ITEM 1. BUSINESS.
As of December 30, 2001, we operated 161 O'Charley's restaurants in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Mississippi, Missouri, North Carolina, Ohio, South Carolina, Tennessee and Virginia, and two Stoney River Legendary Steaks restaurants in Atlanta, and one in Chicago. O'Charley's is a leading casual dining restaurant concept known for its high quality, freshly prepared food, moderate prices and friendly and attentive customer service. Stoney River Legendary Steaks 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.
THE O'CHARLEY'S CONCEPT
O'Charley's restaurants provide fresh, high quality food in a relaxed, friendly atmosphere. Our goal is to differentiate our O'Charley's restaurants by exceeding customer expectations as to the quality of food and the friendliness of service. The key elements of the O'Charley's concept include the following:
Offer High-Quality, Freshly Prepared American Fare. The O'Charley's menu is mainstream, but innovative and distinctive in taste. The O'Charley's menu features approximately 45 items including USDA Choice hand-cut and aged steaks, baby-back ribs basted with our own tangy BBQ sauce, chicken that is always fresh and never frozen, fresh salmon and grilled tuna with a spicy ginger sauce, a variety of fresh-cut salads with special recipe salad dressings and O'Charley's signature caramel pie. All entrees are made from original recipes, are cooked to order and feature two side items in addition to our hot, freshly-baked yeast rolls. O'Charley's restaurants are open seven days a week and serve lunch, dinner and Sunday brunch. Specialty menu items include "limited-time" promotions, O'Charley's Express Lunch, daily special selections and a special kids menu. We are continually developing new menu items for our O'Charley's restaurants to respond to changing customer tastes and preferences.
Provide an Attractive Price-to-Value Relationship. We believe that the pricing strategy for our O'Charley's restaurants, as well as the generous portions we serve, create an attractive price-to-value relationship. This strategy, coupled with our high food quality, is 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. Lunch entrees range in price from $6.49 to $7.99, with dinner entrees ranging from $6.49 to $16.99. In 2001, the average check per customer, including beverages, was $9.68 for lunch and $12.43 for dinner.
Ensure a Superior Dining Experience. Our strategy stresses providing prompt, friendly and attentive service to ensure customer satisfaction. Our strategy is to staff each restaurant with an experienced management team that is dedicated to enhancing customer satisfaction and to keep our table-to-server ratios low. In order to promote customer satisfaction, we adopted the following strategy, which we refer to as "The Promise:"
- create a friendly, warm environment;
- provide prompt food and service;
- present a clean, professional appearance; and
- have the knowledge needed to give each guest the best dining experience possible.
Our management team, including area supervisors, district directors, regional directors and home office personnel, visit our restaurants frequently in order to reinforce our commitment to customer service to our restaurant level managers and hourly employees and communicate with and receive feedback from customers. We also employ a "mystery shopper" program to independently monitor quality control in areas such as timeliness of service, atmosphere, employee attitude and food quality. Through the use of customer surveys, we receive valuable feedback on our restaurants and, where appropriate,
respond promptly to customer comments in order to demonstrate our continuing dedication to customer satisfaction.
Create a Casual, Neighborhood Atmosphere Through Our Restaurant Design. 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 prototypical O'Charley's restaurant is a free-standing brick building containing approximately 6,800 internal square feet and seating for approximately 275 customers, including approximately 52 bar seats. The exterior features old-style red brick, bright red and green neon borders, multi-colored awnings and attractive landscaping. The interior 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. In addition, the kitchen design provides flexibility in the types of food items that can be prepared so that we can adapt to changing customer tastes and preferences. 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.
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 and operate an approximately 9,500 square foot management training facility at our home office in Nashville, Tennessee. Each new manager participates in a comprehensive ten-week training program that combines hands-on experience in one of our training restaurants and instruction at the training facility. To instill a sense of ownership, a large portion of the compensation of our restaurant level managers is based upon restaurant operating results, employee turnover and mystery shopper reports. This focus on restaurant level operations is intended to create a "single store mentality" and provide an incentive for managers to improve same store sales and restaurant operating results. We believe our strong focus on employee satisfaction has resulted in a decrease in our employee turnover rate in each of the past five years.
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 restaurants. The commissary operates a USDA-approved and inspected facility at which we age and cut our beef and a production facility at which we prepare the yeast rolls, salad dressings and sauces served in our O'Charley's restaurants. We believe our commissary enhances restaurant operations by maintaining consistent food quality, helping to ensure reliable distribution services to our restaurants and simplifying our restaurant managers' food cost management responsibilities. We attribute the decreases in food cost as a percentage of our restaurant sales over the past four years, in part, to the financial leverage generated from the increased purchasing volumes and operating efficiencies of our commissary. In 2001, we completed an expansion of our commissary facilities to add approximately 15,500 square feet of refrigerated storage and 36,000 square feet of production facilities, which we believe will enable us to meet a substantial majority of the distribution needs of our existing and planned restaurants for the next several years.
Pursue Disciplined Growth Strategy. During 2001, we opened 24 new O'Charley's restaurants in the following markets:
Atlanta, Georgia(2) Kingsport, Tennessee Charleston, South Carolina Mobile, Alabama Charlotte, North Carolina(2) Nashville, Tennessee Cincinnati, Ohio(2) Panama City, Florida Columbus, Ohio Raleigh, North Carolina Destin, Florida Richmond, Virginia(2) Indianapolis, Indiana(2) Springfield, Illinois(2) Jonesboro, Arkansas St. Louis, Missouri(3)
We plan to open 18 to 22 O'Charley's restaurants in 2002. We intend to continue to develop new O'Charley's restaurants in our target markets, primarily in the Southeast and Midwest. Our target markets 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.
Management devotes significant time and resources to analyzing prospective restaurant sites and gathering appropriate cost, demographic and traffic data. We utilize an in-house construction and real estate department to develop architectural and engineering plans and to oversee new construction. While we prefer to develop restaurants based on our prototype O'Charley's restaurant, we from time to time develop O'Charley's restaurants in existing buildings. Our ability to remodel an existing building into an O'Charley's restaurant can permit greater accessibility to quality sites in more developed markets.
THE STONEY RIVER LEGENDARY STEAKS CONCEPT
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 make the interior of the restaurant inviting and comfortable. The menu features hand-cut, premium midwestern beef along with 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. The price range of entrees is $16.95 to $29.95. In 2001, the average check per customer was $33.96. Stoney River restaurants are open for dinner during the week and opening times on the weekend vary by location with some opening at noon and others opening in the early afternoon. During 2001, we opened one new Stoney River restaurant in Chicago. We plan to open two Stoney River restaurants in 2002. Our growth strategy for the Stoney River concept is to concentrate on major metropolitan markets in the Southeast and Midwest with disciplined, controlled development and the potential to accelerate development over the next several years. At December 30, 2001, we operated three Stoney River restaurants: two in Atlanta and one in Chicago.
O'CHARLEY'S RESTAURANT OPERATIONS
Restaurant Management. Each O'Charley's restaurant requires an effective management team in order to ensure high quality food and attentive service. Each restaurant typically has five to six managers (a general manager, two to three assistant managers, a kitchen manager and an assistant kitchen manager) and an average of approximately 80 full-time and part-time employees. We employ area supervisors who have day-to-day responsibility for the operating performance of approximately three to six O'Charley's restaurants. In certain larger markets, we have district directors who supervise 16 to 20 restaurants. Our four regional directors each currently supervise 31 to 60 restaurants in their respective regions and are directly involved in the development of new O'Charley's restaurants. Our Executive Vice President, Operations oversees all O'Charley's restaurant operations.
As an incentive for restaurant managers to improve sales and operating efficiency, we have a monthly incentive compensation plan. Pursuant to this plan, each member of the restaurant management team may earn a bonus, payable during each four-week accounting period, based on a percentage of the sales of the restaurant for which the manager has responsibility. The monthly bonus is earned when budgeted and prior year financial results are exceeded, subject to adjustment based upon same store sales increases and certain operating performance factors. We also offer a restaurant management stock option program pursuant to which each member of the restaurant management team is eligible to receive annual grants of options upon the attainment of certain performance-based goals.
We also provide a "3-Point Compensation Plan" that gives general managers of our O'Charley's restaurants an opportunity to participate in the growth of their restaurant and our company. Pursuant to the 3-Point Compensation Plan, general managers receive a competitive minimum base salary, are eligible to receive a bonus calculated quarterly and paid annually, and receive long-term stock options that provide an incentive for general managers to improve restaurant level operating results. The annual bonuses are based on the attainment of certain performance targets that the managers establish each year for their own restaurants.
We believe that our compensation plans, particularly the bonus plans, encourage the general managers to establish and implement an annual strategy. Area supervisors, district directors, regional directors and senior management also are eligible to receive performance based cash bonuses and participate in the senior management stock program pursuant to which they receive stock options, the vesting of which can be accelerated based on our achievement of certain specified financial targets.
Recruiting and Training. We emphasize the careful selection and training of all restaurant employees. The restaurant management recruiting and training program begins with an evaluation and screening program. In addition to multiple interviews and background and experience verification, we conduct a testing procedure designed to identify those applicants who we believe are well suited to manage restaurant operations. Management trainees are required to complete a ten-week training program, a portion of which is conducted at our training center in Nashville, Tennessee. The training facility has a theater-style auditorium, facilities for operational and information services training and an area for team-building exercises. The program familiarizes new managers with the responsibilities required at an individual restaurant and with our operations, management objectives, controls and evaluation criteria before they assume restaurant management responsibility. Each new hourly employee is trained by an in-restaurant trainer called an "ETE" (Educator Through Excellence). Each restaurant has approximately 14 ETE's who are qualified and tested in their area of responsibility. Restaurant level management is responsible for the hiring and training of servers and kitchen staff, but they typically involve hourly employees in the process.
