UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission file number 0-18629

O’Charley’s Inc.

(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.

O’Charley’s Inc.
Form 10-Q
For the Quarter Ended April 18, 2004

Index

Part I – FINANCIAL INFORMATION

See notes to unaudited consolidated financial statements.

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O’CHARLEY’S INC.

See notes to unaudited consolidated financial statements.

4

O’CHARLEY’S INC.

See notes to unaudited consolidated financial statements.

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O’CHARLEY’S INC.

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 2004 and 2003 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 for the year ended December 28, 2003. Certain reclassifications have been made to the prior year information to conform to the current year presentation.

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 1.5 million shares were excluded from the 2004 16-week diluted weighted average common share calculation due to these shares being anti-dilutive. Options for approximately 1.1 million shares were excluded from the 2003 16-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, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), 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 16-week periods ended April 18, 2004 and April 20, 2003 if the fair-value-based method had been applied to awards that were granted in each period:

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C. ACQUISITION

     On January 27, 2003, the Company acquired Ninety Nine Restaurant and Pub (“Ninety Nine”), a casual dining chain based in Woburn, Massachusetts, primarily to continue expanding its portfolio of quality restaurant concepts in becoming a multi-concept restaurant operation. The Company acquired Ninety Nine for $116 million in cash and approximately 2.34 million shares of common stock, plus the assumption of certain liabilities. In addition to the purchase price, the Company agreed to pay a total of $1.0 million per year, plus accrued interest, on each of January 1, 2004, 2005, 2006 and 2007, to certain key employees of Ninety Nine who continue to be employed at the time of such payments. Of the stock portion of the purchase price, the Company delivered 941,176 shares at closing, and 390,586 shares in January 2004 and will deliver 407,843 shares on each of the second and third anniversaries of the closing and 94,118 shares on each of the fourth and fifth anniversaries of the closing.

     The transaction was accounted for using the purchase method of accounting as required by SFAS No. 141 and, accordingly, the results of operations of Ninety Nine have been included in the Company’s consolidated financial statements from the date of acquisition. The Ninety Nine concept is being operated through wholly owned subsidiaries of the Company. The Company attributes the goodwill shown below to the long-term historical financial performance and the anticipated future performance of Ninety Nine. The final purchase price allocation, which includes additional transaction costs paid through the first anniversary of the date of the transaction, to the acquired net assets is as follows (in thousands):

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     The following unaudited pro forma condensed results of operations for the 16 weeks ended April 20, 2003 give effect to the acquisition of Ninety Nine as if such transaction had occurred at the beginning of fiscal 2003:

     Unaudited Pro Forma Earnings:

     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. 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.

D. DERIVATIVE INSTRUMENTS

     At April 18, 2004, the Company’s derivative financial instruments consisted of interest rate swaps with a combined notional amount of $110 million; $10 million that effectively converts an equal portion of the Company’s revolver debt from a floating rate to a fixed rate and $100 million that effectively converts an equal portion of the fixed-rate indebtedness related to the $125.0 million senior subordinated notes due 2013 into variable-rate obligations. The Company’s purpose for holding such instruments is to hedge its exposure to cash flow and fair value fluctuations due to changes in market interest rates as well as to maintain an appropriate mix of fixed and floating rate debt.

     The fair value of the Company’s derivative financial instruments at April 18, 2004 is a liability of $1.4 million compared to a liability of approximately $760,000 at December 28, 2003, which is included in other long-term liabilities on the unaudited consolidated balance sheet. The fair value adjustment resulted in the recognition of an unrealized loss of $394,000, net of related income taxes of $252,000, in accumulated other comprehensive loss in 2004.

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. The components of total comprehensive income for all periods presented are as follows:

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F. RESTRICTED STOCK 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. The 2003 restricted stock unit tranche did not vest due to the Company’s earnings being below the established performance criteria. The Company has recognized approximately $90,000 in the 16-week period ended April 18, 2004 associated with the 2004 restricted stock unit tranche.

     During the first quarter of 2003, the Company granted approximately 135,000 shares of restricted stock to certain executives and members of senior management. Compensation cost related to these restricted stock awards recognized by the Company during the 16-week periods ended April 18, 2004 and April 20, 2003 approximated $145,000 and $248,000, respectively.

