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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 13, 2003

Commission file number 0-18629

O’Charley’s Inc.

(Exact name of registrant as specified in its charter)

(615) 256-8500

     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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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O’Charley’s Inc.
Form 10-Q
For the Quarter Ended July 13, 2003

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O’CHARLEY’S INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

(Unaudited)

See notes to unaudited consolidated financial statements.

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O’CHARLEY’S INC.
CONSOLIDATED STATEMENTS OF EARNINGS
12 Weeks Ended July 13, 2003 and July 14, 2002
(In thousands, except per share data)

(Unaudited)

See notes to unaudited consolidated financial statements.

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O’CHARLEY’S INC.
CONSOLIDATED STATEMENTS OF EARNINGS
28 Weeks Ended July 13, 2003 and July 14, 2002
(In thousands, except per share data)

(Unaudited)

See notes to unaudited consolidated financial statements.

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O’CHARLEY’S INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
28 Weeks Ended July 13, 2003 and July 14, 2002
(In thousands)
(Unaudited)

See notes to unaudited consolidated financial statements.

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O’CHARLEY’S INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12 and 28 Weeks Ended July 13, 2003 and July 14, 2002

A. BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X. The Company’s fiscal year ends on the last Sunday in December with its first quarter consisting of sixteen weeks and the remaining three quarters consisting of twelve weeks each. Both fiscal 2003 and 2002 consist of fifty-two weeks each.

     In the opinion of management, the unaudited interim consolidated financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals, which are necessary for a fair presentation of the financial position and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

     These unaudited consolidated financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended December 29, 2002.

B. NET EARNINGS PER COMMON SHARE AND STOCK BASED COMPENSATION

     Basic earnings per common share have been computed on the basis of the weighted average number of common shares outstanding, and diluted earnings per common share have been computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of options outstanding.

     Following is a reconciliation of the weighted average common shares used in the Company’s basic and diluted earnings per share calculation.

     Options for approximately 1.4 million shares were excluded from the 2003 12 and 28 week diluted weighted average common share calculation due to these shares being anti-dilutive. Options for approximately 62,000 shares were excluded from the 2002 12 and 28 week diluted weighted average common share calculation due to these shares being anti-dilutive.

     The Company has elected to continue to apply the intrinsic-value-based method of accounting pursuant to APB Opinion 25, and has adopted only the disclosure requirements of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation” as amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of Financial Accounting Standards Board Statement No. 123”. The following table illustrates the effect on net earnings for the 12 and 28-week periods ended July 13, 2003 and July 14, 2002 if the fair-value-based method had been applied to awards that were granted in each period:

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     During the first 28 weeks of 2003, the Company granted approximately 1.1 million stock options to various individuals within the Company. These options have vesting periods ranging from two to five years and have a weighted average exercise price of $21.07.

C. ASSET IMPAIRMENT AND EXIT COSTS

     As discussed in Note 16 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 29, 2002, the Company incurred charges during the third quarter of fiscal 2001 for asset impairment of approximately $5.0 million and exit costs totaling approximately $800,000 related to our decision to close five restaurants. We closed one store during the fourth quarter of 2001, two stores during the first quarter of 2002, one store during the third quarter of 2002 and one store during the first quarter of 2003. During the quarter ended July 13, 2003, the Company paid exit costs totaling approximately $45,000. During the first 28 weeks of 2003, the Company paid exit costs totaling approximately $233,000. The remaining balance of the accrual at July 13, 2003, which primarily represents the Company’s estimate of its remaining net lease obligations related to the closed stores, was approximately $300,000.

D. DERIVATIVE INSTRUMENTS

     At July 13, 2003, the Company’s derivative financial instruments consisted of interest rate swaps with a combined notional amount of $20 million that effectively convert an equal portion of the Company’s debt from a floating rate to a fixed rate. The Company’s purpose for holding such instruments is to hedge its exposure to cash flow fluctuations due to changes in market interest rates. The fair value of the Company’s derivative financial instruments at July 13, 2003 is a liability of $1.2 million compared to a liability of $1.4 million at December 29, 2002, which is included in other liabilities on the consolidated balance sheet. The fair value adjustment resulted in the recognition of an unrealized gain of $198,000, net of related income taxes of $76,000, in accumulated other comprehensive loss in 2003.