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 restaurants. The commissary operates a USDA-approved and inspected facility at which we age and cut our beef and a production facility at which we manufacture O'Charley's yeast rolls, salad dressings and sauces. The commissary primarily services our restaurants; however, it also sells food products and supplies to certain other customers, including retail grocery chains, mass merchandisers and wholesale clubs. Food products and other restaurant supplies are distributed to our restaurants twice each week by our trucks. Seafood and some produce, which require more frequent deliveries, are typically purchased locally by restaurant management to ensure freshness. In 2001, we completed an expansion of our commissary facilities to add additional capacity. The commissary contains approximately 45,000 square feet of dry storage, approximately 52,000 square feet of refrigerated storage, approximately 52,000 square feet of production facilities and approximately 71,000 square feet of office and additional warehouse facilities.
We believe our commissary enhances restaurant operations by maintaining consistent food quality, helping to ensure reliable distribution services to our restaurants and simplifying our restaurant managers' food cost management responsibilities by negotiating prices on food items and supplies for our restaurants. We set food and other product quality standards for our restaurants, and the commissary negotiates directly with food manufacturers and other suppliers to obtain lower prices for those items through volume purchasing.
SUPPORT OPERATIONS
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 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.
Advertising and Marketing. We have an ongoing advertising and marketing plan for the development of television, radio and newspaper advertising for our O'Charley's 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 the O'Charley's 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 2001, our advertising expenses were approximately 3.0% 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. We are currently developing an advertising and marketing plan for our Stoney River restaurants.
Restaurant Reporting. Our use of technology and management information systems is essential for the management oversight needed to produce strong operating results. In the past several years, we have made significant improvements in our technology and systems. 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 Director of Real Estate and certain other members of our executive management team, together with other members of management, analyze 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. 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.
We maintain a company-wide alternative dispute resolution program pursuant to which employees use a three-tiered dispute resolution process that involves an open door policy, mediation and, if necessary, binding arbitration. We believe this alternative dispute resolution program helps us and our employees to resolve issues that arise in the workplace without litigation and enhances our relationship with our employees.
RESTAURANT LOCATIONS
At December 30, 2001, we operated 161 O'Charley's and three Stoney River Legendary Steak restaurants. As of that date, we owned the land and building at 99 of our O'Charley's restaurants, leased the land and buildings at ten of our O'Charley's restaurants and leased the land only at 52 of our O'Charley's restaurants. The following table sets forth the markets in which our O'Charley's restaurants were located at December 30, 2001, including the number of restaurants in each market. Two of our Stoney River restaurants are located in Atlanta and the other Stoney River restaurant is located in Chicago. We own the land and building at one of our Stoney River restaurants in Atlanta and lease the land only at our other Stoney River restaurants in Atlanta and Chicago.
FRANCHISING
We have recently completed a detailed study of the potential franchising of the O'Charley's concept and, based upon the results of this study, intend to begin franchising O'Charley's restaurants in 2002. We expect to enter into franchising arrangements with experienced restaurant operators for the development of O'Charley's restaurants in areas that are outside of our current development and growth plans. 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.
SERVICE MARKS
The name "O'Charley's" and its logo and the names "Stoney River" and "Legendary Steaks" are registered service marks with the United States Patent and Trademark Office. 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. Except for these limited geographical areas, we are not aware of any infringing uses that could materially affect our business. We intend to protect our service marks by appropriate legal action whenever necessary.
GOVERNMENT REGULATION
We are subject to various federal, state, and local laws affecting our business. Our commissary is 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 10% of our restaurant sales in 2001 was 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.
EMPLOYEES
At December 30, 2001, we employed approximately 4,750 full-time and 8,900 part-time employees, approximately 175 of whom were home office management and staff personnel, approximately 200 of whom were commissary personnel and the remainder of whom were restaurant personnel. None of our employees is covered by a collective bargaining agreement. We consider our employee relations to be good.
RISK FACTORS
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.
OUR CONTINUED GROWTH DEPENDS ON OUR ABILITY TO OPEN NEW RESTAURANTS AND OPERATE OUR NEW RESTAURANTS PROFITABLY; WE MAY EXPERIENCE UNEXPECTED DELAYS IN OPENING NEW RESTAURANTS AND WE MAY NOT BE ABLE TO OPERATE NEW RESTAURANTS PROFITABLY.
A significant portion of our historical growth has been due to opening new restaurants. We opened 24 O'Charley's restaurants and one new Stoney River restaurant in 2001 and plan to open 18 to 22 additional O'Charley's restaurants and two Stoney River restaurants during 2002. Our ability to open new restaurants will depend on a number of factors, such as:
o the selection and availability of quality restaurant sites;
o our ability to negotiate acceptable lease or purchase terms;
o our ability to hire, train and retain the skilled management and other personnel necessary to open new restaurants;
o our ability to secure the governmental permits and approvals required to open new restaurants;
o 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 o the availability of adequate financing.
Many of these factors are beyond our control. We cannot assure you that we will be successful in opening new restaurants in accordance with our current plans or otherwise or that our rate of future growth, if any, will not decline from our recent historical growth rates. 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. In May 2000, we acquired the Stoney River Legendary Steaks concept, including two Stoney River restaurants in suburban Atlanta. As of December 30, 2001, we have opened one Stoney River restaurant in the Chicago metropolitan area. These restaurants are more upscale than an O'Charley's restaurant and are more expensive to construct. We cannot assure you that we will be able to operate these restaurants profitably.
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 the Stoney River
Legendary Steaks concept. The development of this new concept will 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 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 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 plans 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. The cost of many items we serve in our restaurants are subject to seasonal fluctuations, weather, demand and other factors. 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. 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 anticipate and react to changing costs through our purchasing and hiring practices or menu price increases. As a result, increases in operating costs could have a material adverse effect on our business and results of operations.
We have completed a feasibility study on franchising our O'Charley's restaurant concept and are in the process of finalizing the proper legal and regulatory requirements in order to begin franchising. We have begun marketing the franchise concept, but we do not believe we will generate any revenue or profits in 2002. We project approximately $750,000 in expenditures for this franchising project in 2002, and we may continue to experience expenditures and losses until such time, if ever, that we generate sufficient 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, competition for qualified employees could require us to pay higher wages to attract a sufficient number of competent employees, resulting in higher labor costs.
FLUCTUATIONS IN OUR OPERATING RESULTS AND OTHER FACTORS MAY RESULT IN DECREASES IN OUR STOCK PRICE.
In recent periods, the market price for our common stock has fluctuated substantially. From time to time, there may be significant volatility in the market price of our common stock. We believe that the current market price of our common stock reflects expectations that we will be able to continue to operate our existing restaurants profitably and to develop new restaurants at a significant rate and operate them profitably. If we are unable to operate our restaurants as profitably as we have in the past or develop restaurants at a pace that reflects the expectations of the market, investors could sell shares of our common stock at or after the time that it becomes apparent that the expectations of the market may not be realized, resulting in a decrease in the market price of our common stock.
In addition to our operating results, the operating results of other restaurant companies, changes in financial estimates or recommendations by analysts, adverse weather conditions, which can reduce the number of customers visiting our restaurants, increase food costs and delay the construction and opening of new restaurants, changes in general conditions in the economy or the financial markets or other developments affecting us or our industry, such as outbreaks of "mad cow" and "foot and mouth" disease, could cause the market price of our common stock to fluctuate substantially. In recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance.
Preopening costs represent costs incurred prior to a restaurant opening for business. Prior to 1999, we capitalized preopening costs and amortized them over one year. Commencing in the first quarter of 1999, we expense preopening costs in the period in which those costs are incurred. See note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Our preopening costs may vary significantly from quarter to quarter primarily due to the timing of restaurant openings. This variability may increase in future periods as we anticipate higher preopening costs for each Stoney River restaurant we open as compared to the average preopening costs for an O'Charley's restaurant. We typically incur most preopening costs for a new restaurant within the two months immediately preceding, and the month of, its opening. In addition, our labor and operating costs for a newly opened restaurant during the first three to six months of operation generally are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of restaurant sales. Accordingly, the volume and timing of new restaurant openings in any quarter may have a significant impact on our results of operations for that quarter. As a result of these factors, our results may fluctuate significantly, which could adversely affect the market price of our common stock.
OUR RESTAURANTS ARE CONCENTRATED GEOGRAPHICALLY; IF ANY ONE OF THE REGIONS IN WHICH OUR RESTAURANTS ARE LOCATED EXPERIENCES AN ECONOMIC DOWNTURN OR OTHER MATERIAL CHANGE, OUR BUSINESS RESULTS MAY SUFFER.
Our existing restaurants are located predominantly in the Southeastern and Midwestern United States. As of December 30, 2001, 32 of our 161 O'Charley's restaurants were located in Tennessee. Our plans include significant further expansion in the Southeast and Midwest. As a result, our business and our financial or operating results may be materially adversely affected by adverse economic, weather or business conditions in the Southeast and Midwest, 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. If we lose the services of Messrs. Burns, Hislop, or Fitzhugh 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.
If our restaurants are unable to compete successfully with other restaurants in new and existing markets, our results of operations will be adversely affected. 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. 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.
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.
Even if we are able to compete successfully with other restaurant companies, we may be forced to make changes in our concepts and menus in order to respond to changes in consumer tastes or dining patterns. 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 "mad cow" and "foot and mouth" disease. 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, we may have different or additional competitors for our intended customers as a result of a concept change and may not be able to compete successfully against those competitors. Our success also depends on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. Adverse changes in these factors could reduce guest traffic or impose practical limits on pricing, either of which could reduce revenues.
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. Our restaurants may lose revenue if they are unable to maintain liquor or other licenses required to serve alcoholic beverages or food. In addition, our commissary is licensed and subject to regulation by the United States Department of Agriculture and is subject to further regulation by state and local agencies. Our failure to obtain or retain federal, state or local licenses for our commissary 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 was 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.
RESTAURANT COMPANIES HAVE BEEN THE TARGET OF CLASS ACTIONS AND OTHER LAWSUITS ALLEGING 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 cannot assure you that we will not incur substantial damages and expenses resulting from lawsuits of this type, which could have a material adverse effect on our business.
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.
We are sometimes the subject of 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.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY OUR LEVERAGE AND OUR OBLIGATIONS UNDER CAPITAL AND OPERATING LEASES.
