<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934. For the fiscal year ended December 29, 1996.
[NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
or
Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ______________ to
______________.
Commission file number 1-8766
J. ALEXANDER'S CORPORATION
--------------------------
(Exact name of Registrant as specified in its charter)
Tennessee 62-0854056
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 24300
3401 West End Avenue
Nashville, Tennessee 37203
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615)269-1900
-------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Class: Name of each exchange on which registered:
- ------------------------------------------------ ------------------------------------------
<S> <C>
Common stock, par value $.05 per share. New York Stock Exchange
Series A junior preferred stock purchase rights. New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the last sales price on the New York
Stock Exchange of such stock as of March 24, 1997, was $42,083,670, assuming
that (i) all shares beneficially held by members of the Company's Board of
Directors are shares owned by "affiliates," a status which each of the directors
individually disclaims and (ii) all shares held by the Trustee of the J.
Alexander's Corporation Employee Stock Ownership Plan are shares owned by an
"affiliate".
The number of shares of the Company's Common Stock, $.05 par value,
outstanding at March 24, 1997, was 5,382,994.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report to Shareholders for the fiscal
year ended December 29, 1996, are incorporated by reference into Parts I and II.
Portions of the Proxy Statement for the 1997 Annual Meeting of
Shareholders to be held May 20, 1997, are incorporated by reference into Part
III.
<PAGE> 2
PART I
ITEM 1. BUSINESS
J. Alexander's Corporation (the "Company", formerly Volunteer Capital
Corporation) operates as a proprietary concept 14 J. Alexander's full-service,
casual dining restaurants located in Tennessee, Ohio, Florida, Kansas, Alabama,
Michigan and Illinois. J. Alexander's is a traditional restaurant with an
American menu that features prime rib of beef; mesquite-grilled steaks, seafood
and chicken; pasta; salads and soups; assorted sandwiches, appetizers and
desserts; and a full-service bar. Management believes quality food, outstanding
service and value are critical to the success of J. Alexander's.
The Company has historically operated as a major franchisee of Wendy's
International, Inc. ("Wendy's International"). However, in November 1996, the
Company sold 52 of its 58 Wendy's Old Fashioned Hamburgers restaurants ("Wendy's
Restaurants") to Wendy's International. Of the six restaurants not acquired by
Wendy's International in November 1996, two were in operation at December 29,
1996. As of March 24, 1997 the Company has closed or sold all of its Wendy's
restaurants.
Management intends to concentrate on development of new J. Alexander's
restaurants and may also consider use of the Company's capital resources for
acquisitions of restaurants similar to J. Alexander's.
Unless the context requires otherwise, all references to the Company
include J. Alexander's Corporation and its subsidiaries.
Information concerning net sales and operating results of the Company's
J. Alexander's Restaurants and Wendy's Restaurants is set forth in "Management's
Discussion and Analysis" on pages through of the Company's 1996 Annual Report to
Shareholders.
J. ALEXANDER'S RESTAURANT OPERATIONS
General. J. Alexander's is a quality casual dinner house with an
American theme. J. Alexander's strategy is to provide a broad range of
high-quality menu items that are intended to appeal to a wide range of consumer
tastes and are served by a courteous, friendly and well-trained service staff.
The Company believes that quality food, outstanding service and value are
critical to the success of J. Alexander's.
Each restaurant is open from 11:00 a.m. to 11:00 p.m. Sunday through
Thursday and 11:00 a.m. to 12:00 midnight on Friday and Saturday. Entrees
available at lunch and dinner range in price from $4.95 to $18.45. The Company
estimates that the average check per customer, excluding alcoholic beverages, is
approximately $13.80. J. Alexander's net sales during fiscal 1996 were $42.1
million, of which alcoholic beverage sales accounted for approximately 15%.
The Company opened its first J. Alexander's restaurant in Nashville,
Tennessee in May 1991. Since that time, the Company opened two restaurants in
1992, two restaurants in 1994, four restaurants in 1995 and five restaurants in
1996. The Company plans to open five J. Alexander's in 1997, four of which are
currently being developed in Tampa, Florida; Denver, Colorado; Livonia,
Michigan; and San Antonio, Texas (a leased location). The Tampa restaurant is
scheduled to open in the second quarter of 1997, the Denver restaurant is
scheduled to open in the third quarter of 1997, and the Livonia and San Antonio
restaurants, as well as a fifth new restaurant, are scheduled to open in the
fourth quarter of 1997.
Menu. The J. Alexander's menu is designed to appeal to a wide variety
of tastes and features prime rib of beef; hardwood-grilled steaks, seafood and
chicken; pasta; salads and soups; and assorted sandwiches, appetizers and
desserts.
