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Article by DailyStocks_admin    (04-09-12 01:06 AM)

Description

Ocharleys Inc. 10% Owner Financial, I Fidelity National bought 18067581 shares on 4-05-2012 at $ 9.85

BUSINESS OVERVIEW

We are a multi-concept 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 25, 2011, we operated 221 O’Charley’s company-owned restaurants in 17 states in the East, Southeast and Midwest, 105 Ninety Nine restaurants in seven states throughout New England and upstate New York, and 10 Stoney River restaurants in six states in the East, Southeast and Midwest. As of December 25, 2011, we had six franchised O’Charley’s restaurants in four states in the Southeast and Midwest.

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 Item 8 “Financial Statements and Supplementary Data” of this Form 10-K. References made herein to “we,” “our,” “us,” or the “Company” refer to O’Charley’s Inc. and its direct and indirect subsidiaries.

Proposed Acquisition of Our Company

On February 5, 2012, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Fidelity National Financial, Inc., a Delaware corporation (“FNF”), and Fred Merger Sub Inc. (“Merger Sub”), a Tennessee corporation and an indirect, wholly-owned subsidiary of FNF, pursuant to which FNF, through Merger Sub, agreed to commence a tender offer (the “Offer”) to acquire all of our outstanding shares of common stock, no par value per share (the “Shares”), for $9.85 per Share, net to the seller thereof in cash (the “Offer Price”), without interest and subject to any required withholding of taxes. The Offer commenced on February 27, 2012.

Completion of the Offer is subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including (i) that the number of Shares validly tendered and not validly withdrawn, together with any Shares then owned by FNF and its affiliates, equals at least a majority of the Shares outstanding as of the expiration of the Offer on a fully-diluted basis, (ii) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and certain other antitrust laws, (iii) the absence of a material adverse effect on the Company and (iv) certain other customary conditions.

The Merger Agreement also provides that after consummation of the Offer and subject to statutory waiting periods and the satisfaction or waiver of certain conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”) and the Company will become an indirect, wholly-owned subsidiary of FNF. In the Merger, each Share that was not tendered pursuant to the Offer, other than Shares owned by the Company, FNF or Merger Sub or by a wholly-owned subsidiary of the Company or FNF, will be converted into the right to receive cash in an amount equal to the Offer Price, subject to any required withholding of taxes and without interest.

If Merger Sub holds at least 90% of the outstanding Shares immediately prior to the Merger, Merger Sub may effect the Merger as a short-form merger without additional approval by the Company’s shareholders. Otherwise, we would hold a special shareholders’ meeting to obtain shareholder approval of the Merger. Subject to the terms of the Merger Agreement, applicable laws and the number of authorized Shares available under our charter, we have granted to FNF and/or Merger Sub an irrevocable right (the “Top-Up Option”), exercisable following consummation of the Offer, if necessary, to purchase from us, at a price per share equal to the Offer Price, up to that number of newly issued Shares so that FNF, its subsidiaries and Merger Sub own one share more than 90% of the Shares then outstanding on a fully-diluted basis after giving effect to the Top-Up Option.

We are permitted to solicit inquiries or engage in discussions with third parties relating to “acquisition proposals” (as defined in the Merger Agreement) for a 30-day “go-shop” period ending March 6, 2012, and with certain parties who make written competing proposals during the “go-shop” period (each, an “Excluded Party”). After such period, we may not solicit or initiate discussions with third parties regarding other proposals to acquire the Company and have agreed to certain restrictions on our ability to respond to such proposals, subject to the fulfillment of certain fiduciary duties of our board of directors.

The Merger Agreement can be terminated by us or FNF under certain circumstances. If terminated, we must pay FNF a termination fee under certain circumstances, which fee will be either $6.74 million or $3.37 million depending on the circumstances giving rise to payment of the termination fee.

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 genuinely friendly and attentive guest service. O’Charley’s restaurants are intended to appeal to a broad spectrum of guests from a diverse income base with varying family composition.

The O’Charley’s menu features a variety of items, including hand-cut and aged steaks, baby-back ribs basted with a sweet, smoky BBQ sauce, slow roasted prime rib, fresh-never-frozen Atlantic salmon, hand breaded chicken tenders, freshly made salads with O’Charley’s special recipe salad dressings and O’Charley’s signature caramel pie. All entrées 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, serve lunch, dinner and Sunday brunch and offer full bar service. Specialty menu items include seasonal promotions, O’Charley’s lunch and dinner combos 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 entrées start at $5.99, with dinner entrées ranging from $7.99 to $18.79. The average check per guest, including beverages, was $12.64 in 2011, $12.43 in 2010 and $12.85 in 2009.

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. Additionally, the interior features warm woods, exposed brick 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 225 guests, including 17 bar seats. We did not open any new restaurants during 2011 and do not plan to open any new restaurants during 2012.

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, Massachusetts. 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 reasonable price. Ninety Nine restaurants are intended to appeal to mainstream casual-dining and value-oriented guests. The Ninety Nine menu features a wide selection of appetizers, soups, salads, sandwiches, burgers, beef, chicken and seafood entrées 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 entrées start at $5.99, with dinner entrées ranging from $7.99 to $18.99. The average check per guest, including beverages, was $14.79 in 2011, $14.59 in 2010 and $14.62 in 2009.

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 6,300 square feet with seating for 190 guests, including 30 bar seats. Ninety Nine has historically grown through remodeling traditional and non-traditional restaurant locations as well as through developing new restaurants in the style of our prototype restaurant. We did not open any new restaurants during 2011 and do not plan to open any new restaurants during 2012.

Stoney River Legendary Steaks

We acquired Stoney River Legendary Steaks (“Stoney River”) in May 2000. Stoney River restaurants are steakhouses that 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 are intended to make the interior of the restaurant inviting and comfortable. While Stoney River has both free-standing and in-line footprints, the average restaurants have 7,500 square feet with seating for 275 guests including 25 bar seats. During 2009 and 2010, we repositioned Stoney River to provide the same great guest experience with lower menu prices, new menu offerings, and a new menu format. This repositioning included reduced prices of certain menu offerings, the addition of new menu items to appeal to the upscale casual-dining guests and an improved and more price conscious wine list. The Stoney River menu features several offerings of premium Midwestern beef, fresh seafood and a variety of other gourmet entrées. An extensive assortment of freshly prepared salads, side dishes, several specialty appetizers and desserts are also available. Stoney River restaurants offer full bar service, including an extensive selection of wines. The dinner price range of entrées is $12.99 to $33.99. The average check per guest, including beverages, was $35.90 in 2011, $36.97 in 2010, and $41.22 in 2009. We did not open any new restaurants during 2011 and do not plan to open any new restaurants during 2012.

Support Operations

Supply Chain Management. Our supply chain management process 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. The supply chain team focuses on three key areas: 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.

