Annual Reports

  • 10-K (Mar 10, 2011)
  • 10-K (Mar 12, 2010)
  • 10-K (Mar 12, 2009)
  • 10-K (Mar 12, 2008)
  • 10-K (Mar 14, 2007)
  • 10-K (Mar 10, 2006)

 
Quarterly Reports

 
8-K

 
Other

O CHARLEYS INC 10-K 2009
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

 

 

For the fiscal year ended December 28, 2008

 

Commission file number 0-18629

O’CHARLEY’S INC.

(Exact name of registrant as specified in its charter)

 

Tennessee

62-1192475

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

3038 Sidco Drive

 

Nashville, Tennessee

37204

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code:

(615) 256-8500

 

 

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par

 

Series A Junior Preferred Stock Purchase Rights

 

(Title of Each Class)

 

 

Name of each Exchange on Which Registered

NASDAQ Global Select Market

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer o Accelerated filer x Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $210.8 million. For purposes of this calculation, shares held by non-affiliates excludes only those shares beneficially owned by officers, directors and shareholders beneficially owning 10% or more of the outstanding common stock.

 

The number of shares of common stock outstanding on March 3, 2009 was 21,330,686.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

Part of Form 10-K

Documents from which portions are

___________________incorporated by reference____________________

Part III

Proxy Statement relating to the registrant’s Annual Meeting of Shareholders to be held May 13, 2009

 

 

 

INDEX

 

PART I

3

Item 1. Business

3

Item 1A. Risk Factors

9

Item 1B. Unresolved Staff Comments

13

Item 2. Properties

13

Item 3. Legal Proceedings

13

Item 4. Submission of Matters to a Vote of Security Holders

14

PART II

14

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

14

Item 6. Selected Financial Data

16

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

19

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

35

Item 8. Financial Statements and Supplementary Data

36

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

70

Item 9A. Controls and Procedures

70

Item 9B. Other Information

72

PART III

72

Item 10. Directors, Executive Officers and Corporate Governance

72

Item 11. Executive Compensation

72

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

72

Item 13. Certain Relationships and Related Transactions, and Director Independence

72

Item 14. Principal Accountant Fees and Services

72

PART IV

73

Item 15. Exhibits and Financial Statement Schedules

73

SIGNATURES

78

EX-10.50 SUMMARY OF DIRECTOR AND EXECUTIVE OFFICER COMPENSATION

 

EX-10.55 FORM OF SECOND AMENDMENT TO O’CHARLEY’S INC. EXECUTIVE EMPLOYMENT AGREEMENT

 

EX-21 SUBSIDIARIES OF THE COMPANY

 

EX-23 CONSENT OF KPMG LLP

 

EX-31.1 SECTION 302 CERTIFICATION OF THE CEO AND CFO

 

EX-32.1 SECTION 906 CERTIFICATION OF THE CEO AND CFO

 

 

 

 

 

2

 

 


O’CHARLEY’S INC.

 

PART I

 

Item 1.

Business.

 

We are a leading casual dining restaurant company headquartered in Nashville, Tennessee. We own and operate three restaurant concepts under the “O’Charley’s,” “Ninety Nine” and “Stoney River Legendary Steaks” trade names. As of December 28, 2008, we operated 232 O’Charley’s company-owned restaurants in 16 states in the East, Southeast and Midwest, 116 Ninety Nine restaurants in nine states throughout New England and the Mid-Atlantic states, and eleven Stoney River restaurants in seven states in the East, Southeast and Midwest. As of December 28, 2008, we had nine franchised O’Charley’s restaurants, including four in Michigan, two in Ohio, and one in each Iowa, Pennsylvania and Tennessee. As of December 28, 2008, we had two joint venture O’Charley’s restaurants in Louisiana and one joint venture O’Charley’s restaurant in Wisconsin, in all of which we have an ownership interest.

 

The following description of our business should be read in conjunction with the information in Item 7 of this Form 10-K under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements in Item 8 of this Form 10-K.

 

Our Restaurant Concepts

 

O’Charley’s

 

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

 

O’Charley’s restaurants are open seven days a week and serve lunch, dinner and weekend brunch and offer full bar service. Specialty menu items include “limited time only” promotions, O’Charley’s Lunch Club and a special kids menu. We are continually developing new menu items for our O’Charley’s restaurants to respond to changing guest tastes and preferences. Lunch entrees range in price from $6.99 to $9.99, with dinner entrees ranging from $7.49 to $17.99. The average check per guest, including beverages, was $12.99 in 2008, $12.65 in 2007, and $12.04 in 2006.

 

We seek to create a casual, neighborhood atmosphere in our O’Charley’s restaurants through an open layout and by tailoring the decor of our restaurants to the local community. The interior typically is open, casual and well lighted and features warm woods, exposed brick, color prints and hand-painted murals depicting local history, people, places and events. The prototypical O’Charley’s restaurant is a free-standing building of approximately 6,000 square feet with seating for approximately 225 guests, including approximately 17 bar seats. We periodically update the interior and exterior of our restaurants to reflect refinements in the concept and respond to changes in guest tastes and preferences.

 

Historically, we have grown the O’Charley’s concept through opening new restaurants. As part of our strategic planning process, our focus on improving results in existing restaurants, and the current economic environment, we decided to open fewer restaurants in 2008 than in previous years. We opened four new company-owned restaurants and closed one company-owned restaurant in 2008. In 2009, we plan to open two new franchised O’Charley’s restaurants and no company-owned restaurants. During 2008 we re-branded 33 O’Charley’s restaurants and as of December 28, 2008 we have re-branded a total of 62 O’Charley’s restaurants. This initiative has focused on our overall brand design to enhance the guest experience, as well as improve our profitability. Re-brandings include the remodeling and re-imaging of the restaurants, staff training, and the introduction of new service standards, plateware and uniforms. We have suspended our ‘Project RevO’lution’ re-branding initiative until economic conditions improve.

 

Ninety Nine

 

In January 2003, we acquired Ninety Nine restaurants (“Ninety Nine”), a Woburn, Massachusetts-based casual dining concept that began in 1952 with its initial location at 99 State Street in downtown Boston. Ninety Nine restaurants are casual dining restaurants that we believe have earned a reputation as friendly, comfortable places to gather and enjoy great American food and drink at a terrific price. Ninety Nine restaurants are intended to appeal to mainstream casual dining and value oriented guests. The Ninety Nine menu features approximately 75 items, including a wide selection of appetizers, soups, salads, sandwiches, burgers, beef, chicken and seafood entrees and desserts. Ninety Nine restaurants offer full bar service, including a wide selection of imported and domestic beers, wines and specialty drinks.

 

Ninety Nine restaurants are open seven days a week and serve lunch and dinner. Lunch entrees range in price from $6.99 to $9.49 with dinner entrees ranging from $7.99 to $17.99. The average check per guest, including beverages, was $14.97 in 2008, $14.64 in 2007, and $14.08 in 2006.

 

Ninety Nine restaurants seek to provide a warm and friendly neighborhood pub atmosphere. Signature elements of the prototypical Ninety Nine restaurant include an open view kitchen, booth seating and a centrally located rectangular bar. The prototypical Ninety Nine restaurant is a free-standing building of approximately 6,700 square feet in size with seating for approximately 190 guests, including approximately 25 bar seats. Ninety Nine has grown through remodeling traditional and non-traditional restaurant locations as well as through developing new restaurants in the style of our prototype restaurant. During 2009, we plan to open one new Ninety Nine restaurant. During 2008, we re-branded 20 Ninety Nine

 

3

 

 


restaurants and as of December 28, 2008 we have re-branded a total of 62 Ninety Nine restaurants. We have suspended our ‘Dressed to the Nines’ re-branding initiative until economic conditions improve.

 

Stoney River Legendary Steaks

 

We acquired Stoney River Legendary Steaks (“Stoney River”) in May 2000. Stoney River restaurants are upscale steakhouses that are intended to appeal to both upscale casual-dining and fine-dining guests by offering the high-quality food and attentive guest service typical of high-end steakhouses at more moderate prices. Stoney River restaurants have an upscale “mountain lodge” design with a large stone fireplace and rich woods that is intended to make the interior of the restaurant inviting and comfortable. The Stoney River menu features several offerings of premium Midwestern beef, fresh seafood and a variety of other gourmet entrees. An extensive assortment of freshly prepared salads and side dishes are available a la carte. The menu also includes several specialty appetizers and desserts. Stoney River restaurants offer full bar service, including an extensive selection of wines. The dinner price range of entrees is $21.99 to $35.99. The average check per guest, including beverages, was $47.72 in 2008, $44.62 in 2007, and $41.72 in 2006.

 

Support Operations

 

Supply Chain Management. Our supply chain management offers a systematic approach to managing the acquisition of goods and services that achieves the lowest total cost of ownership and matches internal customers’ needs with marketplace capabilities. In 2007, we completed the sale of our Nashville commissary and now outsource all the commissary and food preparation functions previously provided in house. The supply chain team focuses on three key areas that include strategic sourcing, quality assurance and supply chain operations. Descriptions of these functions are as follows:

 

 

Strategic sourcing: manages and facilitates enterprise-wide sourcing activities, including the development of sourcing strategies, supplier negotiation and selection, and supplier performance management for specified expenditure areas.

 

 

Quality assurance: designs, implements, and measures strategic programs for both quality assurance and food safety that ensures we achieve, sustain, and continue to improve best of class programs for food quality and food safety for all our concepts.

