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EX-32.2 - SECTION 906 CERTIFICATION OF THE INTERIM CFO - O CHARLEYS INCexhibit32-2.htm
EX-31.1 - SECTION 302 CERTIFICATION OF THE CEO - O CHARLEYS INCexhibit31-1.htm
EX-32.1 - SECTION 906 CERTIFICATION OF THE CEO - O CHARLEYS INCexhibit32-1.htm
EX-31.2 - SECTION 302 CERTIFICATION OF THE INTERIM CFO - O CHARLEYS INCexhibit31-2.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
 
FORM 10-Q

   
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended April 17, 2011
Commission file number 0-18629
O’Charley’s Inc.
(Exact name of registrant as specified in its charter)

     
Tennessee
 
62-1192475
     
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

     
3038 Sidco Drive, Nashville, Tennessee
 
37204
     
(Address of principal executive offices)
 
(Zip Code)

(615) 256-8500
(Registrant’s telephone number, including area code)

       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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes o  No  o

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

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

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

     
Class
 
Outstanding as of May 23, 2011
     
Common Stock, no par value
 
21,716,361 shares

 
 

 
O’Charley’s Inc.
Form 10-Q
Index

       
   
Page No.
     
     
   
3
   
4
   
5
   
6
                      ended April 17, 2011      
   
7
   
18
   
30
   
31
     
   
32
   
32
   
32
   
33
     Signatures
   
34


 
2

 
PART I — FINANCIAL INFORMATION

 
O’CHARLEY’S INC.
(In thousands)
(Unaudited)

   
April 17,
   
December 26,
 
   
2011
   
2010
 
ASSETS
           
Current Assets:
           
    Cash and cash equivalents
$
36,486
 
$
29,693
 
    Trade accounts receivable, net
 
14,271
   
14,931
 
    Inventories
 
8,309
   
9,071
 
    Assets held for sale
 
4,932
   
4,847
 
    Other current assets
 
5,401
   
4,201
 
        Total current assets
 
69,399
   
62,743
 
             
Property and equipment, net of accumulated depreciation of $388,509 and $379,580
 
310,770
   
320,011
 
Trade names and other intangible assets
 
25,946
   
25,946
 
Other assets
 
12,466
   
14,041
 
Total Assets
$
418,581
 
$
422,741
 
             
LIABILITIES AND SHAREHOLDERS’ EQUITY
           
Current Liabilities:
           
    Trade accounts payable
$
5,994
 
$
8,211
 
    Accrued payroll and related expenses
 
16,664
   
14,639
 
    Accrued expenses
 
27,832
   
24,314
 
    Deferred revenue
 
7,313
   
17,584
 
    Federal, state and local taxes
 
14,374
   
9,998
 
    Current portion of long-term debt and capitalized lease obligations
 
1,139
   
1,710
 
        Total current liabilities
 
73,316
   
76,456
 
             
Deferred income taxes, net
 
3,398
   
4,034
 
Other liabilities
 
43,783
   
46,853
 
Long-term debt and capitalized lease obligations, less current portion
 
117,008
   
117,164
 
             
Shareholders’ Equity:
           
    Common stock — No par value; authorized, 50,000 shares; issued and
                 outstanding, 21,732 in 2011 and 21,713 in 2010
 
166,607
   
165,547
 
    Retained earnings
 
14,469
   
12,687
 
        Total shareholders’ equity
 
181,076
   
178,234
 
Total Liabilities and Shareholders’ Equity
$
418,581
 
$
422,741
 
             

See accompanying notes to unaudited consolidated financial statements

 
3

 
O’CHARLEY’S INC.
16 Weeks Ended April 17, 2011 and April 18, 2010
(In thousands, except per share data)
(Unaudited)

   
2011
   
2010
 
             
Revenues:
           
     Restaurant sales
$
264,725
 
$
266,767
 
     Franchise and other revenue
 
321
   
333
 
   
265,046
   
267,100
 
Costs and Expenses:
           
     Cost of restaurant sales:
           
          Cost of food and beverage
 
82,527
   
78,148
 
          Payroll and benefits
 
90,866
   
92,837
 
          Restaurant operating
 
52,469
   
53,683
 
                 Cost of restaurant sales, exclusive of depreciation and
           
                         amortization shown separately below
 
225,862
   
224,668
 
             
     Advertising and marketing
 
11,105
   
11,673
 
     General and administrative
 
11,049
   
10,949
 
     Depreciation and amortization of property and equipment
 
11,602
   
13,443
 
     Impairment and disposal charges, net
 
162
   
3,129
 
     Pre-opening costs
 
   
7
 
   
259,780
   
263,869
 
Income from Operations
 
5,266
   
3,231
 
             
Other Expense:
           
     Interest expense, net
 
3,338
   
4,043
 
     Other, net
 
4
   
2
 
   
3,342
   
4,045
 
Income (Loss) from Continuing Operations Before Income Taxes
 
1,924
   
(814
)
Income Tax Expense
 
38
   
775
 
             
Income (Loss) from Continuing Operations
 
1,886
   
(1,589
)
Loss from Discontinued Operations, Net
 
(104
)
 
(2,755
)
Net Income (Loss)
$
 1,782
 
$
(4,344
)
             
Net Income Available (Loss) Attributable to Common Shareholders – basic:
           
          Income (Loss) from Continuing Operations
$
0.09
 
$
(0.08
)
          Loss from Discontinued Operations, Net
 
(0.01
)
 
(0.13
)
Net Income Available (Loss) Attributable to Common Shareholders
$
0.08
 
$
(0.21
)
             
Net Income Available (Loss) Attributable to Common Shareholders – diluted:
           