Human Resources. We maintain a human resources department that supports restaurant operations and our home office through the design and implementation of policies, programs, procedures and benefits for our team members. The human resources department is responsible for all customary human resource and compensation functions, including hiring, on-boarding, benefits and team member relations (including use of the Open Door Policy, a confidential toll free 800 number, and an alternative dispute resolution process), and the design and implementation of team member compensation policies and practices. The human resources department is also responsible for all training and development of new hourly team members and managers, as well as new product rollouts and the continuing training and development of the restaurant teams.

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, Ninety Nine, and Stoney River 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 or an internet survey. Primary focus is placed on identification and improvement of primary drivers of a highly satisfied guest experience. Our ability to continuously monitor service levels and guest 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 and responds as applicable to direct calls, written correspondence and social media feedback from O’Charley’s, Ninety Nine, and Stoney River guests.

Advertising and Marketing . We have an ongoing advertising and marketing plan for each of our restaurant concepts that utilizes some combination of television, radio, internet, outdoor 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 value offerings and new product promotions, the quality and freshness of our products, and the overall guest experience. 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 home office. The management accounting system polls data from our restaurants and generates periodic 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 and labor utilization. Our internal audit department audits a sample of our restaurants to measure compliance within our operational systems, procedures and controls. Our back office systems and processes are designed to consolidate and integrate our accounting functions. In addition, a centralized call line is available to restaurant management for questions, comments and problem resolution relating to their financial reports or employee benefits. We believe having a consolidated accounting function for 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.

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 customers, 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. 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 are 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. 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 11.6 percent of restaurant sales in 2011 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, and in some states or localities, to provide service for extended hours and on Sunday. In addition, the Patient Protection and Affordable Care Act (“PPACA”) will require, effective January 1, 2014, that chain restaurants with 20 or more locations display caloric content on their menus. Also, some states require, or are considering requiring, us to disclose nutritional information on our menus. Each restaurant has food service licenses from local health authorities. 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.

We are subject, in most states in which we operate restaurants, to “dram-shop” statutes or judicial interpretations, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.

The federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. We design our restaurants to be accessible to the disabled and believe that we are in substantial compliance with all current applicable regulations relating to restaurant accommodations for the disabled.

The development and construction of 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.

Seasonality

Our sales volumes fluctuate seasonally. Our first fiscal quarter is a 16-week quarter, while our second through fourth fiscal quarters are each 12 weeks. Historically, average weekly sales per restaurant are higher in the first quarter than in subsequent quarters, and we typically generate a disproportionate share of our income from operations in the first quarter. Holidays, severe weather and other disruptive conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

Purchasing

Our ability to maintain consistent quality throughout each of our restaurant concepts depends upon acquiring products from reliable sources. Our pre-approved suppliers and our restaurants are required to adhere to strict product and safety specifications established through our quality assurance and culinary programs. These requirements ensure that high-quality products are served in each of our restaurants. We strategically negotiate directly with major suppliers to obtain competitive prices. We also use purchase commitment contracts when appropriate to stabilize the potentially volatile pricing of certain commodity items. All essential products are available from pre-qualified distributors to be delivered to any of our restaurant locations. Additionally, as a purchaser of a variety of protein products, we require our vendors to adhere to humane processing standards for their respective industries and encourage them to evaluate new technologies for food safety and humane processing improvements. Because of the relatively rapid turnover of perishable food products, inventories in the restaurants, consisting primarily of food, beverages and supplies, have a modest aggregate dollar value in relation to revenues.

Team Members

As of December 25, 2011, we employed approximately 21,000 team members, approximately 19,000 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.

CEO BACKGROUND

Arnaud Ajdler has been a managing director of Crescendo Partners since December 2005. Since March 2008, Mr. Ajdler has served as a director of Destination Maternity Corporation, a designer and retailer of maternity apparel. Since its inception in June 2006, Mr. Ajdler has served as a member of the board of directors and the secretary of Rhapsody Acquisition Corp., an OTC Bulletin Board-listed blank check company formed to effect a business combination with an operating business. From June 2004 until June 2006 Mr. Ajdler also served as the chief financial officer, a director and the secretary of Arpeggio Acquisition Corporation. Arpeggio completed its business combination with Hill International, Inc. in June 2006 and since then Mr. Ajdler has served as a director of the surviving company. Mr. Ajdler also serves as a director and member of the audit committee of Charming Shoppes, Inc., a multi-brand specialty apparel retailer.
Mr. Ajdler brings to the board a strong business and financial background, as well as perspective from his service on other public company boards of directors. In particular, Mr. Ajdler’s experience in the retail industry with Destination Maternity Corporation and Charming Shoppes, Inc., provides him with sophisticated perspectives regarding brand marketing and consumer discretionary spending habits, which are directly relevant to our business and value-oriented marketing strategy. In addition to his business and financial experience, Mr. Ajdler also brings to the board the perspective of a major company shareholder.
William F. Andrews has served as chairman of the executive committee of Corrections Corporation of America, an owner and operator of privatized correctional and detention facilities, since July 2008, after having served as its chairman of the board since August 2000. Mr. Andrews has been a principal of Kohlberg & Company, a private equity firm specializing in middle market investing, since 1995. He is currently the chairman of the board of directors of Katy Industries, Inc., a manufacturer and distributor of consumer and commercial products. Mr. Andrews also currently serves as a director of Black Box Corporation, a publicly-traded provider of information technology infrastructure solutions, and Trex Company, Inc., a publicly-traded producer of decking and railing products.
Mr. Andrews is a respected business leader with a diverse business background, bringing to the board multiple perspectives, including those of an investor and an executive. For 15 years, he has been a principal in the private equity firm Kohlberg & Company, which experience lends him, and consequently our board, a deep knowledge of how investors analyze and value business enterprises. Additionally, Mr. Andrew’s service as a chief executive officer of another publicly-traded company and in leadership roles on other public company boards has resulted in valuable experience in the processes and policies needed to effectively govern a publicly-traded enterprise.
Douglas Benham is the president and chief executive officer of DNB Advisors, LLC, a restaurant industry consulting firm. Mr. Benham served as president and chief executive officer of Arby’s Restaurant Group, a quick service restaurant company, from January 2004 until April 2006. From August 2003 until January 2004, Mr. Benham was president and chief executive officer of DNB Advisors, LLC. From January 1989 until August 2003, Mr. Benham served on the board of directors, as well as chief financial officer, of RTM Restaurant Group, Inc., an Arby’s franchisee. Since August 2009, Mr. Benham also serves as a director of Sonic Corp., a publicly-traded company which has over 3,500 drive-in restaurants. Mr. Benham also currently serves as a director and member of the audit committee of Macquarie CNL Global Income Trust, a real estate investment trust.
With more than 20 years experience in the restaurant industry, Mr. Benham offers the board valuable knowledge in restaurant operations and management. This understanding of the restaurant industry allows Mr. Benham a variety of viewpoints and perspectives critical to productive board deliberations.
David W. Head has served as Chief Executive Officer, President and member of our board of directors since September 2010. Prior to joining O’Charley’s and since 2006, Mr. Head served as chairman, president and chief executive officer of Captain D’s Seafood Kitchen, an operator and franchisor of over 550 quick-service seafood restaurants generating nearly $500 million in annual revenue. From 2003 to 2006, Mr. Head served as president, Chief Executive Officer and director of Romacorp, Inc., which operates and franchises over 250 Tony Roma’s casual dining locations throughout the United States and in over 30 countries. In November 2005, Romacorp, Inc., as part of its general turnaround strategy, filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. In April 2006, Romacorp emerged from bankruptcy protection and has since expanded its international and domestic franchising program. Additionally, Mr. Head successfully led franchised start-up restaurants in the Applebee’s International and Red Robin bar and grill systems.
Mr. Head is a proven leader with a broad skill set, deep operational experience in the restaurant industry, and an impressive track record refining and repositioning restaurant brands. As Chief Executive Officer, he brings management’s perspective to the board .

