly reflect the Company's transactions; - prohibit the establishment of any undisclosed or unrecorded funds or assets; and 2 - maintain a system of internal controls that will provide reasonable assurances to management that material information about the Company is made known to management, particularly during the periods in which the Company's periodic reports are being prepared. Each employee should ensure that all business records, expense accounts, vouchers, bills and payroll records and other statements and reports are prepared timely and with care and honesty. False or misleading entries are prohibited. It is the responsibility of all employees to ensure that both the letter and the spirit of corporate accounting and internal control procedures are strictly adhered to at all times. No employee shall directly or indirectly take any action, or encourage anyone to take an action; to improperly influence, coerce, manipulate, or mislead any independent public accountant engaged in the performance of an audit or review of the Company's financial statements. Some examples of improper action include any action causing the Company's independent auditors to (a) issue a report on the Company's financial statements that is not warranted in the circumstances (due to material violations of generally accepted accounting principles, generally accepted auditing standards, or other standards), (b) not perform audit, review or other procedures required by generally accepted auditing standards or other professional standards, (c) not to withdraw an issued report, or (d) not communicate matters to the Company's Audit Committee. Improper action also includes: (a) offering or paying bribes or other financial incentives, including offering future employment or contracts for non-audit services, (b) providing an auditor with inaccurate or misleading legal analysis, (c) threatening to cancel or canceling existing non-audit or audit engagements if the auditor objects to the Company's accounting, (d) seeking to have a partner removed from the audit engagement because the partner objects to the Company's accounting, (e) blackmailing, or (f) making physical threats. The Company has established a Disclosure Committee to assist management in the full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the Company with the SEC. It is the responsibility of each employee to: - promptly bring to the attention of the Disclosure Committee any material information of which he or she may become aware that affects the disclosures made by the Company in its public findings; - promptly bring to the attention of the Disclosure Committee and the Audit Committee any information he or she may have concerning (a) significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize and 3 report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's financial reporting, disclosures or internal controls; and - promptly bring to the attention of the CFO and to the Audit Committee any information he or she may have concerning evidence of a material violation of the securities or other laws, rules or regulations applicable to the Company and the operation of its business, by the Company or any agent thereof. Political Contributions. No funds or assets of the Company will be used for federal, state, or local political campaign contributions without the prior approval of the CFO, COO or CEO. These prohibitions cover not only direct contributions but also indirect assistance or support of candidates or political parties through the purchase of tickets to special dinners or other fundraising events or the furnishing of any other goods, services or equipment to political parties or committees. The U.S. Foreign Corrupt Practices Act prohibits the Company from giving anything of value, directly or indirectly, to foreign government officials, parties or candidates to obtain or retain business. Accordingly, no funds or assets of the Company will be used or offered, directly or indirectly, for political contributions outside the United States, even where permitted by applicable law, without the prior written approval of the Chief Financial Officer of the Company. The above prohibitions apply only to the direct or indirect use of corporate funds or assets for political purposes and are, of course, not intended to discourage employees from making personal contributions to candidates, parties or committees of their choice. Under no circumstances will employees be reimbursed in any way for personal contributions. Bribery and Kickbacks. An employee may not give anything of value to any customer or potential customer as an inducement to obtain favorable treatment personally. Similarly, employees are prohibited from giving anything of value to public officials, as an inducement to have a law or regulation enacted, defeated or violated. Gifts and Contributions. The general purpose of gifts and favors in a business context is to create goodwill. If they do more than that, and have the potential to unduly influence judgment or create a feeling of obligation, employees should not accept them. Employees may not solicit any kind of gift, contribution, service or any personal benefit from present or potential suppliers or vendors. Employees are prohibited from accepting gifts of money, whether solicited or unsolicited. Employees may not accept non-monetary unsolicited gifts, contributions, prizes or entertainment unless consistent with normal business customs. Gifts, which may be considered excessive, require the prior 4 approval of the Compliance Officer or, the Chief Financial Officer in the case of the Board of Directors. GOVERNMENT REQUESTS It is the Company's policy to cooperate with all reasonable requests from government authorities. All requests for information should be responded to with complete and accurate information. In addition, documents should always be retained in accordance with the Company's document retention policy and should never be concealed, altered or destroyed in anticipation of, or in response to, any investigation. Any request for information from a government authority, other than routine items requested in the ordinary course of business, should be reported to the Chief Financial Officer so that the Company may consult its legal counsel about the request prior to providing any information. CONFLICTS OF INTEREST A conflict of interest occurs when an employee's individual private interest interferes, or appears to interfere, in any way with the interests of the Company. Following are certain ways that a conflict of interest may arise, but they are by no means a comprehensive list. If any employee believes that he or she or another employee may have an actual or potential conflict of interest with the Company, the employee should immediately report it to his or her supervisor or the Compliance Officer. Outside Activities. The Company expects its employees to devote their full energies to their work during their working hours. Therefore, an employee's outside activities must not reflect adversely on the Company or give rise to a real or apparent conflict of interest with the employee's duties with the Company. Employees must be alert to potential conflicts of interests and be aware that they may be asked to discontinue any outside activity should such a conflict arise. Personal Financial Interest. Employees, and members of their household, should avoid any outside financial interests that might conflict with the Company's interests and shall promptly notify the Compliance Officer upon becoming aware of any such potential conflict. Protection and Use of Company Personnel or Property. Directors, officers and employees shall not use the Company's employees or property for purposes other than those related to Company business except as specifically authorized by their immediate supervisor. Employees are prohibited from the unauthorized use or taking of the Company's equipment, supplies, software, data, intellectual property, materials or products. Prior to engaging in any activity on the Company's time, which will result in remuneration to the employee or the use of Company equipment, supplies, materials or services for personal or non-work related purposes, employees must obtain the approval of their supervisor. 5 Buying or Selling Stock While Possessing Inside Information. Numerous complex laws regulate stock transactions. Severe civil and criminal penalties can be imposed on individuals and corporations convicted of violations. The information contained in the Code is a summary of the Company's Insider Trading Policy (the "Policy"), and employees are encouraged to consult the Policy for a complete description. 1. Employees who know any "material" fact about the Company that has not been disclosed to the public ("inside information") may not buy or sell the Company's stock until reasonable time has passed after the information has been disclosed to the public. "Material" information means facts that would be likely to cause the value of the stock to go up or down. Examples include knowledge of corporate, concept or store level sales or expense information; earnings figures; acquisitions; mergers; and sales of businesses. 