<PAGE> 3
As a part of the Company's commitment to quality, soups, sauces, salsa,
salad dressings and desserts are made daily from scratch; steaks, chicken and
seafood are grilled over genuine hardwood; all steaks are U.S.D.A.
Midwestern, Cornfed Choice Beef, aged a minimum of 21 days and cut by hand in
the kitchen; and imported Italian pasta, topped with fresh grated imported
Reggiano Grassi parmesan cheese, is used.
Emphasis on quality is present throughout the entire J. Alexander's
menu. Milkshakes are made from Haagen-Dazs ice cream, with flavoring being the
only addition. Desserts such as chocolate cake, carrot cake and cheesecake are
prepared in-house, and each restaurant bakes its featured croissants.
Customer Service. Management believes that prompt, courteous and
efficient service is an integral part of the J. Alexander's concept. The
management staff of each restaurant are referred to as "coaches" and the other
employees as "champions". The Company seeks to hire coaches who are committed to
the principle that quality products and service are key factors to success in
the restaurant industry. Each J. Alexander's restaurant typically employs five
to six fully-trained concept coaches and two kitchen coaches. The coaches
typically have previous experience in full-service restaurants and complete an
intensive 19-week J. Alexander's development program involving all aspects of
restaurant operations.
Each J. Alexander's has approximately 45 to 65 service personnel, 25 to
30 kitchen employees, 8-10 host persons and six to eight pubkeeps. The Company
places significant emphasis on its initial training program. In addition, the
coaches hold training breakfasts for the service staff to further enhance their
product knowledge. Management believes J. Alexander's restaurants have a low
table to server ratio, which is designed to provide better, more attentive
service. The Company is committed to employee empowerment, and each member of
the service staff is authorized to provide complimentary entrees in the event
that a guest has an unsatisfactory dining experience or the food quality is not
up to the Company's standards. Further, all members of the service staff are
trained to know the Company's product specifications and to alert management as
to any potential problems.
Quality Assurance. A key position in each J. Alexander's restaurant is
the quality control coordinator. This position is staffed by a coach who
inspects each plate of food before it is served to a guest. The Company believes
that this product inspection by a member of management is a significant key to
maintaining consistent, high food quality in its restaurants.
Another important component of the quality assurance system is the
preparation of taste plates. Certain menu items are taste-tested daily by
a coach to ensure that only the highest quality food is served in the
restaurant. The Company also uses a service evaluation program to monitor
service staff performance, food quality and guest satisfaction.
Restaurant and Site Selection. The J. Alexander's restaurants built
from 1992 through 1996 have generally been freestanding structures that contain
approximately 7,400 square feet and seat approximately 230 people. The exterior
typically combines brick, fieldstone and copper with striped awnings covering
the windows and entrance. The restaurants' interiors are designed to provide a
comfortable dining experience and feature high ceilings, wooden trusses with
exposed pipes and an open kitchen immediately adjacent to the reception area.
Consistent with the Company's intent to develop different looks for different
markets, the last three restaurants opened in 1996 represented a departure from
the "warehouse" style building described above. The J. Alexander's in Troy,
Michigan is located inside the prestigious Somerset Collection mall and
features a very upscale, contemporary design. The Chattanooga, Tennessee J.
Alexander's features a stucco style exterior and includes a number of other
unique design features as the result of being converted from another free-
standing restaurant building acquired by the Company. The J. Alexander's in
Memphis, Tennessee represents the Company's latest prototype design which it
expects to use for most of the restaurants opened in 1997. This building was
designed to provide a high level of curb appeal using exterior craftsman-style
architecture with unique natural materials such as stone, stained woods and
weathering copper.
The Company plans to open five J. Alexander's restaurants in 1997,
four of which are currently under development in Tampa, Florida; Denver,
Colorado; San Antonio, Texas; and Livonia, Michigan. The Company estimates that
its capital expenditures for 1997 will total approximately $22,000,000. The
capital expenditures for restaurants include the cost of constructing and
equipping the restaurant and, if the land on which a restaurant is located is
purchased, the cost of purchasing the land and associated site work. Based upon
the Company's cost experience in developing restaurants and the Company's
current estimates of cost levels, the Company believes that the cost of
constructing a J. Alexander's building will range from approximately $1,650,000
to $1,850,000. The Company is also developing a lower cost building, anticipated
to range from $1,300,000 to $1,400,000, for use in selected markets beginning
in 1998. The Company estimates that the cost of equipping a J. Alexander's
restaurant will range from $650,000 to $700,000. Currently, the principal
variable in the cost of a restaurant is the decision to own or lease a
restaurant site and if a decision is made to own the site, the cost of land in
the proposed market. In general, the Company prefers to own its sites because
of the long-term value of owning such an asset. For restaurants opened during
1996, the cost of land ranged from $800,000 to $1,200,000. In addition, site
preparation and improvement costs are expected to range from approximately
$275,000 to $350,000 per restaurant. Management estimates that pre-opening
costs will range from $250,000 to $300,000 per restaurant.
