-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E5hP+KlTMKBJfsB18EQLYYkN+YgGow80t3tTVFlImAtcGGa+HrvR3Zu5k3kRQHFy FKI6WXagMjscvXtCR0vIcg== 0000950144-96-005952.txt : 19960829 0000950144-96-005952.hdr.sgml : 19960829 ACCESSION NUMBER: 0000950144-96-005952 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960714 FILED AS OF DATE: 19960828 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: O CHARLEYS INC CENTRAL INDEX KEY: 0000864233 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 621192475 STATE OF INCORPORATION: TN FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18629 FILM NUMBER: 96621780 BUSINESS ADDRESS: STREET 1: 3038 SIDCO DR CITY: NASHVILLE STATE: TN ZIP: 37204 BUSINESS PHONE: 6152568500 MAIL ADDRESS: STREET 1: 3038 SIDEO DR CITY: NASHVILLE STATE: TN ZIP: 37204 10-Q 1 O'CHARLEY'S INC. FORM 10-Q 7-14-96 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended July 14, 1996 Commission file number 0-18629 ----------------------- O'Charley's Inc. --------------------------------------------------- (Exact name of registrant as specified in its charter) Tennessee 62-1192475 - --------------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3038 Sidco Drive, Nashville, Tennessee 37204 - --------------------------------------- ------ (Address of principal executive offices) (Zip Code) (615) 256-8500 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date.
Class Outstanding as of August 21, 1996 ----- ---------------------------------- Common Stock, no par value 7,798,444 shares
2 O'Charley's Inc. Form 10-Q For Quarter Ended July 14, 1996 Index Page No. -------- Part I - Financial Information Item 1. Financial statements: Balance sheets as of July 14, 1996 and December 31, 1995 3 Statements of earnings for the twelve weeks 4 ended July 14, 1996 and July 9, 1995 Statements of earnings for the twenty-eight weeks ended July 14, 1996 and July 9, 1995 5 Statements of cash flows for the twenty-eight weeks ended July 14, 1996 and July 9, 1995 6 Notes to unaudited financial statements 7 Item 2. Management's discussion and analysis of financial condition and results of operations 8 - 11 Part II - Other Information Item 1. Legal proceedings 12 Item 6. Exhibits and reports on form 8-K 12 Signatures 13
3 O'Charley's Inc. Balance Sheets (dollars in thousands)
July 14, December 31, 1996 1995 Assets ----------- ------------- Current Assets: Cash $ 1,674 $ 2,576 Accounts receivable 1,510 1,244 Due from related parties 15 108 Inventories 6,157 3,780 Preopening costs 1,175 1,045 Deferred income taxes 839 925 Other current assets 2,284 971 -------- ------- Total current assets 13,654 10,649 Property and Equipment, net 91,181 81,512 Other Assets 998 1,276 -------- ------- $105,833 $93,437 ======== ======= Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 5,165 $ 4,424 Accrued payroll and related expenses 3,490 3,435 Accrued expenses 12,400 4,650 Federal, state and local taxes 559 2,606 Current portion of long-term debt and capitalized leases 2,858 2,793 -------- ------- Total current liabilities 24,472 17,908 Deferred Income Taxes 733 2,619 Long-Term Debt 24,816 11,990 Capitalized Lease Obligations 10,282 9,272 Shareholders' Equity: Common stock - No par value;authorized, 50,000,000 shares; issued and outstanding, 7,798,744 in 1996 and 7,770,967 in 1995 29,615 29,819 Retained earnings 15,915 21,829 -------- ------- 45,530 51,648 -------- ------- $105,833 $93,437 ======== =======
See notes to financial statements. -3- 4 O'Charley's Inc. Statements of Earnings Twelve Weeks Ended July 14, 1996 and July 9, 1995
1996 1995 --------- --------- (in thousands, except per share data) Revenues: Restaurant sales $37,926 $31,152 Commissary sales 551 2,518 Franchise revenue 8 6 ------- ------- 38,485 33,676 Costs and Expenses: Cost of restaurant sales: Cost of food, beverage and supplies 13,652 11,465 Payroll and benefits 11,908 9,374 Restaurant operating costs 5,783 4,676 Cost of commissary sales 527 2,409 Advertising, general and administrative expenses 2,099 1,845 Depreciation and amortization 1,831 1,387 Asset revaluation 5,110 - ------- ------- 40,910 31,156 ------- ------- Income (loss) from Operations (2,425) 2,520 Other(Income)Expense: Interest expense, net 641 531 Litigation 8,500 - Other, net (16) (308) ------- ------- 9,125 223 ------- ------- Earnings (Loss) Before Income Taxes (11,550) 2,297 Income Tax Expense (Benefit) (4,067) 804 ------- ------- Net Earnings (Loss) $(7,483) $ 1,493 ======= ======= Earnings (Loss) per Common Share $ (0.89) $ 0.18 ======= ======= Weighted Average Common Shares Outstanding 8,371 8,356 ======= =======