Philip J. Hickey, Jr. has served as the Chairman of our board of directors since June, 2009. Mr Hickey has also served as the chief executive officer of Park Row Ventures, an investment and consulting firm, since October 2007. Prior to October 2007, Mr. Hickey served as the chairman of the board of directors of RARE Hospitality International, Inc., a restaurant company, from January 2001 to October 2007 and its chief executive officer from July 1998 until October 2007. Mr. Hickey currently serves as a director of Radiant Systems, Inc., a provider of technology solutions for managing site operations in the hospitality and retail industries.
Mr. Hickey has extensive experience in the restaurant industry and possesses a sophisticated understanding of the industry’s financial and operational aspects. Under Mr. Hickey’s leadership, RARE Hospitality grew from 108 to 319 restaurants and to over $1 billion in annual revenue. Prior to his experience with Rare Hospitality, Mr. Hickey served as president and chief operating officer of Innovative Restaurant Concepts, Inc. and Rio Bravo International, Inc., operators and franchisors of casual dining restaurants that were acquired by Applebee’s International, Inc. in March 1995. Mr. Hickey’s extensive public company experience and experience and success within our industry demonstrate not only the range of Mr. Hickey’s knowledge, but also exemplify the qualities we believe qualify him as chairman of our board.
Gregory Monahan has been a managing director of Crescendo Partners since December 2008, after serving as a senior vice president (from December 2007 to December 2008), vice president (from December 2005 to December 2007) and an investment analyst (from May 2005 to December 2005) of Crescendo Partners. Mr. Monahan founded Bind Network Solutions in March 1998 and served with that company until November 2002. Mr. Monahan also previously worked as assistant to the chairman of the board and board observer of Computer Horizons Corp. Mr. Monahan also currently serves as a director of Cott Corporation, a non-alcoholic beverage retailer, and Bridgewater Systems, a mobile personalization company.
Mr. Monahan brings to the board a wide array of financial knowledge and business acumen. His background as an investment analyst allows him to view the company from the perspective of an existing or potential institutional shareholder. In addition to his business and financial experience, Mr. Monahan also brings to the board the perspective of a major company shareholder.
Dale W. Polley is currently retired. Mr. Polley was a founder in February 2000 of Pinnacle Financial Partners, a bank holding company, and serves as a member of its board of directors. Mr. Polley also serves on the board of directors of Healthstream, Inc., a provider of healthcare education products and services. Mr. Polley served as a director for the Federal Reserve Bank of Atlanta, Nashville Branch from January 1995 to December 2001. Mr. Polley served as president and vice chairman of First American Corporation, a bank holding company, from 1991 to 2000.
Drawing from his financial and accounting background, Mr. Polley Chairs the company’s audit committee and is the company’s audit committee financial expert. Mr. Polley has served as president of another public company. This service, combined with his leadership and management experience in other capacities, his service on other public company boards and his reputation in the Nashville business community and beyond, make him a valued contributor to the board.
Richard Reiss, Jr. is the chairman of Georgica Advisors, LLC, a private investment management firm. Mr. Reiss is also a director of The Lazard Funds, Inc.
As an experienced and sophisticated investor in companies in a variety of industries, including investments in other restaurant companies, Mr. Reiss brings to the board a diverse understanding of different industries. Mr. Reiss provides valuable guidance to the board on compensation-related matters as Chair of the compensation and human resources committee. With more than 25 years of service on the company’s board, Mr. Reiss has cultivated a deep understanding of the company and its operations strategy.
H. Steve Tidwell has served as chairman of SPFS, Inc., which operates 18 unaffiliated restaurants in three southern states, since January 2000 and served as president of SPFS, Inc. from February 1991 to January 2000. From January 1987 to February 1991, Mr. Tidwell served as secretary and treasurer of SPFS, Inc. Mr. Tidwell served as vice president of real estate and construction at Shoney’s, Inc. from December 1978 to January 1987.
Mr. Tidwell has over 30 years of experience in the restaurant industry, which provides him a broad understanding of our strategic priorities. This background, coupled with over 20 years of service on the company’s board, has given Mr. Tidwell an institutional knowledge of the company and the industry in which it operates and competes .
Robert J. Walker , an attorney for over 40 years, has been a partner in Walker, Tipps & Malone, a law firm, since January 2000.
Mr. Walker’s 40 years of legal experience give him a strong background in the realm of corporate governance and more generally business negotiations. The board values his insight and leadership skills as well as the knowledge of the restaurant industry that he has developed during his tenure with the company as a director. The company believes these skills serve him well in his role as Chair of the nominating and corporate governance committee.

Shirley A. Zeitlin serves as chief executive officer of Zeitlin & Co. Realtors, a real estate brokerage firm. Ms. Zeitlin has served as president and a member of the board of the Tennessee Association of Realtors and the Nashville Board of Realtors. She has also served as a member of the board of the Federal Reserve Bank of Nashville, where she served as chairman in 1991. Ms. Zeitlin serves as an advisory board director of Regions Bank as well as a director for numerous civic and charitable organizations.
Ms. Zeitlin brings a unique background to the board with regard to her experience in real estate and as an owner and operator of a diverse business enterprise. Her knowledge of and contacts within the real estate industry are directly applicable to our company, which leases or owns sites in multiple markets. The board values her experience as a female entrepreneur who is well-connected and respected in the company’s’ hometown of Nashville, Tennessee.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a multi-concept 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 25, 2011, we operated 221 O’Charley’s company-owned restaurants in 17 states in the East, Southeast and Midwest, 105 Ninety Nine restaurants in seven states throughout New England and upstate New York, and 10 Stoney River restaurants in six states in the East, Southeast and Midwest. As of December 25, 2011, we had six franchised O’Charley’s restaurants in four states in the Southeast and Midwest.