2. In addition, employees can be legally liable if someone outside the Company trades in the Company stock based on a "tip" of inside information given by an employee. Company policy forbids giving confidential information about the Company to outsiders except under limited circumstances approved by legal counsel. 3. Specific additional legal restrictions on Company stock trading apply to corporate officers and directors, who have been furnished with detailed explanations of these restrictions. 4. Trading in the stock of outside concerns while in the possession of material inside information is also prohibited. Examples of material inside information, which might be obtained as a result of an employee's position with the Company, include proposed acquisitions of outside concerns or awards of important contracts to suppliers of the Company. FAIR EMPLOYMENT PRACTICES Race, Color, Religion, National Origin, Citizenship, Veteran Status, Sex, Age and Disability. Diversity is not only a welcomed reality in today's competitive work force, but also a key to increased productivity. Employees at the Company were recruited, selected and hired on the basis of individual merit and ability with respect to the position filled. As a business comprised of talented and diverse co-workers, the Company must be committed to the fair and effective utilization of all employees without regard to race, color, religion, national origin, sex, age or disability unrelated to ability to do the job. Employees must all keep in mind that equal employment opportunity is indispensable in every aspect of the employment relationship. The relationship covers origin, training, working conditions, benefits, compensation practices, employment functions (including promotion, demotion, discipline, transfer, termination and reduction in force) and 6 Company sponsored educational, social and recreational programs. The Company will move affirmatively and aggressively toward full and equal participation for each and every one of its employees as a matter of sound moral, legal and business policy. The Company steadfastly requires all of its employees to treat each other, regardless of title or position, with the fairness and respect necessary to maintain a diverse place of employment that encourages each person to contribute to her or his fullest potential. Harassment. Every person conducting business on Company premises, whether or not employed by the Company, must refrain from engaging in any verbal or physical conduct that could be construed as harassment. Conduct by an employee that is offensive or is otherwise damaging or harmful to another will not be tolerated. In addition, each employee must refrain from all types of conduct that might be considered sexual harassment. Such conduct may consist of making unwelcome sexual advances, or engaging in coercive behavior that is sexual in nature when the rejection of or submission to such conduct affects, either implicitly or explicitly, an employee's status of employment (e.g. pay, promotion, assignment, termination, etc.). In addition to offending -- if not injuring -- the victim of such conduct, sexual harassment is counterproductive to sound business policy. Any employee who experiences, witnesses or becomes aware of an act of harassment should report it immediately. MISAPPROPRIATION OF PROPRIETARY INFORMATION Certain copyrights and trademarks owned by the Company are valuable assets. Each employee must carefully consider any action that could dilute or affect in any way the Company's copyright and trademark interests. No employee should enter into any agreement to transfer, assign or license the Company's copyrights or trademarks without the prior approval of the Company's Chief Financial Officer, President or Chief Executive Officer. In addition to protecting the Company's intellectual property rights, the Company respects the valid intellectual property rights of others. It is the policy of the Company to comply fully with all laws of the United States and each state where the Company conducts business concerning intellectual property matters. No employee shall copy, cause to have copies made or otherwise use any video tapes, audio tapes, other sound recordings, written works, musical works, computer software or any other "work of authorship" protected by copyright in violation of such copyright without the written consent of the copyright holder. Such written consent shall be obtained whether or not the "work of authorship" bears evidence of copyright. Software programs, which are licensed to the Company for use by its employees, are subject to specific use requirements as authorized in the licensing agreement. No employee should copy any software programs owned or used by the Company until the employee has contacted the Company's Chief Information Officer to determine whether such copying is permitted. 7 Any question whether a proposed action would infringe upon the rights of another company or individual should be referred directly to the Chief Executive Officer, President or Chief Financial Officer. Such matters include copying or distributing written work prepared by others, using signs or symbols that may be trademarks or service marks, or doing Company business under any name other than the Company's or any subsidiary's name. In addition, employees shall not use confidential business information obtained from competitors, including customer lists, price lists, contracts, or other information in violation of a covenant not to compete, prior employment agreements or in any other manner likely to provide an unfair or illegal competitive advantage to the Company. SAFETY AND QUALITY OF FOOD AND OTHER PRODUCTS The safety and quality of the Company's food and other products are critical to maintaining the trust of customers and the Company's reputation. It is a goal of the Company to provide safe products that meet high quality standards. It is the policy of the Company to comply with all food and product safety laws applicable to the Company and its operations. Each employee is expected to acquaint himself or herself with all food safety and other laws and procedures applicable to the employee's assigned duties and comply with all such laws and procedures. ENVIRONMENTAL COMPLIANCE It is the policy of the Company to comply with all environmental laws and regulations as they relate to our operations. We will comply with all environmental laws and operate each of our restaurants, our commissaries and other facilities with the necessary permits, approvals and controls. Each employee should diligently employ proper procedures with respect to the handling of hazardous materials and immediately alert his or her supervisor to any discharge of hazardous material or any situations, which may be potentially damaging to the environment. PURCHASING Employees purchasing products on behalf of the Company must do so based on the best interests of the Company without regard to outside influences or personal interests. Employees making purchasing decisions on behalf of the Company should, consistent with the Company's policies, obtain bids for products and services, evaluate the quality of goods and services provided and verify product liability coverage by the supplier. Agreements with suppliers should be written and clearly set forth the terms of the purchase. CODE IMPLEMENTATION Ethical conduct means being correct from the standpoint of legal, propriety and social judgment. It also means avoiding any actions that would violate these standards. 8 All Directors and above are required to read, understand and refer to this Code. Compliance with the conduct policies set forth in this Code is required of all personnel. Enforcement is the direct responsibility of every supervisor. If an employee becomes aware of any illegal or unethical conduct or behavior in violation of this Code by anyone working for or on behalf of the Company, that employee should report it promptly, fully and objectively to people who are in a position to respond to the matter, preferably in writing. The normal disclosure procedure involves reporting misconduct to a supervisor. If an employee wishes to remain completely anonymous, that employee may submit his or her report through 800/43 CHARLEY (800/432-4275) if they are with O'Charley's or Stoney River, or 877/293-0299 for Ninety-Nine Restaurant & Pub employees. All reports must contain sufficient information for an appropriate investigation to occur. The Company will attempt to treat such reports with the utmost discretion and to protect the identity of the employee who has made the request to the maximum extent and as may be permitted under applicable law. When an employee is in doubt as to how a specific ethical or other situation covered by this Code should be handled, the employee should seek assistance from other Company sources. As a general rule, the employee should initially address such questions to his or her own supervisor. If the supervisor's response is not satisfactory or if, because of the nature of the issue, the employee would prefer to report the problem to someone else, the employee should report to the next highest