See notes to financial statements. -4- 5 O'Charley's Inc. Statements of Earnings Twenty-Eight Weeks Ended July 14, 1996 and July 9, 1995
1996 1995 -------- --------- (in thousands, except per share data) Revenues: Restaurant sales $84,306 $69,716 Commissary sales 1,241 5,803 Franchise revenue 17 15 ------- ------- 85,564 75,534 Costs and Expenses: Cost of restaurant sales: Cost of food, beverage and supplies 30,242 25,677 Payroll and benefits 26,217 20,877 Restaurant operating costs 12,950 10,516 Cost of commissary sales 1,181 5,541 Advertising, general and administrative expenses 4,802 4,277 Depreciation and amortization 4,229 3,006 Asset revaluation 5,110 - ------- ------- 84,731 69,894 ------- ------- Income from Operations 833 5,640 Other(Income)Expense: Interest expense, net 1,340 1,126 Litigation 8,500 1,000 Other, net 92 (694) ------- ------- 9,932 1,432 ------- ------- Earnings (Loss) Before Income Taxes (9,099) 4,208 Income Tax Expense (Benefit) (3,185) 1,473 ------- ------- Net Earnings (Loss) $(5,914) $ 2,735 ======= ======= Earnings (Loss) per Common Share $ (0.70) $ 0.33 ======= ======= Weighted Average Common Shares Outstanding 8,401 8,274 ======= =======
See notes to financial statements. -5- 6 O'Charley's Inc. Statements of Cash Flows Twenty-Eight Weeks Ended July 14, 1996 and July 9, 1995
1996 1995 --------- --------- (in thousands) Cash Flows from Operating Activities: Net earnings (loss) $(5,914) $ 2,735 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 3,101 2,493 Amortization of preopening costs 1,128 513 Asset revaluation adjustment 5,110 - Provision for deferred income taxes (1,800) 274 Gain on the sale of assets (171) - Changes in assets and liabilities: Accounts receivable (173) (387) Inventories (2,377) 219 Additions to preopening costs (1,258) (1,064) Other current assets (1,313) (12) Accounts payable 741 1,786 Accrued payroll and other accrued expenses 5,758 672 -------- ------- Net cash provided by operating activities 2,832 7,229 Cash Flows from Investing Activities: Additions to property and equipment (14,864) (12,694) Proceeds from the sale of assets 171 - Other, net 49 (240) -------- ------- Net cash used by investing activities (14,644) (12,934) Cash Flows from Financing Activities: Proceeds from long-term debt 14,137 6,000 Payments on long-term debt and capitalized lease obligations (3,023) (1,354) Distribution to Shoex, Inc. shareholders (315) (317) Exercise of employee incentive stock options 111 164 -------- ------- Net cash provided by financing activities 10,910 4,493 -------- ------- Decrease in Cash (902) (1,212) Cash at Beginning of the Period 2,576 1,727 -------- ------- Cash at End of the Period $ 1,674 $ 515 ======== =======
See notes to financial statements. -6- 7 O'Charley's Inc. Notes To Unaudited Financial Statements Twelve and Twenty-Eight Weeks Ended July 14, 1996 and July 9, 1995 A. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. In the opinion of management, the unaudited interim financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals which are necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. B. Litigation On February 15, 1994, a purported class action suit was filed in the United States District Court in the Western District of Tennessee against the Company and certain of its current and previous officers. The suit alleged racially discriminatory job selection, termination and work environment practices in violation of federal law. In June 1996, the U.S. District Court Judge ruled that the pending lawsuit would proceed provisionally as a class action. On July 22, 1996, the Company agreed to a preliminary settlement. The settlement is contingent upon execution of a definitive settlement agreement, U.S. District Court approval and certain other conditions. Under the proposed settlement, the Company will pay to members of the class and their counsel $7.5 million, consisting of $6.1 million in cash and $1.4 million in O'Charley's common stock. The Company charged to earnings the $7.5 million and an additional $1.0 million for legal and related expenses incurred and anticipated to be incurred in connection with the settlement. The settlement and related reserves resulted in a second quarter charge to earnings of approximately $5.5 million after-tax or $.66 per share. C. Asset Revaluation During the second quarter of 1996, losses at certain