     During the first quarter of 2004, the Company granted approximately 42,000 shares of restricted stock to certain employees associated with a 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 dates varying from immediately to seven years following the grant date. In the event that either the employment of the individual by the Company is terminated for any reason or, for any reason, the individual ceases to remain employed by the Company in the same position the individual held on the date of grant (or a substantially equivalent or higher position), no further vesting of restricted stock 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 16-week period ended April 18, 2004 approximated $65,000.

G. SALE AND LEASEBACK TRANSACTIONS

     During the fourth quarter of 2003, the Company completed two sale and leaseback transactions. The first transaction, completed on October 17, 2003, involved the sale of 23 O’Charley’s restaurant properties for aggregate gross proceeds of approximately $50.0 million. The second transaction, completed on November 7, 2003, involved the sale of five O’Charley’s restaurant properties for aggregate gross proceeds of approximately $9.1 million. During the first quarter of 2004, the Company entered into a third sale and leaseback transaction. This transaction, completed on December 30, 2003, involved the sale of six O’Charley’s restaurant properties for aggregate gross proceeds of approximately $12.1 million.

     All of these sales were made to an unrelated entity who then leased the properties back to the Company. The leases that the Company entered into in connection with these transactions require the Company to make future minimum lease payments aggregating $119.4 million over the 20-year term of the leases, or an average of approximately $6.0 million annually. The leases also provide for the payment of additional rent beginning in the sixth year of the lease term based on increases in the Consumer Price Index. The net proceeds from these transactions were used to pay down existing indebtedness under the Company’s bank credit facility.

     The Company recognized a gain of approximately $16.9 million on the sale and leaseback transactions completed in fiscal 2003. This gain is being deferred and amortized over the 20-year lease term. The short term portion of the gain is reflected in Accrued Expenses and the long-term portion is shown in Other Liabilities in the accompanying unaudited consolidated balance sheets.

     The future minimum lease payments on the transaction completed in the first quarter of 2004 are as follows: $895,000 – 2004; $943,000 – 2005; $991,000 – 2006; $1,040,000 – 2007; $1,088,000 – 2008; $16,322,000 – thereafter. The deferred gain on the transaction completed in the first quarter was approximately $4.5 million.

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H. LEGAL PROCEEDINGS

     In September 2003, the Company became aware that customers and employees at one of its O’Charley’s restaurants located in Knoxville, Tennessee were exposed to the Hepatitis A virus, which resulted in a number of the Company’s employees and customers becoming infected. The Company has worked closely with the Knox County Health Department and the Centers for Disease Control and Prevention since it became aware of this incident and has cooperated fully with their directives and recommendations. The Company is aware of 81 individuals who have contracted the Hepatitis A virus, most of whom have been linked to its Knoxville restaurant during the time of the outbreak. As of the date of this filing, the Company is also aware of 37 lawsuits that have been filed against it, all of which have been filed in the circuit court for Knox County, Tennessee, that allege injuries or fear of injuries from the Hepatitis A incident. A number of these suits seek substantial damages, including treble damages under Tennessee consumer protection laws and punitive damages, and some of which seek to be certified as class actions. One of the lawsuits was filed by an individual who contracted Hepatitis A and died following the filing of his lawsuit. This suit has been amended to seek compensatory damages not to exceed $7.5 million and punitive damages not to exceed $10.0 million alleging wrongful death. Other plaintiffs have alleged significant health concerns, including ailments requiring hospitalization. To date, 24 of the cases have been consolidated for discovery purposes only.

     The Company is also aware of an outbreak of Hepatitis A linked to numerous independent restaurants and restaurant chains located in Georgia, including two of its O’Charley’s restaurants. The Company has received the preliminary report of the Georgia Division of Public Health indicating that ten persons who contracted the Hepatitis A virus in Georgia stated that they had eaten at the Centerville, Georgia or the Macon, Georgia O’Charley’s restaurant. Each of the Knox County Health Department, the Georgia Division of Public Health, the Centers for Disease Control and Prevention and the Food and Drug Administration have tentatively associated the recent outbreaks of the Hepatitis A virus affecting a number of restaurants, including O’Charley’s, to eating green onions (scallions).