level of authority. If these procedures do not satisfactorily deal with the situation, the employee should take the matter up with the Human Resources Manager, the Vice-President of Human Resources Support Services or the Compliance Officer, whose role is discussed below. All reports will be investigated. Upon receipt of credible reports of suspected violations or irregularities, the supervisor or Compliance Officer shall see that corrective action takes place appropriately. The Company will weigh relevant facts and circumstances, including, but not limited to, the extent to which the behavior was contrary to the express language or general intent of the Code, the seriousness of the behavior, the employee's history with the Company and other factors which the Company deems relevant. Violations of the Code may result in discipline ranging from warnings and reprimand to discharge or, where appropriate, the filing of a civil or criminal complaint. In addition, managers and supervisors may be sanctioned for failure to instruct adequately their subordinates or for failing to detect non-compliance with applicable policies and legal requirements, where reasonable diligence on the part of the manager or supervisor would have led to the discovery of any problems or violations and given the Company the opportunity to correct them earlier. No adverse action or retribution of any kind will be taken by the Company against an employee solely because he or she reports in good faith a suspected violation of this Code or other irregularity by any person other than the reporting employee. Any 9 employee responsible for retaliation against an individual who in good faith reports a known or suspected violation will be subject to disciplinary action. Any employee who knowingly makes a false report will be subject to disciplinary action. If an employee is approached by anyone inside or outside of the Company with a request to do something the employee recognizes to be illegal or unethical, the employee should refuse. The employee should tell the person making the request that such conduct is contrary to the Company's policy and then report the incident to the employee's supervisor. No supervisor may direct a subordinate to violate this Code. THIS CODE SETS FORTH GENERAL GUIDELINES ONLY AND MAY NOT INCLUDE ALL CIRCUMSTANCES THAT WOULD FALL WITHIN THE INTENT OF THE CODE AND BE CONSIDERED A VIOLATION THAT SHOULD BE REPORTED. EMPLOYEES SHOULD REPORT ALL SUSPECTED DISHONEST OR ILLEGAL ACTIVITIES WHETHER OR NOT THEY ARE SPECIFICALLY ADDRESSED IN THE CODE. Compliance Officer. In order to help ensure compliance with this Code, the Company has appointed a Compliance Officer who is the Company's Chief Support Officer. The Compliance Officer will have the responsibility for overseeing the following duties: 1. Coordinating periodic reviews and updating this Code as necessary; 2. Ensuring that each employee who is subject to the Code of Conduct, or who has responsibility as a process owner for decisions made within the company, is given a copy of this Code immediately after employment and that each such employee signs an acknowledgment annually that he or she has read, understands and supports this Code; 3. Maintaining records related to this Code; and 4. Performing such other activities as may be reasonably related to the foregoing or are required to ensure a successful application of the program contemplated by this Code. The Compliance Officer shall make periodic reports to the Company's Chief Executive Officer and the Audit Committee of the Board of Directors concerning compliance with these requirements. Waiver. A waiver of any provision of this Code with respect to the Company, the CFO, COO or the CEO may only be given by the Audit Committee of the Board of Directors. RESERVATION OF RIGHTS The Company reserves the right to amend this Code, in whole or in part, at any time and solely at its discretion. 10 EMPLOYEE-AT-WILL Nothing contained in this Code is to be construed or interpreted to create a contract of employment, either express or implied, nor is anything contained in this Code intended to alter a person's status of "employment-at-will" with the Company to any other status. 11 COMPANY POLICIES The Company has adopted policies consistent with this Code, which may address certain matters set forth in this Code in more detail. Employees are encouraged to consult the Company's Policy Manual for more information regarding these matters. 12 O'CHARLEY'S INC. CODE OF CONDUCT AND BUSINESS ETHICS CERTIFICATION PAGE In accordance with the Policy on Code of Conduct and Business Ethics, you are required annually to provide the company with the certification as set forth below. Employees who fail to disclose reportable interests or relationships, or who fail to comply with the Company's policies shall be subject to disciplinary action up to and including termination. The undersigned hereby certifies as follows: 1. I have read and understand the Company's Code of Conduct and Business Ethics (the "Code of Conduct"). 2. I am not aware of any illegal or unethical conduct or behavior in violation of the Code of Conduct by me or by any other employee in the Company that has not been reported. 3. I agree to comply with the Code of Conduct. -------------------------------------- ------------------------------ Signature Position -------------------------------------- ------------------------------ Print Name Date EX-21 9 g87708exv21.txt EX-21 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE COMPANY 1. Air Travel Services, Inc., a Tennessee corporation 2. DFI, Inc., a Tennessee corporation 3. O'Charley's Finance Company, Inc., a Tennessee corporation 4. O'Charley's Management Company, Inc., a Tennessee corporation 5. O'Charley's Restaurant Properties, LLC, a Delaware limited liability company 6. O'Charley's Service Company, Inc., a Tennessee corporation 7. O'Charley's Sports Bar, Inc., an Alabama corporation 8. OCI, Inc., a Delaware corporation 9. OPI, Inc., a Colorado corporation 10. SRLS LLC 5001, a Delaware limited liability company 11. SRLS LLC 5002, a Delaware limited liability company 12. SRLS LLC 5003, a Delaware limited liability company 13. SRLS LLC 5004, a Delaware limited liability company 14. SRLS LLC 5005, a Delaware limited liability company 15. SRLS LLC 5006, a Delaware limited liability company 16. Stoney River Legendary Management, L.P., a Georgia limited partnership 17. Stoney River, LLC, a Delaware limited liability company 18. Stoney River Management Company, Inc., a Delaware corporation 19. 99 Commissary, LLC, a Delaware limited liability company 20. 99 Restaurants, LLC, a Delaware limited liability company 21. 99 Restaurants of Boston, LLC, a Delaware limited liability company 22. 99 Restaurants of Massachusetts, a Massachusetts Business Trust 23. 99 Restaurants of Vermont, LLC, a Vermont limited liability company 24. 99 West, Inc., a Massachusetts corporation EX-23 10 g87708exv23.txt 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) of O'Charley's Inc. of our report dated February 11, 2004, relating to the consolidated balance sheets of O'Charley's Inc. and subsidiaries as of December 28, 2003 and December 29, 2002, 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 28, 2003, which report appears in the December 28, 2003 annual report on Form 10-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 March 12, 2004 EX-31.1 11 g87708exv31w1.txt EX-31.1 SECTION 302 CERTIFICATION OF THE CEO EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Gregory L. Burns, certify that: 1. I have reviewed this Annual Report on Form 10-K of O'Charley's Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 11, 2004 /s/ Gregory L. Burns ------------------------------------- Chief Executive Officer EX-31.2 12 g87708exv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF THE CFO EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, A. Chad Fitzhugh, certify that: 1. I have reviewed this Annual Report on Form 10-K of O'Charley's Inc; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 11, 2004 /s/ A. Chad Fitzhugh ------------------------------------- Chief Financial Officer EX-32.1 13 g87708exv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF THE CEO Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of O'Charley's Inc. (the "Company") on Form 10-K for the period ending December 28, 2003, as filed with the Securities and Exchange Commission on March 12, 2004 (the "Report"), I, Gregory L. Burns, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Gregory L. Burns - ---------------------------------------- Gregory L. Burns Chief Executive Officer March 11, 2004 EX-32.2 14 g87708exv32w2.txt EX-32.2 SECTION 906 CERTIFICATION OF THE CFO Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of O'Charley's Inc. (the "Company") on Form 10-K for the period ending December 28, 2003, as filed with the Securities and Exchange Commission on March 12, 2004 (the "Report"), I, A. Chad Fitzhugh, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ A. Chad Fitzhugh - --------------------------------------- A. Chad Fitzhugh Chief Financial Officer March 11, 2004 -----END PRIVACY-ENHANCED MESSAGE-----