restaurant units prompted an evaluation of net realizable value of certain assets in accordance with Financial Accounting Standards Board Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FASB 121"). Accordingly, the Company recorded a $5.1 million pre-tax charge to earnings in the second quarter of 1996 for assets impaired under FASB 121. This amount represents the difference between fair value and net book value for certain identifiable assets. The $5.1 charge is comprised of the following impaired restaurant assets: $1.9 million for two units closed subsequent to the end of the second quarter; $1.0 million for an additional three units expected to be closed or relocated within one-year; and $2.2 million for other assets expected to be held. The fair market value for the assets of stores expected to remain open was primarily measured by discounting the future expected cash flows for those units. D. Business Acquisitions On January 5, 1996, the shareholders of the Company approved an Agreement and Plan of Merger, dated October 9, 1995, to merge with Shoex, Inc. (Shoex), a franchisee of the Company which owned and operated six O'Charley's restaurants in Alabama. The transaction was accounted for as a pooling of interests. The Company exchanged 666,666 shares of company stock valued at approximately $9.5 million. The Company assumed approximately $1.9 million in net obligations of Shoex, Inc. (defined as long-term debt, capitalized lease obligations and working capital deficit). As a result of the merger, O'Charley's owns the six restaurants and the rights to develop other O'Charley's restaurants in Alabama, Mississippi and specific locations in Florida and Georgia. The accompanying 1996 financial statements include the transactions and balances of Shoex. Each of the previously reported financial statements have been restated to reflect the combined results of the Company and Shoex. -7- 8 O'Charley's Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Twelve and Twenty-Eight Weeks Ended July 14, 1996 and July 9, 1995 Results of Operations The following table highlights the operating results for the second quarter and first half of 1996 and 1995 as a percentage of total revenue unless otherwise indicated. Each of the second quarters is comprised of 12 weeks. Each of the first halves is comprised of 28 weeks. All comparisons included in management's discussion and analysis compares the respective second quarter and first half of 1996 to the second quarter and first half of 1995 unless otherwise indicated. - ------------------------------------------------------------------------------- Second Quarter Year To Date ---------------- ---------------- 1996 1995 1996 1995 ------- ------- ------- ------- Revenues: Restuarant sales 98.6% 92.5% 98.5% 92.3% Commissary sales 1.4% 7.5% 1.5% 7.7% ------ ------ ------ ------ 100.0% 100.0% 100.0% 100.0% Costs and Expenses: Cost of restaurant sales: (1) Cost of food, beverage and supplies 36.0% 36.8% 35.9% 36.8% Payroll and benefits 31.4% 30.1% 31.1% 29.9% Restaurant operating costs 15.2% 15.0% 15.4% 15.1% ------ ------ ------ ------ 82.6% 81.9% 82.4% 81.8% Restaurant operating margin 17.4% 18.1% 17.6% 18.2% Cost of commissary sales (2) 95.6% 95.7% 95.2% 95.5% Advertising, general and administrative expenses 5.5% 5.5% 5.6% 5.7% Asset revaluation 13.3% - 6.0% - Depreciation and amortization 4.8% 4.1% 4.9% 4.0% Other(Income)Expense: Interest expense, net 1.7% 1.6% 1.6% 1.5% Litigation 22.1% - 9.9% 1.3% Other, net -0.0% -0.9% 0.1% -0.9% Earnings (Loss) Before Income Taxes -30.0% 6.8% -10.6% 5.6% Net Earnings (Loss) -19.4% 4.4% -6.9% 3.6% ====== ====== ====== ====== (1) As a percentage of restaurant sales. (2) As a percentage of commissary sales. - ------------------------------------------------------------------------------- -8- 9 TOTAL REVENUES increased $4,809,000 or 14.3% for the second quarter of 1996 and $10,030,000 or 13.3% for the first twenty-eight weeks of 1996. Restaurant sales increased $6,774,000 or 21.7% and $14,590,000 or 20.9% for the second quarter and first half of 1996, respectively. These increases are primarily due to additional Company owned restaurants operated in 1996. The following table presents the number of restaurants in operation for each of the first two quarters in 1996 and 1995:
1996 1995 ---- ---- Company Restaurants: Number of restaurants at beginning of year 61 50 Opened during first quarter 5 3 Opened during second quarter 3 3 -- -- Number of restaurants at end of second quarter 69 56 == == Franchised Restaurants: 1 1 -- -- Total Restaurants: 70 57 == ==