 

 

Supply chain operations: ensures uninterrupted, timely flow of goods to our concepts, and monitors compliance with all sourcing and distribution agreements.

 

We continue to operate a distribution center in Bellingham, Massachusetts which distributes products to all Ninety Nine restaurants. We believe that our supply chain management team, as a result of these changes, is better positioned to focus upon improving the quality and cost of our products.

 

Human Resources. We maintain a human resources department that supports restaurant operations, our restaurant support center, our financial services center, and our Ninety Nine service center through the design and implementation of policies, programs, procedures and benefits for our team members. The human resources department is responsible for all customary HR functions, including assisting in the selection, on-boarding, training and development, team member relations, and benefits for our workforce. This includes the oversight and utilization of the alternative dispute resolution process. However, all team members are encouraged to first address any employment related issues or concerns through our open door policies or a toll free 800 number. The human resources area also administers the Team Member Survey and is responsible for identifying issues and developing action plans to resolve any issues that are identified. During 2007, we realigned our human resources department to provide more focus and support to our restaurant operations by moving support from the main office out to the field. This realignment has allowed us to improve the quality of team members we hire, evaluate the strengths of our team, ensure we optimize the performance of our team members at all levels across the enterprise and ultimately improve the overall operating execution and performance of our restaurants.

 

Guest Relations. Our guests’ perceptions and experiences are measured through the Guest Satisfaction Index (GSI). GSI is a survey-based tool designed to measure guest satisfaction levels at each O’Charley’s and Ninety Nine restaurant, providing immediate feedback to all levels of the organization. Guests are issued an invitation on a random basis through our point-of-sale system to take a telephone survey. Primary focus is placed on identification and improvement of top box predictors of a highly satisfied guest experience. Our ability to continuously monitor service levels and satisfaction at the restaurant level, while providing guests with a convenient, brief, unbiased, and user-friendly way to share their comments, allows us to focus on converting satisfied guests to highly satisfied or loyal guests. In addition to measuring and communicating guest satisfaction results, our guest relations team receives direct calls and written correspondence from O’Charley’s, Ninety Nine, and Stoney River guests, ensuring timely and accurate response to all communications.

 

Advertising and Marketing. We have an ongoing advertising and marketing plan for each of our restaurant concepts that utilize television, radio and print advertising. We also support our restaurants with point of purchase materials, menus and local restaurant marketing programs. We focus our marketing efforts on limited time promotional products, the quality and freshness of our products, the types of guests that typically visit us and the restaurant setting. We conduct or subscribe to studies of food trends, changes in guest tastes and preferences and are continually evaluating the quality of our menu offerings. In addition to advertising, we encourage restaurant level team members to become active in their communities through local charities and other organizations and sponsorships.

 

Restaurant Reporting and Back-Office Support. Our use of technology and management information systems is essential for the management oversight needed to improve our operating results. We maintain theoretical food, labor, and beverage cost systems in each of our restaurants through which we closely monitor and control restaurant operating costs. We also maintain operational and financial controls in each restaurant, including management information systems that monitor sales, inventory, and labor and that provide reports and data to our restaurant support center. The management accounting system polls data from our restaurants and generates daily reports of sales, sales mix, guest counts, average check, 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 analyses of sales by restaurant, product mix

 

4

 

 


and labor utilization. Our internal audit department audits a sample of our restaurants to measure compliance within our operational systems, procedures and controls. Our Financial Services Center is located in Brentwood, Tennessee and has been designed to consolidate and integrate our accounting functions. In addition, a centralized call line is available to restaurant management for questions or comments relating to their financial reports or employee benefits. We believe that consolidating the accounting function of our three concepts provides a structure that creates consistency and provides more centralized control over our accounting and financial reporting function while also promoting continuous process improvement and savings.

 

Real Estate and Construction. We maintain an in-house real estate and construction department to assist in the site selection process, secure real estate, develop architectural and engineering plans, and oversee new construction and re-brandings of existing restaurants. We maintain a broad database of possible sites which we analyze against our site criteria in order to target the best possible locations. Once a site is selected, our real estate department oversees the acquisition process, while our construction department obtains zoning and all other required governmental approvals, develops detailed building plans and specifications and constructs and equips the restaurants. During 2008, we suspended our re-branding efforts and further reduced our new restaurant development plans in response to the changing economic environment.

 

Restaurant Locations

 

The following table sets forth the markets in which our company-owned O’Charley’s, Ninety Nine and Stoney River restaurants were located at December 28, 2008, including the number of restaurants in each market.

 

O’Charley’s Restaurants

 

Alabama (21)

Kentucky (20)

Ohio (19)

Alabaster

Ashland

Cincinnati (7)

Birmingham (5)

Bowling Green

Cleveland

Decatur

Cold Spring

Columbus (7)

Dothan

Danville

Dayton (3)

Florence

Elizabethtown

Harrison

Guntersville

Florence

 

Huntsville (2)

Frankfort

South Carolina (12)

Mobile (4)

Hopkinsville

Aiken

Montgomery (2)

Lexington (4)

Anderson

Opelika

Louisville (5)

Charleston (2)

Oxford

Owensboro

Columbia (3)

Tuscaloosa

Paducah

Greenwood

 

Richmond

Rock Hill

Arkansas (2)

 

Simpsonville

Jonesboro

Louisiana (1)

Spartanburg

Rogers

Monroe

Summerville

 

 

 

Florida (6)

Mississippi (8)

Tennessee (40)

Destin

Gulfport

Chattanooga (2)

Jacksonville (3)

Hattiesburg

Clarksville (2)

Panama City

Meridian

Cleveland

Pensacola

Olive Branch

Cookeville

 

Pearl

Hendersonville

Georgia (28)

Ridgeland

Jackson

Atlanta (19)

Southaven

Johnson City

Augusta

Tupelo

Kingsport

Canton

 

Knoxville (5)

Columbus

 

Manchester

Dalton

Missouri (10)

Memphis (4)

Ft. Oglethorpe

Cape Girardeau

Morristown

Gainesville

Kansas City (2)

Mt. Juliet

Griffin

St. Louis (7)

Murfreesboro (2)

Macon (2)

 

Nashville (13)

 

North Carolina (25)

Pigeon Forge

Illinois (5)

Asheville

Springfield

Champaign

Burlington

Spring Hill

Marion

Charlotte (9)

 

O’Fallon

Fayetteville

Virginia (12)

Springfield (2)

Greensboro

Bristol

 

Greenville

Fredericksburg

Indiana (21)

Hendersonville

Harrisonburg

Bloomington

Hickory

Lynchburg

Clarksville

Jacksonville

Roanoke (2)

Corydon

Raleigh (3)

Richmond (6)

Evansville (2)

Wilmington (2)

 

Fort Wayne (2)

Winston-Salem (2)

West Virginia (2)

Indianapolis (11)

Wake Forest

Charleston (2)

Lafayette

 

 

Mooresville

 

 

Richmond

 

 

 

 

5

 

 


Ninety Nine Restaurants

 

Connecticut (15)

New Hampshire (14)

Massachusetts (62)

Enfield

Concord

Auburn

Groton

Dover

Boston (37)

Hartford (7)

Hooksett

Centerville

Manchester

Keene

Chicopee

New Haven (2)

Littleton

Fairhaven

Norwich

Londonderry

Fall River

Torrington

Manchester

Fitchburg

Stratford

Nashua

Franklin

 

North Conway

Holyoke

Maine (5)

Portsmouth

Greenfield

Augusta

Salem

Mashpee

Bangor

Seabrook

Marlboro

Portland (3)

Tilton

North Attleboro

 

West Lebanon

North Dartmouth

Rhode Island (3)

 

Plymouth

Cranston

New York (9)

Pittsfield

Newport

Albany (2)

Seekonk

Westerly

Clifton Park

Springfield (4)

 

Kingston

Tewksbury

Vermont (3)

Plattsburgh

West Yarmouth

Brattleboro

Queensbury

Worcester (3)

Rutland

Rotterdam

 

Williston

Saratoga Springs

 

 

Utica

 

 

 

 

New Jersey (1)

Pennsylvania (4)

 

Deptford

Audubon

 

 

Philadelphia

 

 

Trevose (Bensalem)

 

 

Warrington

 

 

 

 

 

Stoney River Restaurants

 

Georgia (3)

Kentucky (1)

Ohio (1)

Atlanta (3)

Louisville

Columbus

 

 

 

Illinois (2)

Tennessee (2)

Missouri (1)

Chicago (2)

Nashville (2)

St. Louis

 

 

 

Maryland (1)

 

 

Annapolis

 

 

 

In addition to the above company-owned locations, the table below sets forth our franchised and joint venture locations as of December 28, 2008.