          Income (Loss) from Continuing Operations
$
0.09
 
$
(0.08
)
          Loss from Discontinued Operations, Net
 
(0.01
)
 
(0.13
)
Net Income Available (Loss) Attributable to Common Shareholders
$
0.08
 
$
(0.21
)
             
             
Weighted Average Shares Used to Compute Net Income Available (Loss) Attributable to
           
Common Shareholders:
           
          Basic
 
21,397
   
21,066
 
          Diluted
 
21,778
   
21,066
 
             
See accompanying notes to unaudited consolidated financial statements
 
4

 
 
O’CHARLEY’S INC.
16 Weeks Ended April 17, 2011 and April 18, 2010
(In thousands)
(Unaudited)

   
2011
   
2010
 
             
Cash Flows from Operating Activities:
           
Net income (loss)
$
1,782
 
$
(4,344
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
           
     Depreciation and amortization of property and equipment
 
11,602
   
13,624
 
     Amortization of debt issuance costs and swap termination payment
 
119
   
463
 
     Share-based compensation
 
900
   
1,434
 
     Loss on early extinguishment of debt
 
   
198
 
     Amortization of deferred gain on sale-leasebacks
 
(325
)
 
(325
)
     Deferred income taxes and other income tax related items
 
233
   
622
 
     Loss on the sale of assets
 
68
   
16
 
     Impairment and disposal charges, net
 
(131
)
 
5,552
 
     Changes in assets and liabilities:
           
          Trade accounts and other receivables
 
660
   
3,063
 
          Inventories
 
762
   
1,696
 
          Other current assets
 
(1,200
)
 
(765
)
          Trade accounts payable
 
(2,217
)
 
5,459
 
          Deferred revenue
 
(10,271
)
 
(9,664
)
          Accrued payroll, accrued expenses, and federal, state and local taxes
 
8,457
   
6,512
 
          Other long-term assets and liabilities
 
(1,156
)
 
(1,292
)
Net cash provided by operating activities
 
9,283
   
22,249
 
             
Cash Flows from Investing Activities:
           
     Additions to property and equipment
 
(3,084
)
 
(2,970
)
     Proceeds from the sale of assets
 
970
   
 
     Other, net
 
87
   
5
 
Net cash used in investing activities
 
(2,027
)
 
(2,965
)
             
Cash Flows from Financing Activities:
           
     Payments on long-term debt and capitalized lease obligations
 
(598
)
 
(708
)
     Repurchase of senior notes
 
   
(9,993
)
     Debt issuance costs
 
(25
)
 
(1,631
)
     Proceeds from issuances under CHUX Ownership Plan and the exercise of stock options
 
319
   
386
 
     Shares tendered and retired for minimum tax withholdings
 
(164
)
 
(257
)
     Excess tax benefit from share-based payments
 
5
   
5
 
     Dividends paid
 
   
(2
)
Net cash used in financing activities
 
(463
)
 
(12,200
)
Increase in cash and cash equivalents
 
6,793
   
7,084
 
Cash and cash equivalents at beginning of the period
 
29,693
   
21,880
 
Cash and cash equivalents at end of the period
$
36,486
 
$
28,964
 

See accompanying notes to unaudited consolidated financial statements

 
5

 
 
O’CHARLEY’S INC.
16 Weeks Ended April 17, 2011
(In thousands)
(Unaudited)


 
Common Stock
   
Retained
       
 
Shares
   
Amount
   
Earnings
   
Total
 
Balance, December 26, 2010
21,713
 
$
165,547
 
$
12,687
 
$
178,234
 
Comprehensive Income:
                     
     Net Income
   
   
1,782
   
1,782
 
Shares issued under CHUX Ownership Plan and exercise of stock options
65
   
319
   
   
319
 
Shares tendered and retired for minimum tax withholdings
(26
)
 
(164
)
 
   
(164
)
Excess tax benefit from share-based payments
   
5
   
   
5
 
Share-based compensation expense
(20
)
 
900
   
   
900
 
Balance, April 17, 2011
21,732
 
$
166,607
 
$
14,469
 
$
181,076
 

See accompanying notes to unaudited consolidated financial statements
 
6

 
O’CHARLEY’S INC.
16 Weeks Ended April 17, 2011 and April 18, 2010
(Unaudited)
A.  
 BASIS OF PRESENTATION

At April 17, 2011, O’Charley’s Inc. (the “Company”) operates 221 full-service restaurant facilities in 17 states in the East, Southeast and Midwest under the trade name “O’Charley’s,” 106 full-service restaurant facilities in seven states throughout New England and upstate New York under the trade name “Ninety Nine Restaurants” (“Ninety Nine”) and 10 full-service restaurant facilities in six states in the Southeast and Midwest under the trade name “Stoney River Legendary Steaks” (“Stoney River”). As of April 17, 2011, the Company had six franchised O’Charley’s restaurants in four states.

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 its second, third and fourth quarters consisting of twelve weeks each in most years.

In the opinion of management, the unaudited interim consolidated financial statements contained in this report reflect all adjustments, consisting primarily of normal recurring accruals, which are necessary for a fair presentation of the consolidated 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.

The Company’s significant interim accounting policies include the recognition of certain advertising and marketing costs, generally in proportion to revenue.

These unaudited interim consolidated financial statements and footnote disclosures should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 26, 2010. Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the periods presented to prepare these unaudited interim consolidated financial statements in conformity with GAAP.

B. DISCONTINUED OPERATIONS

During fiscal year 2010, the Company closed 24 underperforming restaurants: 14 O’Charley’s restaurants and 10 Ninety Nine restaurants.  The decision to close these restaurants was the result of an extensive review of the Company’s restaurant portfolio that examined each restaurant’s recent and historical financial and operating performance, its position in the marketplace, and other operating considerations. Given the geographic location of certain restaurants and in accordance with relevant GAAP, nine of these restaurants were considered discontinued operations.  Due to the consideration of these nine restaurants as discontinued operations, prior-year  revenues and expenses have been revised in the accompanying unaudited interim consolidated statements of operations.