In addition, restaurant sales were positively affected from higher average unit volumes of newly opened stores. Same store sales increased .5% and decreased .1% in the second quarter and first half of 1996, respectively. From mid-April 1996 through mid-June 1996, the Company experienced a decrease in same store sales. These decreases were more than offset by same store sales increases for the remainder of the second quarter. The lost operating days due to the impact of winter stores in the midwest and southeast during January and February contributed to the year-to-date decrease in same store sales. For each of the first two quarters of 1996, same store sales were positively affected by an increase in the overall check average due primarily to a menu price increase of 1.5% taken in the fourth quarter of 1995. In the first two quarters of 1996, the Company experienced declines in same store customer counts. Commissary sales decreased in each of the first two quarters of 1996 primarily as the result of discontinuing sales to Logan's Roadhouse Restaurants and to certain unaffiliated restaurants. Following its initial public offering, Logan's ceased purchasing products from the Commissary in October 1995. RESTAURANT OPERATING MARGIN, defined as restaurant sales less cost of restaurant sales, increased $946,000 or 16.8% in the second quarter of 1996 and $2.3 million or 17.8% in the first half of 1996. As a percentage of restaurant sales, the restaurant operating margin decreased .7% to 17.4% in the second quarter and decreased .6% to 17.6% in the first half. In each of the first two quarters of 1996, the percentage margin decrease was due to increases in the percentage cost of payroll and benefits and restaurant operating cost partially offset by a decrease in the percentage cost of food, beverage and supplies. COST OF FOOD, BEVERAGE AND SUPPLIES as a percentage of restaurant sales decreased .8% and .9% in the second quarter and first half of 1996, respectively. These decreases are primarily attributable to a reduction in overall meat cost and to the increased purchasing power of the Company's Commissary. Additionally, cost reductions in produce, primarily lettuce, were offset by increased poultry cost. PAYROLL AND BENEFITS as a percentage of restaurant sales increased 1.3% and 1.2% in the second quarter and first half of 1996, respectively. The Company is continuing to pay higher base salaries and hourly wage rates in order to attract and retain management and hourly co-workers. Additionally, the Company experienced higher bonus expense and vacation pay in 1996. A decrease in workers compensation expense partially offset the above mentioned increases. The federal minimum wage rate will increase by $.50 to $4.75 per hour on October 1, 1996 and an additional increase of $.40 to $5.15 per hour on September 1, 1997. The base wage rate paid to directly tipped employees will remain at $2.13 per hour. The Company generally pays higher wage rates for its hourly co-workers as compared to the expected increase in the minimum wage rate. The Company will, however, experience a minimal increase in labor costs as a result of the minimum wage increase. Management expects to raise menu prices to offset the impact from the increased labor costs. The inflationary effects of the minimum wage increase is currently unknown and may increase the cost of payroll and benefits in the future. RESTAURANT OPERATING COSTS as a percentage of restaurant sales increased .2% and .3% in the second quarter and first half of 1996, respectively. The increase was due primarily from an increase in outside services. A decrease in supervisory cost and -9- 10 rent expense as a percentage of restaurant sales mostly offset the above mentioned increase. ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of total revenue did not change in the second quarter and decreased .1% in the first half of 1996. The Company had previously expensed $1.0 million in the first quarter of 1995 for legal fees expected to be incurred in defending a purported class action alleging racial discrimination. This expense has been reclassed to litigation for reporting purposes. In the second quarter and first half of 1996, the Company increased its percentage cost of advertising. Additionally, the Company incurred higher salary and related payroll cost due to the hiring of additional management personnel in the areas of information services, advertising and real estate. These increases were partially offset by a decrease in executive officers' bonus compensation which is based on a formula of increased profits. Certain other cost percentages decreased as a result of spreading certain general and administrative expenses over a greater volume of total revenue. DEPRECIATION AND AMORTIZATION EXPENSE as a percentage of total revenues increased .7% and .9% in the second quarter and first half of 1996. Pre-opening amortization expense has increased due to the increased number of new stores opened for less than one year and to an increase in the average amount of pre-opening cost capitalized per store. Depreciation expense as a percentage of restaurant sales increased as the Company increased the amount of building improvement costs due to the remodeling of certain existing restaurants. ASSET REVALUATION represents the write down of certain assets in accordance with FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". See footnote C of the accompanying notes to unaudited financial statements. INTEREST EXPENSE increased as a result of increased borrowings associated primarily with the Company's expansion of new restaurants. LITIGATION represents the proposed settlement of a purported class action lawsuit alleging racial discrimination. These costs include anticipated payments to the defendants, legal costs and other payments expected in accordance with the proposed settlement. See footnote B of the accompanying notes to unaudited financial statements and liquidity and capital resources. OTHER (INCOME) EXPENSE, NET was a net expense of $92,000 for the twenty-eight weeks ended July 14, 1996 and a net income of $694,000 for the same period in 1995, a $786,000 increase in net expenses. During the first two quarters of 1995, the Company recorded its equity earnings of Logan's Roadhouse Restaurants and net rental income and guarantee fees related to its ownership of the five Logan's restaurant sites in other income, net. In July 1995, Logan's completed an initial public offering and the Company sold substantially all of its interest in Logan's. Consequently, the Company no longer receives any income from Logan's except that in the first quarter of 1996, the Company sold its remaining 7,000 shares of Logan's common stock. On January 5, 1996, the shareholders of the Company approved an Agreement and Plan of Merger to merge with Shoex, Inc., a franchisee of the Company which owned and operated six O'Charley's restaurants in Alabama. During the first quarter of 1996, the Company expensed approximately $290,000 in acquisition cost associated with this merger. INCOME TAX EXPENSE for fiscal year 1995 was 36.5% of pre-tax income and the expected rate for 1996 is approximately 35.0%. Due to the litigation expense, the Company's federal income tax bracket in 1996 is expected to decrease by 1.0% Liquidity and Capital Resources During the first twenty-eight weeks of 1996, the Company expended approximately $17.7 million in capital expenditures for new stores and improvements to existing facilities. Additionally, the Company incurred approximately $1.3 million in pre-opening costs and made $3.0 million in principal reductions in its capitalized lease obligations and long-term debt. These cash outlays were funded primarily by borrowings of $14.1 million on the Company's line of credit facility, borrowings under capitalized lease obligations of $2.8 million and $2.8 million cash provided by operating activities. On April 21, 1994, the Company entered into a $30 million revolving line of credit agreement with four banks (bank group) for a three-year term. At July 14, 1996, $23.9 million was outstanding under this facility compared with $10.5 million at December 31, -10- 11 1995. The credit facility requires quarterly interest payments at the lower of the bank's prime rate or the LIBOR rate plus 1.5%. The credit facility contains certain financial and other covenants, including restrictions on the sale of certain assets and additional long-term debt facilities. The facility has a term expiring in July 1997, but includes an option to extend the maturity for an additional two years upon conversion of the facility to a term loan with principal payments required quarterly based on a seven-year amortization. At July 14, 1996, the Company had available $6.1 million under this credit facility. As a result of the charge to earnings of $5.5 million after tax incurred in the second