E. COMPREHENSIVE INCOME

     Comprehensive income consists of net earnings and other comprehensive income/loss items attributable to unrealized gains and losses on derivative financial instruments and unrealized gains and losses on available for sale securities. The components of total comprehensive income for all periods presented are as follows:

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F. RESTRICTED STOCK UNIT GRANTS

     In the first quarter of 2002, the Company granted approximately 84,000 restricted stock units to certain executive officers and members of senior management in order to provide retention incentives and to incentivize them to meet and exceed budgeted increases in targeted performance criteria. Each restricted stock unit represents the right to receive one share of the Company’s common stock. For each of fiscal years 2002, 2003, and 2004, the compensation committee of the board of directors will establish performance criteria related to targeted earnings per share. If the annual performance targets are achieved, one-third of the restricted stock units will vest in that year and the Company will issue the corresponding number of common shares to the individuals. In the event the performance criteria are not achieved, the restricted stock units that would have vested related to that fiscal year shall not vest and all rights thereto shall terminate. In the event that the employment of the individual by the Company is terminated for any reason, no further vesting of restricted stock units shall occur. The 2002 restricted stock unit tranche vested in 2002 due to the attainment of the applicable performance targets. No compensation cost attributable to the 2003 restricted stock units was recognized in the 12 and 28 week periods ended July 13, 2003 due to the Company’s earnings being below the established performance criteria.

     During the first quarter of 2003, the Company granted approximately 134,000 shares of restricted stock to certain executives and members of senior management associated with a performance accelerated restricted stock plan in order to provide retention incentives for these individuals. The grantee’s rights in the restricted stock shall become fully vested on the sixth anniversary of the grant date. Vesting can be accelerated on the attainment of certain stock performance criteria that are measured against the total shareholder return for the Standard and Poor’s 500 Restaurant Index for the period from the grant date to the measurement date. The awards may vest as early as three years from the grant date if the stock performance criteria are met at that time. In the event that the employment of the individual by the Company is terminated for any reason, no further vesting of restricted stock units shall occur. Upon issuance of restricted stock awards, unearned compensation is charged to shareholders’ equity for the fair value of the restricted stock and recognized as compensation expense ratably over the vesting periods, as applicable. Compensation cost related to these restricted stock awards recognized by the Company during the 12 and 28-week periods ended July 13, 2003 approximated $101,000 and $349,000, respectively.

G. NEW ACCOUNTING PRONOUNCEMENTS

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. It applies in the first fiscal year, or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The application of this Interpretation has not had an impact on the Company’s consolidated financial statements or the disclosures thereto.

     On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstance) three classes of freestanding financial instruments that embody obligations for the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS No. 150 on July 14, 2003. The adoption of SFAS No. 150 did not have an impact on the Company’s consolidated financial statements or the disclosures thereto.

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H. ACQUISITION OF NINETY NINE RESTAURANT & PUB AND NEW CREDIT FACILITY

     On January 27, 2003, the Company acquired Ninety Nine Restaurant and Pub (“Ninety Nine”), a family-owned and operated casual dining chain based in Woburn, Massachusetts with operations in Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. The Company acquired Ninety Nine for $116 million in cash and approximately 2.35 million shares of its common stock, plus the assumption of certain liabilities. The cash portion of the purchase price is subject to adjustment based on the consolidated net book value of Ninety Nine on the closing date. Of the stock portion of the purchase price, the Company delivered approximately 941,000 shares at closing, and will deliver approximately 408,000 shares on each of the first, second, and third anniversaries of the closing and 94,000 shares on each of the fourth and fifth anniversaries of the closing. As the passage of time is the only condition for the ultimate issuance of the common shares, all shares are assumed issued for purposes of basic and diluted earnings per share, and were valued in determining the purchase price of the acquisition. The results of operations for Ninety Nine are included in the consolidated results from January 27, 2003, the date of the acquisition.

     The transaction was accounted for using the purchase method of accounting as required by SFAS No. 141. Ninety Nine is being operated through direct and indirect wholly owned subsidiaries of the Company.