Tennessee		62-1192475

(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)


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

Securities registered pursuant to Section 12(b) of the Act:		None

Securities registered pursuant to Section 12(g) of the Act:		Common Stock, no par value
		Series A Junior Preferred Stock Purchase Rights


		Documents from which portions are
Part of Form 10-K		incorporated by reference

Part III		Proxy Statement relating to the registrant’s Annual
		Meeting of Shareholders to be held May 13, 2004


PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF EARNINGS
		CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
PART IV
	Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
Ex-2.3 Settlement Agreement
Ex-10.16 Severance Compensation Agreement
Ex-10.17 Severance Compensation Agreement
Ex-10.18 Severance Compensation Agreement
Ex-10.44 Development Agreement
Ex-14 Code of Conduct and Business Ethics Policy
Ex-21 Subsidiaries of the Company
Ex-23 Consent of KPMG LLP
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO
Ex-32.2 Section 906 Certification of the CFO


Fiscal 2003	High		Low

First Quarter	$	23.65	$	17.50
Second Quarter		23.32		17.50
Third Quarter		22.60		14.09
Fourth Quarter		17.92		13.66

Fiscal 2002

First Quarter	$	24.25	$	18.11
Second Quarter		25.82		21.08
Third Quarter		23.00		17.35
Fourth Quarter		22.48		15.59


[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


3038 Sidco Drive
Nashville, Tennessee		37204

(Address of principal executive offices)		(Zip Code)


Name	Age		Position

Gregory L. Burns		49	Chief Executive Officer and Chairman of the Board

Steven J. Hislop		44	President and Chief Operating Officer

A. Chad Fitzhugh		43	Chief Financial Officer, Secretary and Treasurer

William E. Hall, Jr.		49	Concept President-O’Charley’s

Herman A. Moore, Jr.		52	President, Commissary Operations

Charles F. Doe, Jr.		43	Concept President-Ninety Nine Restaurant and Pub

Suzanne M. Osterberg		39	Chief Support Officer

R. Jeffrey Williams		37	Controller


			Fiscal Years

			2003⁽¹⁾			2002			2001			2000⁽²⁾			1999

			(in thousands, except per share data)
Statement of Earnings Data:
Revenues:
	Restaurant sales		$	753,740		$	495,112		$	440,875		$	373,700		$	299,014
	Commissary sales			5,271			4,800			4,056			3,562			3,191

				759,011			499,912			444,931			377,262			302,205
Costs and expenses:
	Cost of restaurant sales:
		Cost of food and beverage		221,129			140,577			129,529			109,480			89,713
		Payroll and benefits		251,579			154,311			138,009			115,029			90,625
		Restaurant operating costs		138,473			85,761			76,321			64,818			52,483
	Cost of commissary sales			4,970			4,488			3,808			3,341			3,013
	Advertising, general and administrative expenses			53,493			37,677			29,979			24,480			19,235
	Depreciation and amortization ⁽³⁾			36,360			25,527			22,135			18,202			14,060
	Asset impairment and exit costs⁽⁴⁾			—			—			5,798			—			—
	Preopening costs ⁽³⁾			6,337			5,074			5,654			4,705			4,037