In response to the macroeconomic conditions of the past several years, much of management’s focus has been on improving guest satisfaction, stabilizing and increasing guest counts and sales, controlling margins, reducing overhead costs, maximizing cash flow, and reducing debt. While we believe that we have made progress in these areas, and that the tools we applied, such as our food, labor, and beverage cost management systems, continue to contribute positively to our operating results, we believe that we still have considerable opportunities to improve our financial performance.

Our Guest Satisfaction Index (“GSI”) scores, which we believe are a barometer signifying our guests’ intent to return to the restaurant, continued to improve during fiscal 2011. The percentage of respondents who gave the highest rating for overall satisfaction improved by 400 basis points at O’Charley’s, by 500 basis points at Ninety Nine, and by 300 basis points at Stoney River in fiscal 2011 compared to the prior-year period. Going forward, we believe that our primary focus must be on positioning each of our restaurant concepts to increase guest counts, sales, and profitability.

During 2011, each of our concepts produced positive comparable sales for the full year as compared to the prior year, with a 0.3% increase for O’Charley’s, a 3.9% increase for Ninety Nine and a 7.2% increase for Stoney River. Comparable sales at Ninety Nine and Stoney River concepts have produced positive comparable sales growth for six consecutive quarters. Guest counts and average check per guest increased at two of our three restaurant concepts. We are in the early stages of improving our ability to produce sustainable, long-term profitability growth and believe long-term success will come from continuing to focus on the key points of our turnaround plan: (1) lead with food and win with food: serving a menu of memorable offerings priced to provide a compelling value for our guests; (2) operate great restaurants: consistently delivering a quality dining experience; (3) drive guest counts through effective messages: clearly communicating the attributes of our concepts; and (4) provide attractive and comfortable restaurants: delivering a great environment for our guests every day at each O’Charley’s, Ninety Nine and Stoney River restaurant.

At our O’Charley’s restaurants , during 2011 we saw a slight increase in our comparable sales as compared to the prior-year. While sales and average check per guest increased, our comparable guest counts decreased. During the year we continued to build upon the concept’s existing strengths by simplifying the menu and improving the quality of menu items. We also continued our re-training and re-certification program with our restaurant management teams to improve service and execution, which were also aided by a simplified menu. In addition, we continue to strengthen the management team. During the third quarter we announced the hiring of Marc Buehler as the Concept President for O’Charley’s. Mr. Buehler has extensive experience in casual dining, most recently as President, CEO and a director of Kona Grill, Inc. Subsequent to our fiscal 2011 year-end, we announced the hiring of Rick Trebilcock as our O’Charley’s Vice President of Marketing. Mr. Trebilcock joined us from Potbelly Sandwich Shops and previously led the marketing team at Longhorn Steakhouse when it was owned by RARE Hospitality.

At our Ninety Nine restaurants , we continue to focus on our core guests, who we believe appreciate a friendly environment that offers generous portions of high-quality traditional fare at moderate prices. This “back to the basics” approach has produced six consecutive quarters of accelerating comparable sales growth along with improved guest counts and average check per guest during fiscal 2011.

At our Stoney River restaurants , we have focused on broadening the appeal of this brand to a wider audience. We believe this strategy is the primary reason that, Stoney River’s comparable guest counts have increased for nine consecutive quarters and comparable sales have grown for six consecutive quarters. We are now focused on refreshing our menu choices as well as bringing Stoney River’s cost structure in line with a lower check average.

In addition, during 2011, we redeemed at par $115.2 million principal amount of our 9% Senior Subordinated Notes which were to mature in November 2013 (“the “Senior Notes”). The gross proceeds of approximately $105.0 million from the sale-leaseback of 50 O’Charley’s restaurant properties combined with then available cash funded the redemption of the Senior Notes. The sale-leaseback was completed and announced on October 17, 2011. The Senior Note redemption was completed on November 16, 2011. The anticipated impact of these two transactions will be a decrease in annual interest expense associated with the Senior Notes of approximately $10.0 million, as well as approximately $2.5 million less in annual depreciation, partly offset by approximately $8.9 million of incremental annual rent expense. In addition, we recorded a loss in the fiscal fourth quarter of 2011 of approximately $1.2 million on the sale of certain properties included in the sale-leaseback transaction. Also on October 17, 2011 we entered into a Fourth Amended and Restated Credit Agreement with existing banks, which reduced our revolving credit facility to $30 million from $45 million and extended the facility’s term under our credit facility to 2016.

As announced subsequent to the end of fiscal 2011, on February 5, 2012, we signed a definitive merger agreement with FNF whereby FNF would acquire all of the outstanding shares of the Company’s common stock for $9.85 per share, representing a total equity value of approximately $221 million on a fully diluted basis. See Item 1 “Business – Proposed Acquisition of Our Company” and Note 24 of the “Notes to the Consolidated Financial Statements” for further information. Unless expressly noted to the contrary, all forward-looking statements in this Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” relate to us on a stand-alone basis and are not reflective of the impact of the proposed transaction with FNF.

Fiscal years end on the last Sunday of the calendar year. Fiscal years 2011, 2010 and 2009 each consisted of 52 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 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 and other revenue consist of development fees, royalties on sales by franchised units, and royalties on sales of branded food items, particularly salad dressings. The development fees are recognized during the reporting period in which the developed restaurant begins operation. The royalties are recognized as revenue in the period corresponding to the franchisees’ sales. Revenue resulting from the sale of gift cards is recognized in the period redeemed. A percentage of gift card redemptions, based upon actual experience, is recognized as a reduction in restaurant operating cost for gift cards sold that will not be redeemed.

Cost of Food and Beverage primarily consists of the costs of beef, seafood, poultry 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, seafood, and poultry which accounted for approximately 25 percent, 13 percent and 10 percent, respectively, of our overall cost of food and beverage in fiscal 2011. 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.

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) contribution match, hourly wages for restaurant level team members, payroll taxes, workers’ compensation programs, 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, benefits 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. A percentage of gift card redemptions, based upon actual experience, is recognized as a reduction in restaurant operating costs for gift cards sold that will not be redeemed.

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. We expense advertising and marketing costs in the year incurred, except for certain advertising production costs that are initially capitalized and subsequently expensed the first time the advertising takes place.

General and Administrative Expenses include the costs of the 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 plan gains or losses in employees’ self-directed non-qualified deferred compensation plan accounts, 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 2010 restaurant closures and the 2009 sale of the Ninety Nine distribution operations 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.