 

Franchised Restaurants

Joint Venture Restaurants

 

 

Michigan (4)

Louisiana (2)

Belleville

Lafayette

Chesterfield

Lake Charles

Grand Rapids

 

Holland

Wisconsin (1)

 

Grand Chute

Ohio (2)

 

Boardman

 

Niles

 

 

 

Pennsylvania (1)

 

Erie

 

 

 

Iowa (1)

 

Des Moines

 

 

 

Tennessee (1)

 

Nashville

 

 

 

6

 

 


Franchising

 

We seek franchising relationships with successful restaurant operators for the development of O’Charley’s restaurants in areas that are outside of our current growth plans for company-owned restaurants. We have entered into and continue to look to enter into, exclusive multi-unit development agreements with third-party franchisees to open and operate O’Charley’s restaurants. Franchisees and joint venture partners are required to comply with our specifications as to restaurant space, design and décor, menu items, principal food ingredients, team member training and day-to-day operations. The following table illustrates the various agreements that we have executed with our joint venture partners and franchisees along with the contracted markets, the number of restaurants operated by each joint venture and franchisee as of December 28, 2008 and the number of restaurants that they are contractually required to develop and open:

 

 

 

 

 

Program

 

 

Franchise / Joint

Venture

Entity

 

 

 

Open

Restaurants

Total

Restaurants

Contracted for

Development

 

 

 

 

Markets

 

Joint Venture:

 

 

 

 

JFC Enterprises, LLC

 

2

 

3

 

Southern Louisiana and Beaumont, Texas

 

 

WI-Tenn Restaurants, LLC

 

1

 

3

Wisconsin

 

Franchisee:

 

 

 

 

Four Star Restaurant Group, LLC

 

 

1

 

1

 

Iowa

 

 

O’Candall Group, Inc.

 

3

 

50

 

Tampa and Orlando Florida, Western Pennsylvania, Northwest West Virginia and Northern Ohio

 

 

Meritage Hospitality Group, Inc.

 

4

 

15

 

Michigan

 

 

Delaware North Companies Travel Hospitality Services

 

1

 

1

 

Tennessee (Nashville International Airport)

 

Competition

 

The restaurant industry is extremely competitive. Restaurants compete across numerous areas, including food quality, price, service quality, location, design, and attractiveness. To remain competitive, we must constantly monitor changing consumer tastes, national and regional economic conditions, the effectiveness of our advertising and many other factors. We compete within each market with national and regional chains and locally-owned restaurants for consumers, management, and hourly personnel and suitable locations. We also face growing competition from the supermarket industry, which offers “convenient meals” in the form of improved entrées and side dishes from the deli selection. We expect intense competition to continue in these areas.

 

Service Marks

 

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

 

Government Regulation

 

We are subject to various federal, state and local laws affecting our business. 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 effect on our operations to date.

 

Approximately 12 percent of restaurant sales in 2008 were attributable to the sale of alcoholic beverages. Each restaurant, where permitted by local law, has appropriate licenses from regulatory authorities allowing it to sell liquor, beer and wine, menu labeling, 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 its operations or, in an extreme case, cause us to close the restaurant. We have established standardized procedures for our restaurants designed to assure compliance with applicable codes and regulations.

 

7

 

 


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.

 

Many of our markets are seeing changes in laws regarding smoking inside of buildings. These laws can negatively affect our bar business, with ancillary effects on our dining room business.

 

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 our restaurants are 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 or changes the allowable tip credit, any such changes would likely result in an increase in payroll and benefits expense.

 

Team Members

 

As of December 28, 2008, we employed approximately 24,000 team members, approximately 22,000 of whom represented our hourly workforce within our restaurants. None of our team members are covered by a collective bargaining agreement. We have an alternative dispute resolution program in which all team members are required to participate as a condition of employment. We consider our team member relations to be good.

 

Executive Officers of the Registrant

 

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.

 

Name

Age

Position

Lawrence E. Hyatt

54

Interim President and Chief Executive Officer, Chief Financial Officer  and Treasurer

Lawrence D. Taylor

51

Chief Supply Chain Officer

Jeffrey D. Warne

48

Concept President-O’Charley’s

John R. Grady

56

Concept President-Ninety Nine Restaurants

Anthony J. Halligan III

50

Concept President-Stoney River Legendary Steaks

R. Jeffrey Williams

42

Chief Accounting Officer and Corporate Controller

Michael K. Ellis

46

Chief Development Officer

Colin M. Daly, Esq.

37

General Counsel, Corporate Secretary and Chief Compliance Officer

 

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

 

Lawrence E. Hyatt has served as Interim President and Chief Executive Officer since February 2009 and as Chief Financial Officer, Secretary and Treasurer since November 2004. Prior to joining our company, he was Executive Vice President and Chief Financial Officer of Cole National Corporation from 2002 to 2004. Mr. Hyatt was with PSINet, Inc. as Chief Financial and Restructuring Officer from 2000 to 2002; with HMS Host Corporation as Chief Financial Officer from 1999 to 2000; and with Sodexho Marriott Services, Inc. and its predecessor company as Chief Financial Officer from 1989 to 1999.

 

Lawrence D. Taylor has served as Chief Supply Chain Officer since May 2006. Prior to joining our company, he was the Chief Procurement Officer for Carlson Companies, Inc. from 2003 to 2006. Mr. Taylor was Vice President, Supply Chain Management for Carlson Restaurants from 2001 to 2003. Mr. Taylor’s earlier experience included senior procurement and supply chain management positions with Taco Bell Corporation, Burger King, Inc., and Perseco. Mr. Taylor was also an owner-operator of a franchised McDonald’s restaurant.

Jeffrey D. Warne has served as Concept President-O’Charley’s since February 2006. Prior to joining our company he was with Carlson Companies, Inc. During his tenure at Carlson Companies, Inc. he served as the President and Chief Operating Officer of Pick Up Stix from 2005 to 2006 and the Executive Vice President and Chief Operating Officer of TGI Friday’s International from 2002 to 2004. Mr. Warne’s earlier experience at Carlson includes serving as Chief Financial Officer of Carlson Restaurants Worldwide from 1998 to 2002, Vice President of Business Planning from 1994 to 1998, and Director of Corporate Audit from 1990 to 1994.

John R. Grady has served as Concept President-Ninety Nine Restaurants since April 2004. Mr. Grady joined Ninety Nine Restaurants in March 1975. Prior to being named President, Mr. Grady was Executive Vice President and has also served in various capacities in the Operations, Training and Real Estate Departments for Ninety Nine Restaurants over the years.

 

Anthony J. Halligan III was named Concept President - Stoney River Legendary Steaks in February 2006. Prior to being named President, Mr. Halligan served in the capacity of Vice President from 2000 until 2006. Prior to his tenure with Stoney River, Mr. Halligan served in various capacities for companies in the restaurant and retail industries.

 

8

 

 


R. Jeffrey Williams has served as Chief Accounting Officer since February 2006 and as Corporate Controller since February 2003. Mr. Williams served as Controller for the O’Charley’s Concept from July 2001 to February 2003. Mr. Williams served as Controller of The Krystal Company from 2000 to 2001. Mr. Williams served as Director of Financial Planning and Analysis for Cracker Barrel Old Country Store from 1999 to 2000 and as Accounting Manager for Cracker Barrel Old Country Store from 1996 to 1999. Mr. Williams is a certified public accountant.

 

Michael K. Ellis has served as Chief Development Officer since April 2007. Mr. Ellis served as Vice President Asset Management for BP Products North America from 2006 to 2007. Mr. Ellis served as the Senior Vice President of Development at Carlson Restaurants Worldwide from 2004 to 2006. Mr. Ellis served as the Chief Development Officer for Burger King Corporation from 2003 to 2004. Prior to that Mr. Ellis has held other various roles of increasing responsibility at Darden Restaurants Inc. and DF&R Restaurants, Inc. throughout his career.

 

Colin M. Daly, Esq. has served as Corporate Secretary since March 2009 and General Counsel since February 2008. Prior to being named General Counsel, Mr. Daly served as the company’s Senior Corporate Counsel from April 2006 to January 2008. Prior to joining our company, Mr. Daly served as an Assistant General Counsel for ARAMARK Corporation from 2003 to 2006. Prior to ARAMARK, Mr. Daly practiced law with law firms in Nashville, Tennessee and Philadelphia, Pennsylvania.

 

Available Information

 

We file reports with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically. Our website address is www.ocharleysinc.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge through our website the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is specifically referenced elsewhere in this report.

 

We have posted our Corporate Governance Guidelines, Code of Conduct and Business Ethics Policy for directors, officers and team members, and the charters of our Audit, Compensation and Human Resources and Nominating and Corporate Governance Committees of the board of directors on our website at www.ocharleysinc.com. Copies of our corporate governance materials are available free of charge upon request by any shareholder to our Corporate Secretary, O’Charley’s Inc., 3038 Sidco Drive, Nashville, Tennessee 37204.

 

Item 1A.

Risk Factors.

 

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 such as statements concerning 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, franchising and joint venture 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 adverse effect on our results from operations of decreases in consumer spending; our ability to maintain or increase same store sales and operating margins at our restaurants; the effect that increases in food, labor, energy, interest costs and other expenses have on our results of operations; our ability to successfully implement changes to our supply chain; our ability to sell closed restaurants and other surplus assets; our ability to comply with the terms and conditions of our financing agreements; the effect of increased competition; our ability to successfully implement and realize projected benefits of our turnaround and transformation process, including our re-brandings and other initiatives; the resolutions of outstanding legal proceedings; and 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 undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

 

The risks described below are not the only ones we face. Additional risks not presently known to us or currently deemed immaterial could also impair our business operations.

 

The continuing deterioration in U.S. economic conditions is expected to adversely affect our results of operations.

 

The continuing deterioration in the U.S. economy has and is expected to continue to negatively affect our business. For instance, the dramatic decline in the housing market, tightening credit and increasing unemployment have led to lack of consumer confidence, particularly for consumers that frequent casual dining chains. Continuing weakness in the spending of those consumers has had and could continue to have an adverse impact on our results of operations. In addition, some of our suppliers could experience serious cash flow problems due to the credit market crisis. As a result, they may attempt to increase their prices, pass through increased costs or alter payment terms. Our suppliers may be forced to reduce their production, shut down their operations or file for bankruptcy protection, which could have a material adverse affect on our business. We do not expect that the difficult economic conditions are likely to improve significantly in the near future, and any continuation or worsening of the credit crisis, or even the fear of such a development, could intensify the adverse effects of these difficult market conditions on our results of operations.