     While the Company intends to vigorously defend the litigation that has been filed against it, the Company is not able to predict the outcome of the litigation that has been filed against it or that may be filed against it in the future relating to the Hepatitis A outbreak or the amounts that it may be required to pay to settle that litigation or to satisfy any adverse judgments that may be rendered against it. The Company has liability insurance; however, there can be no assurance that the Company’s insurance carriers will reimburse it for any loss or liability it suffers in connection with this incident or that its insurance will be sufficient to cover any loss or liability. The Company has submitted a claim pursuant to its insurance coverage for this type of loss. At this point, the Company cannot reasonably estimate the value of any potential settlement of this claim or the timing thereof. If the Company suffers losses or liabilities in excess of its insurance coverage or if its insurance does not cover those losses or liabilities, there could be a material adverse effect on its results of operations and financial condition.

I. RECENT ACCOUNTING PRONOUNCEMENTS

     In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, and Interpretation of ARB No. 51. This Interpretation addresses how a business enterprise should evaluate whether it has a controlling financial interest in any entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46. The Company was required to adopt FIN 46R during the quarter ended April 18, 2004. The adoption of FIN 46R had no impact on the Company’s consolidated financial statements.

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J.

SUPPLEMENTARY CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF SUBSIDIARY GUARANTORS

     In the fourth quarter of 2003, the Company issued $125 million aggregate principal amount of 9% senior subordinated notes due 2013. The obligations of the Company under the senior subordinated notes are guaranteed by all of the Company’s subsidiaries, with the exception of certain minor subsidiaries. The guarantees are made on a joint and several basis. The claims of creditors of the non-guarantor subsidiaries have priority over the rights of the Company to receive dividends or distributions from such subsidiaries. Presented below is supplementary condensed consolidating financial information for the Company and the subsidiary guarantors as of April 18, 2004 and December 28, 2003 and for the 16 weeks ended April 18, 2004 and April 20, 2003.

Condensed Consolidating Balance Sheet
As of April 18, 2004

(Unaudited)

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Condensed Consolidating Balance Sheet
As of December 28, 2003

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Condensed Consolidating Statement of Earnings
16 Weeks Ended April 18, 2004

(Unaudited)

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Condensed Consolidating Statement of Earnings
16 Weeks Ended April 20, 2003

(Unaudited)

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Condensed Consolidating Statement of Cash Flows
16 Weeks Ended April 18, 2004

(Unaudited)

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Condensed Consolidating Statement of Cash Flows
16 Weeks Ended April 20, 2003

(Unaudited)

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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 same restaurant sales; 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; 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 other risks described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2003 under the caption “Risk 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.

Introduction

     We are a leading casual dining restaurant company operating three restaurant concepts under the “O’Charley’s,” “Ninety Nine Restaurant and Pub” and “Stoney River Legendary Steaks” trade names. Our primary concepts, O’Charley’s and Ninety Nine, are leading casual dining concepts in their respective operating markets. As of April 18, 2004, we owned and operated 212 O’Charley’s restaurants in 16 states in the Southeast and Midwest regions, 89 Ninety Nine restaurants in seven Northeastern states, and six Stoney River restaurants in the Southeast and Midwest.

O’Charley’s Concept Sales-Building Plan

     Prior to 2002, we consistently reported annual increases in same restaurant sales and customer visits at our O’Charley’s concept. In the second quarter of 2002, we began to experience decreases in customer visits at our O’Charley’s restaurants, which eventually led to declines in same restaurant sales. The decrease in customer visits at O’Charley’s continued through the first two quarters of 2003. During the third quarter of 2003, we initiated a three phase plan intended to increase our sales and customer visits at our O’Charley’s restaurants. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Introduction” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2003 for additional information on the first and second phases of our sales-building initiatives.

     During the first quarter of 2004, we introduced the third phase of our sales-building initiatives which is designed to maintain the customer visit momentum established in 2003, while improving the overall check average and same restaurant sales. During the first quarter of 2004, our same restaurant sales increased 4.0% with customer visit increases of 6.4% partially offset by a 2.1% decline in the average check. We believe the adverse weather conditions coupled with the war in Iraq during the first quarter of 2003 had a favorable effect on our same restaurant sales results during the first quarter of 2004. During the 16 weeks ended April 18, 2004, the average check decreased approximately 2.1% compared to the same prior-year period, improving from down approximately 4.3% and 3.0% during the first and second phases, respectively, compared to the same prior-year period. We believe evolutionary changes in our menu, supported with limited-time promotions, will broaden our customer base, appeal to core customers and positively affect our margins. We expect the third phase of the sales-building initiatives to be longer in term and broader in scope than the prior two phases, which lasted approximately four months. While these initiatives are currently meeting our expectations, there can be no assurance they will result in a sustained improvement in customer visits or in same restaurant sales.