As of December 30, 2001, the total amount of our long-term debt and capitalized lease obligations, including current portion, was approximately $121.9 million. In addition, as of December 30, 2001, we were a party to operating leases requiring approximately $77.4 million in minimum future lease payments. In addition, we intend to continue to make borrowings under our revolving credit facility in connection with the development of new restaurants and for other general corporate purposes, and the aggregate amount of our indebtedness and capitalized and operating lease obligations will likely increase, perhaps substantially.
The amount of our indebtedness and lease obligations could have important consequences to investors, including the following:
o our ability to obtain additional financing in the future may be impaired;
o a substantial portion of our cash flow from operations must be applied to pay principal and interest on our indebtedness and lease payments under capitalized and operating leases, thus reducing funds available for other purposes;
o some of our borrowings, including borrowings under our revolving credit facility, and, to the extent utilized in the future, lease payments under our synthetic lease facility are and will continue to be at variable rates based upon prevailing interest rates, which will expose us to the risk of increased interest rates;
o we may be constrained by financial covenants and other restrictive provisions contained in credit agreements and other financing documents;
o we may be substantially more leveraged than some of our competitors, which may place us at a competitive disadvantage; and
o our leverage may limit our flexibility to adjust to changing market conditions, reduce our ability to withstand competitive pressures and make us more vulnerable to a downturn in general economic conditions or our business.
OUR SHAREHOLDER RIGHTS PLAN, CHARTER AND BYLAWS AND TENNESSEE LAW COULD DELAY OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY THAT OUR SHAREHOLDERS CONSIDER FAVORABLE.
We have a shareholder rights plan that may have the effect of discouraging unsolicited takeover proposals. The rights issued under the shareholder rights plan would cause substantial dilution to a person or group that attempts to acquire us on terms not approved in advance by our board of directors. In addition, provisions in our charter and bylaws and Tennessee law may discourage, delay or prevent a merger, acquisition or change in control involving our company that our shareholders may consider favorable. These provisions could also discourage proxy contests and make it more difficult for shareholders to elect directors and take other corporate actions. Among other things, these provisions:
o authorize us to issue preferred stock, the terms of which may be determined at the sole discretion of our board of directors and may adversely affect the voting or economic rights of our common shareholders;
o provide for a classified board of directors with staggered three year terms so that no more than one-third of our directors could be replaced at any annual meeting;
o provide that directors may be removed only for cause;
o provide that any amendment or repeal of the provisions of our charter establishing our classified board of directors and concerning the removal of directors must be approved by the affirmative vote of the holders of two-thirds of our outstanding shares; and
o establish advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by shareholders at a meeting.
We also have severance agreements with our senior management and we are subject to anti-takeover provisions under Tennessee law. These provisions of our charter and bylaws, Tennessee law, our shareholder rights plan and the severance agreements may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices for our common stock and also could limit the price that investors are willing to pay in the future for shares of our common stock.
WE MAY ISSUE A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK UNDER OUR STOCK OPTION AND STOCK PURCHASE PLANS, AND SHAREHOLDERS MAY BE ADVERSELY AFFECTED BY THE ISSUANCE OF THOSE SHARES.
As of December 30, 2001, options to purchase 3,598,218 shares of our common stock, representing 19.6% of our shares outstanding at that date, were outstanding. These options had a weighted average exercise price of $11.11 per share. As of December 30, 2001, we had a total of 6,350,873 shares reserved for issuance under our stock purchase and stock option plans, including the shares reserved for issuance upon the exercise of outstanding stock options. The total shares reserved for issuance under our plans represented 34.6% of our outstanding shares at December 30, 2001. We believe that the issuance of stock options is an important tool to motivate our employees and align their interests with those of our shareholders and we intend to continue issuing stock options to our employees. We believe that the shares reserved for issuance under our plans will be sufficient to cover awards to our employees for at least the next several years, although there can be no assurance in this regard. The issuance of significant additional shares of our common stock upon the exercise of outstanding options or otherwise pursuant to these stock plans could have a material adverse effect on the market price of our common stock and could significantly dilute the interests of other shareholders.
EXECUTIVE OFFICERS
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 10, 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 Executive Vice President, Operations since September 1999. 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 Vice President, Commissary Operations since January 1996. Mr. Moore served as Director of Commissary Operations from 1988 to January 1996.
ITEM 2.
ITEM 2. PROPERTIES.
Of the 161 O'Charley's and three Stoney River restaurants in operation at December 30, 2001, we own 100 restaurants, lease the land and building for ten restaurants, and lease only the land for the remaining 54 restaurants. Two of the restaurant locations we leased at December 30, 2001 were owned by partnerships whose partners are affiliated with our company. We purchased these two properties in January 2002. Restaurant lease expirations range from 2003 to 2019, 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 executive offices and commissary are located in Nashville, Tennessee in approximately 290,000 square feet of office and warehouse space. We own these facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In November 2000, we were 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 O'Charley's, and Gregory L. Burns, who owns 25% of the partnership and is our Chairman of the Board and Chief Executive Officer. 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 we 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, we entered into a comprehensive settlement agreement with Two Mile Partners settling all litigation and business matters between us. As a result of the settlement, (i) we purchased restaurant properties located in Goodlettsville, Murfreesboro and Clarksville, Tennessee that we leased from Two Mile Partners for $1.7 million, $1.6 million and $1.0 million, respectively, (ii) we terminated our lease with Two Mile Partners for a restaurant property located in Bowling Green, Kentucky on which we formerly operated our 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 us in consideration of a payment by us of $200,000.
Mr. Burns recused himself from our discussions and considerations of any matters relating to the settlement. We believe that we terminated the Clarksville lease in accordance with its terms and deny 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 our best interest in order to settle the litigation to avoid the expense, uncertainty and distraction of this litigation. We believe the terms of the purchase of the Goodlettsville, Murfreesboro and Clarksville properties and the sale of the Bowling Green property were fair to the Company, and on terms no less favorable than, we would have obtained in an arms' length transaction with an unrelated third party.
We are also defendants from time to time in various legal proceedings arising in the ordinary course of our business, including claims relating to the 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 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.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of shareholders during the fourth quarter ended December 30, 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock trades on the NASDAQ National Market under the symbol "CHUX." As of December 30, 2001, there were approximately 3,200 shareholders of record of our common stock. The following table shows quarterly high and low closing 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. Presently, our revolving credit facility prohibits the payment of cash dividends on our common stock without the consent of the participating banks.
We did not sell any securities during the fiscal year ended December 30, 2001 without registration under the Securities Act of 1933, as amended.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- --------------- (1) 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. (2) 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 1997 and 1998 included preopening cost amortization of $2.4 million and $2.9 million, respectively. For 1999, 2000 and 2001, 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. (3) 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. (4) Reflects restaurant sales less cost of restaurant sales. While restaurant operating income is a non-GAAP measurement, we believe it is a relevant and useful metric in discussing our operating results.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
General
As of December 30, 2001, we operated 161 O'Charley's restaurants in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Mississippi, Missouri, North Carolina, Ohio, South Carolina, Tennessee and Virginia and two Stoney River restaurants in Atlanta and one in Chicago. O'Charley's are casual dining restaurants that are intended to appeal to mainstream casual dining customers as well as upscale casual dining and value oriented customers by offering high quality, freshly prepared food at moderate prices with friendly and attentive customer service. Our growth strategy for the O'Charley's concept is to continue penetrating existing and new targeted major metropolitan areas while opening new units in smaller secondary markets in close proximity to our metropolitan markets. Stoney River restaurants are upscale steakhouses that are intended to appeal to both upscale casual dining and fine dining customers by offering hand-cut, premium midwestern beef along with fresh seafood and other gourmet entrees with attentive service in a warm, friendly and relaxed environment. Our growth strategy for Stoney River is to concentrate on major metropolitan markets in the Southeast and Midwest with disciplined, controlled development and the potential to accelerate development over the next several years.
We operate a commissary for the primary purpose of providing our restaurants with consistent quality food products that meet our specifications while obtaining lower prices for those items through volume purchasing. A substantial majority of the food products served in our restaurants are distributed to the restaurants by the commissary. In addition to purchasing food and other non-food products, the commissary manufactures certain proprietary products and ages and cuts red meat into steaks in its USDA-approved and inspected facility. We believe our commissary gives us a competitive advantage in servicing our restaurants and a financial advantage. We attribute the decreases in food cost as a percentage of our restaurant sales over the past three years, in part, to the financial leverage generated from the increased purchasing volumes and operating efficiencies of our commissary.
On May 26, 2000, we purchased two existing 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. Total revenues for the Stoney River concept were $10.8 million and $5.4 million in 2001 and 2000, respectively. Our interest expense increased as a result of the indebtedness incurred to finance the acquisition. Our depreciation and amortization increased as a result of the $10.7 million of goodwill associated with the acquisition. The pretax loss for the Stoney River concept was $2.3 million and $1.3 million in 2001 and 2000, respectively.
The following tables reflects changes in the number of restaurants we operated during the years presented:
During the third quarter of 2001, we incurred a charge of approximately $5.8 million, or approximately $0.20 per diluted share, related to the closing of five stores. These current closings are the result of a comprehensive review of the past and expected performance of all locations, taking into consideration the difficult economic environment. We closed one of the five restaurants closed in 2001. We
closed two additional stores in the first quarter of 2002.
We have completed a feasibility study on franchising our O'Charley's restaurant concept and are in the process of finalizing the proper legal and regulatory requirements in order to begin franchising. We have begun marketing the franchise concept, but we do not believe we will generate any revenue or profits in 2002. We project approximately $750,000 in expenditures for this franchising project in 2002, and we may continue to experience expenditures and losses until such time, if ever, that we generate sufficient revenue to cover these expenditures.
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, beverage and supplies primarily consists of the costs of beef, poultry, seafood, produce and alcoholic and non-alcoholic beverages. We believe our menu offers 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. Various factors beyond our control, including adverse weather, cause periodic fluctuations in food and other costs. 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. We typically pay our employees more than minimum wage and do not expect an immediate adverse effect on our financial performance from any further increase in the federal minimum wage rate. However, as in prior years, we do expect that overall wage inflation will be higher for several years following any minimum wage increase. As Congress has raised the federal minimum wage rate in recent years, the base wage rate for our tipped employees has remained at $2.13. Any increase to the base wage rate for our tipped employees would increase payroll costs.