 

9

 

 


If we are unable to comply with our financial covenants, our liquidity and results of operations could be adversely affected.

 

At December 28, 2008, we had a total of $163.1 million in debt and capitalized lease obligations, which includes $23.8 million outstanding under our credit facility and $125.0 million pursuant to our senior subordinated notes due 2013.

 

Our credit facility contains customary restrictive covenants, including limitations on dividends, repurchases of capital stock, sale leaseback transactions, the incurrence of additional indebtedness and mergers, acquisitions and asset sales. In addition, our credit facility contains certain financial covenants, including an adjusted debt to EBITDAR ratio, a senior secured leverage ratio, a fixed-charge coverage ratio and capital expenditures ratio. In December 2008, we amended our credit facility to revise certain financial covenants. As of the end of our 2008 fiscal year, there were no defaults under our credit facility and we were in compliance with all covenants. Although we currently project that we will remain in compliance with these covenants there can be no assurance that we will remain in compliance with these covenants.

 

If we were to violate any of our covenants under our credit facility there can be no assurance that we will be successful in obtaining amendments or waivers on acceptable terms. Any waiver or amendment may result in future increases in the interest costs and possible additional restrictions under our credit facility. If we were unable to obtain a waiver or negotiate an amendment on acceptable terms and a default were to occur under our credit facility, such default would also constitute a default under certain conditions under the indenture governing our senior subordinated notes.

We also have four separate lease agreements for an aggregate of 30 of our Ninety Nine Restaurants properties which contain financial covenants. Each of the four restaurant groups are subject to an annual fixed charge coverage ratio of 1.50 to 1.00. Although we currently project that we will remain in compliance with these covenants, if we are unable to remain in compliance with these covenants, our liquidity and our results of operations could be adversely impacted.

 

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

 

A significant portion of our historical growth has been due to opening new restaurants. We have substantially reduced our new restaurant growth over the past several years as we formulated our turnaround plan and more recently due to the deteriorating economic environment. We opened four new company-owned O’Charley’s restaurants, two new Ninety Nine restaurants, and one new Stoney River restaurant in 2008. We currently plan to open no new company-owned O’Charley’s restaurants, one new Ninety Nine restaurant, and one new Stoney River restaurant in 2009. Our ability to open new restaurants successfully depends on a number of factors, such as:

 

 

the selection and availability of quality restaurant sites;

 

 

our ability to negotiate acceptable lease or purchase terms;

 

 

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

 

 

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

 

 

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

 

 

the availability of adequate financing.

 

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

 

Our success depends on our ability to execute our strategic plan and to realize our anticipated supply chain efficiencies.

Our strategic plan involves a number of initiatives intended to improve our restaurant level economics and enhance guest loyalty. Our strategic plan involves significant investments in our management team and our restaurants and the success of the strategic plan depends on our ability to successfully implement the plan and realize the projected return on our investment. As part of our strategic plan, we have developed new prototype restaurants and we have re-branded many of our existing O’Charley’s and Ninety Nine restaurants. These re-branding efforts include substantial capital investment in remodeling the restaurants. As of December 28, 2008, we have completed 62 re-brandings at O’Charley’s restaurants and 62 re-brandings at Ninety Nine restaurants since inception of our re-branding programs. However, we have decided to suspend our re-branding initiatives until economic conditions improve in order to preserve cash and pay down debt. Our strategy also includes improving our restaurant level economics, and we believe that effective supply chain management will contribute significantly to achieving this goal. However, a failure to successfully implement and realize projected savings from these actions could adversely affect the results of our strategic plans.

 

 

 

10

 

 


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

 

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

 

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

 

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, team member benefits, energy and other costs. Various factors beyond our control, including adverse weather conditions (including hurricanes), governmental regulation, production, availability, recalls of food products and seasonality may affect our food costs or cause a disruption in our supply chain. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results. In addition, because the pricing strategy at our O’Charley’s and Ninety Nine restaurants is intended to provide an attractive price-to-value relationship, we may not be able to pass along price increases to our guests without adversely impacting our guest counts.

 

We compete with other restaurants for experienced management personnel and hourly team members. Each of our concepts offers medical benefits to hourly team members. Increases in health care costs, changes in state or federal minimum wage laws, or changes in legal requirements relating to employee benefits would likely cause an increase in our labor costs. We cannot assure that we will be able to offset increased wage and benefit costs through our purchasing and hiring practices or menu price increases, particularly over the short term. As a result, increases in wages and benefits could have a material adverse effect on our business.

 

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

 

Our O’Charley’s restaurants are located in the Southeastern, Eastern, and Midwestern United States. Our Ninety Nine restaurants are located primarily in the Northeastern United States. As of December 28, 2008, we operated 40 of our 232 O’Charley’s restaurants in Tennessee and 62 of our 116 Ninety Nine restaurants in Massachusetts. As a result, our business and our financial or operating results may be materially adversely affected by adverse economic, weather or business conditions in these markets, as well as in other geographic regions in which we operate restaurants.

 

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

 

The restaurant industry is intensely competitive with respect to price, service, location, nutritional and dietary trends 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. Some of our competitors advertise on national television, which may provide them with greater awareness and name recognition than we can achieve through our advertising efforts. Additionally, we face increasing competition from the convergence of restaurant, deli and grocery services, as supermarkets and grocery stores offer “convenient meals” in the form of improved entrees and side dishes in their deli sections. If our restaurants are unable to compete successfully in new and existing markets, our results of operations will be adversely affected.

 

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

 

Any disruption in manufacturing and distribution operations could adversely affect our ability to operate our restaurants.

 

We historically operated a commissary in Nashville, Tennessee through which we manufactured, purchased, and distributed a substantial majority of the food products and supplies for our O’Charley’s and Stoney River restaurants. We currently operate a distribution facility in Bellingham, Massachusetts, through which we distribute a portion of the food products and supplies for our Ninety Nine restaurants. During the second quarter of 2007, we completed the sale of our commissary facility in Nashville, Tennessee and the outsourcing of various food processing and distribution activities performed at our commissary and distribution facilities in Nashville, Tennessee and Woburn, Massachusetts.

 

11

 

 


Following the sale of our commissary, we outsourced the manufacture of certain food products and our signature yeast rolls, as well as the distribution and transportation services to the O’Charley’s and Stoney River brands, to third parties. Since the transition is now complete, we are now dependant upon the performance of third-party manufacturers and distributors. Any disruptions to their operations could have a material impact on our future reported results. If the operation of our Bellingham, Massachusetts distribution center is disrupted, we may not be able to deliver food and supplies to our Ninety Nine restaurants. Any disruption in our distribution operations could adversely affect our ability to operate our Ninety Nine restaurants and would adversely affect our results of operations.

 

We rely heavily on technology in our business, and any interruption, failure or breach of security of that technology could negatively affect our ability to effectively operate our business.

 

If we experience problems with our ability to effectively manage our information systems it could disrupt our operations. Our business depends on information systems that assist us in, among other things, point-of-sale processing in our restaurants, management of our supply chain, financial reporting, various other processes and transactions and maintaining operational efficiencies. All of these processes depend upon the reliability and capacity of these information systems. These systems include software developed in-house and systems provided by external contractors and other service providers. To the extent that these external contractors or other service providers become insolvent or fail to support the software or systems, our operations could be negatively affected. If we experience a reduction in the performance, reliability, or availability of our information systems, our operations and ability to produce timely and accurate reports could be adversely affected.

 

Our information systems and applications require continual maintenance, upgrading, and enhancement to meet our operational needs. In addition, a breach of security could cause delays in customer service, hinder operational efficiencies and could require a significant investment to remediate the problem. If we are unable to successfully implement, maintain, secure, or expand our systems properly, we could suffer from, among other things, operational disruptions and increases in administrative expenses.

 

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 (such as regulations regarding labeling, allergens content, trans fat content and other menu information regarding nutrition), the sale of alcoholic beverages, zoning and building codes and other health, sanitation and safety matters. All of these regulations impact not only our current restaurant operations but also our ability to open new restaurants. We will be required to comply with applicable state and local regulations in any new locations into which we expand. Any difficulties, delays or failures in obtaining licenses, permits or approvals in such new locations could delay or prevent the opening of a restaurant in a particular area or reduce operations at an existing location, either of which could materially and adversely affect our growth and results of operations. In addition, our Bellingham, Massachusetts distribution center is licensed and subject to regulation by state and local agencies. Our failure to obtain or retain federal, state or local licenses for our Bellingham, Massachusetts distribution center or to comply with applicable regulations could adversely affect its operations and disrupt delivery of food and other products to our restaurants.

 

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

 

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

 

We are subject to complaints or litigation from time to time from guests alleging illness, injury or other food quality or health concerns. Litigation or adverse publicity resulting from these allegations may materially adversely affect our business, regardless of whether the allegations are valid or whether we are liable. We are subject to litigation under “dram shop’’ laws that allow a person to sue us based on any injury or death caused by an intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. While we maintain insurance for lawsuits under a dram shop law or alleging illness or injury from food, we have significant deductibles under such insurance and any such litigation may result in a verdict in excess of our liability insurance policy limits, which could result in substantial liability for us and could have a material adverse effect on our results of operations.