During the first fiscal quarter of 2011, the Company recorded a $0.1 million loss from discontinued operations, net of taxes, which represents $0.4 million of exit and disposal costs, partly offset by a $0.3 million gain on the sale of an O’Charley’s restaurant location during the quarter. During the first fiscal quarter of 2010, the Company recorded a $2.8 million loss from discontinued operations, net of taxes, which represents $2.4 million in asset impairments and a $0.4 million net loss from operations.

The results of discontinued operations for the 16-week periods ended April 17, 2011 and April 18, 2010 were as follows (In thousands):
 
   
April 17, 2011
   
April 18, 2010
 
             
Revenues
$
 
$
4,387
 
Loss before income taxes
$
(104
)
$
(2,782
)
Income tax benefit
$
 
$
(27
)
Net Loss
$
(104
)
$
(2,755
)
 
7

 
 
C.  
FAIR VALUE MEASUREMENTS

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825, “Fair Value of Financial Instruments,” (“ASC 825”), requires disclosure of the fair values of most on- and off-balance sheet financial instruments for which it is practicable to estimate that value. The scope of ASC 825 excludes certain financial instruments, such as trade receivables and payables when the carrying value approximates the fair value, employee benefit obligations, lease contracts, and all nonfinancial instruments, such as land, buildings, and equipment. The fair values of the financial instruments are estimates based upon current market conditions and quoted market prices for the same or similar instruments as of April 17, 2011 and December 26, 2010.  Book value approximates fair value for substantially all of the Company’s financial assets and liabilities that fall under the scope of ASC 825, except for the Company’s 9% senior subordinated notes (the “Senior Notes”). The fair value of the Senior Notes was $117.6 million and $116.4 million as of April 17, 2011 and December 26, 2010, respectively, compared to the carrying value of  $115.2 million as of both April 17, 2011 and December 26, 2010. The fair value of the Senior Notes was based on quoted market prices as of the last day of the first quarter of fiscal 2011 and last day of fiscal 2010.
 
ASC 820, “Fair Value Measurements and Disclosures,” (“ASC 820”) defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  Fair value is defined under ASC 820 as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a three-level hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability on the measurement date.

Level 1
Inputs based on quoted prices in active markets for identical assets.
Level 2
Inputs other than quoted prices within Level 1 that are observable for the asset, either directly or indirectly.
Level 3
Inputs that are unobservable for the asset.

There were no transfers among levels within the fair value hierarchy during the 16-week period ended April 17, 2011.  Assets measured at fair value on a recurring basis are summarized in the table below (In thousands):

   
Fair Value Measurement
Description
 
Level
 
April 17, 2011
 
December 26, 2010
             
Deferred compensation plan assets
 
1
 
3,969
 
4,227

The deferred compensation plan assets are comprised of various investment funds, which are valued based upon their quoted market prices.

There were no assets and liabilities measured at fair value on a nonrecurring basis during the first quarter of fiscal 2011. In certain prior periods significant adjustments were made to assets and liabilities where observable inputs were not available. As such, when future positive cash flows were projected, but less than the carrying value, Level 3 fair value was determined by projected future discounted cash flows for each restaurant location. The discount rate is the Company’s weighted average borrowing rate on outstanding debt which the Company believes is commensurate with the required rate of return that a potential buyer would expect to receive when purchasing a similar restaurant and the related long-lived assets. The Company limits assumptions about important factors such as sales and margin change to those that are supportable for the restaurant.
 
 
8

 
 
D.  
 IMPAIRMENT AND DISPOSAL, NET

Long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the first quarter of fiscal 2011, the Company recorded exit and disposal charges $0.1 million and minor impairment charges with respect to previously fully-impaired restaurants of $0.1 million, resulting in net impairment and disposal charges of $0.2 million for the 16 weeks ended April 17, 2011, as compared to $3.1 million in the same prior-year period.

During the 16 weeks ended April 17, 2011, there are exit and disposal costs included in continuing and discontinued operations associated with lease obligations from previously closed restaurants and the Bellingham, MA distribution center. These locations currently have operating lease obligations with lease termination dates ranging from 2011 to 2021. The liability associated with lease obligations is included in accrued expenses and other long-term liabilities on the unaudited interim consolidated balance sheet as of April 17, 2011.

A reconciliation of the liability balance is summarized in the table below (In millions):

Exit and Disposal Liability
 
Balance, December 26, 2010
$
4.8
 
Exit and Disposal Costs- Continuing Operations
 
0.1
 
Payments- Continuing Operations
 
(0.6
)
Payments- Discontinued Operations
 
(0.3
)
Balance, April 17, 2011
$
4.0
 


E.  
 SHARE-BASED COMPENSATION
 
Total net share-based compensation expense was $0.9 million for the 16 weeks ended April 17, 2011 and $1.4 million for the 16 weeks ended April 18, 2010.  The Company’s net share-based compensation expense primarily consisted of expense associated with restricted stock awards and, to a lesser extent, expense associated with unvested stock options and the Company’s employee share purchase plan.
 
During the 16 weeks ended April 17, 2011, the Company issued 60,000 shares of non-qualified stock options to certain members of senior management. As of April 17, 2011, there were 1.6 million options outstanding and 0.3 million restricted stock awards outstanding.
 