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Commodity Cost

     During the first quarter of 2004, we continued to experience higher food costs, a trend that began during the second quarter of 2003. We estimate that food cost inflation, as compared to the same prior-year period, was approximately 4% in the first quarter of 2004, comprised of higher poultry, pork and cheese costs. During 2003 and the first quarter of 2004, poultry represented, on average, approximately 10% to 12% of our total food costs. During the first quarter of 2004, our price of purchasing poultry was approximately 25% higher compared to the same prior-year period. We have not historically entered into long-term contracts to purchase poultry and, accordingly, are subject to weekly market price fluctuations that have negatively affected our results of operations. We believe we will continue to experience year-over-year commodity cost increases at least through the end of the second quarter of 2004.

Restaurant Development

     Historically, we have grown the O’Charley’s concept by a combination of opening new stores and increasing same restaurant sales. Prior to 2003, the growth in new stores had typically been in the 15% to 20% range year-over-year. During 2003, we opened 26 new stores and closed two stores. This represented an approximate 13% increase over 2002. In 2004, we reduced our planned growth rate of our O’Charley’s concept to approximately 8%, in order to better focus on our sales-building initiatives in our existing O’Charley’s restaurants as well as focus on brand development in new expansion markets. We intend to open 15 O’Charley’s restaurants by the end of 2004, six of which were open by the end of the first quarter of 2004. During 2004, we plan to develop 13 prototypical O’Charley’s restaurants that seat approximately 275 customers, and that require, on average, a total invested capital of approximately $2.5 million per restaurant. During 2004, we plan to test two new O’Charley’s prototypes, an in-line restaurant and a smaller, free-standing restaurant. These two new O’Charley’s prototypes are projected to be approximately 4,900 square feet with seating for approximately 160 customers at the in-line and approximately 190 at the free-standing prototype. We opened the first in-line O’Charley’s restaurant during the first quarter of 2004 and plan to open the new free-standing prototype during the second half of 2004. The O’Charley’s restaurants we plan to develop in 2004 will be located in existing markets.

     We intend to open 12 Ninety Nine Restaurant and Pub restaurants by the end of 2004, two of which were open by the end of the first quarter of 2004. During 2004, five of the 12 new Ninety Nine restaurants we intend to develop are prototypical, free-standing buildings of approximately 5,800 square feet in size with seating for approximately 190 customers. We intend to develop the remaining seven restaurants through remodeling traditional restaurant locations in the style of the prototype restaurant. On average, the total invested capital of a prototypical Ninety Nine restaurant is approximately $2.2 million. The Ninety Nine restaurants we plan to develop in 2004 will be located in existing markets.

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Following is an explanation of certain items in the Company’s 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. Generally, temporary increases in these costs are not passed on to customers; however, we have, in the past, generally adjusted menu prices to compensate for increased costs of a more permanent nature.

     Payroll and Benefits include payroll and related costs and expenses directly relating to restaurant level activities including restaurant management salaries and bonuses, hourly wages for restaurant level employees, payroll taxes, workers’ compensation, various health, life and dental insurance programs, vacation expense and sick pay. We have an incentive bonus plan that compensates restaurant management for achieving and exceeding certain restaurant level financial targets and performance goals.

     Restaurant Operating Costs include occupancy and other expenses at the restaurant level, except property and equipment depreciation and amortization. Supplies, rent, supervisory salaries, bonuses 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, General and Administrative Expenses include all advertising and home office administrative functions that support the existing restaurant base and provide the infrastructure for future growth. Advertising, executive management and support staff salaries, bonuses and related expenses, data processing, legal and accounting expenses and office expenses account for the major expenses in this category.

     Depreciation and Amortization primarily includes depreciation on property and equipment calculated on a straight-line basis over the estimated useful lives of the respective assets.

     Preopening Costs include operating costs and expenses incurred prior to a new restaurant opening. The amount of preopening costs incurred in any one period includes costs incurred during the period for restaurants opened and under development. Our preopening costs may vary significantly from quarter to quarter primarily due to the timing of restaurant openings.

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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 first 16 weeks of 2004 and 2003 as a percentage of total revenues unless specified otherwise. Certain reclassifications have been made to the prior year information to conform to the current year presentation.

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     The following table sets forth certain financial and other restaurant data relating to the Company’s restaurants: