-----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, ErtoKk5ExjJ2TxehVxS08neyb7+4fhq5Q6qy9KIdSfOie8EtXZSC3omKaxw4M6SD q42gU5p6/rrlpXJ7aJGZuQ== 0000950144-99-010671.txt : 19990826 0000950144-99-010671.hdr.sgml : 19990826 ACCESSION NUMBER: 0000950144-99-010671 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990711 FILED AS OF DATE: 19990825 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: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18629 FILM NUMBER: 99699376 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 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 11, 1999 Commission file number O-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 20, 1999 ----- --------------------------------- Common Stock, no par value 15,479,525 shares 2 O'Charley's Inc. Form 10-Q For Quarter Ended July 11, 1999 Index
Page No. -------- Part I - Financial Statements Item 1. Financial statements: Balance sheets as of July 11, 1999 and December 27, 1998 3 Statements of earnings for the twelve weeks ended July 11, 1999 and July 12, 1998 4 Statements of earnings for the twenty-eight weeks ended July 11, 1999 and July 12, 1998 5 Statements of cash flows for the twenty-eight weeks ended July 11, 1999 and July 12, 1998 7 Notes to unaudited financial statements 8 Item 2. Management's discussion and analysis of financial condition and results of operations 10 Item 3. Quantitative and qualitative disclosures about market risk 16 Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and reports on Form 8-K 17 Signatures 18
3 O'Charley's Inc. Balance Sheets (dollars in thousands)
July 11, December 27, 1999 1998 --------- --------- Assets Current Assets: Cash and cash equivalents $ 878 $ 3,068 Accounts receivable 2,583 2,371 Inventories 8,077 7,029 Preopening costs -- 2,074 Deferred income taxes 869 143 Other current assets 3,601 2,553 --------- --------- Total current assets 16,008 17,238 Property and Equipment, net 199,586 174,196 Other Assets 2,168 2,348 --------- --------- $ 217,762 $ 193,782 ========= ========= Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 9,316 $ 6,941 Accrued payroll and related expenses 6,582 5,104 Accrued expenses 6,901 7,351 Federal, state and local taxes 5,753 3,984 Current portion of long-term debt and capitalized leases 5,297 5,429 --------- --------- Total current liabilities 33,849 28,809 Deferred Income Taxes 4,290 4,290 Long-Term Debt 50,494 35,566 Capitalized Lease Obligations 13,475 16,343 Shareholders' Equity: Common stock - No par value; authorized, 50,000,000 shares; issued and outstanding, 15,425,650 in 1999 and 15,394,128 in 1998 66,115 65,986 Additional paid-in capital 509 509 Accumulated other comprehensive loss, net of tax (103) (103) Retained earnings 49,133 42,382 --------- --------- 115,654 108,774 --------- --------- $ 217,762 $ 193,782 ========= =========
See notes to financial statements. -3- 4 O'Charley's Inc. Statements of Earnings Twelve Weeks Ended July 11, 1999 and July 12, 1998
1999 1998 --------- --------- (in thousands, except per share data) Revenues: Restaurant sales $ 69,490 $ 56,021 Commissary sales 735 568 --------- --------- 70,225 56,589 Costs and Expenses: Cost of restaurant sales: Cost of food, beverage and supplies 23,166 19,320 Payroll and benefits 21,136 17,024 Restaurant operating costs 9,806 7,886 Cost of commissary sales 695 532 Advertising, general and administrative expenses 4,422 3,479 Depreciation and amortization 3,245 3,023 Preopening costs 1,165 -- --------- --------- 63,635 51,264 --------- --------- Income from Operations 6,590 5,325 Other (Income) Expense: Interest expense, net 965 639 Other, net 43 (56) --------- --------- 1,008 583 --------- --------- Earnings Before Income Taxes 5,582 4,742 Income Taxes 1,953 1,659 --------- --------- Net Earnings $ 3,629 $ 3,083 ========= ========= Basic Earnings per Share: Earnings per Common Share $ 0.24 $ 0.20 ========= ========= Weighted Average Common Shares Outstanding 15,420 15,323 ========= ========= Diluted Earnings per Share: Earnings per Common Share $ 0.22 $ 0.19 ========= ========= Weighted Average Common Shares Outstanding 16,640 16,481 ========= =========
See notes to financial statements. -4- 5 O'Charley's Inc. Statements of Earnings Twenty-Eight Weeks Ended July 11, 1999 and July 12, 1998