Impairment, Disposal and Restructuring Charges, net includes asset impairments, either operating or held for sale, severance and other exit costs for closed locations, 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. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Impairment charges for assets that are held for sale represent 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. Exit and disposal costs are primarily future lease obligations net of expected sublease income, if any, or changes in these net future lease obligations.

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, costs shared with open locations, and the significance of the impact on the related consolidated financial statement line items.

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 were not material in 2011. 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 re-branding or remodeling initiatives.

Interest Expense, net represents the sum of the following: interest on our 9% Senior Subordinated notes (the “Senior Notes”) which were fully redeemed during the fourth fiscal quarter of 2011; interest and fees associated with our credit facility; amortization of prepaid interest and finance charges; impact of the interest rate swaps that were terminated in December 2008; amortization of the swap exit payment; changes in the value of the assets associated with our non-qualified deferred compensation plan resulting from gains and losses in the underlying funds; and interest on capital lease obligations; and the premiums paid over the face value of any Senior Notes repurchased during the relevant fiscal period.

Income Tax Expense (Benefit) represents the provision for income taxes, including the impact of permanent tax differences, uncertain tax provisions and valuation allowances on our income tax provision.

Loss from Discontinued Operations, Net includes the operating results of closed locations classified as discontinued operations and impairment, disposal and exit costs related to these restaurants and ongoing real estate, utility and maintenance costs, net of income taxes. Impairment charges are taken for land, buildings and equipment and certain other assets upon closing and are measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset based upon the future highest and best use of the impaired asset. Exit costs represent activities necessary to close the restaurant, including termination benefits such as severance, contract termination costs, and other contract costs that will remain without future economic benefit, such as operating leases. Remaining operating lease obligations are reduced by estimated sublease rentals that could be reasonably obtained.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

We are a multi-concept restaurant company headquartered in Nashville, Tennessee. We operate three restaurant concepts under the “O’Charley’s,” “Ninety Nine Restaurants” (“Ninety Nine”) and “Stoney River Legendary Steaks” (“Stoney River”) trade names. As of October 2, 2011, we operated 221 O’Charley’s restaurants in 17 states in the East, Southeast and Midwest, 106 Ninety Nine restaurants in seven states throughout New England and upstate New York, and 10 Stoney River restaurants in six states in the Southeast and Midwest. As of October 2, 2011, we had six franchised O’Charley’s restaurants in four states. Our fiscal year ends on the last Sunday of the calendar year. We have one reportable segment.

In response to the macroeconomic conditions of the past several years, much of management’s focus has been on improving guest satisfaction, stabilizing and increasing guest counts and sales, controlling margins, reducing overhead costs, maximizing cash flow, and reducing debt. While we believe that we have made progress in these areas, and that the tools we applied, such as our food, labor, and beverage cost management systems, continue to contribute positively to our operating results, we believe that we still have considerable opportunities to improve our financial performance.

Our Guest Satisfaction Index (GSI) scores, which we believe are often a barometer signifying a guest’s intent to return to the restaurant, continued to improve during the third quarter of fiscal 2011. The percentage of respondents who gave the highest rating for overall satisfaction improved by 400 basis points at O’Charley’s, by 500 basis points at Ninety Nine, and by 200 basis points at Stoney River in the third quarter of fiscal 2011 compared to the prior-year period. Going forward, we believe that our primary focus must be on positioning each of our restaurant concepts to increase guest counts, sales, and profitability.

During the third fiscal quarter of 2011, both the Ninety Nine and the Stoney River restaurant concepts produced their fifth consecutive quarter of improved comparable sales. Although two of our three concepts generated positive comparable sales, negative comparable sales at our O’Charley’s concept and the closure of 12 restaurants, excluding those considered as discontinued operations, since the end of the second fiscal quarter of 2010, resulted in a reduction in total restaurant sales when compared to the prior year periods. Guest counts increased at two of our three restaurant concepts and average check per guest increased at all three restaurant concepts. We are pleased to report this very real progress; however, we are in the early stages of improving our ability to produce sustainable, long-term profitable growth. We believe that success will come from continuing to focus on the key points of our turnaround plan: (1) lead with food and win with food: serving a menu of memorable offerings priced to provide a compelling value for our guests; (2) operate great restaurants: consistently delivering a quality dining experience; (3) drive guest counts through effective messages: clearly communicating the attributes of our concepts; and (4) provide attractive and comfortable restaurants: delivering a great environment for our guests every day at each O’Charley’s, Ninety Nine and Stoney River.

At our O’Charley’s restaurants , we saw a decline in our comparable sales as compared to the same prior-year quarter. While sales declined, our average check per guest increased. We believe a change in year-over-year promotions contributed to this shift in sales and average check. Beginning in August of 2010 we re-introduced the “2 Meals for $14.99” promotion which ended in January 2011, as compared to the “8 Meals for Under $8” offering during the third quarter of 2011. While the pricing of our third quarter 2011 offering improved our average check, we believe this difference in our value offering, in part, drove our decline in sales. We continue to build upon the concept’s existing strengths by simplifying the menu and improving the quality of menu items. We are also actively working with our advertising agency to enhance our value messaging. During the third quarter we announced the hiring of Marc Buehler as the concept President for O’Charley’s. Mr. Buehler has extensive experience in casual dining, most recently as President, CEO and a director of Kona Grill, Inc. Previously, he served as CEO of LS Management, Inc. the operator of nearly 200 locations: Lone Star Steakhouse and Saloon and Texas Land & Cattle Steak House .

At our Ninety Nine restaurants , we continue to focus on our core guests, who we believe appreciate a friendly environment that offers generous portions of high-quality traditional fare at moderate prices. This “back to the basics” approach has now produced five consecutive quarters of accelerating comparable sales and improved guest counts for the past three quarters. We believe this trend of improved performance as well as the favorable comparison to Knapp Track is largely attributed to returning this concept to its historic roots as a neighborhood bar and grill. This was evidenced by our successful guest loyalty “Red Sox Win/Kids Eat Free” promotion and the meaningful sales growth in our promotion of our lobster roll.

At our Stoney River restaurants , our focus on broadening the appeal of this brand to a wider audience continues to show favorable results. We are now focused on refreshing our menu choices as well as bringing Stoney River’s cost structure in line with a lower check average. We are pleased that the average check per guest increased at Stoney River, which is the first time since the first quarter of 2009. In addition, our third quarter comparable sales increase is the fifth consecutive quarter of increased comparable sales and the eighth consecutive quarter of increased comparable guest counts. We believe this on-going sales improvement, coupled with a modest increase in check average, is evidence of the long-term success of our repositioning efforts.