F.   LONG-TERM DEBT

On January 26, 2010 the Company entered into its Third Amended and Restated Credit Agreement (the “Credit Agreement”).  The maximum borrowing capacity under the Credit Agreement is $45 million.  The maximum adjusted leverage ratio is 5.25.  Under the Credit Agreement, the Company is permitted to repurchase its Senior Notes due in 2013, subject to certain limitations. The Credit Agreement also permits sale-leaseback transactions, subject to certain limitations.  At April 17, 2011, the Company had no amounts outstanding on its revolving credit facility and $11.7 million outstanding in letters of credit, which reduced its available borrowing capacity under the Credit Agreement to $33.3 million. The $117.0 million recorded on the unaudited interim consolidated balance sheet as of April 17, 2011, is comprised of $115.2 million in Senior Notes, $1.7 million related to the swap termination agreement and $0.1 million in capital leases.

 
9

 
 
G.   NET INCOME AVAILABLE (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS

The following is a reconciliation of the Company’s basic and diluted income (loss) per share calculation. As the Company incurred a net loss in the 16 weeks ended April 18, 2010, the weighted average common shares outstanding used in the determination of the 16 weeks ended April 18, 2010 basic loss per common share is used for the diluted loss per common share as well.

   
16 weeks ended
 
   
April 17, 2011
   
April 18, 2010
 
(In thousands, except per share data)
           
             
Income (Loss) from Continuing Operations
$
1,886
 
$
(1,589
)
Loss from Discontinued Operations, Net
 
(104
)
 
(2,755
)
Net Income (Loss)
$
1,782
 
$
(4,344
)
             
Weighted average common shares outstanding:
           
Basic
 
21,397
   
21,066
 
Diluted
 
21,778
   
21,066
 
             
Net Income Available (Loss) Attributable to Common Shareholders – basic:
           
       Income (Loss) from Continuing Operations
$
0.09
 
$
(0.08
)
       Loss from Discontinued Operations, Net
 
(0.01
)
 
(0.13
)
Net Income Available (Loss) Attributable to Common Shareholders
$
0.08
 
$
(0.21
)
             
Net Income Available (Loss) Attributable to Common Shareholders – diluted:
           
       Income (Loss) from Continuing Operations
$
0.09
 
$
(0.08
)
       Loss from Discontinued Operations, Net
 
(0.01
)
 
(0.13
)
Net Income Available (Loss) Attributable to Common Shareholders
$
0.08
 
$
(0.21
)

Options for 1.6 million shares were excluded from the 16 weeks ended April 17, 2011 diluted weighted average share calculations and options for 2.3 million  shares were excluded from the 16 weeks ended April 18, 2010 diluted weighted average share calculations, due to these shares being anti-dilutive.  In addition, restricted stock awards for 0.3 million shares were excluded from the 16 weeks ended April 17, 2011 diluted weighted average shares calculations and 0.5 million shares were excluded from the 16 weeks ended April 18, 2010 diluted weighted average share calculations due to these shares being anti-dilutive.

H.    LEGAL PROCEEDINGS

As previously disclosed in the Company’s Form 10-K for the year ended December 26, 2010, on September 30, 2010, a jury in the matter of Evelyn Y. Davis v. O’Charley’s, Inc. in Mobile County, Alabama Circuit Court, Civil Action No. 2008-900315, rendered a verdict in favor of the plaintiff, awarding damages in the amount of approximately $1.8 million. The plaintiff in this matter alleged claims relating to injury suffered from a “slip and fall” at one of the Company’s O’Charley’s restaurants. The Company filed an appeal in the matter, and pending such appeal, on April 7, 2011 the parties reached a confidential settlement agreement and release of claims. The settlement amount was covered by the Company’s insurance policies, subject to a self-insured retention of $250,000.

 
10

 
       
  The Company is also a defendant from time to time in various legal proceedings arising in the ordinary course of its business, including claims relating to injury or wrongful death under “dram shop” laws that allow a person to sue the Company based on any injury caused by an intoxicated person who was wrongfully served alcoholic beverages at one of its restaurants; claims relating to workplace, workers’ compensation and employment matters, discrimination and similar matters; claims resulting from “slip and fall” accidents; claims relating to lease and contractual obligations; claims  relating to its franchising initiatives; and claims from guests or employees alleging illness, injury or other food quality, health or operational concerns.

       The Company does not believe that any of the legal proceedings pending against it as of the date of this report will have a material adverse effect on its liquidity or financial condition. The Company may incur liabilities, receive benefits, settle disputes, sustain judgments, or accrue expenses relating to legal proceedings in a particular fiscal quarter which may adversely affect its results of operations, or on occasion, receive settlements that favorably affect results of operations.

I.    ASSETS HELD FOR SALE

As of April 17, 2011, the $4.9 million shown in assets held for sale on the unaudited interim consolidated balance sheet consisted of the assets related to seven restaurants closed in the fourth quarter of 2010, five liquor licenses from restaurants closed in the fourth quarter of 2010, assets related to a site previously subleased which the Company no longer intends to sublease and assets related to a site the Company no longer plans to utilize.  The Company ceases recognizing depreciation expense for all assets that are being held for sale.

J.    INCOME TAXES

During the first quarter ended April 17, 2011, the Company performed its quarterly assessment of its net deferred tax assets. Under ASC 740, “Income Taxes” (“ASC 740”), companies are required to assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified.  As a result of the goodwill impairment charge recognized by the Company during fiscal 2008, the Company had a three-year cumulative pre-tax loss.  In evaluating all of the positive and negative evidence in determining that a valuation allowance was required, pursuant to ASC 740, the Company evaluated future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years, if applicable, and tax planning strategies, and compared the likelihood of these sources of income in light of the recent pre-tax losses and determined that it is more likely than not that the Company will not be able to realize its net deferred tax assets in the future. A cumulative pre-tax loss is given considerably more weight than projections of future income, and a recent historical cumulative loss is considered a significant factor that is difficult to overcome.