     In order to retain and incentivize certain key employees of Ninety Nine, the Company agreed to pay a total of $1 million per year, plus interest, on each of January 1, 2004, 2005, 2006 and 2007 to those key employees of Ninety Nine who continue to be employed at such dates. Compensation cost recognized by the Company in the 12 and 28 week periods ended July 13, 2003 approximated $261,000 and $490,000, respectively.

     On January 27, 2003, the Company entered into a new senior secured credit facility for the purpose of funding the cash portion of the purchase price of Ninety Nine, retiring the previous revolving credit facility and providing capital for future growth. The senior secured credit facility is secured by all tangible and intangible assets and capital stock of O’Charley’s Inc. and each of its subsidiaries. The new credit facility is comprised of a revolving credit facility in the maximum principal amount of $200 million and a term loan in the original principal amount of $100 million. The revolving credit facility matures on January 27, 2007 and the term loan matures on January 27, 2009. The term loan provides for scheduled quarterly principal amortization of $2.5 million commencing June 30, 2003 and ending March 31, 2008 and quarterly principal amortization of $16.5 million commencing June 30, 2008, with a final payment of $17.0 million due at maturity.

     Amounts outstanding under the new revolving credit facility bear interest, at the Company’s option, at either LIBOR plus a specified margin ranging from 2.25% to 3.0% based on certain financial ratios or the base rate, which is the higher of the lender’s prime rate and the federal funds rate plus 0.5%, plus a specified margin ranging from 1.0% to 1.75% based on certain financial ratios. Amounts outstanding under the term loan bear interest, at the Company’s option, at either LIBOR plus 4.0% or the base rate plus 2.75%. The new credit facility imposes restrictions on the Company with respect to the incurrence of additional indebtedness, sales of assets, mergers, acquisitions, joint ventures, investments, repurchases of stock and the payment of dividends. In addition, the credit facility requires the Company to comply with certain specified financial covenants, including covenants relating to maximum adjusted debt to EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) ratio, maximum leverage, minimum fixed charge coverage ratio, minimum asset coverage ratio and minimum capital expenditures ratio.

     The following table sets forth the preliminary purchase price allocation in accordance with SFAS No. 141. The information set forth below is management’s preliminary purchase price allocation, and is subject to change:

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     The following unaudited pro forma condensed results of operations give effect to the acquisition of Ninety Nine as if such transaction had occurred at the beginning of fiscal 2002:

     The foregoing unaudited pro forma amounts are based upon certain assumptions and estimates, including, but not limited to the recognition of interest expense on debt incurred to finance the acquisition and the issuance of shares associated with the purchase price. The unaudited pro forma amounts do not necessarily represent results which would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Note Regarding Forward Looking Statements

     This report contains certain forward-looking statements within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our intent, belief and expectations such as statements concerning our future profitability, operating and growth strategy, and financing plans. These forward-looking statements may be affected by certain risks and uncertainties, including, but not limited to, the Company’s ability to successfully implement sales building initiatives at the O’Charley’s concept and increase comparable store sales; the ability to successfully integrate the Ninety Nine Restaurant & Pub acquisition; the possible adverse effect that the war with Iraq or other hostilities may have on our results of operations; the possible adverse effect on our sales of any decrease in consumer spending; the effect of increased competition; and the effect that any increases in food, labor and other expenses, including those associated with the sales building initiatives, may have on our results of operations; and the other risks described in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 29, 2002, under the caption “Forward-looking Statements/Risks Factors” and in the Company’s other filings with the Securities and Exchange Commission. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the objectives and plans of the Company will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

General

     At July 13, 2003, we operated 199 O’Charley’s restaurants in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, Ohio, South Carolina, Tennessee, Virginia, and West Virginia, 82 Ninety Nine Restaurant and Pub restaurants in Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont, and six Stoney River restaurants in suburban Atlanta, Georgia, Chicago, Illinois, Louisville, Kentucky, and Nashville, Tennessee. O’Charley’s are casual dining restaurants that are intended to appeal to mainstream casual dining customers as well as upscale casual dining and value-oriented customers by offering high quality, freshly prepared food at moderate prices with friendly and attentive customer service. Ninety Nine Restaurant and Pub restaurants are casual dining restaurants that have earned a reputation for providing high quality food at moderate prices in a comfortable, relaxed atmosphere. Stoney River restaurants are upscale steakhouses that are intended to appeal to both upscale casual dining and fine dining customers by offering hand-cut, premium mid-western beef along with fresh seafood and other gourmet entrees with attentive service in a warm, friendly and relaxed environment.