In addition to operational improvements, we believe we made significant progress toward reducing our future financing risks by the planned fiscal fourth quarter 2011 redemption at par of the $115.2 million principal amount of Senior Notes which were to mature in November 2013. The gross proceeds of approximately $105 million from the sale-leaseback of 50 O’Charley’s restaurant properties combined with available cash will fund the redemption of the Senior Notes. Both the sale-leaseback and Senior Note redemption notifications were completed and announced on October 17, 2011, after the end of the fiscal third quarter.

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

Revenues consist primarily of company-operated 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 and other revenue consists of development fees, royalties on sales by franchised units, and royalties on sales of branded food items, particularly salad dressings. The development fees are recognized during the reporting period in which the developed restaurant begins operation. The royalties are recognized as revenue in the period corresponding to the franchisees’ sales. Revenue resulting from the sale of gift cards is recognized in the period redeemed. A percentage of gift card redemptions, based upon actual experience, is recognized as a reduction in restaurant operating costs for gift cards sold that will not be redeemed.

Cost of Food and Beverage primarily consists of the costs of beef, poultry, seafood, 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 24 percent, 10 percent and 15 percent, respectively, of our overall cost of food and beverage in the first 40 weeks of fiscal 2011. 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.

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 programs, 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 programs, property taxes, utilities, repairs and maintenance, outside services and credit card fees account for the major expenses in this category. A percentage of gift card redemptions, based upon actual experience, is recognized as a reduction in restaurant operating costs for gift cards sold that will not be redeemed.

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. We expense advertising and marketing costs in the year incurred, except for certain advertising production costs that are initially capitalized and subsequently expensed the first time the advertising takes place. On a quarterly basis and for purposes of interim reporting, we expense a portion of the projected annual advertising and marketing expenses in proportion to revenue for the quarter compared to projected annual revenue.

General and Administrative Expenses include the costs of the 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, legal and accounting expenses, changes in the liabilities associated with plan gains or losses in employees’ self-directed non-qualified deferred compensation plan accounts and office expenses account for the major expenses in this category. This category also includes recruiting, relocation and most severance-related expenses.

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 base 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.

Impairment and Disposal Charges, net includes asset impairments, either operating or held for sale, exit and disposal costs related to restaurant closings, asset disposals, and gains and losses incurred upon the sale of assets or from insurance proceeds, net of deductibles. 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. The impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Impairment charges for assets that are held for sale represent 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. Exit and disposal costs are primarily future lease obligations net of expected sublease income, if any, or changes in these net future lease obligations.

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.

Pre-opening Costs represent costs associated with our restaurant 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 for 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 new or recently opened restaurants and those 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 were not material in 2010 and are not expected to be material in 2011 due to curtailment of development activity. 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 remodeling initiatives.

Interest Expense, net represents the sum of the following: interest on our 9% Senior Subordinated Notes due 2013 (the “Senior Notes”); interest and fees associated with our credit facility; amortization of prepaid interest and finance charges; amortization of a swap exit payment; 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; and the premiums paid over the face value of any Senior Notes repurchased during the relevant fiscal period.

Income Tax Expense (Benefit) represents the provision for income taxes, including the impact of permanent tax differences, uncertain tax positions and valuation allowances on our income tax provision.

Loss from Discontinued Operations, Net includes the operating results of closed locations classified as discontinued operations and impairment, disposal and exit costs related to these restaurants and ongoing real estate, utility and maintenance costs, net of income taxes. Impairment charges are taken for land, buildings and equipment and certain other assets and are measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset based upon the future highest and best use of the impaired asset. Exit costs represent activities necessary to close the restaurant, including termination benefits such as severance, contract termination costs, and other contract costs that will remain without future economic benefit, such as operating leases. Remaining operating lease obligations are reduced by estimated sublease rentals that could be reasonably obtained.

Revenues

During the 12 week period ended October 2, 2011, total revenues decreased 1.1 percent to $186.6 million from $188.6 million for the same prior-year period. This decrease in revenues primarily reflects the decrease in restaurant sales resulting from restaurant closures in the prior year partly offset by comparable sales growth. Total revenues for the first 40 weeks of 2011 decreased 0.3 percent to $644.9 million from $646.7 million in the same prior-year period.

Restaurant sales for O’Charley’s decreased $3.7 million, or 3.1 percent, to $115.2 million for the third quarter of 2011, reflecting a decrease in comparable sales of 0.9 percent and the closure of nine restaurants since the end of the second quarter of 2010. The closure of the nine restaurants reduced sales in the third quarter by $2.6 million. The comparable sales decrease of 0.9 percent was the result of a 4.5 percent decrease in guest counts partly offset by a 3.8 percent increase in average check. The 4.5 percent decrease in guest counts reduced sales by $5.2 million compared to the prior-year period while the 3.8 percent increase in average check increased sales by $4.2 million compared to the prior-year period. Restaurant sales for company-operated O’Charley’s restaurants decreased by $6.2 million to $407.1 million for the first 40 weeks of 2011 from $413.3 million for the first 40 weeks of 2010, reflecting a comparable sales increase of 0.8 percent and the closure of ten restaurants since the beginning of 2010. The closure of the ten restaurants reduced sales in the first 40 weeks of 2011 by $9.6 million. The comparable sales increase of 0.8 percent was the result of a 0.9 percent increase in average check partly offset by a 0.1 percent decrease in guest counts. The 0.9 percent increase in average check increased sales by $3.6 million compared to the prior-year period while the 0.1 percent decrease in guest count reduced sales by $0.4 million compared to the prior-year period.

Restaurant sales for Ninety Nine increased $1.8 million, or 2.9 percent, to $63.8 million in the third quarter of 2011, reflecting an increase in comparable sales of 4.1 percent, partly offset by the effect of closing two restaurants since the end of the second quarter of 2010. The closure of the two restaurants reduced sales in the current quarter by $0.6 million. The comparable sales increase of 4.1 percent was the result of a 4.0 percent increase in guest counts and a 0.1 percent increase in average check. The 4.0 percent increase in guest counts increased sales by $2.5 million compared to the prior-year period and the 0.1 percent increase in average check increased sales by $0.1 million compared to the prior-year period. Restaurant sales for Ninety Nine increased by $4.3 million to $211.5 million for the first 40 weeks of 2011 from $207.2 million for the first 40 weeks of 2010, reflecting a comparable sales increase of 3.5 percent, partly offset by the effect of closing five restaurants since the beginning of 2010. The closure of the five restaurants reduced sales in the first 40 weeks of 2011 by $2.5 million. The comparable sales increase of 3.5 percent was the result of a 2.6 percent increase in guest counts and a 0.8 percent increase in average check. The 2.6 percent increase in guest counts and the 0.8 percent increase in average check increased sales by $5.4 million and $1.7 million, respectively, compared to the prior-year period.