				712,341			453,415			411,233			340,055			273,166

Income from operations				46,670			46,497			33,698			37,207			29,039
Other (income) expense:
	Interest expense, net			14,153			5,556			6,610			7,398			4,174
	Debt extinguishment costs			1,800			—			—			—			—
	Other, net			(652	)		(118	)		189			24			82

				15,301			5,438			6,799			7,422			4,256

Earnings before income taxes and cumulative effect of change in accounting principle				31,369			41,059			26,899			29,785			24,783
Income taxes				10,096			14,268			9,347			10,425			8,674

Earnings before cumulative effect of change in accounting principle				21,273			26,791			17,552			19,360			16,109
Cumulative effect of change in accounting principle, net of tax⁽³⁾⁽⁵⁾				—			(6,123	)		—			—			(1,348	)

Net earnings			$	21,273		$	20,668		$	17,552		$	19,360		$	14,761

Basic earnings per common share before cumulative effect of change in accounting principle			$	0.98		$	1.44		$	0.99		$	1.24		$	1.04
Cumulative effect of change in accounting principle, net of tax ⁽³⁾⁽⁵⁾				—			(0.33	)		—			—			(0.09	)

Basic earnings per common share			$	0.98		$	1.11		$	0.99		$	1.24		$	0.95

Diluted earnings per common share before cumulative effect of change in accounting principle			$	0.95		$	1.35		$	0.93		$	1.17		$	0.97
Cumulative effect of change in accounting principle, net of tax⁽³⁾⁽⁵⁾				—			(0.31	)		—			—			(0.08	)

Diluted earnings per common share			$	0.95		$	1.04		$	0.93		$	1.17		$	0.89

Balance Sheet Data (at end of period):
Working capital (deficit)			$	(31,306	)	$	(20,997	)	$	(15,053	)	$	(20,145	)	$	(19,411	)
Total assets				620,235			428,791			383,430			311,018			240,180
Current portion of long-term debt and capitalized lease obligations				10,031			8,015			7,924			7,574			7,013
Long-term debt and capitalized lease obligations, including current portion				209,629			132,102			121,929			122,244			80,471
Total shareholders’ equity				303,135			229,964			204,202			143,490			122,689

(1)		On January 27, 2003, we acquired Ninety Nine Restaurant and Pub, a casual dining restaurant company based in Woburn, Massachusetts. Our 2003 earnings include the earnings of Ninety Nine for the period from January 27, 2003 through December 28, 2003.

(2)		In May 2000, we acquired two Stoney River restaurants and all associated trademarks and intellectual property for approximately $15.8 million in a cash transaction accounted for as a purchase. Accordingly, the results of operations of the two Stoney River restaurants have been included in our consolidated results of operations since the date of acquisition. Fiscal 2000 consisted of 53 weeks.

(3)		During the first quarter of 1999, we adopted Statement of Position 98-5 “Reporting on the Costs of Start-Up Activities,” which requires that restaurant preopening costs be expensed rather than capitalized. Previously, we capitalized restaurant preopening costs and amortized these amounts over one year from the opening of each restaurant. The depreciation and amortization expense recorded in 1998 included preopening cost amortization of $2.9 million. For subsequent years, the depreciation and amortization line item does not include amortization of preopening costs. We incurred a pre-tax charge of $2.1 million, or $1.3 million net of tax, in the first quarter of 1999 as a result of this change in accounting principle.

(4)		During the third quarter of 2001, we decided to close certain restaurant locations. As a result, we recorded a non-cash charge of $5.0 million pursuant to the provisions of Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” to reflect the differences between the fair value and net book value of the assets and a charge of $800,000 for exit costs associated with the closure of such locations.

(5)		We incurred an after-tax charge of $6.1 million, or $0.31 per diluted share, which was recorded as a cumulative effect of a change in accounting principle as of the beginning of fiscal 2002 associated with the adoption of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”. The charge was related to the goodwill associated with the Stoney River acquisition in May 2000. See note 1 to the accompanying consolidated financial statements for net earnings and earnings per share for fiscal 2001 as if SFAS No. 142 had been adopted at the beginning of fiscal 2001.


		2003			2002			2001

Revenues:
	Restaurant sales		99.3	%		99.0	%		99.1	%
	Commissary sales		0.7			1.0			0.9

			100.0	%		100.0	%		100.0	%

Costs and expenses:
	Cost of restaurant sales: ⁽¹⁾
	Cost of food and beverage		29.3	%		28.4	%		29.3	%
	Payroll and benefits		33.4			31.2			31.3
	Restaurant operating costs		18.4			17.3			17.4
	Cost of commissary sales ⁽²⁾		0.7			0.9			0.9
	Advertising, general and administrative expenses		7.0			7.5			6.7
	Depreciation and amortization ⁽³⁾		4.8			5.1			5.0
	Asset impairment and exit costs		—			—			1.3
	Preopening costs		0.8			1.0			1.3

Income from operations			6.1			9.3			7.6

	Interest expense, net		1.9			1.1			1.5
	Debt extinguishment charge		0.2			—			—
	Other, net		(0.1	)		—			—

Earnings before income taxes and cumulative effect of change in accounting principle			4.1			8.2			6.1
Income taxes			1.3			2.9			2.1

Earnings before cumulative effect of change in accounting principle			2.8			5.3			4.0
Cumulative effect of change in accounting principle, net of tax			—			(1.2	)		—

Net earnings			2.8	%		4.1	%		4.0	%

(1)		As a percentage of restaurant sales.

(2)		Cost of commissary sales as a percentage of commissary sales was 94.3%, 93.5%, and 93.9% for fiscal years 2003, 2002 and 2001, respectively.

(3)		See note 1 to the accompanying consolidated financial statements for net earnings and earnings per share for fiscal 2001 as if SFAS No. 142 had been adopted at the beginning of fiscal 2001.