1999 1998 --------- --------- (in thousands, except per share data) Revenues: Restaurant sales $ 156,345 $ 126,078 Commissary sales 1,729 1,461 Franchise revenue -- 11 --------- --------- 158,074 127,550 Costs and Expenses: Cost of restaurant sales: Cost of food, beverage and supplies 52,225 43,671 Payroll and benefits 47,670 38,464 Restaurant operating costs 22,091 17,764 Cost of commissary sales 1,631 1,369 Advertising, general and administrative expenses 10,227 8,124 Depreciation and amortization 7,097 6,711 Preopening costs 2,459 -- --------- --------- 143,400 116,103 --------- --------- Income from Operations 14,674 11,447 Other (Income) Expense: Interest expense, net 2,140 1,416 Other, net 75 (39) --------- --------- 2,215 1,377 --------- --------- Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle 12,459 10,070 Income Taxes 4,360 3,524 --------- --------- Earnings Before Cumulative Effect of Change in Accounting Principle 8,099 6,546 Cumulative Effect of Change in Accounting Principle (net of tax benefit) (1,348) -- ========= ========= Net Earnings $ 6,751 $ 6,546 ========= =========
See notes to financial statements. -5- 6 O'Charley's Inc. Statements of Earnings (Continued) Twenty-Eight Weeks Ended July 11, 1999 and July 12, 1998
1999 1998 --------- --------- (in thousands, except per share data) Basic Earnings per Share: Earnings per Common Share Before Cumulative Effect of Change in Accounting Principle $ 0.53 $ 0.43 Cumulative Effect of Change in Accounting Principle ($ 0.09) -- --------- --------- Basic Earnings per Common Share $ 0.44 $ 0.43 ========= ========= Weighted Average Common Shares Outstanding 15,407 15,303 ========= ========= Diluted Earnings per Share: Earnings per Common Share Before Cumulative Effect of Change in Accounting Principle $ 0.49 $ 0.40 Cumulative Effect of Change in Accounting Principle ($ 0.08) -- --------- --------- Diluted Earnings per Common Share $ 0.41 $ 0.40 ========= ========= Weighted Average Common Shares Outstanding 16,631 16,409 ========= =========
See notes to financial statements. -6- 7 O'Charley's Inc. Statements of Cash Flows Twenty-Eight Weeks Ended July 11, 1999 and July 12, 1998
1999 1998 -------- -------- (in thousands) Cash Flows from Operating Activities: Net earnings $ 6,751 $ 6,546 Adjustments to reconcile net earnings to net cash provided by operating activities: Cumulative effect of accounting change, net of tax 1,348 -- Depreciation and amortization 7,097 5,279 Amortization of preopening costs -- 1,432 Provision for deferred income taxes -- 400 Loss on the sale of assets -- (250) Changes in assets and liabilities: Accounts receivable (212) (149) Inventories (1,048) (2,393) Additions to preopening costs -- (1,736) Other current assets (1,048) (368) Accounts payable 2,375 1,319 Accrued payroll and other accrued expenses 2,797 1,577 -------- -------- Net cash provided by operating activities 18,060 11,657 Cash Flows from Investing Activities: Additions to property and equipment (32,514) (20,669) Proceeds from the sale of assets -- 1,734 Other, net 207 (1,093) -------- -------- Net cash used by investing activities (32,307) (20,028) Cash Flows from Financing Activities: Proceeds from long-term debt 15,000 11,042 Payments on long-term debt and capitalized lease obligations (3,072) (2,647) Exercise of employee incentive stock options 129 427 -------- -------- Net cash provided by financing activities 12,057 8,822 -------- -------- (Decrease) Increase in Cash (2,190) 451 Cash at Beginning of the Period 3,068 1,965 -------- -------- Cash at End of the Period $ 878 $ 2,416 ======== ========
See notes to financial statements. -7- 8 O'Charley's Inc. Notes To Unaudited Financial Statements Twelve Weeks Ended July 11, 1999 and July 12, 1998 A. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. The Company's fiscal year ends on the last Sunday in December with its first quarter consisting of sixteen weeks and the remaining three quarters consisting of twelve weeks each. In the opinion of management, the unaudited interim financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals, which are necessary for a fair presentation of the financial position, and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 27, 1998. B. Earnings Per Common Share The Board of Directors of the Company approved a 3-for-2 stock split effected as a 50% stock dividend for shareholders of record on May 20, 1998. The new shares were distributed on June 1, 1998. On May 20, 1998, the total number of outstanding shares of common stock increased 5,114,762 shares from 10,229,524 shares to 15,344,286 shares as a result of the stock split. All share and per share information in the financial statements have been adjusted for the stock split. The Company follows Statement of Financial Accounting Standards No. 128 ("FAS 128"), Earnings Per Share. FAS 128 establishes standards for both the computing and presentation of basic and diluted EPS on the face of the statements of earnings. Basic earnings per common share have been computed on the basis of the weighted average number of common shares outstanding, and diluted earnings per common share have been computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of options outstanding. -8- 9 Following is a reconciliation of the Company's basic and diluted earnings per share in accordance with FAS 128.