Under ASC 740, companies are required to apply their estimated full year tax rate on a year to date basis in each interim period. Under ASC 740-270-30-18, companies should not apply the estimated full year tax rate to interim financial results if the estimated full-year tax rate is not reliably predictable. In this situation, the interim tax rate should be based on the actual year-to-date results. Based on the Company’s current projections, a small change in pre-tax earnings would result in a material change in the estimated annual effective rate, producing significant variations in the customary relationship between income tax expense and pre-tax accounting income in interim periods.  As such, the Company recorded a tax expense for the first quarter of 2011 based on the actual year-to-date results, in accordance with ASC 740-270-30-18.

For the 16 weeks ended April 17, 2011, the Company has recorded income tax expense of less than $0.1 million based on an effective tax rate on income from continuing operations of approximately 2.0 percent, compared to tax expense of $0.8 million in the prior-year period.    The change in the effective tax rate from fiscal 2010 to fiscal 2011 is the result of fluctuations in pre-tax net income (loss) and the related rate impacts of federal tax credits, as well as changes in the fiscal 2011 valuation allowance.  Additionally, there was no income tax benefit related to discontinued operations for first quarter 2011, compared to an income tax benefit of less than $0.1 million in the prior-year period.  The Company estimates that its tax credits, which are primarily the FICA (Social Security and Medicare taxes) tip credits and the WOTC (Work Opportunity Tax Credit), will be $2.3 million for the first quarter of 2011.  The FICA tip credit is a non-refundable federal income tax credit available to offset a portion of employer’s FICA tax paid on employee cash tips.  WOTC is available for wages paid by employers who hire individuals from certain targeted groups of hard-to-employ individuals.

 
11

 
K.    SUPPLEMENTARY CONSOLIDATING FINANCIAL INFORMATION OF SUBSIDIARY GUARANTORS

Presented below is supplementary consolidating financial information for the Company and the subsidiary guarantors as of April 17, 2011 and December 26, 2010 and for the 16-week periods ended April 17, 2011 and April 18, 2010.

Consolidating Balance Sheet
As of April 17, 2011
(Unaudited)

               
Minor
       
               
Subsidiaries and
       
   
Parent
   
Subsidiary
   
Consolidating
       
   
Company
   
Guarantors
   
Adjustments
   
Consolidated
 
 
(In thousands)
                         
ASSETS
                       
Current Assets:
                       
     Cash and cash equivalents
$
601
 
$
35,885
 
$
 
$
36,486
 
     Trade accounts receivable, net
 
6,112
   
8,578
   
(419
)
 
14,271
 
     Intercompany (payable) receivable
 
(223,127
)
 
192,057
   
31,070
   
 
     Inventories
 
3,845
   
4,464
   
   
8,309
 
     Assets held for sale
 
3,538
   
1,394
   
   
4,932
 
     Other current assets
 
1,147
   
2,561
   
1,693
   
5,401
 
          Total current (liabilities) assets
 
(207,884
)
 
244,939
   
32,344
   
69,399
 
                         
Property and equipment, net
 
221,891
   
88,879
   
   
310,770
 
Trade names and other intangible assets
 
25
   
25,921
   
   
25,946
 
Other assets
 
209,658
   
29,040
   
(226,232
)
 
12,466
 
Total Assets (Liabilities)
$
223,690
 
$
388,779
 
$
(193,888
)
$
418,581
 
                         
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
                       
Current Liabilities:
                       
     Trade accounts payable
$
4,880
 
$
(1,208
)
$
2,322
 
$
5,994
 
     Accrued payroll and related expenses
 
12,709
   
3,955
   
   
16,664
 
     Accrued expenses
 
21,066
   
7,185
   
(419
)
 
27,832
 
     Deferred revenue
 
   
7,942
   
(629
)
 
7,313
 
     Federal, state and local taxes
 
(10,282
)
 
24,656
   
   
14,374
 
     Current portion of long-term debt and capitalized
                       
                  lease obligations
 
995
   
144
   
   
1,139
 
          Total current liabilities (assets)
 
29,368
   
42,674
   
1,274
   
73,316
 
                         
Deferred income taxes
 
3,398
   
   
   
3,398
 
Other liabilities
 
24,176
   
19,507
   
100
   
43,783
 
Long-term debt and capitalized lease obligations,
 
141,548
   
116
   
(24,656
)
 
117,008
 
                  less current portion
                       
                         
Shareholders’ Equity (Deficit):
                       
     Common stock
 
124,231
   
343,431
   
(301,055
)
 
166,607
 
     Retained (deficit) earnings
 
(99,031
)
 
(16,949
)
 
130,449
   
14,469
 
          Total shareholders’ equity (deficit)
 
25,200
   
326,482
   
(170,606
)
 
181,076
 
Total Liabilities and Shareholders’ Equity (Deficit)
$
223,690
 
$
388,779
 
$
(193,888
)
$
418,581
 

 
12

 
Consolidating Balance Sheet
As of December 26, 2010
(Unaudited)

                   
Minor
         
                   
Subsidiaries and
         
   
Parent
     
Subsidiary
     
Consolidating
         
   
Company
     
Guarantors
     
Adjustments
     
Consolidated
 
 
(In thousands)
                               
ASSETS
                             
Current Assets:
                             
     Cash and cash equivalents
$
1,744
   
$
27,949
   
$
   
$
29,693
 
     Trade accounts receivable, net
 
6,659
     
8,490
     
(218
)
   
14,931
 
     Intercompany (payable) receivable
 
(277,713
)
   