	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter

	(dollars in thousands, except per share data)
2003 (1)
Revenues	$	215,084	$	179,214	$	181,720	$	182,993
Income from operations	$	17,337	$	12,704	$	7,814	$	8,815
Net earnings	$	8,895	$	6,114	$	3,407	$	2,857
Basic earnings per common share	$	0.43	$	0.28	$	0.15	$	0.13
Diluted earnings per common share	$	0.41	$	0.27	$	0.15	$	0.13
Restaurants in operation, end of quarter		277		287		296		299

2002 (2)
Revenues	$	149,632	$	115,141	$	116,622	$	118,517
Income from operations	$	13,946	$	10,446	$	10,277	$	11,828
Net earnings	$	1,935	$	5,975	$	5,902	$	6,856
Basic earnings per common share	$	0.10	$	0.32	$	0.31	$	0.36
Diluted earnings per common share	$	0.10	$	0.30	$	0.30	$	0.35
Restaurants in operation, end of quarter		171		177		183		188

2001 (3)
Revenues	$	130,084	$	103,335	$	105,757	$	105,755
Income from operations	$	12,771	$	8,800	$	2,146	$	9,982
Net earnings	$	6,738	$	4,860	$	495	$	5,459
Basic earnings per common share	$	0.42	$	0.26	$	0.03	$	0.29
Diluted earnings per common share	$	0.39	$	0.25	$	0.03	$	0.28
Restaurants in operation, end of quarter		149		157		162		164

(1)		On January 27, 2003, the Company acquired Ninety Nine Restaurant and Pub for $116.0 million in cash and approximately 2.34 million shares of common stock. Ninety Nine operated 78 restaurants at January 27, 2003. The earnings above include the earnings of Ninety Nine for the period from January 27, 2003 through December 28, 2003.

(2)		The Company incurred an after-tax charge of $6.1 million, or $0.31 per diluted share, which was recorded as a cumulative effect of a change in accounting principle as of the beginning of fiscal 2002 associated with the adoption of Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets. The charge was related to the write off of goodwill associated with the Stoney River acquisition in May 2000.

(3)		During the third quarter of 2001, management decided to close five restaurants. As a result, we recorded a non-cash charge of $5.0 million pursuant to the provisions of Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of to reflect the differences between the fair value and net book value of the assets, and a charge of $800,000 for exit costs associated with the closure of such locations.


		2003					2002

($ in thousands)		$		%			$		%

Revolving credit facility		$	40,000		7.8	%	$	98,000		27.1	%
Secured mortgage note payable			164		0.0			181		0.0
Capitalized lease obligations			44,465		8.7			33,921		9.4

	Total senior debt		84,629		16.5			132,102		36.5
Senior subordinated notes			125,000		24.4			0		0.0

	Total debt		209,629		40.9			132,102		36.5
Shareholders’ equity			303,135		59.1			229,964		63.5

	Total capitalization	$	512,764		100.0	%	$	362,066		100.0	%

Adjusted total debt (1) (2)		$	381,589				$	199,350
Adjusted total capitalization (1) (2)		$	684,724				$	429,314


Atlanta, Georgia(2)		Louisville, Kentucky		Nashville, Tennessee


			Payments Due by Period
Contractual
Obligation	Total		1 Yr		2-3 Yrs		4-5 Yrs		Thereafter

	(in thousands)
Long-term debt	$	165,164	$	19	$	44	$	40,053	$	125,048
Capitalized lease obligations (1)		49,664		11,773		21,592		13,261		3,038
Operating leases (2)		397,877		23,758		47,620		48,266		278,233
Interest rate swaps		1,228		614		614		—		—
Unconditional purchase obligations (3)		52,776		27,427		13,875		10,214		1,260

Total contractual cash obligations	$	666,709	$	63,591	$	83,745	$	111,794	$	407,579


	At December 28,			At December 29,
	2003			2002

EBITDA (1) (3)	$	81,882		$	72,142
Ratio of total debt to EBITDA		2.6x			1.8x
Ratio of EBITDA to interest expense, net		5.8x			13.0x
Ratio of total debt to total capitalization		41	%		37	%
Ratio of adjusted total debt to adjusted total capitalization		56	%		46	%

1)		Capitalized lease obligations include the $5.2 million interest component.

2)		The operating lease commitments exclude the minimum lease obligations totaling $21.3 million arising from the sale and lease-back transaction consummated in January 2004.

3)		These purchase obligations are primarily fixed volume, fixed price food and beverage contracts. In situations where the price is based on market prices, we use the existing market prices at December 28, 2003 to determine the amount of the obligation. Of the total unconditional purchase obligations shown, $14.7 million are based on variable pricing.

4)		This pertains to our revolving line of credit of which $40.0 million is included in long-term debt shown above.


	Page

Independent Auditors’ Report		40
Consolidated Balance Sheets at December 28, 2003 and December 29, 2002		41
Consolidated Statements of Earnings for the Years Ended December 28, 2003, December 29, 2002 and December 30, 2001		42
Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Years Ended December 28, 2003, December 29, 2002, and December 30, 2001		43
Consolidated Statements of Cash Flows for the Years Ended December 28, 2003, December 29, 2002, and December 30, 2001		44
Notes to the Consolidated Financial Statements		45


					December 28, 2003			December 29, 2002

					(dollars in thousands)
				ASSETS
Current Assets:
	Cash and cash equivalents				$	9,574		$	8,311
	Accounts receivable, less allowance for doubtful accounts of $78 in 2003 and $188 in 2002					8,049			4,800
	Inventories					21,980			18,300
	Deferred income taxes					3,405			4,255
	Short-term notes receivable					3,070			2,950
	Other current assets					3,426			2,288

		Total current assets				49,504			40,904
Property and Equipment, net						429,361			381,553
Goodwill						93,069			—
Other Intangible Assets						25,921			—
Other Assets						22,380			6,334

					$	620,235		$	428,791

			LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable				$	15,387		$	13,284
	Accrued payroll and related expenses					11,608			13,328
	Accrued expenses					19,506			9,967
	Deferred revenue					15,442			8,712
	Federal, state and local taxes					8,836			8,595
	Current portion of long-term debt and capitalized leases					10,031			8,015