quarter of 1996 in connection with the proposed settlement of the discrimination litigation and the charge to earnings of $3.3 million after tax incurred in the second quarter of 1996 in connection with the write down of certain assets in accordance with FASB 121, the Company and the bank group amended the credit facility to exclude the litigation charge and the FASB 121 charge from net earnings, total liabilities and shareholders equity. In addition, an interest coverage ratio was amended. The Company anticipates having to increase the amount of its available credit near the end of the fourth quarter of 1996. The Company is currently in discussions with its bank group to increase the amount available for borrowings under the credit facility and to extend its term. The Company opened eight restaurants in the first half of 1996. As of July 14, 1996, the Company had five additional restaurants under construction, of which three are expected to open in the third quarter of 1996. For fiscal 1996, the Company expects to open 12 new Company-owned restaurants. Management estimates that the Company will spend approximately $32 million in capital expenditures in 1996. Actual capital expenditures in 1996 may vary based on a number of factors, including the timing of additional purchases of future restaurant sites. The Company intends to continue to finance the furniture, fixtures and equipment for its new stores with capitalized lease obligations. On February 15, 1994, a purported class action suit was filed in the United States District Court in the Western District of Tennessee against the Company and certain of its current and previous officers. The suit alleged racially discriminatory job selection, termination and work environment practices in violation of federal law. The lawsuit was originally set for trial in April 1995, however, on March 17, 1995 the Court continued the trial until such time as the Court was able to resolve the motions pending before it, including those relating to whether the litigation would proceed as a class action. Anticipating an April trial, in the first quarter of 1995, the Company reserved a total of $1.0 million for legal and other expenses expected to be incurred in defending this litigation. Management has always believed that this lawsuit was unwarranted and totally without merit and that the Company has always been an equal opportunity employer. In June 1996, the U.S. District Court Judge ruled that the pending lawsuit will proceed provisionally as a class action. Due to the significant distraction this lawsuit has had on management and the uncertainty it has caused in the market place, the Company, on July 22, 1996, agreed to a preliminary settlement. The settlement is contingent upon execution of a definitive settlement agreement, U.S. District Court approval and certain other conditions. Under the proposed settlement, the Company will pay $7.5 million to the members of the class and their counsel, consisting of $6.1 million in cash and $1.4 million in O'Charley's common stock. The Company charged to earnings in the second quarter the $7.5 million and an additional $1.0 million reserve for legal and related expenses incurred and anticipated to be incurred in connection with the settlement. The settlement and related reserves resulted in a second quarter charge to earnings of approximately $5.5 million after-tax or $.66 per share. The Company anticipates having to borrow funds from its revolving credit facility to pay for this settlement. As previously mentioned, the Company has received the consent of its lenders for the proposed settlement amount. -11- 12 Part II - Other Information Item 1. Legal Proceedings On February 15, 1994, a purported class action suit was filed in the United States District Court in the Western District of Tennessee against the Company and certain of its current and previous officers. The suit alleged racially discriminatory job selection, termination and work environment practices in violation of federal law. The lawsuit was originally set for trial in April 1995, however, on March 17, 1995 the Court continued the trial until such time as the Court was able to resolve the motions pending before it, including those relating to whether the litigation would proceed as a class action. Anticipating an April trial, in the first quarter of 1995, the Company reserved a total of $1.0 million for legal and other expenses expected to be incurred in defending this litigation. Management