Twelve weeks ended Twenty-eight weeks ended ---------------------- ------------------------- (In thousands, July 11, July 12, July 11, July 12, except per share data) 1999 1998 1999 1998 - ------------------------------------------------- ------- ------- -------- -------- Earnings Before Cumulative Effect of Change in Accounting Principle $ 3,629 $ 3,083 $ 8,099 $ 6,546 Cumulative Effect of Change in Accounting Principle (net of tax benefit) -- -- (1,348) -- ------- ------- -------- ------- Net Earnings $ 3,629 $ 3,083 $ 6,751 $ 6,546 ======= ======= ======== ======= Basic Earnings Per Share: Weighted average shares outstanding 15,420 15,323 15,407 15,303 ======= ======= ======== ======= Earnings per share before cumulative effect of change in accounting principle $ 0.24 $ 0.20 $ 0.53 $ 0.43 Cumulative effect of accounting change -- -- (0.09) -- ------- ------- -------- ------- Basic earnings per share $ 0.24 $ 0.20 $ 0.44 $ 0.43 ======= ======= ======== ======= Diluted Earnings Per Share: Weighted average shares outstanding 15,420 15,323 15,407 15,303 Incremental stock option shares outstanding 1,220 1,158 1,224 1,106 ------- ------- -------- ------- Weighted average diluted shares outstanding 16,640 16,481 16,631 16,409 ======= ======= ======== ======= Earnings per share before cumulative effect of change in accounting principle $ 0.22 $ 0.19 $ 0.49 $ 0.40 Cumulative effect of accounting change -- -- (0.08) -- ------- ------- -------- ------- Diluted earnings per share $ 0.22 $ 0.19 $ 0.41 $ 0.40 ======= ======= ======== =======
Options for approximately 826,700 shares were excluded from the 1999 diluted weighted average shares calculation due to these shares being anti-dilutive. C. New Accounting Pronouncements On April 3, 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP 98-5) which is effective for financial statements issued for fiscal years beginning after December 15, 1998. The SOP requires that costs incurred during a start-up activity be expensed as incurred. The Company adopted SOP 98-5 effective December 28, 1998. As a result, the Company recognized as a cumulative effect of the accounting change a charge of $1.3 million, net of tax benefit, or $0.08 per diluted share during the first quarter of 1999. The effect of adopting SOP 98-5 on earnings before the cumulative effect of the change in accounting principle was an additional expense of $223,000, or $0.01 per diluted share for the second quarter and $415,000, or $0.02 per diluted share for the twenty-eight weeks ended July 11, 1999. D. Comprehensive Income There were no components of other comprehensive income for the twenty-eight week periods ended July 11, 1999 and July 12, 1998. Comprehensive income for such periods was comprised solely of net earnings. -9- 10 O'Charley's Inc. Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations Twenty-Eight Weeks Ended July 11, 1999 and July 12, 1998 RESULTS OF OPERATIONS GENERAL At July 11, 1999, we owned and operated 111 O'Charley's restaurants in Alabama, Florida, Georgia, Indiana, Kentucky, Mississippi, North Carolina, Ohio, South Carolina, Tennessee and Virginia. O'Charley's are full service, casual dining restaurants, which appeal to traditional casual dining customers as well as value-oriented customers by offering high quality food at moderate pricing with outstanding service. Our growth strategy is to continue fully penetrating existing and new targeted major metropolitan areas while opening new units in smaller secondary markets in close proximity to our major markets. We operate a commissary for the primary purpose of providing our restaurants with consistent quality food products, which meet our specifications while obtaining the best possible prices for those items. The majority of the food products served in our restaurants are distributed to the stores by the commissary. In addition to purchasing food and supply products, the commissary manufactures certain proprietary products and ages and cuts red meat into steaks in its USDA approved meat facility. All sales from the commissary to the restaurants are eliminated in the consolidated financial statements. During the first quarter of 1999, we adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activity", which requires that preopening and start-up costs be expensed as incurred rather than capitalized. Before the accounting change, preopening costs were amortized over one year. The cumulative effect of the accounting change totaled $2.1 million pre-tax and $1.3 million net of tax, or $0.08 per diluted share. Net earnings for the first twenty-eight weeks of 1999 were $6.8 million, or $0.41 per diluted share. Earnings before the cumulative effect of the change in accounting principle were $8.1 million, or $0.49 per diluted share for the first twenty-eight weeks of 1999 as compared with $6.5 million, or $0.40 per diluted share for the same period in 1998. The following table reflects changes in the number of Company-owned restaurants for the first half of 1999 and 1998.