 

We are a defendant from time to time in various legal proceedings arising in the ordinary course of our business, including claims relating to injury; claims relating to workplace and employment matters, discrimination and similar matters; claims resulting from “slip and fall” accidents; claims relating to lease and contractual obligations; claims  relating to our joint venture or franchising initiatives; and claims from guests 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 liquidity or financial condition. We may incur liabilities, receive benefits, settle disputes, sustain judgments, or accrue expenses relating to legal proceedings in a particular fiscal quarter which may adversely affect our results of operations, or on occasion, receive settlements that favorably affect results of operations.

 

Failure to comply with current regulatory requirements will result in additional expenses and may adversely affect us.

 

Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, Securities and Exchange Commission regulations and NASDAQ Stock Market rules, has required an increased amount of our management’s attention and greater utilization of external resources. We remain committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, including any standards or regulations approved under the current government administration. This investment has resulted,

 

12

 

 


and we expect will continue to result, in increased general and administrative expenses. It also takes management’s time and attention away from revenue-generating activities to compliance activities.

 

We are dependent upon our senior management team to execute our business strategy.

 

Our operations and our ability to execute our business strategy are highly dependent on the efforts of our senior management team. Many of the members of our senior management team do not have long tenures with us.

 

Although the members of our senior management team have employment agreements with us, these agreements may not provide sufficient incentives for these officers to continue employment with us. The loss of one or more of the members of our senior management team could adversely affect our business. We do not maintain key man insurance on any of the members of our senior management team.

 

In February 2009, our Chief Executive Officer (“CEO”) and President retired after serving 25 years with us. In the interim, our Board of Directors has appointed our Chief Financial Officer to serve as Interim President and CEO until a qualified replacement is found. We have retained a recruiting firm and are currently conducting a nationwide search for a new CEO. The departure of our CEO and President could have a disruptive effect on our ability to attract and retain qualified team members and execute our strategic plan. Though we intend to hire a qualified candidate for CEO in the near term, no assurance can be given that we will be able to attract and retain a suitable CEO. An extended period of time without a permanent CEO could materially and adversely affect our business, financial conditions or results of operations. Furthermore, in recruiting a new CEO we will incur recruiting, relocation, training and possibly experience operational inefficiencies. In the event we are unable to effect a smooth transition from our Interim President and CEO to a new CEO, or if a new CEO should unexpectedly prove to be unsuitable for our Company, the resulting disruption could negatively impact our operations and impede our ability to execute our strategic plan.

 

 

Item 1B.

Unresolved Staff Comments.

 

None.

 

Item 2.

Properties.

 

As of December 28, 2008, we operated 232 O’Charley’s restaurants, 116 Ninety Nine restaurants and 11 Stoney River Legendary Steak restaurants. As of that date, we owned the land and buildings at 97 of our O’Charley’s restaurants, leased the land and buildings at 43 of our O’Charley’s restaurants and leased the land only at 92 of our O’Charley’s restaurants. We lease the land and buildings at 84 of our Ninety Nine restaurants and lease the land at only 32 of our Ninety Nine restaurants. We own the land and buildings at four of our Stoney River restaurants and lease the land only at five of our Stoney River restaurants and lease the land and buildings at two of our Stoney River Restaurants. See “Item 1-Business-Restaurant Locations” above. Restaurant lease expirations range from 2009 to 2029, 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 triple net leases, which require us to pay the cost of insurance, utilities, and taxes.

 

We own our corporate office that is located in Nashville, Tennessee with approximately 96,000 square feet. We lease administrative offices of approximately 30,000 square feet in Woburn, Massachusetts. We also lease a distribution facility with approximately 79,000 square feet of space in Bellingham, Massachusetts for our Ninety Nine concept. We also lease approximately 16,000 square feet of office space in Brentwood, Tennessee which is used for our Financial Services Center.

 

Item 3.

Legal Proceedings.

 

On November 5, 2007, we filed suit in Davidson County, Tennessee, against Richard Arras, Steven Pahl and Wi-Tenn Investors, LLC, (“Defendants”) alleging breach of contract and breach of fiduciary duty by the Defendants related to Wi-Tenn Restaurants, LLC, a joint venture owned 50% by us and 50% by the Defendants, which developed and operates an O’Charley’s restaurant in Grand Chute, Wisconsin (the “Tennessee Action”). Subsequently, on November 7, 2007, the Defendants filed suit in Outagamie County, Wisconsin, against us and seven of our current and former employees alleging violations of the Wisconsin Franchise Investment Law, Wisconsin Uniform Securities Law, fraud, misrepresentation and unjust enrichment, stemming from Defendants’ ownership in Wi-Tenn Restaurants, LLC (the “Wisconsin Action”). We filed a motion to dismiss Defendants’ complaint in the Wisconsin Action and this motion was granted on August 12, 2008, resulting in dismissal of the Wisconsin Action. On February 15, 2008, Defendants filed a counterclaim in the Tennessee Action against us and the aforementioned current and former employees, pertaining to the same subject matter referenced in the Wisconsin Action (the “Tennessee Counterclaim”). The Tennessee Counterclaim was amended and asserts ten causes of action including the claims asserted in the Wisconsin Action, claims under the Tennessee Securities Act and Delaware Securities Act, claims under the Tennessee Consumer Protection Act, and claims for tortuous interference, breach of fiduciary duty and breach of contract. The Tennessee Counterclaim alleges damages in excess of $75,000. On August 6, 2008, the Court in the Tennessee Action dismissed Defendants’ Counterclaims concerning the Wisconsin Franchise Investment Law, Wisconsin Uniform Securities Law, Tennessee Securities Act and Delaware Securities Act with prejudice and required Defendants to re-plead their claims under the Tennessee Consumer Protection Act and their claims for fraud, misrepresentation, tortuous interference and breach of contract. The Court subsequently dismissed Defendants’ counterclaim for breach of contract. We have amended our complaint to include claims against Sun Capital Partners, Inc., Boston Market Corporation and Market Dining Holding, LLC, for interference in our contractual business relationships with Defendants. We deny all liability and intend to vigorously contest the allegations contained in the Tennessee Counterclaim and to vigorously prosecute the Tennessee Action against the Defendants and Sun Capital Partners, Boston Market and Market Dining Holding. During the fourth fiscal quarter, we recorded an impairment charge of $2.6 million on the one Wi-Tenn restaurant located in Grand Chute, Wisconsin. The Tennessee Action is set for trial on December 7, 2009.

 

On October 30, 2008, a jury in the matter of Laurie Clifford v. David Kvinlaug, Geno Barone, O’Charley’s, Inc. and 99 Restaurants of Boston, LLC, Essex (Massachusetts) Superior Court, Civil Action No. 2004-00041, rendered a verdict in favor of the plaintiff awarding damages in the amount of approximately $3.2 million plus prejudgment interest of approximately $1.9 million as of the date of the verdict. The plaintiff in

 

13

 

 


this matter alleged claims relating to injury caused by an intoxicated person who was served alcoholic beverages at one of our Ninety Nine Restaurants. The judgment is not yet final and is subject to post-trial motions and appeal. We maintain insurance to cover these types of claims, subject to a self-insured retention of $500,000. Based on the information currently available, and acknowledging the uncertainty of litigation, our December 28, 2008 consolidated balance sheet reflects the amount awarded, plus pre-judgment interest, estimated post-judgment interest, and the related expected recovery should such liability be confirmed. Such amounts are included in “Other Liabilities” and “Other Assets,” respectively. Our primary insurance carrier has asserted a reservation of rights, claiming that it did not receive timely notice of this matter from our third party claims administrator in accordance with the terms of the policy. We intend to appeal the judgment once finalized in the event we are not successful in invalidating the judgment through our post-trial motions and believe that we have valid coverage under our insurance policies for amounts in excess of our self-insured retention. There can be no assurance, however, that we will be successful in our post-trial motions or appeal of the judgment or, in the event we are not successful, that we will prevail in any dispute with our insurance carrier regarding the validity of our coverage, which could have a material adverse impact on our consolidated financial position and results of operations.

 

We are also a defendant from time to time in various legal proceedings arising in the ordinary course of our business, including claims relating to injury or wrongful death under “dram shop” laws that allow a person to sue us based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants; claims relating to workplace, workers compensation and employment matters, discrimination and similar matters; claims resulting from “slip and fall” accidents; claims relating to lease and contractual obligations; claims  relating to our joint venture and franchising initiatives; and claims from guests 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 liquidity or financial condition. We may incur liabilities, receive benefits, settle disputes, sustain judgments, or accrue expenses relating to legal proceedings in a particular fiscal quarter which may adversely affect our results of operations, or on occasion, receive settlements that favorably affect results of operations.

 

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 28, 2008.

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock trades on the NASDAQ Global Select Market under the symbol “CHUX.” As of March 2, 2009, there were 2,794 shareholders of record of our common stock. In May 2007, our Board of Directors approved the initiation of a quarterly cash dividend of $0.06 per share which was paid in June, September and December of 2007 and March, June and September of 2008. Total cash dividends of $3.9 million were paid in 2008.

 

On October 20, 2008, we announced that we had discontinued the quarterly dividend. Pursuant to our credit facility and the bond indenture, the “basket” available to pay dividends and repurchase shares is equal to $62.5 million plus 50% of cumulative net earnings since the beginning of fiscal 2006. Since the beginning of fiscal 2006, we have paid dividends of $8.1 million and made share repurchases of $54.8 million. Our cumulative net loss since the beginning of fiscal 2006 is $106.4 million. Based upon our cumulative net loss since the beginning of fiscal 2006, we cannot pay dividends on nor repurchase shares of our stock. The following table shows quarterly high and low sales prices for our common stock for the periods indicated, as reported by the NASDAQ Global Select Market.