     As discussed in Note H to the unaudited consolidated financial statements, on January 27, 2003, we completed the acquisition of the Ninety Nine Restaurant and Pub concept for $116 million in cash and approximately 2.35 million shares of common stock, plus the assumption of certain liabilities. The year to date consolidated results for 2003 include the earnings of Ninety Nine Restaurant and Pub since January 27, 2003.

     We operate two commissaries for the primary purpose of providing our restaurants with consistent quality food products that meet our specifications while obtaining lower prices for those items through volume purchasing. A substantial majority of the food products served in our O’Charley’s and Stoney River restaurants are distributed to the restaurants by our Nashville commissary. The commissary for Ninety Nine Restaurant and Pub distributes primarily the “center of the plate” items including red meat, poultry and seafood. In addition to purchasing food and other non-food products, the Nashville commissary manufactures certain proprietary products and both of our commissaries cut red meat into steaks in USDA-approved and inspected facilities. We believe our commissaries give us a competitive advantage in servicing our restaurants and a financial advantage. We attribute a portion of the general decrease in food cost as a percentage of our restaurant sales over the past four years to the operating leverage generated from the increased purchasing volumes and efficiencies achieved at our Nashville commissary.

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     The following table reflects information regarding the number of O’Charley’s and Stoney River restaurants during the first 28 weeks of 2003 and 2002 and Ninety Nine restaurants since their acquisition on January 27, 2003.

     During the third quarter of 2003, we plan to implement certain sales-building initiatives to increase our sales at the O’Charley’s restaurants. These initiatives include, among other things, increased advertising and certain menu price reductions designed to increase guest traffic. We estimate these sales-building initiatives may negatively affect pre-tax earnings by approximately $2.0 million over the remainder of 2003.

     In the first quarter of 2002, we recorded a non-cash pretax charge of $9.9 million ($6.1 million net of tax, or $0.31 per diluted share) as a cumulative effect of a change in accounting principle as a result of our evaluation of the goodwill carrying value of the Stoney River reporting unit. We were required to perform this evaluation upon the adoption of a new accounting standard, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangibles”, that dictates how companies must account for goodwill. We adopted SFAS No. 142 at December 31, 2001 and we determined that the goodwill was impaired based upon our valuation of the fair value of the Stoney River reporting unit and the fair value of its net assets, exclusive of goodwill. The write-off represented the total unamortized goodwill associated with the Stoney River acquisition.

     We have completed our feasibility study on franchising our O’Charley’s restaurant concept and are reviewing franchising opportunities. We will continue to incur legal and administrative expenses during the development stage of this program which we expect will not be offset by franchising revenue during 2003. The establishment of franchising operations could have an adverse effect on our operating results until such time, if ever, as those operations begin to generate revenues in excess of their related expenses. We anticipate approximately $665,000 in expenses for this program in fiscal 2003.

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

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

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

     Payroll and Benefits includes payroll and related costs and expenses directly relating to restaurant level activities including restaurant management salaries and bonuses, hourly wages for store level employees, payroll taxes, workers’ compensation, various health, life and dental insurance programs, vacation expense and sick pay. We have an incentive bonus plan that compensates restaurant management for achieving and exceeding certain restaurant level financial targets and performance goals. In 2003, we made improvements to the insurance benefits offered to our hourly employees, which are intended to enable us to attract and retain the most qualified candidates available. These improvements will result in an increase to our payroll and related costs and expenses as a percentage of restaurant sales in 2003.

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

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

     Depreciation and Amortization includes depreciation and amortization on property and equipment calculated on a straight-line basis over an estimated useful life.

     Pre-opening Costs includes operating costs and expenses incurred prior to a new restaurant opening. 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 quarter to quarter primarily due to the timing of restaurant openings. We typically incur average pre-opening costs of approximately $200,000 for each new O’Charley’s and Stoney River restaurant and approximately $130,000 for each new Ninety Nine restaurant.

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     The following section should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto included elsewhere herein. The following table highlights the operating results for the second quarter and the first 28 weeks of 2003 and 2002 as a percentage of total revenues unless specified otherwise.