Restaurants 1999 1998 ----------- ---- ---- In operation, beginning of period 99 82 Restaurants opened first quarter 7 5 Restaurants opened second quarter 5 4 Restaurants formerly operated by franchisee -- 1 --- --- In operation, end of period 111 92 === ===
Revenues consist almost entirely of restaurant sales. Restaurant sales include food and beverage sales and are net of applicable state and local sales taxes. Revenues also include commissary sales, which represent sales to outside parties consisting primarily of sales of O'Charley's label food items, primarily salad dressings, to retail grocery chains, mass merchandisers and wholesale clubs. Consistent with industry trends, liquor sales as a percentage of restaurant sales has declined in each of the last three fiscal years. We have historically maintained a "kids eat free" program where we provide meals from a selected menu to kids 10 years old and under. In select markets, we are currently testing a value oriented kids program where we provide a meal from a kid's menu, which includes a beverage and a dessert for a set price. It is too premature to understand the impact of this test. Early results indicate that we will realize a higher check average and a lower number of customers from the new value kids meals. -10- 11 Cost of food, beverage and supplies primarily consists of the costs of beef, poultry, seafood, produce and alcoholic and non-alcoholic beverages. Various factors beyond our control, including adverse weather, cause periodic fluctuations in food costs. Generally, temporary increases are absorbed and are not passed on to customers, however, we typically adjust menu prices to compensate for increased costs of a more permanent nature. Payroll and benefits include payroll and related costs and expenses directly relating to restaurant level activities including restaurant management salaries and bonuses, hourly wages for store level employees, payroll taxes, workers' compensation, various health, life and dental insurance programs, vacation expense and sick pay. We have an incentive bonus plan that compensates store management for achieving and exceeding certain store level financial targets and performance goals. Restaurant operating costs includes occupancy and other expenses at the restaurant level, except property and equipment depreciation and amortization. Rent, supervisory salaries, bonuses and expenses, management training salaries, property insurance, property taxes, utilities, repairs and maintenance, outside services and credit card fees account for the major expenses in this category. Restaurant operating margin is defined as restaurant sales less cost of restaurant sales. Cost of restaurant sales, for purposes of this discussion, consists of cost of food, beverage and supplies, payroll and benefits and restaurant operating costs. Advertising, general and administrative expenses includes all advertising and home office administrative functions that support the existing restaurant base and provide the infrastructure for future growth. Advertising, executive management and support staff salaries, bonuses and related expenses, data processing, legal and accounting expenses and office expenses account for the major expenses in this category. Depreciation and amortization primarily includes depreciation on property and equipment calculated on a straight-line basis over an estimated useful life and in 1998, includes amortization of preopening costs for new restaurants, which includes costs of hiring and training the initial staff and certain other costs. Depreciation and amortization as a percentage of total revenues may increase as the number of new store openings increases. Beginning in the first quarter of 1999, preopening costs are expensed as incurred in accordance with SOP 98-5 rather than amortized over one year. This new accounting method affects when preopening costs are expensed and may impact earnings relative to the previous method from quarter to quarter and year to year depending on when these costs are incurred. We will continue to capture preopening costs and these costs, beginning in 1999, are recorded in a new line item category on the statement of earnings. The depreciation and amortization category, beginning in 1999, no longer includes any preopening costs or amortization thereon. -11- 12 The following table highlights the operating results for the second quarter and the first half of 1999 and 1998 as a percentage of total revenues unless otherwise indicated. Each of the second quarters are comprised of 12 weeks. The first half results are comprised of the first twenty-eight weeks of the fiscal year.