Restaurant operating costs include occupancy and other expenses at the restaurant level, except property and equipment depreciation and amortization. Rent, supervisory salaries, bonuses and 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. We are evaluating a possible sale leaseback facility pursuant to which the lessor would acquire certain of our restaurant properties and then lease those properties to us. To the extent that proceeds from any sale leaseback transaction are used to repay indebtedness under our revolving credit facility, this would reduce our interest expense. We would incur additional rent expense, however, which would increase our restaurant operating costs. The accounting standards setting bodies are currently considering changes to the accounting rules that could impact how we would account for such a transaction.
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 an estimated useful life. Depreciation and amortization also includes amortization of goodwill, which relates primarily to the acquisition of the Stoney River concept. Our depreciation and amortization increased as a result of the $10.7 million of goodwill incurred in connection with our May 2000 acquisition of the Stoney River Legendary Steaks concept. In accordance with a new accounting pronouncement, SFAS No. 142, (Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangibles") beginning in 2002, goodwill and intangible assets with indefinite useful lives will no longer be amortized. We are currently evaluating the fair value of these assets that have a carrying value of approximately $10.0 million at December 30, 2001. We would be required to record a charge in 2002
if the fair value is determined to be less than the carrying value at December 31, 2001. Any such impairment loss would be recognized as a cumulative effect of a change in accounting principle. See "Accounting Changes and Recent Accounting Pronouncements" - SFAS No. 142 in Accounting Changes and Recent Accounting Pronouncements.
Preopening costs include operating costs and expenses incurred prior to a new restaurant opening. Our current practice of expensing preopening costs may cause fluctuations in our results of operations from quarter to quarter and year to year depending on when those costs are incurred. See "Risk Factors - Fluctuations in our operating results and other factors may result in decreases in our stock price." We recognized a charge for the cumulative effect of this change in accounting policy in the first quarter of 1999. Starting in 1999, we began reflecting our preopening costs on a separate line item labeled "preopening costs" on the statement of earnings rather than reporting these costs in the depreciation and amortization line item. The amount of preopening costs incurred in any one year includes costs incurred during the year for restaurants opened and under development. We incurred average preopening costs of approximately $220,000 for each new O'Charley's restaurant opened during 2001. We anticipate higher preopening costs for each Stoney River restaurant we open as compared to the average preopening costs for an O'Charley's restaurant.
The following information should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report and on Form 10-K. The following table reflects our operating results for 1999, 2000, and 2001 as a percentage of total revenues unless otherwise indicated. Fiscal years 2001 and 1999 were comprised of 52 weeks while fiscal year 2000 was comprised of 53 weeks. As a result, some of the variations reflected in the following data may be attributed to the different lengths of the fiscal years.
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(1) As a percentage of restaurant sales. (2) Reflects restaurant sales less cost of restaurant sales. While restaurant operating margin is a non-GAAP measurement, we believe it is a relevant and useful metric in discussing our operating results. (3) As a percentage of commissary sales.
Fiscal Year 2001 Compared with Fiscal Year 2000
Total revenues in 2001 increased $67.7 million, or 17.9%, to $444.9 million from $377.3 million in 2000 primarily as a result of an increase in restaurant sales of $67.2 million, or 18.0%. The increase in restaurant sales was attributable to the addition of 24 new O'Charley's restaurants, the inclusion of the two original Stoney River restaurants for the entire year following their acquisition in May 2000, one new Stoney River restaurant opened in 2001, and an increase in same store sales at our O'Charley's restaurants of 2.1%, including a customer traffic increase of 1.5%. Our overall check average for the O'Charley's concept was $11.28 in 2001 and $11.13 in 2000. The increases in revenue were partially offset by us having 52 weeks of operations in 2001 as compared to 53 weeks in 2000. In January 2001, we increased menu prices at our O'Charley's restaurants by approximately 2.0%. We believe we realized the majority of that price increase during the first quarter of 2001, but by the end of the first quarter, we began to see slowing consumer spending which resulted in a lower than expected check average. In response to the slowing consumer spending patterns, we increased our marketing efforts and began to promote lower priced entrees and lowered certain daily entree specials. As a result of this effort, we believe we maintained our increases in customer traffic but lowered our overall check average. Near the end of the third quarter of 2001, we began to see increases in consumer spending which raised our check average but we continued to promote lower priced entrees through the end of 2001.
Cost of food, beverage and supplies in 2001 increased $21.6 million, or 17.7%, to $143.4 million from $121.9 million in 2000. As a percentage of restaurant sales, cost of food, beverage and supplies decreased to 32.5% in 2001 from 32.6% in 2000. Although we experienced a slight improvement in the cost of food, beverage, and supplies in 2001, the reduction was not as significant as in the previous two years. We continued to experience improved purchasing and operating efficiencies in our restaurants and commissary, which was partially offset by significantly higher costs for certain commodity food items, including red meat, cheese, and baby back ribs. Additionally, food costs were impacted by our Stoney River restaurants in 2002 where the food costs are higher than O'Charley's due primarily to a higher percentage of red meat sales. Food costs were also impacted by the promotion of lower priced entrees in 2001. We anticipate more moderate increases in commodity costs in 2002.
Payroll and benefits increased $23.0 million, or 20.0%, to $138.0 million in 2001 from $115.0 million in 2000. Payroll and benefits, as a percentage of restaurant sales, increased to 31.3% in 2001 from 30.8% in 2000. The increase was attributable to increasing salaries for restaurant management along with higher employee benefit costs, including workers' compensation and health insurance costs in 2001. Our markets generally have low unemployment rates and we compete with other restaurants for employees. We anticipate continued increases in wage rates and employee benefit costs in 2002.
Restaurant operating costs in 2001 increased $10.0 million, or 19.0%, to $62.4 million from $52.4 million in 2000. Restaurant operating costs, as a percentage of restaurant sales, increased to 14.2% in 2001 from 14.0% in 2000. In 2001, we experienced higher utility costs, primarily natural gas, and higher insurance expenses, primarily general and liquor liability insurance. These increases were partially offset by a decrease in supervisory expenses in 2001 as a percentage of total revenue. Overall utilities in 2001 increased $2.6 million, or 28%, as compared to 2000. Natural gas prices were significantly higher during the first three quarters of 2001, but decreased during the fourth quarter to similar levels in the same quarter of 2000. We expect to continue to see higher insurance expenses in 2002 and are currently evaluating this area for our upcoming annual renewal.
Advertising, general and administrative expenses increased $5.5 million, or 22.5%, to $30.0 million in 2001 from $24.5 million in 2000. As a percentage of total revenues, advertising, general and administrative expenses increased to 6.7% in 2001 from 6.5% in 2000. Advertising expenditures increased 39.6% to $13.3 million in 2001 from $9.5 million in 2000 and, as a percentage of restaurant sales, increased to 3.0% in 2001 from 2.5% in 2000. Stoney River restaurants rely primarily on word of mouth to attract new customers rather than advertising. O'Charley's advertising, as a percentage of O'Charley's restaurant sales, was 3.1% in 2001 compared to 2.6% in 2000. We increased our advertising expenditures beginning in the second quarter of 2001 through the end of the year in response to the slowing consumer spending trends we began to experience near the end of the first quarter. An increase in television costs represented the primary share of the overall increase in advertising expenditures. General and administrative expenses increased 11.6% to $16.7 million in 2001 from $15.0 million in 2000, but as a percentage of total revenues, decreased to 3.8% in 2001 from 4.0% in 2000. The decrease in general and administrative expenses primarily resulted from a decrease in bonus and legal
expenses.
Depreciation and amortization in 2001 increased $3.9 million, or 21.6%, to $22.1 million in 2001 from $18.2 million in 2000. As a percentage of total revenues, depreciation and amortization increased to 5.0% in 2001 from 4.8% in 2000. The increase in depreciation expense was primarily attributable to the growth in the number of new restaurants and capital expenditures for improvements to existing restaurants.
Asset impairment and exit costs were $5.8 million during 2001. During the third quarter of 2001, we made the decision to close five restaurants. The decision followed a review of historical and projected cash flows of our stores in view of the difficult economic environment in which we were operating. As a result of this decision, we recognized a charge during the third quarter of 2001 for asset impairment of approximately $5.0 million and exit costs of approximately $800,000 primarily associated with certain related lease commitments.
Preopening costs in 2001 increased $1.0 million, or 20.2%, to $5.7 million from $4.7 million in 2000. As a percentage of total revenues, preopening costs increased to 1.3% in 2001 from 1.2% in 2000. This increase is attributable primarily to the cost incurred for the new O'Charley's restaurants in addition to higher preopening costs incurred for the new Stoney River restaurant.
Income from operations decreased $3.5 million, or 9.4%, to $33.7 million in 2001 from $37.2 million in 2000. Excluding the asset impairment and exit costs, income from operations increased $2.3 million, or 6.2%, to $39.5 million, in 2001. This increase is less than our original expectations due primarily to slowing consumer spending, higher than expected costs of certain food commodities, higher utilities, higher insurance costs and increased advertising expenditures.
Interest expense, net decreased $800,000 in 2001 to $6.6 million from $7.4 million in 2000. This decrease is primarily the result of overall lower interest rates in 2001. The weighted average interest rate on our revolving credit facility decreased to 5.2% in 2001 as compared with 7.4% in 2000 due to lower short term LIBOR rates in 2001. Additionally, overall interest expense was reduced due to decreased borrowings on our revolver as we used the $41.7 million proceeds from the sale of our common stock in April 2001 to reduce our debt. See "Liquidity and Capital Resources".
Earnings before income taxes for 2001 decreased $2.9 million, or 9.7%, to $26.9 million from $29.8 million in 2000. Excluding the effect of the asset impairment and exit costs, earnings before income taxes increased 9.8 % to $32.7 million in 2001.
Income taxes for 2001 decreased $1.1 million, or 10.3%, to $9.3 million from $10.4 million in 2000. This decrease was primarily the result of the decrease in earnings before income taxes. The effective tax rate decreased to 34.8% of pre-tax earnings from 35.0% in 2000 due primarily to higher tax credits. We currently expect our effective tax rate to be unchanged in 2002.