 

 

 

 

 

 

 

 

 

 

 

 

High

 

Low

Fiscal 2008

 

 

 

 

 

 

 

 

First Quarter

 

$

15.36

 

 

$

9.88

 

Second Quarter

 

 

12.34

 

 

 

9.63

 

Third Quarter

 

 

12.84

 

 

 

8.02

 

Fourth Quarter

 

 

8.27

 

 

 

1.19

 

 

 

 

 

 

 

 

 

 

Fiscal 2007

 

 

 

 

 

 

 

 

First Quarter

 

$

22.61

 

 

$

18.73

 

Second Quarter

 

 

23.45

 

 

 

19.14

 

Third Quarter

 

 

20.49

 

 

 

14.41

 

Fourth Quarter

 

 

16.38

 

 

 

13.17

 

 

 

14

 

 



 

 

Graph Data Points

 

12/28/03

12/26/04

12/25/05

12/31/06

12/30/07

12/28/08

 

 

 

 

 

 

 

 

O’Charley’s Inc.

 

$ 100.00

$ 110.96

$ 90.32

$ 123.36

$ 87.52

$ 12.21

NASDAQ Composite

 

$ 100.00

$ 110.08

$ 112.88

$ 126.51

$ 138.13

$ 80.47

S&P Restaurants

 

$ 100.00

$ 142.44

$ 151.54

$ 192.67

$ 212.61

$ 201.16

 

 

 

 

 

 

 

 

 

Issuer Purchases of Equity Securities

 

15

 

 


The following table sets forth information with respect to purchases of shares of the Company’s common stock made during fiscal 2008 by or on behalf of the Company or any “affiliated purchaser,” as defined by Rule 10b5-1 of the Exchange Act:

 

 

O’Charley’s Accounting Periods

Total Number of Shares Purchased (1)

 

Average Price Paid Per Share (2)

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

Increase in Share Repurchase Authorization

(3)

 

Maximum Number of Shares or Approximate Dollar Value That May Yet be Purchased Under the Plans or Programs

 

 

12/31/07-1/27/08

 

 

 

 

$20,000,000

 

 

1/28/08-2/24/08

498,769

 

$12.01

 

498,769

 

$20,000,000

 

$34,009,603

 

 

2/25/08-3/23/08

1,027,231

 

11.47

 

1,027,231

 

 

$22,225,320

 

 

3/24/08-4/20/08

 

 

 

 

$22,225,320

 

 

4/21/08-5/18/08

 

 

 

 

$22,225,320

 

 

5/19/08-6/15/08

194,147

 

$10.99

 

194,147

 

 

$20,090,965

 

 

6/16/08-7/13/08

464,633

 

$10.47

 

464,633

 

 

$15,225,330

 

 

Total for the Year

2,184,780

 

$11.34

 

2,184,780

 

$20,000,000

 

$15,225,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) All share repurchases were made in open-market transactions pursuant to the publicly announced repurchase plan.

 

 

 

(2) Average price paid per share is calculated on a trade date basis and includes commissions and fees.

 

(3) As of December 30, 2007, our prior fiscal year end, we had $20 million remaining authorization from previous board repurchase approvals. On February 7, 2008, our Board of Directors approved an increase of $20 million to our share repurchase authorization.

 

On February 7, 2008, we announced that our Board of Directors approved a $20 million increase in our share repurchase authorization, giving us $40 million in available repurchase authorization at that time. During 2007, the Board of Directors approved a $50 million repurchase authorization under which we had repurchased $30 million of our common stock by the end of fiscal 2007. During the third and fourth quarters of 2008, we did not repurchase any shares. For the fiscal year 2008, we repurchased 2.2 million shares for $24.8 million. The remaining balance that may be repurchased under the current repurchase authorization is $15.2 million. The share repurchase authorization does not have an expiration date.

 

Pursuant to our credit facility and our bond indenture, the “basket” available to pay dividends and repurchase shares is equal to $62.5 million plus 50% of cumulative net earnings beginning with fiscal 2006. Since the beginning of fiscal 2006, we have paid dividends of $8.1 million and made share repurchases of $54.8 million. Our cumulative net loss since the beginning of fiscal 2006 is $106.4 million. Based upon our cumulative net loss since the beginning of fiscal 2006, we are currently precluded under our debt covenants from repurchasing any more shares of our stock.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

On January 27, 2003, we issued 941,176 shares of common stock to the former owners of Ninety Nine as part of the purchase price of the acquisition of Ninety Nine restaurants. We issued an additional 390,586 shares in January 2004, 407,843 shares in January 2005, 407,843 shares in January 2006, 94,118 in January 2007 and 94,118 in January 2008. The issuance of the shares to the former owners of Ninety Nine was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act of 1933.

 

Item 6.

Selected Financial Data.

 

The selected financial data presented below under the captions “Statement of Operations Data” and “Balance Sheet Data” for, and as of the end of each of the fiscal years in the five-year period ended December 28, 2008, were derived from the consolidated financial statements of O’Charley’s Inc. and subsidiaries. The selected data should be read in conjunction with the consolidated financial statements as of December 28, 2008 and December 30, 2007 and for each of the fiscal years in the three-year period ended December 28, 2008, and the related notes thereto appearing in this Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

When you read this financial data, it is important that you also read the consolidated financial statements and related notes included in this Form 10-K, as well as the section of this report entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations. Historical results are not necessarily indicative of future results.

 

16

 

 


 

 

 

Fiscal Years

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except per share data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

$ 930,317

 

 

$969,497

 

 

 

$978,751

 

 

 

$921,329

 

 

 

$864,259

 

 

Commissary sales

 

 

 

7,783

 

 

 

10,345

 

 

 

8,498

 

 

 

7,035

 

 

Franchise and other revenue

 

843

 

 

472

 

 

 

428

 

 

 

361

 

 

 

92

 

 

 

 

931,160

 

 

977,752

 

 

 

989,524

 

 

 

930,188

 

 

 

871,386

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of restaurant sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of food and beverage

 

276,005

 

 

284,099

 

 

 

291,759

 

 

 

277,391

 

 

 

260,846

 

 

Payroll and benefits

 

325,996

 

 

331,644

 

 

 

328,809

 

 

 

318,513

 

 

 

291,098

 

 

Restaurant operating costs

 

187,966

 

 

184,791

 

 

 

185,938

 

 

 

172,417

 

 

 

157,732

 

 

Cost of restaurant sales, exclusive of depreciation and

amortization shown separately below

 

789,967

 

 

800,534

 

 

 

806,506

 

 

 

768,321

 

 

 

709,676

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of commissary sales

 

 

 

7,700

 

 

 

9,065

 

 

 

7,716

 

 

 

6,646

 

 

Advertising and marketing expenses

 

34,257

 

 

32,537

 

 

 

27,917

 

 

 

25,470

 

 

 

25,656

 

 

General and administrative expenses

 

44,292

 

 

48,670

 

 

 

52,211

 

 

 

42,074

 

 

 

38,401

 

 

Depreciation and amortization, property and equipment

 

50,776

 

 

50,882

 

 

 

46,614

 

 

 

43,806

 

 

 

39,798

 

 

Impairment, disposal and restructuring charges, net (1)

 

16,989

 

 

16,537

 

 

 

2,098

 

 

 

7,335

 

 

 

16

 

 

Goodwill impairment (2)

 

93,656

 

 

 

 

 

 

 

 

 

 

 

 

 

Pre-opening costs

 

3,921

 

 

3,065

 

 

 

4,628

 

 

 

6,271

 

 

 

5,908

 

 

 

 

1,033,858

 

 

959,925

 

 

 

949,039

 

 

 

900,993

 

 

 

826,101

 

 

(Loss) income from Operations

 

(102,698

)

 

17,827

 

 

 

40,485

 

 

 

29,195

 

 

 

45,285

 

 

Other Expense (Income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

14,966

 

 

12,329

 

 

 

14,401

 

 

 

15,123

 

 

 

12,604

 

 

Other, net

 

10

 

 

(10

)

 

 

(6

)

 

 

42

 

 

 

 

 

 

 

14,976

 

 

12,319

 

 

 

14,395

 

 

 

15,165

 

 

 

12,604

 

 

(Loss) Earnings Before Income Taxes and Cumulative Effect of Change in Accounting Principle

 

(117,674

)

 

5,508

 

 

 

26,090

 

 

 

14,030

 

 

 

32,681

 

 

Income Tax expense (benefit) (3)

 

14,823

 

 

(1,724

)

 

 

7,200

 

 

 

2,001

 

 

 

9,362

 

 

(Loss) Earnings Before Cumulative Effect of Change in Accounting
Principle 

 

(132,497

)

 

7,232

 

 

 

18,890

 

 

 

12,029

 

 

 

23,319

 

 

Cumulative Effect of Change in Accounting Principle, net of tax (4)

 

 

 

 

 

 

 

 

 

(151

)

 

 

 

 

Net (Loss) Earnings

 

$(132,497

)

 

$    7,232

 

 

 

$  18,890

 

 

 

$  11,878

 

 

 

$  23,319

 

 

Basic (Loss) Earnings Per Common Share Before Cumulative Effect of Change in Accounting Principle

 

$   (6.34

)

 

$    0.31

 