Second Quarter First Twenty-Eight Weeks ---------------------- ------------------------ 1999 1998 1999 1998 ------ ------ ------ ------ REVENUES: Restaurant sales 99.0% 99.0% 98.9% 98.9% Commissary sales 1.0% 1.0% 1.1% 1.1% ------ ------ ------ ------ 100.0% 100.0% 100.0% 100.0% COSTS AND EXPENSES: Cost of restaurant sales: (1) Cost of food, beverage and supplies 33.4% 34.5% 33.4% 34.6% Payroll and benefits 30.4% 30.4% 30.5% 30.5% Restaurant operating costs 14.1% 14.1% 14.1% 14.1% ------ ------ ------ ------ 77.9% 79.0% 78.0% 79.2% ------ ------ ------ ------ Restaurant operating margin(2) 22.1% 21.0% 22.0% 20.8% Cost of commissary sales(3) 94.6% 93.7% 94.3% 93.7% Advertising, general and administrative expenses 6.3% 6.1% 6.5% 6.4% Depreciation and amortization 4.6% 5.3% 4.5% 5.3% Preopening costs 1.7% -- 1.6% -- ------ ------ ------ ------ INCOME FROM OPERATIONS 9.4% 9.4% 9.3% 9.0% OTHER (INCOME) EXPENSE: Interest expense, net 1.4% 1.1% 1.4% 1.1% Other, net 0.1% (0.1%) 0.0% 0.0% ------ ------ ------ ------ EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 7.9% 8.4% 7.9% 7.9% INCOME TAXES 2.8% 2.9% 2.8% 2.8% ------ ------ ------ ------ EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 5.2% 5.4% 5.1% 5.1% CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE -- -- (0.8%) -- ------ ------ ------ ------ NET EARNINGS 5.2% 5.4% 4.3% 5.1% ====== ====== ====== ======
(1) As a percentage of restaurant sales. (2) Reflects restaurant sales less cost of restaurant sales, expressed as a percentage of restaurant sales. (3) As a percentage of commissary sales. -12- 13 SECOND QUARTER AND FIRST HALF OF 1999 VERSUS SECOND QUARTER AND FIRST HALF OF 1998 TOTAL REVENUES in the second quarter of 1999 increased $13.6 million, or 24.1%, to $70.2 million from $56.6 million in the second quarter of 1998 primarily as a result of an increase in restaurant sales of $13.5 million, or 24.0%. For the first twenty-eight weeks of 1999, total revenues increased $30.5 million, or 23.9%, to $158.1 million from $127.6 million in 1998 as restaurant sales increased $30.3 million and commissary sales increased $268,000. The increase in restaurant sales was attributable to additional units in operation in 1999 and increases in same store sales. We operated 19 additional units in each of the first and second quarters of 1999 as compared to the same periods in 1998. In 1999, we opened seven new units in the first quarter and five new units in the second quarter. Same store sales increased in the second quarter by 2.9% and increased in the first twenty-eight weeks by 3.4%. In March 1999 we increased menu prices by approximately 2%. COST OF FOOD, BEVERAGE AND SUPPLIES in the second quarter of 1999 increased $3.8 million, or 19.9%, to $23.2 million from $19.3 million in the second quarter of 1998. As a percentage of restaurant sales, cost of food, beverage and supplies decreased to 33.4% in the second quarter of 1999 from 34.5% in the second quarter of 1998. For the first twenty-eight weeks of 1999, cost of food, beverage and supplies increased $8.6 million, or 19.6%, to $52.2 million from $43.7 million in the same period of 1998. As a percentage of restaurant sales, these costs decreased to 33.4% in the first half of 1999 from 34.6% in the first half of 1998. We attribute these lower food cost percentages primarily to three factors: we took a menu price increase in March 1999 which increased the average check, the cost of several food items decreased, and we improved our purchasing and operating efficiencies in our stores and in our commissary. The above improvements were partially offset by an increase in red meat costs. For the remainder of 1999, we expect nominal increases in the cost of food items and expect to experience the normal seasonal fluctuations for certain items, including produce and poultry, and we expect red meat costs to remain higher. There can be no assurance that events outside our control will not result in increased food costs. PAYROLL AND BENEFITS in the second quarter of 1999 increased $4.1 million, or 24.2%, to $21.1 million from $17.0 million in the second quarter of 1998. As a percentage of restaurant sales, payroll and benefits remained at 30.4%. For the first twenty-eight weeks of 1999, payroll and benefits increased $9.2 million, or 23.9%, to $47.7 million from $38.5 million in the same period of 1998. As a percentage of restaurant sales, payroll and benefits remained at 30.5% for the first twenty-eight weeks of 1999. Wage rates and salaries for restaurant support staff and management continued to increase in 1999. Those higher wages and salaries were offset due to the economies achieved from higher average unit sales volumes. RESTAURANT OPERATING COSTS in the second quarter of 1999 increased $1.9 million, or 24.3%, to $9.8 million from $7.9 million in the second quarter of 1998. For the first twenty-eight weeks of 1999, restaurant operating costs increased $4.3 million, or 24.4%, to $22.1 million from $17.8 million in 1998. Restaurant operating costs, as a percentage of restaurant sales, remained at 14.1% for each of the second quarters and first half of the years. We continued to see lower restaurant operating costs for certain expense items as a percentage of restaurant sales due to the economies generated from higher average unit volumes. These improvements were offset by higher salary, bonus and training expenses. Additionally, we entered two new major markets in 1999, Charlotte, North Carolina in the first quarter and Columbus, Ohio in the second quarter, which increased certain supervision costs. Typically, we incur higher initial supervision and other operating costs when entering new markets. RESTAURANT OPERATING MARGIN in the second quarter of 1999 increased $3.6 million, or 30.5%, to $15.4 million from $11.8 million in the second quarter of 1998. For the first twenty-eight weeks of 1999, restaurant operating margin increased $8.2 million, or 31.2%, to $34.4 million from $26.2 million in the same period of 1998. ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES in the second quarter of 1999 increased $943,000, or 27.1%, to $4.4 million from $3.5 million in the second quarter of 1998. As a percentage of total revenue, advertising, general and administrative expenses increased to 6.3% from 6.1% in the second quarter of 1998. This increase is primarily attributable to an increase in the amount of advertising expenditures to 2.7% of sales in 1999 from 2.6% of sales in 1998. Overall advertising expenditures were $1.9 million in 1999, an increase of 30.5% from the $1.5 million expended in 1998. General and administrative expenses -13- 14 increased 24.7% to $2.5 million in 1999 from $2.0 million in 1998. General and administrative expenses increased due primarily to higher incentive bonus compensation, increased salaries, employee benefits and legal expenses. For the first twenty-eight weeks of 1999, advertising, general and administrative expenses increased $2.1 million, or 25.9% to $10.2 million from $8.1 million in 1998. As a percentage of revenue, advertising, general and administrative expenses increased to 6.5% in the first half of 1999 from 6.4% for the same period in 1998. Advertising expenditures in the first half of 1999 increased $1.0 million, or 29% to $4.3 million from $3.4 million in 1998. As a percentage of revenue, advertising increased to 2.7% in the first half of 1999 from 2.6% in 1998. DEPRECIATION AND AMORTIZATION in the second quarter of 1999 increased $222,000 to $3.2 million from $3.0 million in the second quarter of 1998. We adopted SOP 98-5 in the first quarter of 1999, which requires preopening costs to be expensed as incurred. Previously, we capitalized preopening costs and amortized these amounts over one year from the opening of each store. The depreciation and amortization expense in the second quarter of 1998 included preopening cost amortization of $650,000. Preopening costs are now recorded in a separate line item category and the depreciation and amortization line, beginning in 1999, no longer includes any preopening cost amortization. Excluding the preopening cost amortization, depreciation expense in the second quarter of 1999 increased $872,000 or 36.7%, to $3.2 million from $2.4 million in 1998, and on a year-to-date basis, depreciation expense increased $1.8 million, or 34.4% to $7.1 million from $5.3 million in 1998. The increase in depreciation expense is primarily attributable to additional capital expenditures for new units and for the remodeling of certain existing stores. PREOPENING COSTS, excluding the one-time cumulative adjustment for the change in accounting principle as measured under SOP 98-5, were $1.2 million in the second quarter of 1999 and $2.5 million for the first twenty-eight weeks of 1999. Preopening costs includes operating costs and expenses incurred prior to a new restaurant opening. This new accounting method affects when preopening costs are expensed and may impact earnings relative to the previous method from quarter to quarter and year to year depending on when these costs are incurred. We typically incur average preopening costs of approximately $190,000 for each new store. The amount of preopening costs incurred in any one quarter will include costs associated with new stores opened during that particular quarter and most likely will include costs associated with stores expected to open subsequent to the quarter. As a percentage of total revenue, preopening costs were 1.7% and 1.6% in the second quarter and first half of 1999, respectively, as compared with preopening cost amortization of 1.1% of total revenue in each corresponding period in 1998. INCOME FROM OPERATIONS in the second quarter of 1999 increased $1.3 million, or 23.7%, to $6.6 million from $5.3 million in 1998. For the first twenty-eight weeks of 1999, income from operations increased $3.2 million or 28.2% to $14.7 million from $11.4 million in 1998. INTEREST EXPENSE in the second quarter of 1999 increased $326,000, or 51.0%, to $965,000 from $639,000 in 1998. For the first twenty-eight weeks, interest expense increased $724,000, or 51.1% to $2.1 million from $1.4 million in 1998. This increase is primarily related to the increased borrowings under our revolving line of credit. During the fourth quarter of 1997, we reduced our long-term debt by $34.7 million with the net proceeds received from the sale of common stock, which reduced interest expense in the first quarter of 1998. EARNINGS FOR THE SECOND QUARTER increased $546,000 or 17.7%, to $3.6 million from $3.1 million in 1998. THE CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE, recorded in the first quarter of 1999 and included in the results for the first twenty-eight weeks, represented the write-off of unamortized preopening costs in accordance with SOP 98-5. The $2.1 million of unamortized preopening costs remaining on our balance sheet at December 28, 1998 was written off in this one-time adjustment. After adjusting for the tax benefit, the net cumulative adjustment was $1.3 million. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of capital have historically been cash provided by operations, borrowings under our bank credit facilities and capitalized lease obligations. Our principal capital needs arise primarily from the purchase and development of new restaurants, equipment replacement and improvements to existing restaurants. -14- 15 Property and equipment expenditures were $32.5 million in the first twenty-eight weeks of 1999. These expenditures were made primarily for new stores opened during the year, stores under construction at July 11, 1999 and for improvements to existing restaurants. Additionally, we repaid $3.1 million in principal on our long-term debt and capitalized lease obligations. These cash outlays were funded primarily by $18.1 million in cash provided by operations and net borrowings of $15.0 million under our revolving credit agreement (the "Revolver"). Total sources and uses of cash decreased available cash by $2.2 million in 1999. For the remainder of 1999, we believe we will incur additional capital expenditures of approximately $17 to $20 million for the planned six additional new restaurants in 1999, for improvements to existing units and our commissary and for the purchase and construction for certain stores expected to open in 2000. As of July 11, 1999, we had seven restaurants under construction, three of which are expected to open during the third quarter of 1999. In addition, we have plans for several new capital projects in 1999 for our commissary including approximately $3.5 million for a new freezer and the possible purchase of the existing commissary and home office land and building facilities which are currently under an operating lease. The purchase of the commissary and home office facilities is currently being considered and, if purchased, we estimate the cost to be approximately $5.0 to $6.0 million. Financing to fund these projects is currently being evaluated and may include borrowings under the Revolver and off balance sheet financing. Actual capital expenditures in 1999 may vary from the above estimate based on a number of factors, including the timing of additional purchases of future restaurant sites. We intend to continue financing the furniture, fixtures and equipment for our new stores with capitalized lease obligations. The Revolver provides for a maximum borrowing capacity of $100 million. As of July 11, 1999, $50.0 million was outstanding under the Revolver and bore interest at an average rate of 5.7%. The Revolver matures on November 30, 2001, which may be extended annually by one year, at the participating banks' option, on each anniversary of the Revolver. The Revolver imposes restrictions on us with respect to the maintenance of certain financial ratios, the incurrence of indebtedness, the sale of assets, mergers and the payment of dividends. Our working capital historically has had current liabilities in excess of current assets due to cash reinvestments in long-term assets, mostly property and equipment additions. At July 11, 1999, the working capital deficiency and the current ratio were $17.8 million and 0.5 to 1, respectively. On September 2, 1998, the Board of Directors of the Company approved the repurchase of up to 5.0% of our outstanding common stock. As of July 11, 1999 approximately 14,000 shares had been repurchased. While we do not anticipate repurchasing any additional shares at this time, we continually evaluate the best uses of our capital and may buy back additional shares in the future. For the next twelve months, we believe that available cash, cash generated from operations and borrowings under the Revolver and capitalized lease obligations will be sufficient to finance our operations and expected capital outlays. Our growth strategy includes the consideration of acquisitions or strategic joint ventures. Any such acquisitions, or joint ventures on other growth opportunities may require additional external financing, and the Company may from time to time seek to obtain additional funds from public or private issuances of equity or debt securities. YEAR 2000 A business issue exists with regard to existing software applications and the ability of these applications to process date values. Specifically, many computer applications are written in two digits rather than four to define the applicable year. Beginning in the year 2000, these applications will need to be capable of recognizing four digit dates in order to properly distinguish the year 2000 from prior periods. We are considering the impact of the year 2000 issues on our business and operations, and we have a remediation plan. We have completed testing of our information technology ("IT") systems, and we are compliant. We