The number of diluted weighted shares outstanding was 18.9 million shares in 2001, compared with 16.5 million shares in 2000. The primary reason for this increase is the 2.3 million shares of our common stock sold in April 2001.
Fiscal Year 2000 Compared with Fiscal Year 1999
Total revenues in 2000 increased $75.1 million, or 24.8%, to $377.3 million from $302.2 million in 1999 primarily as a result of an increase in restaurant sales of $74.7 million, or 25.0%. The increase in restaurant sales was attributable to the addition of 21 new O'Charley's restaurants, an increase in same store sales of 2.6%, the additional week of sales as 2000 was comprised of 53 weeks compared to 52 weeks in 1999, and the inclusion of Stoney River restaurant sales following their acquisition in May 2000. In March 2000, we increased menu prices by approximately 2.0%.
Cost of food, beverage and supplies in 2000 increased $22.1 million, or 22.2%, to $121.9 million from $99.7
million in 1999. As a percentage of restaurant sales, cost of food, beverage and supplies decreased to 32.6% in 2000 from 33.4% in 1999. We attribute these lower food cost percentages primarily to three factors: a menu price increase in March 2000, which increased the average check; a decrease in the cost of several food items; and improved purchasing and operating efficiencies in our restaurants and commissary. These improvements were partially offset by the inclusion of the Stoney River restaurants which we acquired in May 2000 and which have a higher cost of food, beverage and supplies as a percentage of sales, and an increase in poultry, red meat and baby back rib costs.
Payroll and benefits increased $24.4 million, or 26.9%, to $115.0 million in 2000 from $90.6 million in 1999. Payroll and benefits, as a percentage of restaurant sales, increased to 30.8% in 2000 from 30.3% in 1999. The increase was attributable to increasing wage rates and salaries for restaurant support staff and management along with higher workers compensation and health insurance costs in 2000. Those higher wages and salaries were partially offset by economies achieved from higher average restaurant sales volumes and reduced turnover rates for our hourly employees.
Restaurant operating costs in 2000 increased $10.0 million, or 23.5%, to $52.4 million from $42.5 million in 1999. Restaurant operating costs, as a percentage of restaurant sales, decreased to 14.0% in 2000 from 14.2% in 1999. This decrease was primarily attributable to economies achieved from higher average restaurant sales volumes. Utility costs began to significantly increase in December 2000.
Advertising, general and administrative expenses increased $5.2 million, or 27.3%, to $24.5 million in 2000 from $19.2 million in 1999. As a percentage of total revenues, advertising, general and administrative expenses increased to 6.5% in 2000 from 6.4% in 1999. Advertising expenditures increased 15.5% to $9.5 million in 2000 from $8.2 million in 1999 and, as a percentage of restaurant sales, decreased to 2.5% in 2000 from 2.8% in 1999. O'Charley's advertising, as a percentage of O'Charley's restaurant sales, was 2.6% in 2000 compared to 2.8% in 1999. General and administrative expenses increased 36.1% to $15.0 million in 2000 from $11.0 million in 1999, and as a percentage of total revenues, increased to 4.0% in 2000 from 3.6% in 1999. The increase in general and administrative expenses resulted from the inclusion of the Stoney River restaurants acquired in May 2000 and increased salary, bonus and legal expenses.
Depreciation and amortization in 2000 increased $4.1 million, or 29.5%, to $18.2 million from $14.1 million in 1999. As a percentage of total revenues, depreciation and amortization increased to 4.8% in 2000 from 4.7% in 1999. The increase in depreciation expense was primarily attributable to the growth in the number of new restaurants, capital expenditures for improvements to existing restaurants and the amortization of goodwill associated with the acquisition in May 2000 of the Stoney River Legendary Steaks concept.
Preopening costs, excluding the one-time cumulative adjustment made in 1999 for the change in accounting principle as measured under SOP 98-5, increased 16.6% in 2000 to $4.7 million from $4.0 million in 1999. As a percentage of total revenues, preopening costs decreased to 1.2% in 2000 from 1.3% in 1999.
Income from operations increased $8.2 million, or 28.1%, to $37.2 million in 2000 from $29.0 million in 1999.
Interest expense, net increased $3.2 million in 2000 to $7.4 million from $4.2 million in 1999. The increase was primarily related to the increased borrowings due to the addition of new restaurants and the acquisition of the Stoney River Legendary Steaks concept. Additionally, our weighted average interest rate on borrowed funds increased to 7.4% in 2000 from 6.2% in 1999 due to increases in LIBOR.
Earnings before income taxes and cumulative effect of change in accounting principle for 2000 increased $5.0 million, or 20.2%, to $29.8 million from $24.8 million in 1999.
Income taxes for 2000 increased $1.7 million, or 20.2%, to $10.4 million from $8.7 million in 1999.
The cumulative effect of the change in accounting principle, net of tax, recorded in the first quarter of 1999 and included in 1999 results, 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 27, 1998 was written off in this one-time adjustment. After adjusting for the tax benefit, the net cumulative effect was $1.3 million.
QUARTERLY FINANCIAL AND RESTAURANT OPERATING DATA
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 (13 weeks in the fourth quarter of 2000 because it was a 53-week year). As a result, some of the variations reflected in the following table may be attributed to the different lengths of the fiscal quarters.
Fiscal years 1999 and 2001 consisted of 52 weeks and fiscal 2000 consisted of 53 weeks.
(1)During the third quarter 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.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of cash have historically been cash provided by operations, borrowings under our revolving credit facility, capitalized lease obligations, and sales of our common stock. Our principal cash needs arise primarily from the purchase and development of new restaurants, equipment replacement, improvements to existing restaurants, and the repayment of debt.
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, and does not indicate a lack of liquidity. We expect to meet our
obligations as they come due through available cash and internally generated funds, and borrowings under our revolving credit facility. At December 30, 2001, our working capital deficiency was $15.2 million. The total net increase in cash was $3.8 million in 2001.
Cash provided by operations was $46.7 million in 2001, compared to $40.0 million in 2000 and $37.5 million in 1999. Other primary sources of cash in 2001 were $41.7 million in net proceeds from the sale of approximately 2.3 million shares of our common stock, net borrowings of $38.7 million under our revolving credit facility, $5.0 million of proceeds received upon the exercise of employee stock options and issuances under our stock purchase plan, and approximately $1.4 million from the sale of assets. Additionally, we financed $10.6 million in new restaurant equipment through capitalized lease obligations.
Property and equipment expenditures were $84.0 million in 2001, including $10.6 million of equipment acquired under capital leases. These expenditures were made primarily for 24 new O'Charley's restaurants opened during the year, the purchase of our home office and commissary facility, one new Stoney River restaurant opened during the year, restaurants under construction at December 30, 2001, and improvements to existing restaurants and our commissary facilities. Other primary uses of cash in 2001 included the reduction of our credit facility using the $41.7 million from the sale of our common stock, $7.9 million in principal payments on capitalized lease obligations and other long-term debt, and $5.2 million for the repurchase of 286,000 shares of our common stock.
We have an unsecured revolving credit facility that has a maximum borrowing capacity of $135 million that matures in October 2006. The amount outstanding under this facility was $89 million on December 30, 2001, a decrease of $3.0 million from December 31, 2000. The change in the amount outstanding in 2001 resulted from a reduction in the outstanding balance with the $41.7 million in net proceeds from the sale of our common stock, partially offset by net borrowings under the facility of approximately $38.7 million. The maximum borrowing capacity under our revolving credit facility is reduced by amounts financed under our synthetic lease facility described below. The credit facility requires monthly interest payments at a floating rate based on the bank's prime rate plus or minus a certain percentage spread or the LIBOR rate plus a certain percentage spread. The interest rate spread (75 basis points at December 30, 2001) is based on certain financial ratios and is recomputed quarterly. The weighted average interest rate on the outstanding borrowings under the facility during 2001 was 5.2%, as compared with 7.4% during 2000. On December 30, 2001, the average interest rate on the outstanding balance of the facility was 2.9%, as compared with 7.6% at the end of 2000. Our credit facility imposes restrictions on us with respect to the maintenance of certain financial ratios, the incurrence of indebtedness, sale of assets, mergers and the payment of dividends.
From time to time, we may enter into interest rate swap agreements with certain financial institutions for the purpose of fixing the amount of interest we pay over a certain period of time at varying notional amounts. At December 30, 2001, there were $20 million in aggregate amounts of interest rate swap agreements outstanding that carried a weighted average interest rate of 5.6%. The effective amount of interest we pay on the notional amounts of these swap agreements is calculated using the interest rate of the swap plus the percentage spread on our revolving credit facility. The swap agreements outstanding at December 30, 2001 expire as follows: $10 million in January 2004, and $10 million in January 2006.
We have available a synthetic lease facility pursuant to which the lessor has agreed to acquire or construct up to $25.0 million of properties and lease the properties to us. The terms of the facility provide for a separate operating lease agreement to be entered into for each property upon acquisition or completion of construction, each with a lease term ending October 5, 2006. Monthly rental payments for each property lease are based on the total costs advanced by the lessor to acquire or construct such property, and the amount of those payments varies based upon the floating interest rate in effect from time to time under our revolving credit facility. The acquisition and construction costs paid by the lessor under the synthetic lease facility reduce the maximum borrowing capacity under our revolving credit facility. In the fourth quarter of 2001, we elected to purchase $6.0 million of these properties from the lessor. We are not currently leasing any assets under this facility and have no current plans to utilize it in the future. We may do so in the future, however, subject to, among other factors, clarification of the impact of new accounting rules that appear to be forthcoming from the accounting standards setting bodies for such off-balance sheet financing arrangements.
On September 2, 1998, our board of directors approved the repurchase of up to 5.0% of our outstanding common stock. As of December 30, 2001, approximately 581,000 shares, or 3.1% of our outstanding stock, had been repurchased. We repurchased approximately 286,000 shares in 2001 for a total expenditure of approximately $5.2 million.