Restaurant sales for Stoney River Legendary Steaks were $7.4 million in the third quarter of 2011 compared to $7.3 million in the third quarter of 2010, reflecting a 6.8 percent increase in comparable sales offset by the closure of one restaurant since the end of the second quarter of 2010. The closure of the one restaurant decreased sales in the current quarter by $0.4 million. The comparable sales increase of 6.8 percent was the result of a 6.1 percent increase in guest counts and a 0.6 percent increase in average check. The 6.1 percent increase in guest counts and the 0.6 percent increase in average check increased sales by $0.4 million and $0.1 million compared to the prior-year periods, respectively. Restaurant sales for Stoney River Legendary Steaks increased $0.4 million, or 1.6 percent, to $25.6 million for the first 40 weeks of 2011 from $25.2 million for the first 40 weeks of 2010, reflecting a 7.3 percent increase in comparable sales partly offset by the closure of one restaurant since the end of fiscal 2010. The closure of the one restaurant reduced sales in the first 40 weeks of 2011 by $1.4 million. The comparable sales increase of 7.3 percent was the result of a 9.7 percent increase in guest counts partly offset by a 2.3 percent decrease in average check. The 9.7 percent increase in guest counts increased sales by $2.2 million compared to the prior-year period, while the 2.3 percent decrease in average check reduced sales by $0.6 million compared to the prior-year period.