has always believed that this lawsuit was unwarranted and totally without merit and that the Company has always been an equal opportunity employer. In June 1996, the U.S. District Court Judge ruled that the pending lawsuit will proceed provisionally as a class action. Due to the significant distraction this lawsuit has had on management and the uncertainty it has caused in the market place, the Company, on July 22, 1996, agreed to a preliminary settlement. The settlement is contingent upon execution of a definitive settlement agreement, U.S. District Court approval and certain other conditions. Under the proposed settlement, the Company will pay $7.5 million to the members of the class and their counsel, consisting of $6.1 million in cash and $1.4 million in O'Charley's common stock. The Company charged to earnings in the second quarter the $7.5 million and an additional $1.0 million reserve for legal and related expenses incurred and anticipated to be incurred in connection with the settlement. The settlement and related reserves resulted in a second quarter charge to earnings of approximately $5.5 million after-tax or $.66 per share. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10) Material Contracts - Agreement and Amendment No. 1 to Revolving Credit Agreement (27) Financial Data Schedule (for SEC use only) (a) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the twelve weeks ended July 14, 1996. -12- 13 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. O'Charley's Inc. (Registrant) Date: 8-21-96 By: /s/ Gregory L. Burns ---------------- ------------------------------- Gregory L. Burns Chief Executive Officer and Chief Financial Officer Date: 8-21-96 By: /s/ Charles F. McWhorter, Jr. ---------------- ------------------------------ Charles F. McWhorter, Jr. President -13- EX-10 2 REVOLVING CREDIT AGREEMENT 1 EXHIBIT 10 AGREEMENT AND AMENDMENT NO. 1 TO REVOLVING CREDIT AGREEMENT THIS AGREEMENT AND AMENDMENT NO. 1 is made and entered into as of this 27th day of August, 1996 by and among O'Charley's Inc. (the "Borrower"), each of the undersigned Banks, and First American National Bank (the "Agent"), individually and as Agent for such Banks. W I T N E S S E T H: WHEREAS, the parties hereto are parties to a certain Revolving Credit Agreement dated as of April 21, 1994 (the "Credit Agreement"); WHEREAS, terms defined in the Credit Agreement are used herein with the same meanings; and WHEREAS, as a result of (i) the charge to earnings of $5.5 million incurred in the quarter ended July 14, 1996 (the "Second Quarter") in connection with the proposed settlement of the litigation styled Taylor, et al. v. O'Charley's Inc. (the "Taylor Litigation Charge") and (ii) the charge to earnings of $3.3 million incurred in the Second Quarter in connection with the write-down of certain assets in accordance with Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (the "FAS 121 Charge"), the parties wish to amend the Credit Agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants and obligations herein contained, and each intending to be legally bound hereby, the parties agree as follows: 2 SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. 1.1 The following defined terms set forth in Section 1 of the Credit Agreement are hereby deleted in their entirety and the following definitions inserted in lieu thereof: "EBITDA" means earnings before interest expense, taxes, depreciation, and amortization expense, excluding the effects of the Taylor Litigation Charge and the FAS 121 Charge. "INDEBTEDNESS" means, as to the Borrower or any Subsidiary, all items of indebtedness, obligation or liability, whether matured or unmatured, liquidated or unliquidated, direct or contingent, joint or several, including without limitation: (A) All indebtedness guaranteed, directly or indirectly, in any manner, or endorsed (other than for collection or deposit in the ordinary course of business) or discounted with recourse; (B) All indebtedness in effect guaranteed, directly or indirectly, through agreements, contingent or otherwise: (1) to purchase such indebtedness; or (2) to purchase, sell or lease (as lessee or lessor) property, products, materials or supplies or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such indebtedness or to assure the owner of the indebtedness against loss; or (3) to supply funds to or in any other manner invest in the debtor; (C) All indebtedness secured by (or for which the holder of such indebtedness has a