		Total current liabilities				80,810			61,901
Long-Term Debt, net of current portion						165,145			98,164
Capitalized Lease Obligations, net of current portion						34,453			25,923
Deferred Income Taxes						6,940			7,796
Other Liabilities						29,752			5,043
Shareholders’ Equity:
	Common stock — No par value; authorized, 50,000,000 shares; issued and outstanding, 22,252,628 in 2003 and 18,838,826 in 2002					170,008			116,171
	Accumulated other comprehensive loss, net of tax					(519	)		(931	)
	Unearned compensation					(2,351	)		—
	Retained earnings					135,997			114,724

		Total shareholders’ equity				303,135			229,964

					$	620,235		$	428,791


						Year Ended
			December 28,			December 29,			December 30,
			2003			2002			2001

			(in thousands, except per share data)
Revenues:
	Restaurant sales		$	753,740		$	495,112		$	440,875
	Commissary sales			5,271			4,800			4,056

				759,011			499,912			444,931
Costs and Expenses:
	Cost of restaurant sales:
		Cost of food and beverage		221,129			140,577			129,529
		Payroll and benefits		251,579			154,311			138,009
		Restaurant operating costs		138,473			85,761			76,321
	Cost of commissary sales			4,970			4,488			3,808
	Advertising, general and administrative expenses			53,493			37,677			29,979
	Depreciation and amortization			36,360			25,527			22,135
	Asset impairment and exit costs			—			—			5,798
	Preopening costs			6,337			5,074			5,654

				712,341			453,415			411,233

Income from Operations				46,670			46,497			33,698
Other (Income) Expense:
	Interest expense, net			14,153			5,556			6,610
	Debt extinguishment charge			1,800			—			—
	Other, net			(652	)		(118	)		189

				15,301			5,438			6,799

Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle				31,369			41,059			26,899
Income Taxes				10,096			14,268			9,347

Earnings Before Cumulative Effect of Change in Accounting Principle				21,273			26,791			17,552
Cumulative Effect of Change in Accounting Principle, net of tax				—			(6,123	)		—

Net Earnings			$	21,273		$	20,668		$	17,552

Basic Earnings Per Common Share Before Cumulative Effect of Change in Accounting Principle			$	0.98		$	1.44		$	0.99
Cumulative Effect of Change in Accounting Principle, net of tax				—			(0.33	)		—

Basic Earnings Per Common Share			$	0.98		$	1.11		$	0.99

Diluted Earnings Per Common Share Before Cumulative Effect of Change in Accounting Principle			$	0.95		$	1.35		$	0.93
Cumulative Effect of Change in Accounting Principle, net of tax				—			(0.31	)		—

Diluted Earnings Per Common Share			$	0.95		$	1.04		$	0.93


														Accumulated
									Additional					Other
			Common Stock						Capital		Unearned			Comprehensive			Retained
			Shares			Amount			Paid-in		Compensation			Loss, net			Earnings		Total

											(In thousands)
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 (net of shares tendered)				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 including tax benefits (net of shares tendered)				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
	Comprehensive income:
	2003 net earnings			—			—			—		—			—			21,273		21,273
	Market value of derivatives, net of tax			—			—			—		—			412			—		412

		Total comprehensive income																		21,685

Exercise of employee stock options including tax benefits (net of shares tendered)				811			8,021			—		—			—			—		8,021
Shares issued under CHUX Ownership Plan				112			1,682			—		—			—			—		1,682
Restricted share issuances				155			3,281			—		(2,821	)		—			—		460
Amortization of unearned compensation				—			—			—		470			—			—		470
Shares issued or issuable for acquisition				2,336			40,853			—		—			—			—		40,853

Balance, December 28, 2003				22,253		$	170,008		$	—	$	(2,351	)	$	(519	)	$	135,997	$	303,135


2001

Earnings before income taxes	$	26,899
Goodwill amortization		544

Adjusted earnings before income taxes		27,443
Adjusted taxes		9,536
Net earnings	$	17,907

Basic earnings per share	$	1.01

Diluted earnings per share	$	0.95


Current assets	$	11,912
Property and equipment, net		41,990
Other assets		1,981
Purchase price in excess of the net assets acquired (goodwill)		93,069
Other intangible assets (tradename)		25,921
Favorable leases		575
Current liabilities		(14,018	)
Fair value of liabilities assumed		(770	)

Cash and stock paid		160,660
Less stock issued or issuable for acquisition		(40,853	)
Less cash acquired		(5,520	)

Net cash paid for acquisition	$	114,287


Unaudited Pro Forma Earnings:	2003		2002

(In thousands, except for per share data)
Total revenues	$	775,194	$	696,283
Earnings before income taxes and cumulative effect of change in accounting principle		31,749		52,676
Earnings before cumulative effect of change in accounting principle		21,519		34,371
Cumulative effect of change in accounting principle		—		(6,123	)

Net earnings	$	21,519	$	28,248

Basic earnings per share
Earnings before cumulative effect of change in accounting principle	$	0.97	$	1.63
Cumulative effect of change in accounting principle		—		(0.29	)

Net earnings	$	0.97	$	1.34

Basic weighted average common shares outstanding		22,265		21,036

Diluted earnings per share
Earnings before cumulative effect of change in accounting principle	$	0.94	$	1.55
Cumulative effect of change in accounting principle		—		(0.28	)

Net earnings	$	0.94	$	1.27

Diluted weighted average common shares outstanding		22,875		22,139


		Capitalized
		Equipment			Operating
		Leases			Leases

		(in thousands)
2004		$	11,773		$	23,758
2005			12,363			23,663
2006			9,229			23,957
2007			6,661			24,072
2008			6,600			24,194
Thereafter			3,038			278,233

	Total minimum rentals	$	49,664		$	397,877

Less amount representing interest			(5,199	)

Net minimum lease payments			44,465
Less current maturities			(10,012	)

Capitalized lease obligations, net of current portion		$	34,453


					Weighted-Average
		Number of Shares			Exercise Price

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
	Granted		1,261,722			18.60
	Exercised		(969,511	)		6.45
	Forfeited		(101,031	)		18.86