CONF CALL

Gene Marbach
Good morning all and thank you for joining O'Charley's fiscal 2010 third quarter conference call. On the call today are Phil Hickey, Chairman of the company’s Board of Directors; David Head, the company’s President and Chief Executive Officer; and Larry Hyatt, the company’s Chief Financial Officer.
The order of business this morning will be some brief remarks from Phil, David and Larry about the third quarter. We will then open the call to questions. In the time allotted we will take as many questions as possible.
Before we begin, I would like to note that certain statements made by O'Charley's management on this call may be deemed to constitute forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements may be affected by certain risks and uncertainties including risks described in the company's filing with the Securities and Exchange Commission. In light of the significant uncertainties inherent in the forward-looking statements included in the company's comments, you should not regard the inclusion of such information as a representation that its objectives planned and projected results will be achieved and the company's actual results could differ materially from such forward-looking statements.
I would now like to turn the call over to Phil Hickey, Chairman of the Board of Directors of O'Charley's. Please go ahead.
Phil Hickey
Thanks Gene and good morning everyone. In our second quarter conference call back in August, I noted that Ninety Nine and Stoney River had experienced a positive shift in momentum. We are pleased to see this positive momentum continue in the third quarter as both concepts reported same-store sales increase for the first time in three years.
We are also pleased to see this momentum extend to the O'Charley's concept where quarterly guest counts increased for only the second time in five years. And same-store sales show substantial improvement versus recent trends.
While we are encouraged by progress of our efforts to drive guest counts and sales, we know that we have a lot more work to do translating this progress into long-term, sustainable growth in sales and profitability.
During the third quarter David Head joined us as President and CEO. I planned this transition so that future earnings calls will be handled by David.
I also plan to continue to work closely with him to find strategic direction of the company as its now Executive Chairman. I continue to believe in the potential of each of our three concepts and our company’s best days lie ahead of us.
Speaking of David Head, it’s my pleasure to introducing him to you. David joined the company in the beginning of September, as proven restaurant leader whom I have known for 15 years. He has substantial experience in both casual dining and as quick-service. I look forward to working with him as we continue our efforts to revitalize our company. David?
David Head
Phil, thanks for the introduction. Good morning everyone. Since joining the company in early September, I had been all around the country, spending a lot time in many of our restaurants, actually working in kitchens in all three of our concepts, sat down and met with many of our managers and team members and have a develop a clear understanding of what we do well and where we need to improve.
My initial focus is really the foundation of the turnaround plan. This is going to be on improving the execution of the basics, making sure that every guest experience is great food, great service, strong value, while we managed costs to improved profitability.
Although we clearly face many challenges in turning around our company’s performance, I strongly believe in the potential on each of our three concepts and absolutely share Phil’s belief that our company’s days lie ahead of us. I look forward to working closely with our management team and our Board.
So, let me begin my discussion of third quarter results with Ninety Nine where we continue to strengthen the concepts place to our core guests, who appreciate a friendly neighborhood environment that offers very generous portions of high-quality traditional fare at moderate prices.
Ninety Nine outperformed its relevant Knapp-Track averages in the quarter, and had its first quarter of same-stores sales growth in three years. We believe that this quarter’s growth in average check demonstrate that we can provide value for our guests without being overly aggressive with discounts or promotion. The Nine Real-Sized Entrees for $9.99 continues to prove very popular with our guest and profitable for us. We continuously refresh the nine items recently added eggplant [sauté] and Balsamic Chicken.
Our guests at Caption 99 continue to respond favorably to the opportunity to upgrade our Entrees into a full meal for an additional $3 and our Red Sox Win/Kids Eat Free promotion continue to be popular throughout the end of the season.
Now, during the quarter 99 improved its guest satisfaction scores by 200 basis points versus the prior year’s quarter. And through the first four weeks of the current quarter same-store sales and same-store guest counts were positive.
Turning to Stoney River, they had same-store sales growth for the first time in three years with guest count accelerating from the higher single-digits in the priors three quarters to over 15% in the third quarter. We believe that the repositioning of the Stoney River concept continues to show progress as we increase our relevance to a broader guest market.
Now, as previously noted we reduced the prices of certain menu items, added new menu items and more affordable choices to the wine list, while continuing to offer the Royal Stoney River guests the same wonderful service experience and all the signature favorites. We continue to focus on bringing Stoney River’s cost structure in line with the lower check average and this is the fifth concretive quarter in which we improved restaurant operating margin.
During the quarter Stoney River improved its guest satisfaction sores by 400 basis points versus the prior year quarter. And through the first four weeks of the current quarter Stoney River same-store sales and same-store guest counts continue their positive trends.
Now moving on to the O'Charley's concept; our guest counts increased in the quarter for the first time this year and our same-store sales showed substantial improvement versus recent trends, while clearly in its early stages. We believe that the turnaround of the O'Charley's concept is gaining traction.
The first step to improving sales and profits is attracting new guests, increasing the frequency among our recurring guests and providing everyone the great food and service that will make them want to return.
We believe that we started to accomplish this with the reintroduction of ‘2 Meals for $14.99’ in early August and guests responded favorably with the choice of seven proven favorites combine with value-priced beverage and appetizer choices, and then an opportunity to complete the meal with super salad and a dessert for $2.99.
In each of the 12 weeks, since we reintroduced ‘2 for $14.99’, guest counts at the O'Charley's concept outperform the relevant Knapp-Track index. With our culinary retraining and recertification program we believe that we are establishing the service and execution foundation to convert new and returning guests into loyal O'Charley's users.
Guest satisfaction scores in the quarter improved 100 basis points versus the prior year quarter was the highest level since we started measuring it six years ago.
Now as expected our emphasis was valued to induce trial contribute to a decline in average check and margin. Therefore, we believe that step two, in improving sales and profitability is to gradually increase the average check, while continuing to offer items of choices to value-oriented guests.
While we continue to offer enhanced “2 Meals for $14.99”, we recently introduced Classic Combos, which offers a combinations of steak, seafood and chicken at many prices between $12.99 and $15.99. In the two weeks since we introduced Classic Combos, O'Charley's same-store sales and same-store guests counts were both positive.
So we believe that our repositioning efforts for the O'Charley's concept require fresh thinking from an ad agency. As we announced in mid-September, through a review we selected Merkley+Partners of New York as the agency of record for the O'Charley's brand. Merkley is well known for its core competency in food and is considered one of the premier agencies in the country.
We look forward to combining their creative thinking with our great brand as we develop marketing strategies for 2011.
Before I turn the call over to Larry Hyatt for his comments, I just like to say how proud that I am to be part of O'Charley's team. I think this is a great time to join O'Charley's and we have a unique opportunity to build a special company.
I would also like to acknowledge the dedication of our 23,000 team members who are focused on delivering superb guest experiences. I just want to thank them for all that they do. Now, here is Larry to share with you the rest of the story.
Larry Hyatt
Good morning, everyone. And thank you, David. I would like to discuss our financial performance for the third quarter of 2010, some items that impacted that performance and our outlook for the current quarter. Additional information is available in our Form-10Q which we filed this morning with the SEC.
For the third quarter of 2010, revenue declined 1.2% to $191.7 million from $194.1 million in last year’s third quarter.
Loss from operations was $5.6 million or 2.9% of revenues, compared with the income from operations that was $0.3 million or 0.1% of revenue in the prior year quarter.
Results for the quarter include impairment and disposal charges of $2.5 million compared to $0.3 million in the prior year quarter.
Our adjusted EBITDA for the quarter was $7.6 million or 4% of revenues, compared to $13 million, or 6.7% of revenues in the prior quarter.
Reviewing our performance on a concept by concept basis; restaurant sales for company-operated O’Charley’s decreased by 2.5% to $120.2 million, compared to $123.3 in the prior year quarter. The closing of two O’Charley’s restaurants since the third quarter of 2009 accounted for $0.4 of this decline in sales.
Same-store sales at our company-operated O’Charley’s restaurant declined by 2.2% which was the result of an increase in guest count of 2.7% offset by a decline in average check of 4.8%.
Restaurant level margin which we define is restaurants sales minus cost of food & beverage, payroll and benefits costs, and restaurant operating costs at the O’Charley’s concept declined to 11.4% of restaurant sales from 15.1% in the prior year quarter.
Restaurant sales for Ninety Nine decreased by 0.2% to $63.9 million compared to $64 million in the prior year quarter. The closing of 3 Ninety-Nine restaurants in the third quarter of 2009, reduced year-over-year sales by $0.9 million.
Same-store sales increased by 1.2% in the quarter and a 1.8% increase in average check was partially offset by 0.6% decline in guest count.
Restaurant level margin in Ninety-Nine declined to 12.1% of restaurant sales from 12.4% in the prior year quarter.
Restaurant sales for Stoney River increased 10.9% to $7.3 million compared to $6.6 million in the prior year quarter. The opening of one Stoney River restaurant since the third quarter 2009 accounted for $0.6 million of the increase.
Same-store sales increased by 1.7% in the quarter at a 15.4% increase in guest count, talent was partially offset by a 11.9% decline in average check.
Restaurant level margin in Stoney River improved by 190 basis points in the quarter compared to the prior year quarter.
On a consolidated basis restaurant operating margin was $22.6 million or 11.8% of restaurant sales in the quarter compared to $27.5 million or 14.2% of restaurant sales in the prior year quarter. A number of factors contributed to year-over-year change.
Our cost of food and beverage in the quarter was $58 million or 30.3% of restaurant sales compared with $56.5 million or 29.1% of restaurant sales in the prior year quarter. Lower commodity cost was offset by the impact of our effort to improve food quality and provide better value to our guests. Food and beverage cost per guest increased by 1.5% on a consolidated basis while our restaurant sales per guest declined by 2.5%
Our payroll and benefit cost declined to $68.5 million or 35.8% of restaurant sales from $70.5 million or 36.3% of restaurant sales in the prior year quarter. During the quarter the company recognized the year to-date benefit of the hire act which reduced payroll tax expense by $0.8 million. Workers compensation and health insurance expenses were $1.7 million lower in the quarter compared to the prior year quarter, while training expenses were $0.5 million higher reflecting our current cost culinary, retraining and recertification effort.
Restaurant operating costs in the quarter were $42.4 million or 22.1% of restaurant sales compared to $39.5 million or 20.4% of restaurant sales in the prior year quarter.
Utility expenses was $0.7 million higher, reflecting higher electricity usages during the unusually hot summer. Supplies and replacements were $0.7 million higher, repairs and maintenance expense was $0.6 million higher and the property taxes were $0.6 million higher reflecting the true-up of property tax approval in the prior year quarter.
Advertising and marketing expense was $8 million or 4.2% of revenue in the quarter compared with 7.6 million or 3.9% of revenue in the prior year quarter.
Our general and administrative expenses were $8.3 million or 4.3% of revenue in the third quarter compared to $80.7 million or 4.5% of revenue in the prior year quarter. The $0.4 million year-over-year reduction in G&A expenses is due primarily to changes in the value of deferred compensation balances, which is offset by an increase in interest expense. Our interest expense for the third quarter was $2.5 million compared with $2.3 million in the third quarter of 2009.
On a year-over-year basis, the impact of reduced debt level was more than offset by the $0.4 million impact from changes in the value of deferred compensation balances.
At the end of the quarter, we had $115.2 million of senior subordinated notes outstanding, a cash balance of $22.7 million, and $32.4 million of availability on our revolving line of credit.
Our capital expenditures in the quarter were $3.2 million compared to $4.5 million in the prior year quarter. Our results for the quarter include an income tax benefit of $0.6 million compared to an income tax expense of $0.1 million in the prior year quarter. Our net loss in the quarter was $7.4 million was $0.35 per diluted share compared to a net loss of $2.1 million or $0.10 per diluted share in the prior year quarter.
For the fourth quarter of 2010, we forecast total revenue of between $184 million and $190 million. A loss from operation between $3 million and $6 million and adjusted EBITDA between $5 million and $8 million. This forecast reflects the impact of closing of two restaurant at the end of the third quarter of 2010. But does not reflect the impact of any impairment or severance charges that the company may recognize in the fourth quarter.
And, with that, I will turn the conference call back over to the operator, so that we can answer your questions. Thank you.

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