right, contingent or otherwise, to be 2 3 secured by) any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance upon property owned or acquired subject thereto, whether or not the liabilities secured thereby have been assumed; and (D) All indebtedness incurred as the lessee of goods or services under leases that, in accordance with generally accepted accounting principles consistently applied, should not be reflected on the Borrower's or any Subsidiary's balance sheet. Notwithstanding the foregoing, Indebtedness shall not include any obligation or liabilities incurred in connection with the Taylor Litigation Charge and the FAS 121 Charge. "INTEREST COVERAGE RATIO" means the earnings of Borrower (excluding the effects of the Taylor Litigation Charge and the FAS 121 Charge) before interest expense and taxes divided by interest expense. "LOAN TERMINATION DATE" means July 31, 1997. "STOCKHOLDERS' EQUITY" means, at any time, the aggregate of the Subordinated Indebtedness plus the sum of the following accounts set forth in a consolidated balance sheet of the Borrower and its Subsidiaries, prepared in accordance with generally accepted accounting principles consistently applied: (A) the par or stated value of all outstanding capital stock; (B) capital surplus; and (C) retained earnings after excluding the effects of the Taylor Litigation Charge and the FAS 121 Charge." 3 4 1.2 Paragraph 5.1(F)(1) of the Credit Agreement is hereby amended to read in its entirety as follows: "(F) The Borrower will maintain: (1) an Interest Coverage Ratio of greater than 4.2 to 1, calculated quarterly on a four (4) quarter trailing basis. In the event the Borrower exercises the Term Option, the Interest Coverage Ratio shall be replaced with a Fixed Charges Coverage Ratio. In such event, the Borrower shall maintain a Fixed Charges Coverage Ratio of greater than 1.3 to 1, calculated quarterly on a trailing four (4) quarter basis. SECTION 2. CONSENTS AND WAIVERS. 2.1 The Banks hereby waive any default by the Borrower pursuant to Paragraphs 5.2(D), 6.1(H) and 6.1(I) resulting from the settlement of the litigation styled Taylor, et al. v. O'Charley's Inc. on substantially the terms contemplated by the Settlement Agreement, in the form attached to this Agreement and Amendment No. 1 as Exhibit A (the "Settlement Agreement"), and the payment by Borrower of amounts due thereunder. 2.2 The Banks hereby consent pursuant to Paragraph 5.1(A) to the use of the proceeds of the Loans for the payment of sums due in accordance with the terms of the Settlement Agreement. SECTION 3. GENERAL 3.1 The Credit Agreement is ratified and confirmed and shall continue in full force and effect as amended hereby. The Borrower acknowledges and agrees that all agreements, waivers and consents contained in this Agreement and Amendment No. 1 are limited as provided herein and do not extend to any other provisions of the Credit Agreement not specified herein or to any other matters. 4 5 3.2 This Agreement and Amendment No. 1 may be executed by the parties independently in any number of counterparts, all of which together shall constitute but one and the same instrument which is valid and effective as if all parties had executed the same counterpart. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement and Amendment No. 1 as of the day and year first above written. First American National Bank, a national O'Charley's Inc., a Tennessee banking association corporation By: /s/ Dolf H. Roell By: /s/ Gregory L. Burns ------------------------------ ----------------------------- Title: Senior Vice President Title: Chief Executive Officer --------------------------- --------------------------- Mercantile Bank of St. Louis The First National Bank of Boston National Association By: William C. Purinton By: /s/ Don Adam ------------------------------ ------------------------------ Title: Vice President Title: Vice President --------------------------- --------------------------- Nations Bank, N.A. By: William H. Diehl ------------------------------ Title: Vice President --------------------------- 5 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF O'CHARLEYS INC. FOR THE PERIOD ENDED JULY 14, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 OTHER DEC-29-1996 JAN-01-1996 JUL-14-1996 1,674 0 1,510 0 6,157 13,654 91,181 0 105,833 24,472 0 0 0 29,615 15,915 105,833 84,306 85,564 69,409 84,731 8,592 0 1,340 (9,099) (3,185) 0 0 0 0 (5,914) (.70) 0
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