On May 26, 2000, we purchased two existing Stoney River Legendary Steaks restaurants and all associated trademarks and intellectual property for approximately $15.8 million in cash. The transaction includes an earn-out provision pursuant to which we may be required to pay the former owners up to $1.25 million at the end of 2002, $1.25 million at the end of 2003, and $2.5 million at the end of 2004. The potential earn-out is based on the Stoney River Legendary Steaks concept achieving certain performance thresholds (income before taxes and preopening costs) for such year. Based on our 2002 projected results for the Stoney River concept, we currently do not believe any earn-out amounts will be owed for 2002.
We have budgeted approximately $75.0 million to $80.0 million in 2002 for capital expenditures for the planned 18 to 22 new O'Charley's restaurants, improvements to existing O'Charley's restaurants, two new Stoney River restaurants, purchase of three O'Charley's restaurants previously leased, expansion of our commissary facilities, and information systems improvements. There can be no assurance that actual capital expenditures in 2002 will not vary significantly from budgeted amounts based upon a number of factors, including the timing of additional purchases of restaurant sites.
We expect to finance these capital expenditures with operating cash flows, borrowings under our revolving credit facility and capitalized lease obligations. We intend to continue financing the furniture, fixtures and equipment for our new restaurants primarily with capitalized lease obligations.
We are currently evaluating a possible $40 to $60 million sale leaseback facility pursuant to which we would sell some of the 100 restaurant properties at which we currently own the land and building and then lease those properties from the buyer. We currently anticipate that proceeds from the sale would be used primarily to repay indebtedness under our revolving credit facility, which would increase the amount available for future borrowings. The effect of a sale leaseback transaction on our results of operations would be to replace interest expense and depreciation expense of the cost of the applicable properties with rent expense. Any gain on the sale of any properties would be amortized over the life of the lease. Subsequent to a sale leaseback transaction, our earnings could be negatively impacted due to rent expense being higher than the interest and depreciation expense. We cannot assure you that we will enter into a sale and leaseback facility or, if we do so, the number of restaurant properties that we may sell or the terms of the leases pursuant to which we lease properties from the buyer.
We believe that available cash, cash generated from operations and borrowings under our revolving credit facility, and capitalized lease obligations will be sufficient to finance our operations and expected capital outlays for at least the next 12 months. We have historically produced sufficient cash flow from operations to supplement our capital needs each year. Our ability to meet our capital needs are highly dependent on us continuing to generate sufficient cash from operations and there can be no assurance that we will continue to do so. Our growth strategy includes possible acquisitions or strategic joint ventures. Any acquisitions, joint ventures or other growth opportunities may require additional external financing, and we may from time to time seek to obtain additional funds from a public or private issuance of equity or debt securities. There can be no assurances that such sources of financing will be available to us.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following tables set forth our contractual obligations and commercial commitments at December 30, 2001.
(1) Capitalized lease obligations include the interest expense component.
(2) This pertains to our revolving line of credit of which $89.0 million is included in long-term debt shown above.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are as follows:
- - Property and equipment
- - Excess of cost over fair value of net assets acquired (goodwill)
- - Impairment of long-lived assets
PROPERTY AND EQUIPMENT
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. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". 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 assets use are realized.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL)
As discussed in Note 1 to the Consolidated Financial Statements, as of December 30, 2001, we currently amortize goodwill over 20 years. Beginning in fiscal 2002, we will be required to adopt 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. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The goodwill to be tested is primarily related to the acquisition in May 2000 of the Stoney River Legendary Steaks concept.
Inherent in the policies regarding goodwill are the significant management judgments regarding the ongoing cash flow potential of the Stoney River Legendary Steak concept and our ability to locate and develop profitable locations in the future. Since the May 2000 acquisition, we have opened two new Stoney River stores and plan to open one additional store in 2002. These stores, not unlike any new store, may take time to reach a desired profitability point as the costs associated with labor and food cost in the first few months of operation are much higher as training, scheduling, and food preparation processes must be adjusted to meet customer demand. While we fully expect this concept to ultimately operate at a positive cash flow after its opening, the newness of the concept to our management team and our ability to effectively gauge customer demand can materially affect the ultimate cash flow picture for the concept and thereby affect the amount of goodwill deemed to be impaired in accordance with SFAS No. 142.
At this time, because we have not finished our analysis pursuant to implementing SFAS No. 142, we cannot reasonably estimate the ultimate effect that this new statement will have on our consolidated financial statements.
IMPAIRMENT OF LONG-LIVED ASSETS
As discussed in Note 1 to the Consolidated Financial Statements, Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," 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 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 and sustenance 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 can cause the Company to realize an impairment charge. 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.
ACCOUNTING CHANGES AND RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
We are required to adopt the provisions of SFAS No. 141 immediately, except with regard to business combinations initiated prior to July 1, 2001. We were required to adopt SFAS No. 142 on December 31, 2001. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142 will require us to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this we must identify our reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. We will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and we must perform the second step of the transitional impairment test. In the second step, we must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in our consolidated statement of earnings.
As of the date of adoption of SFAS No. 142, we had unamortized goodwill in the amount of approximately $10.0 million, which is subject to the transition provisions of SFAS No. 141 and 142. Amortization expense related to goodwill was $544,000 for the year ended December 30, 2001 and $335,000 for the year ended December 31, 2000. Because of the extensive effort needed to comply with adopting SFAS No. 141 and 142, we have not completed our analysis of the impact of adopting these Statements on our consolidated financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121.
We are required to adopt SFAS No. 144 in the first quarter of 2002. We do not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on our consolidated financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of the statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities. Therefore, we cannot determine the potential effect that adoption of SFAS No. 144 will have on our consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 was later amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133, as amended, requires recognition of the fair value of all derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), on the balance sheet and establishes new accounting rules for hedging activities. We were required to adopt SFAS No. 133, as amended, on January 1, 2001 and the adoption did not impact our results of operations, cash flows or financial position.
RELATED PARTY TRANSACTIONS
During 2001, we leased the land and building of three of our restaurants from Two Mile Partners, a 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 O'Charley's, and Gregory L. Burns, who owns 25% of the partnership and is our Chairman and Chief Executive Officer. During 2000, we terminated a lease with this entity for one of our previously operated restaurants. Subsequently, Two Mile Partners, in an action initiated by Mr. Wachtel in his capacity as managing partner, sued us alleging that we breached a continuous operation provision in the lease by vacating the property and opening another O'Charley's restaurant in Clarksville, Tennessee. We paid approximately $490,000 in 2001 and $775,000 in 2000 in rent expense to Two Mile Partners. In January 2002, we entered into a comprehensive settlement agreement with Two Mile Partners settling all litigation and business matters between us. As a result of the settlement, (i) we purchased restaurant properties located in Goodlettsville, Murfreesboro and Clarksville, Tennessee that we leased from Two Mile Partners for $1.7 million, $1.6 million and $1.0 million, respectively, (ii) we terminated our lease with Two Mile Partners for a restaurant property located in Bowling Green, Kentucky on which we formerly operated our 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 us in consideration of a payment by us of $200,000.
Mr. Burns recused himself from our discussions and considerations of any matters relating to the settlement. We believe that we terminated the Clarksville lease in accordance with its terms and deny 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 our best interest in order to settle the litigation to avoid the expense, uncertainty and distraction of this litigation. We believe the terms of the purchase of the Goodlettsville, Murfreesboro and Clarksville properties and the sale of the Bowling Green property were fair to, and on terms no less favorable than, we would have obtained in an arms' length transaction with an unrelated third party. See Notes to the Consolidated Financial Statements - Related Party Transactions, and "Commitments and Contingencies," and "Legal Proceedings."
IMPACT OF INFLATION
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.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 primarily of our revolving credit facility. In addition, to the extent
we utilize our synthetic lease facility in the future, lease payments would be at variable rates based upon prevailing interest rates.
As an additional method of managing our interest rate exposure on our revolving 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 30, 2001, we had in effect $20.0 million in swaps at an average fixed rate of 5.6%, $10.0 million of which matures in January 2004 and $10.0 million of which matures in January 2006.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS O'CHARLEY'S INC.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders O'Charley's Inc. Nashville, Tennessee:
We have audited the consolidated balance sheets of O'Charley's Inc. and subsidiaries as of December 30, 2001 and December 31, 2000, 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 30, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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 statements 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 30, 2001 and December 31, 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 30, 2001, in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Nashville, Tennessee February 7, 2002
CONSOLIDATED BALANCE SHEETS
See notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF EARNINGS
See notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
See notes to the consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to the consolidated financial statements
O'CHARLEY'S INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
O'Charley's, Inc. (the "Company") owns and operates 161 (at December 30, 2001) full-service restaurant facilities in 14 southeastern and midwestern states under the trade name of "O'Charley's" and three full-service restaurant facilities under the trade name of "Stoney River Legendary Steaks." The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. The Company's fiscal year ends on the last Sunday in December. Fiscal 2001 was comprised of 52 weeks, which ended December 30, 2001. Fiscal 2000 was comprised of 53 weeks, which ended December 31, 2000. Fiscal year 1999 was comprised of 52 weeks, which ended December 26, 1999.
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.
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. The Company adopted SOP 98-5, "Reporting the Costs of Start-Up Activity," in the first quarter of 1999. SOP 98-5 requires that costs incurred during a start-up activity (including organization costs) be expensed as incurred. Prior to the adoption of SOP 98-5, preopening costs were capitalized and amortized over one year. Accordingly, the Company now expenses preopening costs in the period incurred, and recognized in 1999, as a cumulative effect of a change in accounting principle, a charge equal to the after-tax effect of the unamortized preopening costs recorded on the accompanying consolidated balance sheet at December 27, 1998.
Investments. The Company owns certain marketable securities that are accounted for in accordance with Statement of Financial Accounting Standards No. 115. "Accounting for Certain Debt and Equity Securities". Marketable securities are classified as available for sale securities and are carried at fair value, with the unrealized gains and losses recorded in a separate component of shareholders' equity, net of tax unless there is a decline in value which is considered to be other than temporary, in which case the cost of such security is written down to fair value and the amount of the write down is reflected in earnings. At December 30, 2001, the fair value and cost of such securities was $256,000.