Balance at December 28, 2003			3,714,504		$	16.54


Options Outstanding							Options Exercisable

			Weighted-Avg.
			Remaining		Weighted-Average				Weighted-Average
Exercise Price	Number		Contractual Life		Exercise Price		Number		Exercise Price

$7.00 to 7.99		267,075		1.2	$	7.67		266,097	$	7.67
$8.00 to 10.99		210,555		2.7		9.08		198,113		9.03
$11.00 to 13.99		499,760		5.1		12.15		367,235		12.13
$14.00 to 15.99		826,447		5.5		15.08		511,627		15.09
$16.00 to 18.99		491,495		7.7		17.98		225,445		18.04
Over $18.99		1,419,172		8.8		21.21		121,671		22.22

$7.00 to 25.00		3,714,504		6.5	$	16.54		1,690,188	$	13.47


										Minor Subsidiaries
							Subsidiary			and Consolidating
				Parent Company			Guarantors			Adjustments			Consolidated

							(Dollars in thousands)
ASSETS
Current assets:
	Cash and cash equivalents			$	2,946		$	6,628		$	—		$	9,574
	Accounts receivable				3,190			4,859			—			8,049
	Intercompany receivables (payable)				(116,014	)		119,649			(3,635	)		—
	Inventories				3,460			18,520			—			21,980
	Deferred income taxes				3,021			384			—			3,405
	Short-term notes receivable				3,070			—			—			3,070
	Other current assets				1,394			1,916			116			3,426

		Total current assets			(98,933	)		151,956			(3,519	)		49,504
Property and equipment, net					343,641			85,719			1			429,361
Goodwill					—			93,069			—			93,069
Other intangible assets					—			25,921			—			25,921
Other assets					218,985			23,628			(220,233	)		22,380

Total assets				$	463,693		$	380,293		$	(223,751	)	$	620,235

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	6,841		$	12,306		$	(3,760	)	$	15,387
	Accrued payroll and related expenses				7,550			4,058			—			11,608
	Accrued expenses				10,264			9,274			(32	)		19,506
	Deferred revenue				7,277			8,164			1			15,442
	Federal, state and local taxes				(3,063	)		11,900			(1	)		8,836
	Current portion of long-term debt and capitalized leases				9,691			340			—			10,031

		Total current liabilities			38,560			46,042			(3,792	)		80,810
Long-term debt, net of current portion					180,906			—			(15,761	)		165,145
Capitalized lease obligations, net of current portion					32,442			2,010			1			34,453
Deferred income taxes					7,355			(415	)		—			6,940
Other liabilities					21,188			8,438			126			29,752
Shareholders’ equity:
	Common stock				169,629			168,469			(168,090	)		170,008
	Accumulated other comprehensive loss, net of tax				(519	)		—			—			(519	)
	Unearned compensation expense				(2,351	)		—			—			(2,351	)
	Retained earnings				16,483			155,749			(36,235	)		135,997

			Total shareholders’ equity		183,242			324,218			(204,325	)		303,135

Total liabilities and shareholders’ equity				$	463,693		$	380,293		$	(223,751	)	$	620,235


									Minor
									Subsidiaries
							Subsidiary		and Consolidating
				Parent Company			Guarantors		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				7,887			2,251		(171	)		9,967
	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			50,457			18,732		(7,288	)		61,901
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					1,644			3,299		100			5,043
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


Exhibit
Number				Description

2.1				Asset Purchase Agreement by and among O’Charley’s Inc., 99 Boston, Inc., 99 Boston of Vermont, Inc., Doe Family II LLC, and each of William A. Doe, III, Dana G. Doe and Charles F. Doe, Jr. (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to this agreement are omitted, but will be provided supplementally to the Commission upon request.) (Incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Commission on November 1, 2002)

2.2				Merger Agreement by and among O’Charley’s Inc., Volunteer Acquisition Corporation, 99 West, Inc., and each of William A. Doe, III, Dana G. Doe and Charles F. Doe, Jr. (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and exhibits to this agreement are omitted, but will be provided supplementally to the Commission upon request.) (Incorporated herein by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the Commission on November 1, 2002)

2.3				Settlement Agreement, dated as of December 11, 2003, by and among O’Charley’s Inc., 99 Boston, Inc., Doe Family II LLC, 99 Boston of Vermont, Inc., William A. Doe, III, Dana G. Doe, Charles F. Doe, Jr. and 99 West, Inc.

3.1				Restated Charter of the Company (restated electronically for SEC filing purposes only and incorporated by reference to Exhibit 3 to the Company’s Current Report on Form 8-K filed with the Commission on December 27, 2000)

3.2				Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 22, 2001)

4.1				Form of Certificate for the Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1, Registration No. 33-35170)


	O’CHARLEY’S INC

Date: March 11, 2004	By:	/s/ Gregory L. Burns

		Gregory L. Burns
		Chief Executive Officer and Chairman of the Board


Signature	Title	Date

/s/ Gregory L. Burns Gregory L. Burns	Chief Executive Officer and Chairman of the Board (Principal Executive Officer)	March 11, 2004



/s/ Steven J. Hislop Steven J. Hislop	President, Chief Operating Officer and Director	March 11, 2004



/s/ A. Chad Fitzhugh A. Chad Fitzhugh	Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)	March 11, 2004



John W. Stokes, Jr.	Director	March , 2004



/s/ Richard Reiss, Jr. Richard Reiss, Jr.	Director	March 11, 2004



/s/ G. Nicholas Spiva G. Nicholas Spiva	Director	March 11, 2004



/s/ H. Steve Tidwell H. Steve Tidwell	Director	March 11, 2004



/s/ Samuel H. Howard Samuel H. Howard	Director	March 11, 2004



Shirley A. Zeitlin	Director	March , 2004



/s/ Robert J. Walker Robert J. Walker	Director	March 11, 2004



/s/ Dale W. Polley Dale W. Polley	Director	March 11, 2004