have completed inquiries to our suppliers and other third-party entities with which we have business relations as to their own year 2000 issues. We are in the process of developing contingency plans to be implemented in the event any IT system, non-IT system, third party or supplier is not year 2000 compliant by January 1, 2000. We expense all costs associated with system changes as the costs are incurred. A -15- 16 significant portion of our year 2000-related costs are already included in our software support agreements; therefore, we do not believe the year 2000 issues will have a significant impact on our operations or liquidity. However, the malfunction or complete failure of our systems would likely have a material adverse effect on the results of operations and financial condition of the Company. Should the remaining review of our year 2000 risks reveal potentially non-compliant systems or material third-party risks, contingency plans will be developed to address the deficiencies revealed at that time. Our statements regarding year 2000 issues are dependent on many factors, some of which are beyond our control. Due to the general uncertainty inherent in the year 2000 problem, resulting in part from the uncertainty of the year 2000 readiness of third-party suppliers and customers, we are unable to determine at this time whether the consequences of year 2000 failures will have a material impact on our operations, liquidity or financial condition. IMPACT OF INFLATION The impact of inflation on the cost of food, labor, equipment, land and construction costs could adversely affect the Company's operations. A majority of the Company's employees are paid hourly rates related to federal and state minimum wage laws. As a result of increased competition and the low unemployment rates in the markets in which the Company's restaurants are located, the Company has continued to increase wages and benefits in order to attract and retain management personnel and hourly coworkers. In addition, most of the Company's leases require the Company to pay taxes, insurance, maintenance, repairs and utility costs, and these costs are subject to inflationary pressures. The Company may attempt to offset the effect of inflation through periodic menu price increases, economies of scale in purchasing and cost controls and efficiencies at existing restaurants. NOTE REGARDING FORWARD LOOKING INFORMATION This report contains certain forward-looking statements within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our intent, belief and expectations such as statements concerning our future profitability and our operating growth strategy. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, those set forth under the caption "Forward-Looking Statements/Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 27, 1998. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the objectives and plans of the Company will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Item 3. QUANTITATIVE AND QUALITATIVE MARKET RISK The Company is subject to market risk from exposure to changes in interest rates based on its financing, investing, and cash management activities. The Company utilizes a balanced mix of debt maturities along with both fixed-rate and variable-rate debt to manage its exposures to changes in interest rates. The Company does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 1999, although there can be no assurances that interest rates will not significantly change. -16- 17 PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting, the Shareholders elected three Class III directors to hold office for a term of three years and until their successors are elected and qualified. The following table sets forth the votes cast for and withhold/abstain with respect to each of the director nominees:
Director For Abstain -------- --- ------- Richard Reiss, Jr. 9,590,597 1,588,568 G. Nicholas Spiva 11,166,009 13,156 Shirley A. Zeitlin 7,689,737 3,489,428
In addition to the foregoing directors, the following table sets forth the other members of the Board of directors whose terms of office continued after the meeting and the year in which his term expires:
Name Term Expires ---- ------------ John W. Stokes, Jr. 2001 H. Steve Tidwell 2001 Samuel H. Howard 2001 Gregory L. Burns 2000 Steven J. Hislop 2000 C. Warren Neel 2000
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 - Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the twelve weeks ended July 11, 1999. -17- 18 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: August 25, 1999 By: /s/ Gregory L. Burns --------------------- ---------------------------------- Gregory L. Burns Chief Executive Officer Date: August 25, 1999 By: /s/ A. Chad Fitzhugh --------------------- ---------------------------------- A. Chad Fitzhugh Chief Financial Officer -18- EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF THE O'CHARLEY'S INC. FOR THE SIX MONTHS ENDED JULY 11, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-26-1999 DEC-28-1998 JUL-11-1999 878 0 2,583 0 8,077 16,008 199,586 0 217,762 33,849 0 0 0 66,115 49,539 217,632 156,345 158,074 121,986 143,400 75 0 2,140 12,459 4,360 8,099 0 0 (1,348) 6,751 0.44 0.41
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