 

 

$    0.81

 

 

 

$    0.53

 

 

 

$    1.05

 

 

Cumulative effect of Change in Accounting Principle, net of tax (4)

 

 

 

 

 

 

 

 

 

(0.01

)

 

 

 

 

Basic (Loss) Earnings Per Common Share

 

$   (6.34

)

 

$    0.31

 

 

 

$    0.81

 

 

 

$    0.52

 

 

 

$    1.05

 

 

Diluted (Loss) Earnings Per Common Share Before Cumulative Effect of Change in Accounting Principle

 

$   (6.34

)

 

$    0.31

 

 

 

$    0.80

 

 

 

$    0.52

 

 

 

$    1.03

 

 

Cumulative Effect of Change in Accounting Principle, net of tax (4)

 

 

 

 

 

 

 

 

 

(0.01

)

 

 

 

 

Diluted (Loss) Earnings Per Common Share

 

$   (6.34

)

 

$    0.31

 

 

 

$    0.80

 

 

 

$    0.51

 

 

 

$    1.03

 

 

Balance Sheet Data (at end of period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital deficit

 

$(31,883

)

 

$(21,145

)

 

 

$(25,814

)

 

 

$(22,270

)

 

 

$(30,986

)

 

Total assets

 

520,262

 

 

648,983

 

 

 

688,638

 

 

 

687,610

 

 

 

658,177

 

 

Current portion of long-term debt and capitalized lease obligations

 

6,640

 

 

8,597

 

 

 

9,812

 

 

 

10,975

 

 

 

12,670

 

 

Long-term debt and capitalized lease obligations, including current portion

 

163,068

 

 

145,235

 

 

 

154,357

 

 

 

185,683

 

 

 

191,805

 

 

Total shareholders’ equity

 

211,010

 

 

365,526

 

 

 

380,826

 

 

 

349,588

 

 

 

330,740

 

 

Cash dividends per share

 

$ 0.18

 

 

$ 0.18

 

 

 

$ —

 

 

 

$ —

 

 

 

$ —

 

 

 

 

17

 

 


_________

 

(1)

During 2008 we recorded impairment charges on seven O’Charley’s restaurants, ten Ninety Nine restaurants, two Stoney River restaurants, all of which will remain open, our remaining airplane, and on certain previously impaired restaurants. As a result, we recorded a non-cash impairment charge of $17.4 million. The current economic environment, reduced consumer spending, and current negative economic outlook have reduced demand and expected future cash flow for our products, therefore, reducing the fair value of these restaurants, as well as the airplane, below their carrying value. The excess carrying value of the restaurants and airplane was recorded as an impairment charge on our statement of operations. This impairment charge was partially offset by net gains on the disposal of assets of $0.4 million. During 2007 we recorded charges of $10.2 million in connection with changes in our supply chain, which primarily consisted of non-cash charges taken for the loss on the sale of the commissary real estate and facility and related impairment of manufacturing equipment, charges taken for employee severance and retention, and to a lesser extent, legal and transition costs. We also recorded impairment and disposal costs of $6.3 million relating to restaurant impairments and other asset retirements during 2007. Included in the $6.3 million charge is the impairments related to three underperforming O’Charley’s restaurants, one of which was closed, and the impairment of one Stoney River restaurant and two Ninety Nine restaurants that have remained open. During 2006, we took an impairment charge on three planned O’Charley’s restaurant closures, one O’Charley’s restaurant and two Ninety Nine restaurants that are impaired but have remained open, an impairment of purchased software, and assets related to the Company’s re-branding efforts. As a result, we recorded a non-cash impairment charge of $4.5 million to reflect the difference between the fair value and net book value of the underlying assets. This impairment charge was partially offset by net gains on the disposal of assets of $2.4 million. During 2005, we took an impairment charge on two O’Charley’s restaurants that remain open and decided to close six O’Charley’s restaurants and sell a company aircraft. As a result, we recorded a non-cash impairment charge of 7.2 million to reflect the difference between the fair value and net book value of the underlying assets. This impairment charge was in addition to losses of $0.1 million taken on the disposal of assets during 2005.

 

(2)

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No.

 

142”), in 2008 we recorded goodwill impairment charges of $93.1 million related to Ninety Nine restaurants and $0.6 million related to

 

Stoney River restaurants, resulting in the write off of all of the goodwill on our balance sheet.

 

(3)

For the fiscal year 2008, the income tax provision included a charge of $61.6 million to establish a valuation reserve for substantially all of

 

our deferred tax assets.

 

(4)

In 2005, we incurred an after-tax charge of $0.2 million, or $0.01 per basic and diluted share, which was recorded as a cumulative effect of a change in accounting principle for 2005 associated with the adoption of FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations - an interpretation of Statement of Financial Accounting Standards No. 143.”

 

18

 

 


Item 7.

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

 

Overview

 

We are a leading casual dining restaurant company headquartered in Nashville, Tennessee. We own and operate three restaurant concepts under the “O’Charley’s,” “Ninety Nine” and “Stoney River Legendary Steaks” trade names. As of December 28, 2008, we operated 232 O’Charley’s company-owned restaurants in 16 states in the East, Southeast and Midwest, 116 Ninety Nine restaurants in nine states throughout New England and the Mid-Atlantic, and 11 Stoney River restaurants in seven states in the East, Southeast and Midwest. As of December 28, 2008, we had nine franchised O’Charley’s restaurants including four in Michigan, two in Ohio, and one in each of Pennsylvania, Iowa and Tennessee. As of December 28, 2008, we had two joint venture O’Charley’s restaurants in Louisiana and one joint venture O’Charley’s restaurant in Wisconsin, in all of which we have an ownership interest.

 

 

Our strategic plan focuses on the following key elements:

 

Strengthening the organization with a new core of talent and building a winning team. We have assembled a core of executive talent over the past few years with key additions throughout our support, supply chain and operations areas. We believe that we have in place a management team that will be able to execute successfully our turnaround and transformation efforts, and guide the Company through this difficult economic environment. We believe that the success of our Company depends on demonstrating “A Passion to Serve”SM with every guest, at every restaurant, every day.

 

Our Chief Executive Officer and Chairman of the Board retired February 12, 2009 after serving 25 years with us. He will continue to serve as a director until the expiration of his term at our 2009 Annual Shareholder’s Meeting but will not stand for re-election to the Board at the 2009 Annual Meeting. Our Chief Financial Officer is serving as Interim President and CEO until a replacement is found. We have engaged an executive search firm to assist in our search for a new CEO.

 

Improving box economics through the execution of product and labor cost management and increasing same store sales through our re-branding initiatives, new product offerings, new marketing, and a more analytical approach to menu pricing. Box economics is the relationship between the investment in our restaurants and the sales and related operating margin that those investments should produce. Our product development teams at all three concepts continue to deliver great tasting menu offerings. While same-store sales and guest counts decreased at all of our concepts, average check increased during 2008 by 2.7 percent at our O’Charley’s restaurants, 2.4 percent at our Ninety Nine restaurants and 6.3 percent at our Stoney River restaurants. We increased our advertising spending as a percent of sales in 2008 in order to improve consumer awareness of our brands. As part of the re-branding initiative, we have trained and implemented new service standards, and introduced new kitchen technology and menu engineering. While we believe our re-branding programs have improved our guests’ perceptions of our brands, in light of the current economic conditions and the impact on consumer spending, and to maintain financial flexibility, we do not plan to re-brand any additional restaurants in 2009. Through the end of fiscal 2008, we have completed a total of 62 ‘Project RevO’lution’ re-brandings at our O’Charley’s restaurants and 62 ‘Dressed to the Nines’ re-brandings at our Ninety Nine restaurants.

 

During 2008, we opened four new company-operated O’Charley’s restaurants that featured the concept’s new prototype design and two Ninety Nine restaurants featuring the new prototype design. One of our franchisees also opened one O’Charley’s restaurant featuring the concept’s new prototype design.

 

Achieving high guest satisfaction and intent to return by instilling “A Passion to Serve”SM. In 2005, we adopted a vision statement: ‘A Passion to Serve’ SM. This statement describes our commitment to our guests, each other, our stakeholders and our communities. Our vision is to be the best of class in food and service in our segments of the restaurant industry. We are holding ourselves to higher standards as measured by our Guest Satisfaction Index or “GSI” as we believe that the best marketing takes place within the four walls of our restaurants. Many of our initiatives are designed to improve the guest experience. Our senior management teams at Ninety Nine and O’Charley’s have implemented a combination of in-store and market focus groups designed to solicit feedback about how we can continue to improve our delivery of great food and service. We believe that increases in check average and guest counts require sustainable improvement in the guest experience. ‘Project RevO’lution’ and ‘Dressed to the Nines’ are key elements in our effort to achieve higher guest satisfaction. While recent economic conditions have had a negative impact on our financial performance, we believe that we are taking the appropriate steps to generate profitable and sustainable growth while enhancing shareholder value.

 

Fiscal years end on the last Sunday of the calendar year. Fiscal years 2008 and 2007 each consisted of 52 weeks while fiscal 2006 consisted of 53 weeks. We have one reportable segment.