247,227
     
30,486
     
 
     Inventories
 
4,045
     
5,026
     
     
9,071
 
     Assets held for sale
 
3,828
     
1,019
     
     
4,847
 
     Other current assets
 
1,733
     
2,468
     
     
4,201
 
          Total current (liabilities) assets
 
(259,704
)
   
292,179
     
30,268
     
62,743
 
                               
Property and equipment, net
 
226,929
     
93,082
     
     
320,011
 
Trade names and other intangible assets
 
25
     
25,921
     
     
25,946
 
Other assets
 
210,649
     
29,624
     
(226,232
)
   
14,041
 
Total Assets (Liabilities)
$
177,899
   
$
440,806
   
$
(195,964
)
 
$
422,741
 
                               
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
                             
Current Liabilities:
                             
     Trade accounts payable
$
7,502
   
$
80
   
$
629
   
$
8,211
 
     Accrued payroll and related expenses
 
10,630
     
4,009
     
     
14,639
 
     Accrued expenses
 
17,708
     
6,824
     
(218
)
   
24,314
 
     Deferred revenue
         
18,213
     
(629
)
   
17,584
 
     Federal, state and local taxes
 
(14,382
)
   
24,380
     
     
9,998
 
     Current portion of long-term debt and capitalized
                             
                  lease obligations
 
1,567
     
143
     
     
1,710
 
          Total current liabilities (assets)
 
23,025
     
53,649
     
(218
)
   
76,456
 
                               
Deferred income taxes
 
4,034
     
     
     
4,034
 
Other liabilities
 
25,901
     
20,852
     
100
     
46,853
 
Long-term debt, less current portion
 
141,613
     
207
     
(24,656
)
   
117,164
 
                               
Shareholders’ Equity (Deficit):
                             
     Common stock
 
123,171
     
343,431
     
(301,055
)
   
165,547
 
     Retained (deficit) earnings
 
(139,845
)
   
22,667
     
129,865
     
12,687
 
          Total shareholders’ equity (deficit)
 
(16,674
)
   
366,098
     
(171,190
)
   
178,234
 
Total Liabilities and Shareholders’ Equity (Deficit)
$
177,899
   
$
440,806
   
$
(195,964
)
 
$
422,741
 

 
13

 
Consolidating Statement of Operations
16 Weeks Ended April 17, 2011
(Unaudited)

                     
Minor
         
                     
Subsidiaries and
         
     
Parent
     
Subsidiary
     
Consolidating
         
     
Company
     
Guarantors
     
Adjustments
     
Consolidated
 
   
(In thousands)
                                 
Revenues:
                               
     Restaurant sales
 
$
151,338
   
$
108,919
   
$
4,468
   
$
264,725
 
     Franchise and other revenue
   
214
     
107
     
     
321
 
     
151,552
     
109,026
     
4,468
     
265,046
 
                                 
Costs and Expenses:
                               
     Cost of restaurant sales:
                               
          Cost of food and beverage
   
48,053
     
32,824
     
1,650
     
82,527
 
          Payroll and benefits
   
54,151
     
38,879
     
(2,164
)
   
90,866
 
          Restaurant operating
   
27,277
     
21,034
     
4,158
     
52,469
 
                Cost of restaurant sales, exclusive of                          
                               
        depreciation and amortization shown                                 
                         separately below      129,481        92,737        3,644        225,862  
                                 
     Advertising and marketing
   
     
11,067
     
38
     
11,105
 
     General and administrative
   
1,691
     
9,538
     
(180
)
   
11,049
 
     Depreciation and amortization of property and equipment
   
6,656
     
4,820
     
126
     
11,602
 
     Impairment and disposal charges, net
   
90
     
72
     
     
162
 
     Pre-opening costs
   
     
     
     
 
     
137,918
     
118,234
     
3,628
     
259,780
 
Income (Loss) from Operations
   
13,634
     
(9,208
)
   
840
     
5,266
 
Other Expense (Income):
                               
     Interest expense, net
   
3,171
     
167
     
     
3,338
 
     Other, net
   
14,632
     
(14,628
)
   
     
4
 
     
17,803
     
(14,461
)
   
     
3,342
 
(Loss) Income from Continuing Operations Before Income Taxes
   
(4,169
)
   
5,253
     
840
     
1,924
 
     Income Tax Expense
   
9
     
29
     
     
38
 
                                 
(Loss) Income from Continuing Operations
   
(4,178
)
   
5,224
     
840
     
1,886
 
Income (Loss) from Discontinued Operations, net
   
211
     
(314
)
   
(1
)
   
(104
)
Net (Loss) Income
 
$
(3,967
)
 
$
4,910
   
$
839
   
$
1,782
 


 
14

 

Consolidating Statement of Operations
16 Weeks Ended April 18, 2010
(Unaudited)

                   
Minor
         
                   
Subsidiaries and
         
   
Parent
     
Subsidiary
     
Consolidating
         
   
Company
     
Guarantors
     
Adjustments
     
Consolidated
 
 
(In thousands)
Revenues:
                             
     Restaurant sales
$
154,951
   
$
107,569
   
$
4,247
   
$
266,767
 
     Franchise and other revenue
 
211
     
122
     
     
333
 
   
155,162
     
107,691
     
4,247
     
267,100
 
                               
Costs and Expenses:
                             
     Cost of restaurant sales:
                             
          Cost of food and beverage
 
45,362
     
31,262
     
1,524
     
78,148
 
          Payroll and benefits
 
56,148
     
38,921
     
(2,232
)
   
92,837
 
          Restaurant operating
 
28,349
     
21,066
     
4,268
     
53,683
 
                Cost of restaurant sales, exclusive of
                             
                         depreciation and amortization shown
         
 
     
 
     
 
 