Property and Equipment are stated at cost and depreciated on a straight-line method over the following estimated useful lives: buildings and improvements--30 years; furniture, fixtures and equipment--3 to 10 years. Leasehold improvements are amortized over the lesser of the asset's estimated useful life or the expected lease term. Equipment under capitalized leases is amortized to its expected value to the Company at the end of the lease term. Gains or losses are recognized upon the disposal of property and equipment, and the asset and related accumulated depreciation and amortization are removed from the accounts. Maintenance, repairs and betterments that do not enhance the value of or increase the life of the assets are expensed as incurred.
Excess of Cost Over Fair Value of Net Assets Acquired (goodwill), which is included in other assets, is amortized over 20 years using the straight-line method. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the asset balance over its remaining useful life can be recovered through undiscounted future operating cash flows of the acquired operations. The amount of asset impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate commensurate with the risks associated with the acquired entity. The assessment of the recoverability of the asset will be impacted if estimated future operating cash flows are not achieved. The treatment of this asset will change beginning in 2002. See "Accounting Changes and Recent Accounting Pronouncements".
Impairment of Long-Lived Assets. Statement of Financial Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," 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 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. See "Accounting Changes and Recent Accounting Pronouncements".
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 certificates are deferred and recognized as revenue as such gift certificates 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 2001, 2000, and 1999 totaled $13.3 million, $9.5 million, and $8.2 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 accounts for its stock option plans in accordance with Statement of Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of the grant. Alternatively, FAS 123 also allows entities to continue to apply the provisions of Accounting Principle Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and provide pro forma net earnings and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in FAS 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of FAS 123.
Per Share Data. Basic earnings per common share have been computed by dividing net earnings by the weighted average number of common shares outstanding during each year presented. Diluted earnings per common share have been computed by dividing net earnings by the weighted average number of common shares outstanding plus the dilutive effect of options outstanding during the applicable periods.
Stock Repurchase. Under Tennessee law, when a corporation purchases its common stock in the open market, such repurchased shares become authorized but unissued. The Company reflects the purchase price of any such repurchased shares as a reduction of additional paid-in capital and common stock.
Fair Value of Financial Instruments. Statement of Financial Accounting Standards No. 107 ("FAS 107"), "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair values of most on-and-off balance sheet financial instruments for which it is practicable to estimate that value. The scope of FAS 107 excludes certain financial instruments such as trade receivables and payables when the carrying value approximates the fair value, employee benefit obligations, lease contracts, and all nonfinancial instruments such as land, buildings, and equipment. The fair values of the financial instruments are estimates based upon current market conditions and quoted market prices for the same or similar instruments as of December 30, 2001. Book value approximates fair value for substantially all of the Company's assets and liabilities that fall under the scope of FAS 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.
For the year ended December 30, 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. Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income," establishes rules for the reporting of comprehensive income and its components. Comprehensive income, presented in the Consolidated Statement of Shareholders' Equity and Comprehensive Income, consists of net income and unrealized gains (losses) on available for sale securities and interest rate swaps. Other comprehensive loss, net of tax, for 2001 was $270,000. The other comprehensive loss is comprised of an unrealized loss on derivative financial instruments of $490,000, net of tax, offset by the effect of a loss of $220,000, net of tax, recognized in earnings related to available for sale securities.
Operating Segments. Due to similar economic characteristics, as well as a single type of product, production process, distribution system and type of customer, the Company reports the operations of its two concepts on an aggregated basis and does not separately report segment information. Revenues from external customers are derived principally from food and beverage sales. The Company does not rely on any major customers as a source of revenue. As a result, separate segment information is not disclosed.
Use of Estimates. Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from these estimates.
Accounting Changes and Recent Accounting Pronouncements. In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria which intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Company adopted the provisions of SFAS No. 141 on July 1, 2001, except with regard to business combinations initiated prior to July 1, 2001. SFAS No. 142 must be adopted by the Company effective December 31, 2001. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continue to be amortized prior to the adoption of SFAS No. 142.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption.
The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication exists that the reporting unit's goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's consolidated statement of earnings.
As of the date of adoption, the Company had unamortized goodwill in the amount of $10.0 million, which will be subject to the transition provisions of SFAS No. 141 and 142. Amortization expense related to goodwill was $544,000 for the year ended December 30, 2001. Because of the extensive effort needed to comply with adopting SFAS No. 141 and 142, the Company has not completed its analysis and, therefore, is currently unable to reasonably estimate the impact of adopting these Statements on the Company's consolidated financial statements, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. The Company is required to adopt SFAS No. 144 in the first quarter of 2002, and plans to adopt its provisions for the quarter ending April 21, 2002. Management does not expect the adoption of SFAS No. 144 for long-lived assets held for use to have a material impact on the Company's consolidated financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of SFAS No. 144 will have on the Company's consolidated financial statements.
2. ACQUISITION
On May 26, 2000, the Company purchased two existing Stoney River Legendary Steaks restaurants and all associated trademarks and intellectual property for approximately $15.8 million in cash. In addition, the transaction includes an earn-out provision pursuant to which the sellers may receive up to $1.25 million at the end of 2002, $1.25 million at the end of 2003, and $2.5 million at the end of 2004. The potential earn-out is based on the Stoney River concept achieving certain performance thresholds (income before taxes and preopening costs) for such year. The transaction was accounted for using the purchase method of accounting and, accordingly, the results of operations of Stoney River have been included in the Company's consolidated financial statements from the date of acquisition. The Stoney River concept is being operated as a wholly owned subsidiary of the Company. Through December 30, 2001, goodwill resulting from the acquisition was being amortized on a straight-line basis over 20 years. The allocation of the purchase price to the acquired net assets is as follows (in thousands):
The following unaudited proforma condensed results of operations give effect to the acquisition of Stoney River
Legendary Steaks as if such transaction had occurred at December 28, 1998:
The foregoing unaudited proforma amounts are based upon certain assumptions and estimates, including, but not limited to the recognition of interest expense on debt incurred to finance the acquisition and amortization of goodwill over 20 years. The unaudited proforma amounts do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at year-end:
Depreciation and amortization of property and equipment was $21.6 million, $17.9 million, and $14.0 million for the years ended December 30, 2001, December 31, 2000, and December 26, 1999, respectively.
4. OTHER ASSETS
Other assets consist of the following at year-end:
Amortization of goodwill was $544,000, $335,000, and $16,000 for the years ended December 30, 2001,
December 31, 2000, and December 26, 1999, respectively.
5. ACCRUED EXPENSES
Accrued expenses include the following at year-end
6. LONG-TERM DEBT
Long-term debt consists of the following at year-end:
On January 31, 2000, the Company entered into an amended and restated revolving credit agreement (the "Third Amendment") which increased its unsecured line of credit facility to $135.0 million from $100.0 million. However, the maximum borrowing capacity of the credit facility is reduced by amounts outstanding pursuant to the Company's synthetic lease facility (see Note 7). The Third Amendment requires monthly interest payments at a floating rate based on the bank's prime rate plus or minus a certain percentage spread or the LIBOR rate plus a certain percentage spread. The interest rate spread on the facility is based on certain financial ratios achieved by the Company and is recomputed quarterly. At December 30, 2001, the $89.0 million outstanding balance carried interest rates from 2.7% to 4.3%. The Third Amendment also extended the maturity date of the facility to May 31, 2003 and allows the facility to be extended annually by one year at the participating banks' option. The Third Amendment also requires the Company to meet certain financial and other covenants, including restrictions on the incurrence of indebtedness, the sale of assets, mergers and dividend payments. On July 9, 2001, the Company entered into an amendment to its revolving credit agreement that extended the maturity date of the facility from May 31, 2003 to October 5, 2006. The other terms and conditions of the credit facility were not changed. The Company is required to pay commitment fees on the $135 million revolving line of credit. The commitment fees in 2001 ranged from 0.125% to 0.15% depending upon the Company's performance in meeting certain financial and other covenants. The total amount paid in 2001 for commitment fees was approximately $188,000.
The secured mortgage note payable at December 30, 2001, 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 $987,000 at December 30, 2001.
The installment note payable at December 30, 2001, bears interest at 8.6% and are payable in monthly installments, including interest, through October 2002. The installment note payable of $110,000 is secured by an airplane with a depreciated cost of approximately $928,000 at December 30, 2001. This note was paid in full in February, 2002.
The annual maturities of long-term debt as of December 30, 2001, are: $125,000-2002; $17,000-2003; $18,000-2004; $21,000-2005; $89.0 million-2006; and $102,000 thereafter.
7. LEASE COMMITMENTS
The Company has various leases for certain restaurant land and buildings under operating lease agreements. Under these leases, the Company pays taxes, insurance and maintenance costs in addition to the lease payments. Certain leases also provide for additional contingent rentals based on a percentage of sales in excess of a minimum rent. The Company leases certain equipment and fixtures under capital lease agreements having lease terms from five to seven years. The Company expects to exercise its options under these agreements to purchase the equipment in accordance with the provisions of the lease agreements.
The Company has a $25.0 million synthetic lease facility which matures in October 2006. The Company will act as construction agent for the lessor for certain of the properties. A separate operating lease agreement will be entered into for each property upon acquisition or construction completion providing for a term ending in October 2006. Monthly rental payments for each property lease will be based on the total costs advanced by the lessor for such property and a floating rate based on the bank's prime rate minus a certain percentage spread or the LIBOR rate plus a certain percentage spread. The lease facility requires the Company to meet certain financial and other covenants similar to the covenants and restrictions contained in the revolving credit facility. The costs accumulated by the lessor under the synthetic lease facility reduce the maximum borrowing capacity under the Company's revolving credit facility as described in Note 6 to the consolidated financial statements.