 

 

Following is an explanation of certain items in our consolidated statements of operations:

 

Revenues consist primarily of company-operated and joint venture restaurant sales and, to a lesser extent, royalty and franchise revenue. Restaurant sales include food and beverage sales and are net of applicable state and local sales taxes and discounts. Franchise revenue and other revenue consists of development fees, royalties on sales by franchised units and royalties on sales of branded food items, particularly salad dressings. Our development fees for franchisees in which we do not have an ownership interest are between $25,000 and $50,000 per restaurant. The development fees are recognized during the reporting period in which the developed restaurant begins operation. The royalties are recognized in revenue in the period corresponding to the franchisees’ sales. A percentage of gift card redemptions, based on actual experience, are recognized as income for gift cards sold that will not be redeemed.

 

Cost of Food and Beverage primarily consists of the costs of beef, poultry, seafood, produce and alcoholic and non-alcoholic beverages net of vendor discounts and rebates. The three most significant commodities that may affect our cost of food and beverage are beef, poultry and seafood which accounted for approximately 27 percent, 11 percent and 8 percent, respectively, of our overall cost of food and beverage in 2008. Generally, temporary increases in these costs are not passed on to guests; however, in the past, we have adjusted menu prices to compensate for increased costs of a more permanent nature.

 

19

 

 


Payroll and Benefits include payroll and related costs and expenses directly relating to restaurant level activities including restaurant management salaries, bonuses, share-based compensation, 401(k) compensation match, hourly wages for restaurant level team members, payroll taxes, workers’ compensation, various health, life and dental insurance programs, vacation expense and sick pay. We have various incentive plans that compensate restaurant management for achieving certain restaurant level financial targets and performance goals.

 

Restaurant Operating Costs include occupancy and other expenses at the restaurant level, except property and equipment depreciation and amortization. In addition to occupancy costs, supplies, straight-line rent, supervisory salaries, bonuses, share-based compensation, 401(k) and deferred compensation match for multi-unit operational employees, and related expenses, management training salaries, general liability and property insurance, property taxes, utilities, repairs and maintenance, outside services and credit card fees account for the major expenses in this category.

 

Advertising and Marketing Expenses include all advertising and marketing-related expenses for the various programs that we utilize to promote traffic and brand recognition for our three restaurant concepts. This category also includes the administrative costs of our marketing departments.

 

General and Administrative Expenses include the costs of restaurant support center administrative functions that support the existing restaurant base and provide the infrastructure for future growth. Executive management and support staff salaries, bonuses, share-based compensation, 401(k) and deferred compensation match for support employees, benefits, and related expenses, data processing, legal and accounting expenses, changes in the liabilities associated with our non-qualified deferred compensation plan, and office expenses account for the major expenses in this category. This category also includes all recruiting, relocation and most severance-related expenses. Severance costs associated with the 2007 supply chain restructuring are included in the “Impairment, Disposal and Restructuring Charges, net” line.

 

Depreciation and Amortization, Property and Equipment primarily includes depreciation on property and equipment calculated on a straight-line basis over the estimated useful lives of the respective assets or the lease term plus one renewal term for leasehold improvements, if shorter. Based on the size of the investment that we make, the economic penalty incurred by discontinuing use of the leased facility, our historical experience with respect to the length of time a restaurant operates at a specific location, and leases that typically have multiple five-year renewal options that are exercised entirely at our discretion, we have concluded that one five-year renewal option is reasonably assured. It also includes accelerated depreciation expenses taken on assets to be disposed of during our ‘Project RevO’lution’ and‘Dressed to the Nines’ re-branding activities.

 

Impairment, Disposal and Restructuring Charges, net includes asset impairments, asset disposals, gains and losses incurred upon the sale of assets, and to a lesser extent, various costs associated with restructuring our supply chain. Impairment charges are taken for land, buildings and equipment and certain other assets 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 the assets to the future undiscounted net cash flows expected to be generated by the assets. Impairment charges for assets that are held for sale represents the difference between their current book value and the estimated net sales proceeds. Disposal charges include the costs incurred to prepare the asset or assets for sale, including repair and maintenance; clean up costs; broker commissions; and independent appraisals. Gains and/or losses associated with the sale of assets are also included in this category.

 

We evaluate restaurant closures for potential disclosure as discontinued operations based on an assessment of quantitative and qualitative factors, including the nature of the closure, potential for revenue migration to other company-operated and franchised restaurants, planned market development in the area of the closed restaurant and the significance of the impact on the related consolidated financial statement line items.

 

Goodwill Impairment represents the impairment associated with goodwill as events and circumstances result in a carrying value in excess of fair value. The determination of a goodwill impairment, in accordance with SFAS No. 142, consists of a two-step process. The first step consists of comparing each reporting unit’s fair value to its carrying value. If the carrying value exceeds the fair value, the goodwill is considered to be potentially impaired. If a potential impairment exists, a second step is performed to measure the amount of the impairment.

 

Pre-opening Costs represent costs associated with our store opening teams, as well as other costs associated with opening a new restaurant. These costs are expensed as incurred. These costs also include straight-line rent related to leased properties from the period of time between when we have waived any contingencies regarding use of the leased property and the date on which the restaurant opens. The amount of pre-opening costs incurred in any one period includes costs incurred during the period for restaurants opened and under development. Our pre-opening costs may vary significantly from period to period primarily due to the timing of restaurant development and openings. Pre-opening costs also include training, supply, and other incremental costs necessary to prepare for the re-opening of an existing restaurant as part of ‘Project RevO’lution’ and ‘Dressed to the Nines’ re-brandings.

 

Interest Expense, net represents the sum of the following: interest on our credit facility; interest on our 9 percent Senior Subordinated Notes due 2013 (the “Notes”); impact of the interest rate swaps on the $78.0 million notional amount of the Notes; amortization of prepaid interest and finance charges; changes in the value of the assets associated with our non-qualified deferred compensation plan resulting from gains and losses in the underlying funds; interest on capital lease obligations; fees for certain unused credit facilities; and interest income from our investments in overnight repurchase agreements.

 

Income Tax (Benefit) Expense represents the provision for income taxes, as well as the impact of permanent tax differences on our income tax provision. For the fiscal year 2008, the income tax provision included a charge of $61.6 million to establish a valuation reserve for substantially all of our deferred tax assets.

 

20

 

 


Results of Operations

 

The following information should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere herein. The following table reflects our operating results for fiscal years 2008, 2007, and 2006 as a percentage of total revenues unless otherwise indicated. Fiscal years 2008 and 2007 were comprised of 52 weeks while fiscal year 2006 was comprised of 53 weeks.

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales

 

99.9

%

 

99.2

%

 

 

98.9

%

 

Commissary sales

 

0.0

 

 

0.8

 

 

 

1.1

 

 

Franchise and other revenue

 

0.1

 

 

0.0

 

 

 

0.0

 

 

 

 

100.0

%

 

100.0

%

 

 

100.0

%

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of restaurant sales: (1)

 

 

 

 

 

 

 

 

 

 

 

Cost of food and beverage

 

29.7

%

 

29.3

%

 

 

29.8

%

 

Payroll and benefits

 

35.0

 

 

34.2

 

 

 

33.6

 

 

Restaurant operating costs

 

20.2

 

 

19.1

 

 

 

19.0

 

 

Cost of restaurant sales (2)

 

84.9

 

 

82.6

 

 

 

82.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of commissary sales (3)

 

0.0

 

 

0.8

 

 

 

0.9

 

 

Advertising and marketing expenses

 

3.7

 

 

3.3

 

 

 

2.8

 

 

General and administrative expenses

 

4.8

 

 

5.0

 

 

 

5.3

 

 

Depreciation and amortization, property and equipment

 

5.5

 

 

5.2

 

 

 

4.7

 

 

Impairment, disposal, and restructuring charges, net

 

1.8

 

 

1.7

 

 

 

0.2

 

 

Goodwill impairment

 

10.1

 

 

 

 

 

 

 

Pre-opening costs

 

0.4

 

 

0.3

 

 

 

0.5

 

 

(Loss) Income from Operations

 

(11.0

)

 

1.8

 

 

 

4.1

 

 

Other Expense (Income):

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

1.6

 

 

1.3

 

 

 

1.5

 

 

(Loss) Earnings Before Income Taxes

 

(12.6

)

 

0.6

 

 

 

2.6

 

 

Income Tax Expense (Benefit)

 

1.6

 

 

(0.2

)

 

 

0.7

 

 

Net (Loss) Earnings

 

(14.2

)%

 

0.7

%

 

 

1.9

%

 

 

(1)

Shown as a percentage of restaurant sales.

 

(2)

Exclusive of depreciation and amortization shown separately.

 

(3)

Cost of commissary sales as a percentage of commissary sales was 98.8 percent and 87.6 percent for fiscal years 2007 and 2006, respectively.

 

21

 

 


The following information should be read in conjunction with “Selected Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere herein. The following table reflects the margin performance of each of our concepts for fiscal years 2008, 2007, and 2006 as a percentage of restaurant sales for each respective concept. Fiscal years 2008 and 2007 were comprised of 52 weeks while fiscal year 2006 was comprised of 53 weeks.

 

2008

2007

2006

 

($ in millions)

O’Charley’s Concept: (1)

Restaurant Sales:

$    593.9

$    618.2

$    633.4

 

 

 

 

Cost and expenses (2)

Cost of food and beverage

29.4%

29.1%

29.8%

Payroll and benefits

34.9%

34.1%

33.3%

Restaurant operating costs (3)

19.5%

18.6%

18.7%

Costs of restaurant sales (4)

83.8%

81.8%

81.8%

 

 

 

 

Ninety Nine Concept:

Restaurant Sales:

$    299.5

$    311.3

$    311.9

 

 

 

 

Cost and expenses (2)

Cost of food and beverage

29.1%

28.7%

29.0%