                         separately below     129,859         91,249         3,560         224,668  
                               
     Advertising and marketing
 
     
11,626
     
47
     
11,673
 
     General and administrative
 
1,727
     
9,483
     
(261
)
   
10,949
 
     Depreciation and amortization of property and equipment
 
7,572
     
5,705
     
166
     
13,443
 
     Impairment and disposal charges, net
 
2,602
     
527
     
     
3,129
 
     Pre-opening costs
 
     
7
     
     
7
 
   
141,760
     
118,597
     
3,512
     
263,869
 
Income (Loss) from Operations
 
13,402
     
(10,906
)
   
735
     
3,231
 
Other Expense:
                             
     Interest expense, net
 
3,862
     
181
     
     
4,043
 
     Other, net
 
2
     
     
     
2
 
   
3,864
     
181
     
     
4,045
 
Income (Loss) from Continuing Operations Before Income Taxes
 
9,538
     
(11,087
)
   
735
     
(814
)
 Income Tax Expense
 
552
     
253
     
     
775
 
                               
Income (Loss) from Continuing Operations
 
9,016
     
(11,340
)
   
735
     
(1,589
)
 (Loss) Income from Discontinued Operations, net
 
(2,556
)
   
(199
)
   
     
(2,755
)
Net Income (Loss)
$
6,460
   
$
(11,539
)
 
$
735
   
$
(4,344
)

 
15

 
Consolidating Statement of Cash Flows
16 Weeks Ended April 17, 2011
(Unaudited)
                     
Minor
         
                     
Subsidiaries and
         
     
Parent
     
Subsidiary
     
Consolidating
         
     
Company
     
Guarantors
     
Adjustments
     
Consolidated
 
   
(In thousands)
                                 
Cash Flows from Operating Activities:
                               
Net (loss) income 
 
$
(3,967
)
 
$
4,908
   
$
841
   
$
1,782
 
Adjustments to reconcile net (loss) income to net cash
                               
provided by (used in) operating activities:
                               
    Depreciation and amortization of property and equipment
   
6,656
     
4,820
     
126
     
11,602
 
    Amortization of debt issuance costs and swap
                               
                 termination payment
   
119
     
     
     
119
 
    Share–based compensation
   
900
     
     
     
900
 
    Loss on early extinguishment of debt
   
     
     
     
 
    Amortization of deferred gain on sale-leasebacks
   
(325
)
   
     
     
(325
)
    Deferred income taxes and other income tax related items
   
233
     
     
     
233
 
    Loss on the sale of assets
   
48
     
20
     
     
68
 
    Impairment and disposal charges, net
 
 
(249
)
   
118
     
     
(131
)
    Changes in assets and liabilities:
                               
       Trade accounts and other receivables
   
547
     
(89
)
   
202
     
660
 
       Inventories
   
200
     
562
     
     
762
 
       Other current assets
   
586
     
(93
)
   
(1,693
)
   
(1,200
)
       Trade accounts payable
   
(2,622
)
   
(1,288
)
   
1,693
     
(2,217
)
       Deferred revenue
   
     
(10,271
)
   
     
(10,271
)
       Accrued payroll, accrued expenses, and federal,
                               
                 state and local taxes
   
8,075
     
584
     
(202
)
   
8,457
 
       Other long-term assets and liabilities
   
(394
)
   
(762
)
   
     
(1,156
)
Net cash provided by (used in) operating activities
   
9,807
     
(1,491
)
   
967
     
9,283
 
                                 
Cash Flows from Investing Activities:
                               
    Additions to property and equipment
   
(2,129
)
   
(926
)
   
(29
)
   
(3,084
)
    Proceeds from the sale of assets
   
34
     
936
     
     
970
 
    Other, net
   
(8,392
)
   
9,417
     
(938
)
   
87
 
Net cash (used in) provided by investing activities
   
(10,487
)
   
9,427
     
(967
)
   
(2,027
)
                                 
Cash Flows from Financing Activities:
                               
    Payments on long-term debt and capitalized lease
                               
                 obligations
   
(598
)
   
     
     
(598
)
    Excess tax benefit from share-based payments
   
5
     
     
     
5
 
    Debt issuance costs
   
(25
)
   
     
     
(25
)
    Proceeds from issuances under CHUX Ownership Plan
                               
                 and the exercise of  stock options
   
319
     
     
     
319
 
    Shares tendered and retired for minimum tax withholding
   
(164
)
   
     
     
(164
)
Net cash used in financing activities
   
(463
)
   
     
     
(463
)
                                 
(Decrease) increase in cash and cash equivalents
   
(1,143
)
   
7,936
     
     
6,793
 
Cash and cash equivalents at beginning of the period
   
1,744
     
27,949
     
     
29,693
 
Cash and cash equivalents at end of the period
 
$
601
   
$
35,885
   
$
   
$
36,486
 
                                 
 
 
16

 
Consolidating Statement of Cash Flows
16 Weeks Ended April 18, 2010
(Unaudited)
                     
Minor
         
                     
Subsidiaries and
         
     
Parent
     
Subsidiary
     
Consolidating
         
     
Company
     
Guarantors
     
Adjustments
     
Consolidated
 
   
(In thousands)
                                 
Cash Flows from Operating Activities:
                               
Net income (loss) 
 
$
6,460
   
$
(11,539
)
 
$
735
   
$
(4,344
)
Adjustments to reconcile net income (loss) to net cash
                               
provided by (used in) operating activities:
                               
    Depreciation and amortization of property and equipment
   
7,678
     
5,780
     
166
     
13,624
 
    Amortization of debt issuance costs and swap
                               
                 termination payment
   
463
     
     
     
463
 
    Share–based compensation
   
1,434
     
     
     
1,434
 
    Loss on early extinguishment of debt
   
198
     
     
     
198
 
    Amortization of deferred gain on sale-leasebacks
   
(325
)
   
     
     
(325
)
    Deferred income taxes and other income tax related items
   
622
     
     
     
622
 
    Loss on the sale of assets
 
 
17
     
(1
)
   
     
16
 
    Impairment and disposal charges, net
 
 
5,550
     
2
     
     
5,552
 
    Changes in assets and liabilities:
                               
       Trade accounts receivable
   
2,507
     
271
     
285
     
3,063
 
       Inventories
   
511
     
1,185
     
     
1,696
 
       Other current assets
   
(867
)
   
102
     
     
(765
)
       Trade accounts payable
   
6,644
     
(1,185
)
   
     
5,459
 
       Deferred revenue
   
     
(9,664
)
   
     
(9,664
)
       Accrued payroll, accrued expenses, and federal,
                               
                 state and local taxes
   
4,106
     
2,691
     
(285
)
   
6,512
 
       Other long-term assets and liabilities
   
(1,553
)
   
261
     
     
(1,292
)
Net cash provided by (used in) operating activities
   
33,445
     
(12,097
)
   
901
     
22,249
 
                                 
Cash Flows from Investing Activities:
                               
     Additions to property and equipment
   
(1,802
)
   
(1,002
)
   
(166
)
   
(2,970
)
     Other, net
   
(20,240
)
   
20,980
     
(735
)
   
5
 
Net cash (used in) provided by investing activities
   
(22,042
)
   
19,978
     
(901
)
   
(2,965
)
                                 
Cash Flows from Financing Activities:
                               
    Payments on long-term debt and capitalized lease obligations
   
(708
)
   
     
     
(708
)
    Repurchase of senior notes
   
(9,993
)
   
     
     
(9,993
)
    Debt issuance costs
   
(1,631
)
   
     
     
(1,631
)
    Proceeds from issuances under CHUX Ownership Plan
                               
                 and the exercise of stock options
   
386
     
     
     
386
 
    Shares tendered and retired for minimum tax withholding
   
(257
)
   
     
     
(257
)
    Excess tax benefit from share-based payments
   
5
     
     
     
5
 
    Dividends paid
   
(2
)
   
     
     
(2
)
Net cash used in financing activities
   
(12,200
)
   
     
     
(12,200
)
                                 
(Decrease) increase in cash and cash equivalents
   
(797
)
   
7,881
     
     
7,084
 
Cash and cash equivalents at beginning of the period
   
2,127
     
19,753
     
     
21,880
 
Cash and cash equivalents at end of the period
 
$
1,330
   
$
27,634
   
$
   
$
28,964
 
 
17

 


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 estimated results in future periods, operating and growth strategy, and financing plans. Forward-looking statements are generally identifiable by the use of the words “anticipate,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend,” “seek,” “forecast,” or similar expressions.  These forward-looking statements may be affected by certain risks and uncertainties, including, but not limited to, the continued deterioration in the United States economy and the related adverse effect on our sales of decreases in consumer spending; our ability to achieve our internal forecast of sales and profitability; our ability to comply with the terms and conditions of our financing agreements; our ability to maintain or increase comparable sales and operating margins at our restaurants; the effect that increases in food, labor, energy, interest costs and other expenses have on our results of operations; the effect of increased competition; our ability to successfully implement changes to our supply chain; our ability to sell or sublease closed restaurants and other surplus assets; our ability to successfully implement and realize projected benefits of our turnaround and transformation process, and other initiatives; the resolution of outstanding legal proceedings; and the other risks described in our Annual Report on Form 10-K for the fiscal year ended December 26, 2010 under the caption “Risk Factors” and in our other filings with the Securities and Exchange Commission (the “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 our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

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 April 17, 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 April 17, 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. We continue to improve our Guest Satisfaction Index (GSI) scores, which we believe are often a barometer signifying a guest’s intent to return to the restaurant. The percentage of respondents who gave the highest rating for overall satisfaction improved by 400 basis points at O’Charley’s, by 600 basis points at Ninety Nine, and by 400 basis points at Stoney River in the first 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 first fiscal quarter of 2011, comparable sales and guest counts increased at all three restaurant concepts for the first time in five years.  While we are encouraged by this improvement, we recognize this is the first step in strengthening our guest loyalty at all three concepts and we have to translate these sales improvements into margin improvements and profitability.  We believe that success will come from focusing on these 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 visits 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.

 
18

 
At our O’Charley’s restaurants, we have continued our initiatives that began in the last half of 2010 to build upon the concept’s existing strengths by simplifying the menu and improving the quality of every menu item while actively working with our new advertising agency to evolve from our “Two Meals for $14.99” retail-value message to a brand-value message.  During the quarter we continued to see favorable results from our efforts to attract and retain guests through our value messages.  We also continued our emphasis on our re-training and re-certification program with our restaurant management teams to improve service and execution to convert new and returning guests into loyal O’Charley’s guests.

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.  Our “Nine Real-Sized Entrées for $9.99” continues to prove popular with our guests, and we plan to continue to refresh the nine menu items over time.  This offering is now featured in the regular menu and continues to yield favorable results as comparable sales increased during each of the last three fiscal quarters. During the quarter, we began our re-training and re-certification program with our restaurant management teams to improve service and execution to convert new and returning guests into loyal Ninety Nine guests.

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.  In addition, our comparable sales increase of 8.4% during the first fiscal quarter of 2011 was the second largest comparable sales increase since we acquired the concept in May 2000. During the first fiscal quarter of 2011, one Stoney River restaurant was closed.
 
 
19

 
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 25 percent, 8 percent and 11 percent, respectively, of our overall cost of food and beverage in the first quarter 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.

 
20

 
 
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 charge