Upon the expiration of the lease term, the Company may seek to renew the facility. Any renewal of the facility requires the lessor's consent. If the Company is unable to or chooses not to renew the facility, the Company has the option to sell the properties to third parties on behalf of the lessor, surrender the properties to the lessor or purchase the properties at their original cost. If the properties are sold by the Company to third parties for less than their aggregate original cost, the Company is obligated, under a residual value guarantee, to pay the lessor an amount equal to the shortfall, not to exceed 85% of the aggregate original cost of the properties. To the extent the aggregate sales proceeds exceed the aggregate original cost of the properties, the lessor will remit to the Company such excess. If the Company surrenders the properties to the lessor, the Company is obligated, under its residual value guarantee, to pay the lessor an amount equal to 85% of the aggregate original cost of such properties (but if the lessor later sells such properties to third parties, the lessor must remit the sales proceeds to the Company to the extent the sale proceeds, plus the amount of the Company's residual value payment, exceeds the aggregate original cost of the properties). There can be no assurance that the Company will be able to renew the leases or sell the properties to third parties.
The Company currently is not leasing any assets under the synthetic lease facility. The Company is currently evaluating whether it will utilize the synthetic lease facility in the future.
As of December 30, 2001, approximately $34.6 million net book value of the Company's property and equipment is under capitalized lease obligations. Interest rates on capitalized lease obligations range from 5.3% to 7.5%.
Future minimum lease payments at December 30, 2001, are as follows:
Rent expense for the fiscal years ending in December for operating leases is as follows:
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
The Company uses variable-rate debt to help finance its operations. The debt obligations expose the Company to variability in interest payments due to changes in interest rates. Management believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management periodically enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed-rate cash flows. Under the terms of the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt. The swaps have been designated as cash flow hedges.
Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable-rate, long-term debt obligations are reported in accumulated other comprehensive income, net of tax. These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged debt obligation in the same period in which the related interest affects earnings.
As of December 30, 2001, the Company had in effect $20.0 million in swaps at an average fixed rate of 5.6%, $10.0 million of which matures in January 2004 and $10.0 million of which matures in January 2006. As of December 30, 2001, $490,000 of deferred losses, net of tax, on the swaps were included in accumulated other comprehensive income. The Company had no derivative instruments at December 31, 2000.
9. INCOME TAXES
The total income tax expense (benefit) for each respective year is as follows:
Income tax expense related to earnings before cumulative effect of accounting change for each respective year is as follows:
Income tax expense (benefit) attributable to earnings 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 net deferred tax liability (asset) at year-end is recorded as follows:
Based on the Company's history of taxable income and management's projections of future taxable income, the Company believes it is more likely than not that all of the deferred tax assets will be realized; thus, no valuation allowance is recorded.
10. SHAREHOLDERS' EQUITY
On September 2, 1998, the Board of Directors of the Company approved the repurchase of up to 750,000 shares of the Company's common stock. As of December 30, 2001, approximately 598,000 shares have been repurchased.
The Company's charter authorizes 100,000 shares of preferred stock of which the Board of Directors may, without shareholder approval, issue with voting or conversion rights upon the occurrence of certain events. At December 30, 2001, no preferred shares had been issued.
On December 8, 2000, the Company's Board of Directors adopted a Shareholders' Rights Plan (the "Rights Plan") to protect the interests of the Company's shareholders if the Company is confronted with coercive or unfair takeover tactics by third parties. Pursuant to the Rights Plan, a dividend of one Right for each share of outstanding share of the Company's Common Stock was issued to shareholders of record on December 27, 2000. Under certain conditions, each Right may be exercised to purchase one-thousandth of a share of a new Series A Junior Preferred Stock at an exercise price of $80 per Right. Each Right will become exercisable following the tenth day after a person's or group's acquisition of, or commencement of a tender exchange offer for 18% or more of the Company's Common Stock. If a person or group acquires 18% or more of the Company's Common Stock, each right will entitle its holder (other than the person or group whose action has triggered the exercisability of the Rights) to purchase common stock of either O'Charley's Inc. or the acquiring company (depending on the form of the transaction) having a value of twice the exercise price of the Rights. The Rights will also become exercisable in the event of certain mergers or asset sales involving more than 50% of the Company's assets or earning power. The Rights may be redeemed prior to becoming exercisable, subject to approval by the Company's Board of Directors, for $0.001 per Right. The Rights expire on December 8, 2010. The Company has reserved 50,000 shares of Series A Junior Preferred Stock for issuance upon exercise of the Rights.
11. EARNINGS PER SHARE
The following is a reconciliation of the weighted average shares used in the calculation of basic and diluted earnings per share.
During the first quarter of 2002, the Company issued options to purchase 206,000 shares of Common Stock at an exercise price of $21.17 per share. For the fiscal years 2001, 2000, and 1999, the number of anti-dilutive shares excluded from the weighted average shares calculation were approximately 73,000, 1,016,000, and 646,300, respectively.
12. STOCK OPTION AND PURCHASE PLANS
The Company has various incentive stock option plans that provide for the grant of both statutory and nonstatutory stock options to officers, key employees, nonemployee directors and consultants of the Company. The Company has reserved 5,963,768 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 30, 2001, options to purchase 624,850 shares of common stock were outstanding under the 2000 Plan. Following adoption of the 2000 Plan, no additional options may be granted pursuant to previously adopted stock option plans. At December 30, 2001, options to purchase 2,973,368 shares of common stock were outstanding under those previously adopted plans. The Company applies APB Opinion No. 25 in accounting for its plan; and, accordingly, no compensation cost has been recognized.
A summary of stock option activity during the past three years is as follows:
At the end of 2001, 2000 and 1999, the number of options exercisable was approximately 2,267,000, 2,362,000 and 2,038,000, respectively, and the weighted average exercise price of those options was $8.82, $7.48 and $6.28, respectively.
The following table summarizes information about stock options outstanding at December 30, 2001.
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 30, 2001, 287,895 shares have been issued under this plan.
If compensation cost for these plans had been determined consistent with FAS Statement No. 123, the Company's net earnings and earnings per share would have been reduced to the following pro forma amounts:
Because the FAS 123 method of accounting has not been applied to options granted prior to January 1, 1996, 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 $550,000 in 2001, $439,000 in 2000, and $356,000 in 1999.
The Company maintains a deferred compensation plan for a select group of management employees to provide supplemental retirement income benefits through deferrals of salary, bonus and deferral of contributions which cannot be made to the Company's 401(k) Plan due to Internal Revenue Code limitations. Participants in this plan can contribute, on a pre-tax basis, up to 50% of their base pay and 100% of their bonuses. The Company contributes annually to this plan an amount equal to a matching formula of each participant's deferrals. Company contributions were $248,000 in 2001, $214,000 in 2000, and $205,000 in 1999. The amount of the deferred compensation liability payable to the participants is recorded as "other liabilities" on the consolidated balance sheets.
14. RELATED-PARTY TRANSACTIONS
At the beginning of 1999, the Company leased three of its restaurants from CWF Associates, Inc., an entity that was controlled by certain directors and the chief executive officer of the Company. During 1999, the Company terminated one of the leases for a fee of $116,000 paid to CWF Associates, Inc. During 2000, the Company purchased the remaining two leased properties for an aggregate of $1.9 million.
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. Also refer to Note 17.
The aforementioned related-party transactions are reflected in the consolidated financial statements as follows:
15. CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information is as follows:
16. ASSET IMPAIRMENT AND EXIT COSTS
During the 2001 third quarter, management made the decision to close five stores at various specific dates over the next twelve months. 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 is operating. As a result of this decision, the Company recognized a charge during the third quarter 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 30, 2001. There had been no significant payments related to the exit costs as of December 30, 2001.
17. COMMITMENTS AND CONTINGENCIES
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 we 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. The $200,000 cash settlement has been accrued in the accompanying consolidated financial statements.
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.
The Company is also involved in various other legal actions incidental to its business. In the opinion of management, the ultimate outcome of these matters will not have a material impact on the Company's operating results, liquidity or financial position.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Proxy Statement issued in connection with the shareholders meeting to be held on May 9, 2002, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the caption "Election of Directors" information required by Item 10 of Form 10-K as to directors 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."
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The Proxy Statement issued in connection with the shareholders meeting to be held on May 9, 2002, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the caption "Executive Compensation" information required by Item 11 of Form 10-K and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Proxy Statement issued in connection with the shareholders meeting to be held on May 9, 2002, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the captions "Security Ownership of Certain Beneficial Owners" and "Election of Directors" information required by Item 12 of Form 10-K and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Proxy Statement issued in connection with the shareholders meeting to be held on May 9, 2002, to be filed with the Securities and Exchange Commission pursuant to Rule 14a-6(b), contains under the caption "Certain Transactions" information required by Item 13 of Form 10-K and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements: See Item 8
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 10.19)
- First Amendment to O'Charley's Inc. 1990 Employee Stock Plan (included as Exhibit 10.20)
- Second Amendment to O'Charley's Inc. 1990 Employee Stock Plan (included as Exhibit 10.21)
- Third Amendment to O'Charley's Inc. 1990 Employee Stock Plan (included as Exhibit 10.22)
- Fourth Amendment to O'Charley's Inc. 1990 Employee Stock Plan (included as Exhibit 10.23)
- O'Charley's 1991 Stock Option Plan for Outside Directors, as amended (included as Exhibit 10.24)
- CHUX Ownership Plan, as amended (included as Exhibit 10.25)
- O'Charley's 2000 Stock Incentive Plan (included as Exhibit 10.26)
- Severance Compensation Agreement, dated February 16, 2000, by and between O'Charley's Inc. and Gregory L. Burns (included as Exhibit 10.27)
- Severance Compensation Agreement, dated as of April 5, 2001, by and between O'Charley's Inc. and A. Chad Fitzhugh (included as Exhibit 10.28)
- Severance Compensation Agreement, dated as of April 5, 2001, by and between O'Charley's Inc. and Steven J. Hislop (included as Exhibit 10.29)
- Severance Compensation Agreement, dated as of August 30, 2000, by and between O'Charley's Inc. and William E. Hall, Jr. (included as Exhibit 10.30)
4. Exhibits:
(b) No reports on Form 8-K were filed by the Company during the twelve weeks ended December 30, 2001.
SIGNATURES
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, in the City of Nashville, State of Tennessee.
O'CHARLEY'S INC.
Date: March 29, 2002 By: /s/ Gregory L. Burns ---------------------------- Gregory L. Burns Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.