The Company is actively seeking to acquire additional sites for new J.
Alexander's restaurants primarily in the midwestern and the southeastern areas
of the United States. The timing of restaurant openings depends upon the
selection and availability of suitable sites and other factors. The Company has
no current plans to franchise J. Alexander's restaurants.
The Company believes that its ability to select high profile restaurant
sites is critical to the success of the J.
<PAGE> 4
Alexander's operations. The Company employs a Director of Real Estate whose
primary responsibilities are to seek out and evaluate possible restaurant
locations in attractive mid-sized and larger metropolitan areas. After
preliminary site analysis is performed and evaluated, members of the Company's
senior management team visit the proposed location and evaluate the particular
site and the surrounding area. The Company analyzes a variety of factors in the
site selection process, including local market demographics, the number, type
and success of competing restaurants in the immediate and surrounding area and
accessibility to and visibility from major thoroughfares. The Company also
obtains an independent market analysis to verify its own conclusion that a
potential restaurant site meets the Company's criteria. The Company believes
that this site selection strategy results in quality restaurant locations.
WENDY'S RESTAURANT OPERATIONS
Overview and Menu. In November 1996, the Company sold 52 of its 58
Wendy's restaurants to Wendy's International. The remaining six Wendy's
Restaurants have been sold or closed. Each of the Company's Wendy's Restaurants
offered a relatively standard menu, consisting of hamburgers, boneless breast of
chicken sandwiches, the SuperBar (an all-you-can-eat hot and cold food buffet),
chili, french fried and baked potatoes, prepared salads, a child's meal, Frosty
Dairy Dessert, and an assortment of soft drinks and other non-alcoholic
beverages.
Agreements with Wendy's International. The Company and Wendy's
International had previously executed Unit Franchise Agreements for each Wendy's
Restaurant, granting the Company an exclusive franchise for that Wendy's
Restaurant to use the trademarks, service marks and certain other rights of
Wendy's International and obligating the Company to pay Wendy's International an
initial franchise fee and a monthly fee equal to 4% of the restaurant's gross
sales, as well as to spend 4% of the sales for each restaurant for advertising
and promotion. In addition, the Company had previously agreed with Wendy's
International that any proposed sale or transfer which would reduce the
Company's direct or indirect ownership of its Wendy's Restaurants to less than
51% would be subject to a right of first refusal or, in certain circumstances,
consent by Wendy's International. Finally, the Company had also granted to
Wendy's International a right of first refusal or, in certain circumstances,
consent in the event the Company were to receive an acceptable bona fide offer
from a third party to acquire the Company's business through an exchange offer,
merger, share exchange, sale of assets or other transaction of similar effect.
Because the Company has now sold or closed all of its Wendy's Restaurants, the
Unit Franchise Agreements are generally no longer in effect. Furthermore, in
connection with the sale of 52 Wendy's Restaurants to Wendy's International in
November 1996, Wendy's International expressly surrendered its right of first
refusal or, in certain circumstances, consent in the event the Company receives
an offer from a third party to acquire the Company's business.
COMPETITION
The restaurant industry is highly competitive. The Company believes
that the principal competitive factors within the industry are site location,
product quality, service and price; however, menu variety, attractiveness of
facilities and customer recognition are also important factors. The Company's
restaurants compete not only with numerous other casual dining restaurants with
national or regional images, but also with other types of food service
operations in the vicinity of each of the Company's restaurants. These include
other restaurant chains or franchise operations with greater public recognition,
substantially greater financial resources and higher total sales volume than the
Company. The restaurant business is often affected by changes in consumer
tastes, national, regional or local economic conditions, demographic trends,
traffic patterns and the type, number and location of competing restaurants.
PERSONNEL
As of December 29, 1996, the Company employed approximately 1,700
persons. The Company believes that its employee relations are good. It is not a
party to any collective bargaining agreements.
GOVERNMENT REGULATION
Each of the Company's restaurants is subject to various federal, state
and local laws, regulations and administrative practices relating to the sale of
food and alcoholic beverages, and sanitation, fire and building codes.
Restaurant operating costs are also affected by other governmental actions that
are beyond the Company's control, which may include increases in the minimum
hourly wage requirements, workers' compensation insurance rates and
<PAGE> 5
unemployment and other taxes. Difficulties or failures in obtaining the required
licenses or approvals could delay or prevent the opening of a new restaurant.
Alcoholic beverage control regulations require each of the Company's J.
Alexander's restaurants to apply for and obtain from state authorities a license
or permit to sell liquor on the premises and, in some states, to provide service
for extended hours and on Sundays. Typically, licenses must be renewed annually
and may be revoked or suspended for cause at any time. The failure of any
restaurant to obtain or retain any required liquor licenses would adversely
affect the restaurant's operations. In certain states, the Company may be
subject to "dram-shop" statutes, which generally provide a person injured by an
intoxicated person the right to recover damages from the establishment which
wrongfully served alcoholic beverages to the intoxicated person. The Company
carries liquor liability coverage as part of its comprehensive general liability
insurance.
The Americans with Disabilities Act ("ADA") prohibits discrimination on
the basis of disability in public accommodations and employment. The ADA became
effective as to public accommodations in January 1992 and as to employment in
July 1992. Construction and remodeling projects since January 1992 have taken
into account the requirements of the ADA; however, the Company could be required
to further modify its restaurants' physical facilities to comply with the
provisions of the ADA.
RISK FACTORS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is including the following
cautionary statements identifying important factors that could cause the
Company's actual results to differ materially from those projected in forward
looking statements of the Company made by, or on behalf of, the Company.
Risks Associated with Growth. The Company's continued growth depends on
its ability to open new J. Alexander's restaurants and to operate them
profitably, which will depend on a number of factors, including the selection
and availability of suitable locations, the hiring and training of sufficiently
skilled management and other personnel and other factors, some of which are
beyond the control of the Company. There can be no assurance that the Company
will be able to open the anticipated number of J. Alexander's in a timely manner
or that, if opened, those restaurants can be operated profitably. The Company
currently operates fourteen J. Alexander's restaurants, of which only nine have
been open for more than one year. Consequently, the earnings achieved to date by
these J. Alexander's restaurants may not be indicative of future operating
results. Furthermore, because of the Company's relatively small J. Alexander's
restaurant base, an unsuccessful new restaurant could have a more adverse effect
on the Company's results of operations than would be the case in a restaurant
company with a greater number of restaurants.
Competition. The restaurant industry is intensely competitive with
respect to price, service, location and food quality, and there are many
well-established competitors with substantially greater financial and other
resources than the Company. Some of the Company's competitors have been in
existence for a substantially longer period than the Company and may be better
established in markets where the Company's restaurants are or may be located.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, traffic
patterns and the type, number and location of competing restaurants.
Fluctuations in Quarterly Results. The Company's quarterly results of
operations are affected by timing of the opening of new J. Alexander's
restaurants, and fluctuations in the cost of food, labor, employee benefits, and
similar costs over which the Company has limited or no control. The Company's
business may also be affected by inflation. In the past, management has
attempted to anticipate and avoid material adverse effects on the Company's
profitability from increasing costs through its purchasing practices and menu
price adjustments, but there can be no assurance that it will be able to do so
in the future.
Government Regulation. The restaurant industry is subject to extensive
state and local government regulation relating to the sale of food and alcoholic
beverages, and sanitation, fire and building codes. Termination of the liquor
license for any J. Alexander's restaurant would adversely affect the revenues
for the restaurant. Restaurant operating costs are also affected by other
government actions that are beyond the Company's control, which may include
increases in the minimum hourly wage requirements, workers' compensation
insurance rates and unemployment and other taxes. Implementation of mandatory
health care coverage could adversely affect the Company's operations.
Difficulties or failure in obtaining required licensing or other regulatory
approvals could delay or prevent the opening of a new J.
<PAGE> 6
Alexander's restaurant. The suspension of, or inability to renew, a license
could interrupt operations at an existing restaurant, and the inability to
retain or renew such licenses would adversely affect the operations of the
restaurants.
ITEM 2. PROPERTIES
As of December 29, 1996, the Company had fourteen J. Alexander's casual
dining restaurants in operation and two J. Alexander's restaurants under
construction. As a result of the sale of substantially all of its Wendy's
restaurant operations to Wendy's International in November 1996, the Company had
two Wendy's restaurants in operation at December 29, 1996. The following table
gives the locations of, and describes the Company's interest in, the land and
buildings used in connection with the above:
<TABLE>
<CAPTION>
Site Leased
Site and Building and Building Site and Building
Owned by the Owned by the Leased to the
Company Company Company Total
------- ------- ------- -----
<S> <C> <C> <C> <C>
J. Alexander's Restaurants:
Alabama 1 0 0 1
Colorado 1 0 0 1
Florida 2 1 0 3
Illinois 1 0 0 1
Kansas 1 0 0 1
Michigan 0 1 0 1
Ohio 3 1 0 4
Tennessee 3 0 1 4
- - - -
12 3 1 16
-- - - --
Wendy's Restaurants:
Louisiana 2 0 0 2
-- - - --
Total 14 3 1 18
== = = ==
</TABLE>
(a) In addition to the above, the Company leases five properties which are
in turn leased to others.
(b) See Item 1. for additional information concerning the Company's
restaurants.
All of the Company's restaurant lease agreements may be renewed at the
end of the initial term (generally 15 to 25 years) for periods ranging from
five to 10 years. Certain of these leases provide for minimum rentals plus
additional rent based on a percentage of the restaurant's gross sales in excess
of specified amounts. These leases usually require the Company to pay all real
estate taxes, insurance premiums and maintenance expenses with respect to the
leased premises.
Corporate offices for the Company are located in leased office space in
Nashville, Tennessee.
ITEM 3. LEGAL PROCEEDINGS
As of March 24, 1997, the Company was not a party to any pending legal
proceedings material to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
<PAGE> 7
EXECUTIVE OFFICERS OF THE COMPANY
The following list includes names and ages of all of the executive
officers of the Company indicating all positions and offices with the Company
held by each such person and each such person's principal occupations or
employment during the past five years. All such persons have been appointed to
serve until the next annual appointment of officers and until their successors
are appointed, or until their earlier resignation or removal.
Name and Age Background Information
Ronald E. Farmer, 50 Vice-President of Development since May, 1996;
Director of Development from October, 1993 to May,
1996; President of Dinelite Corporation, a franchisee
of Po Folks Restaurants, from 1987 to 1993.
R. Gregory Lewis, 44 Chief Financial Officer since July 1986; Vice
President of Finance and Secretary since August 1984.
Mark A. Parkey, 34 Director of Finance of the Company since January
1993; Audit Manager with Steele, Carter and Martin,
a public accounting firm, from June 1991 to
January 1993.
Lonnie J. Stout II, 50 Chairman since July 1990; Director, President and
Chief Executive Officer since May 1986.
<PAGE> 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required under this item in incorporated by reference
to the section entitled "Price Range of Common Stock" on page 44 and the Note
to the "Five-Year Financial Summary" on page 42 of the Company's Annual Report
to Shareholders for the fiscal year ended December 29, 1996.
ITEM 6. SELECTED FINANCIAL DATA
The information required under this item is incorporated by reference
to the section entitled "Five-Year Financial Summary" on page 42 of the
Company's Annual Report to Shareholders for the fiscal year ended December 29,
1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required under this item is incorporated by reference
to the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 17 through 23 of the Company's
Annual Report to Shareholders for the fiscal year ended December 29, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required under this item is incorporated by reference
to the "Consolidated Financial Statements" of the Company and its subsidiaries
on pages 24 through 39 and the "Quarterly Results of Operations" on page 41
of the Company's Annual Report to Shareholders for the fiscal year ended
December 29, 1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required under this item with respect to directors of
the Company is incorporated herein by reference to the "Proposal No. 1: Election
of Directors" section and the "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" section of the Company's Proxy Statement for the 1997
Annual Meeting of Shareholders to be held May 20, 1997. (See also "Executive
Officers of the Company" under Part I of this Form 10-K.)
ITEM 11. EXECUTIVE COMPENSATION
The information required under this item is incorporated herein by
reference to the "Executive Compensation" section of the Company's Proxy
Statement for the 1997 Annual Meeting of Shareholders to be held May 20, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required under this item is incorporated herein by
reference to the "Security Ownership of Certain Beneficial Owners and
Management" section of the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders to be held May 20, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under this item is incorporated herein by
reference to the "Certain Relationships and Related Transactions" section of the
Company's Proxy Statement for the 1997 Annual Meeting of Shareholders to be held
May 20, 1997.
<PAGE> 9
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) The information required under Item 14, subsections
(a)(1) and (a)(2) is set forth in a supplement filed
as part of this report beginning on page F-1.
(a)(3) Exhibits:
(3)(a)(1) Charter (Exhibit 3(a) of the Registrant's Report on
Form 10-K for the year ended December 30, 1990, is
incorporated herein by reference).
(3)(a)(2) Amendment to Charter dated February 7, 1997.
(3)(b) Bylaws as currently in effect (Exhibit 3(b) of the
Registrant's Report on Form 10-K for the year ended
December 30, 1990, is incorporated herein by
reference).
(4)(a) Form of Indenture dated as of May 19, 1983, between
the Registrant and First American National Bank of
Nashville, Trustee (Exhibit 4 of the Registrant's
quarterly report on Form 10-Q for the quarter ended
June 30, 1983, is incorporated herein by reference).
(4)(b) Rights Agreement dated May 16, 1989, by and between
Registrant and NationsBank (formerly Sovran
Bank/Central South) including Form of Rights
Certificate and Summary of Rights (Exhibit 3 to the
Report on Form 8-K dated May 16, 1989, is
incorporated herein by reference).
(10)(a) Employee Stock Ownership Plan (Exhibit 1 to the
Registrant's Report on Form 8-K dated June 25, 1992,
is incorporated herein by reference).
(10)(b) Employee Stock Ownership Trust Agreement dated June
25, 1992 between Registrant and Third National Bank
in Nashville. (Exhibit 2 to the Registrant's Report
on Form 8-K dated June 25, 1992, is incorporated
herein by reference).
(10)(c) Secured Promissory Note dated June 25, 1992 from the
Volunteer Capital Corporation Employee Stock
Ownership Trust to Registrant (Exhibit 4 to the
Registrant's Report on Form 8-K dated June 25, 1992,
is incorporated herein by reference).
(10)(d) Pledge and Security Agreement dated June 25, 1992, by
and between Registrant and Third National Bank in
Nashville as the Trustee for the Volunteer Capital
Corporation Employee Stock Ownership Trust (Exhibit 5
to the Registrant's Report on Form 8-K dated June 25,
1992, is incorporated herein by reference).
(10)(e) $30,000,000 Loan Agreement dated August 29, 1995 by
and between Volunteer Capital Corporation, VCE
Restaurants, Inc., Total Quality Management, Inc. and
NationsBank of Tennessee, N.A. (Exhibit 10.1 of the
Registrant's quarterly report on Form 10-Q for the
quarter ended October 1, 1995 is incorporated herein
by reference).
(10)(f) $30,000,000 Line of Credit note dated August 29, 1995
by and between Volunteer Capital Corporation, VCE
Restaurants, Inc., Total Quality Management, Inc. and
NationsBank of Tennessee, N.A. (Exhibit 10.2 of the
Registrant's quarterly report on Form 10-Q for the
quarter ended October 1, 1995 is incorporated herein
by reference).
(10)(g) Asset Purchase Agreement dated October 25, 1996 by
and between VCE Restaurants, Inc., Volunteer Capital
Corporation and Wendy's International, Inc. (Exhibit
10.1 of the Registrant's quarterly report on Form
10-Q for the quarter ended September 29, 1996 is
incorporated herein by reference).
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
<PAGE> 10
(10)(h) Written description of Salary Continuation Plan
(description of Salary Continuation Plan included in
the Registrant's Proxy Statement for Annual Meeting
of Shareholders, May 10, 1994, is incorporated herein
by reference).
(10)(i) Form of Severance Benefits Agreement between the
Registrant and Messrs. Stout and Lewis (Exhibit
(10)(j) of the Registrant's Report on Form 10-K for
the year ended December 31, 1989, is incorporated
herein by reference).
(10)(j) 1982 Incentive Stock Option Plan (incorporated by
reference to pages B-1 through B-6 of Registration
Statement No 2-78140).
(10)(k) Amended and restated 1982 Employee Stock Purchase
Plan (incorporated by reference from the Registrant's
Current Report on Form 8-K filed March 29, 1996).
(10)(l) 1985 Stock Option Plan (incorporated by reference to
pages 15 through 20 of the Registrant's Proxy
Statement for Annual Meeting of Shareholders, May 8,
1985, and Exhibit A to the Registrant's Proxy
Statement for Annual Meeting of Shareholders, May 11,
1993.)
(10)(m) 1990 Stock Option Plan for Outside Directors (Exhibit
A of the Registrant's Proxy Statement for Annual
Meeting of Shareholders, May 8, 1990, is incorporated
herein by reference).
(10)(n) 1994 Employee Stock Incentive Plan (incorporated by
reference to Exhibit 4(c) of Registration Statement
No. 33-77476).
(10)(o) Form of Separation Agreement and General Release
between the Registrant and Mr. May dated October 17,
1996.
(11) Statement regarding computation of per share
earnings.
(13) Portions of Annual Report to Shareholders of
J. Alexander's Corporation for the year ended
December 29, 1996
(21) List of subsidiaries of Registrant.
(23) Consent of Independent Auditors.
(b) Reports on Form 8-K:
On November 27, 1996, the Company filed a current report on Form 8-K
pursuant to the Item 2 thereof, reporting that the Company consummated
the previously reported sale of substantially all of the assets of its
Wendy's division to Wendy's International, Inc. and amended such
report on February 4, 1997 to provide certain pro forma financial
information.
(c) Exhibits - The response to this portion of Item 14 is submitted as a
separate section of this report.
(d) Financial Statement Schedules - The response to this portion of Item 14
is submitted as a separate section of this report.
<PAGE> 11
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
J. ALEXANDER'S CORPORATION
Date: 3/26/97 By: /s/ Lonnie J. Stout II
------------------- --------------------------------
Lonnie J. Stout II
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
- ------------------------------ -------------------------------------------- ---------
<S> <C> <C>
/s/ Lonnie J. Stout II Chairman, President, Chief Executive Officer 3/26/97
- ------------------------------ and Director
Lonnie J. Stout II
/s/ R. Gregory Lewis Vice President and Chief Financial Officer 3/28/97
- ------------------------------ (Principal Financial Officer) ---------
R. Gregory Lewis
/s/ Mark A. Parkey Director of Finance 3/28/97
- ------------------------------ (Principal Accounting Officer) ---------
Mark A. Parkey
/s/ Earl Beasley, Jr. Director 3/26/97
- ------------------------------ ---------
Earl Beasley, Jr.
/s/ E. Townes Duncan Director 3/27/97
- ------------------------------ ---------
E. Townes Duncan
/s/ Garland G. Fritts Director 3/26/97
- ------------------------------ ---------
Garland G. Fritts
/s/ John L.M. Tobias Director 3/26/97
- ------------------------------ ---------
John L.M. Tobias
/s/ Toby S. Wilt Director 3/28/97
- ------------------------------ ---------
Toby S. Wilt
</TABLE>
<PAGE> 12
ANNUAL REPORT ON FORM 10-K
ITEM 14(a)(1) AND (2), (c) AND (d)
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FISCAL YEAR ENDED DECEMBER 29, 1996
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
NASHVILLE, TENNESSEE
<PAGE> 13
FORM 10-K-ITEM 14(a)(1) AND (2)
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of J. Alexander's Corporation
and subsidiaries, included in the annual report of the registrant to its
shareholders for the fiscal year ended December 29, 1996, are incorporated by
reference in Item 8:
Consolidated statements of income - Years ended December 29, 1996,
December 31, 1995 and January 1, 1995
Consolidated balance sheets - December 29, 1996 and December 31, 1995
Consolidated statements of cash flows - Years ended December 29, 1996,
December 31, 1995 and January 1, 1995
Consolidated statements of stockholders' equity - Years ended December
29, 1996, December 31, 1995 and January 1, 1995
Notes to consolidated financial statements
The following consolidated financial statement schedule of J. Alexander's
Corporation and subsidiaries is included in Item 14(d):
Schedule II - Valuation and qualifying accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
<PAGE> 14
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------- ---------- ---------------------------- ----------- -----------
Additions
Balance at Charged to Charged to Balance
Beginning Costs and Other Accounts Deductions- at End
Description of Period Expenses Describe Describe of Period
- ---------------------------------------------- ---------- ---------- -------------- ----------- -----------
<S> <C> <C> <C>
Year ended December 29, 1996:
Valuation allowance for deferred tax assets $ 0 $ 0
Year ended December 31, 1995:
Valuation allowance for deferred tax assets $3,071,000 $3,071,000(1) $ 0
Year ended January 1, 1995:
Valuation allowance for deferred tax assets $5,730,000 $2,659,000(2) $3,071,000
</TABLE>
(1) Includes a $2,085,000 reduction in the beginning of the year valuation
allowance reflecting a change in circumstances which resulted in a
judgement that a corresponding amount of the Company's deferred tax
assets will be realized in future years. The remainder of the reduction
results primarily from changes in the deferred tax items.
(2) Includes a $2,100,000 reduction in the beginning of the year valuation
allowance reflecting a change in circumstances which resulted in a
judgement that a corresponding amount of the Company's deferred tax
assets will be realized in future years. The remainder of the reduction
results primarily from changes in the deferred tax items.
<PAGE> 15
J. ALEXANDER'S CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Reference Number Sequentially
per Item 601 of Numbered
Regulation S-K Description Page
- -------------- ----------- ----
<S> <C> <C>
(3)(a)(2) Amendment to Charter dated February 7, 1997.
(10)(o) Form of Separation Agreement and General Release
between the Registrant and Mr. May dated October
17, 1996.
(11) Statement regarding computation of per share earnings
(13) Portions of Annual Report to Shareholders of J. Alexander's
Corporation for the year ended December 29, 1996.
(21) List of subsidiaries of Registrant.
(23) Consent of Ernst & Young LLP, independent auditors
(27) Financial Data Schedule (FOR SEC USE ONLY)
</TABLE>
<PAGE> 1
EXHIBIT (3)(a)(2) -- AMENDMENT TO CHARTER DATED FEBRUARY 7, 1997
ARTICLES OF AMENDMENT TO THE CHARTER
OF
VOLUNTEER CAPITAL CORPORATION
Pursuant to the provisions of Section 48-20-106 of the Tennessee
Business Corporation Act, the undersigned corporation adopts the following
articles of amendment (the "Articles of Amendment") to its Charter (the
"Charter"):
1. Name of Corporation. The name of the corporation is Volunteer
Capital Corporation.
2. Section 1 of the Charter is hereby deleted in its entirety and
replaced with the following:
"1. The name of the corporation is J. Alexander's Corporation."
3. Adoption. These Articles of Amendment were duly adopted by the
Board of Directors and the shareholders of the corporation.
4. Effective Date. These Articles of Amendment will be effective when
filed with the Secretary of State.
Dated: February 7, 1997.
VOLUNTEER CAPITAL CORPORATION
By: /s/ R. Gregory Lewis
--------------------------
R. Gregory Lewis
Secretary
<PAGE> 1
EXHIBIT 10(O) - FORM OF SEPARATION AGREEMENT AND GENERAL RELEASE BETWEEN THE
REGISTRANT AND MR. MAY DATED OCTOBER 17, 1996.
SEPARATION AGREEMENT AND GENERAL RELEASE
In consideration for the payments and additional benefits to be paid by
Volunteer Capital Corporation ("the Company"), I release the Company and its
affiliates and all of its officers, directors, employees and agents from all
claims or causes of action of whatever nature that I now may have and that I
either know about or hereafter may learn about, arising from or during my
employment or resulting from the termination of my employment. This means that
I cannot and will not file any claim, charge, or lawsuit for the purpose of
obtaining any monetary award above and beyond the amounts provided for in this
Separation Agreement and General Release ("Agreement"), reinstatement of my
employment or for any equitable relief.
I acknowledge that this General Release includes, but is not limited to,
all claims arising under federal, state or local laws prohibiting employment
discrimination and all claims growing out of any legal restrictions on the
Company's right to terminate its employees including any breach of contract
claims. This General Release also specifically encompasses all claims of
employment discrimination based on race, color, religion, sex, and national
origin, as provided under Title VII of the Civil Rights Act of 1964, as
amended, all claims of discrimination based on age, as provided under the Age
Discrimination in Employment Act of 1967, as amended, all claims under the
Employee Retirement Income Security Act (ERISA) and all claims of employment
discrimination under the Americans with Disabilities Act (ADA) as well as
claims under state law as provided under Tenn. Code Ann. Sections 8-50-103 and
4-21-401, et seq. and any other applicable state laws concerning my employment.
I intend this Agreement to be binding upon myself, my estate, heirs and
assignees. I understand and agree that if I breach this Agreement or if I file
any claim or lawsuit against the Company seeking any equitable relief, all
payments and benefits provided herein shall cease, and I or my estate shall be
required to reimburse the Company for all payments and benefits I received
under this Agreement prior to such time, including attorneys' fees incurred by
the Company.
In consideration of the foregoing, the Company hereby agrees and
covenants:
a. Upon the condition that I continue to satisfactorily complete my
duties with the Company until, and if, I am not offered continued employment
with the Company and my employment is thereafter terminated, the Company will
pay me severance pay of twelve months at my regular salary, such payments to
commence with the first regularly scheduled pay period following my separation
date.
b. To continue my group health insurance coverage at my current premium
rate for a period of twelve months following my termination if I elect to
continue such coverage under COBRA. Any applicable coverage available under
COBRA subsequent to the initial 12 month period will be at my discretion and I
will pay the prevailing COBRA premiums for such coverage.
c. To provide me with up to 24 hours of outplacement service from Russell
Montgomery.
d. To pay all accrued but unused vacation pay owing to me.
<PAGE> 2
e. To accelerate vesting of all stock options I may presently hold
immediately subsequent to my separation date.
I have carefully read and fully understand all the provisions of this
Agreement, specifically including the general release of claims included in the
Agreement. I further acknowledge that this Agreement sets forth the entire
agreement between the Company and me. In addition, I acknowledge that I have
been given a period of at least twenty-one (21) days to consider this Agreement
and that I am advised that I have the right to consult with an attorney of my
choice during this period. Finally, I acknowledge that, in considering whether
to sign this Agreement, I have not relied upon any representation or statement
by anyone, either written or oral, not set forth in this document and that I
have not been threatened or coerced into signing this Agreement by any official
of the Company and that I have read, understand and fully and voluntarily
accept the terms of this Agreement.
EFFECTIVE DATE: I understand that this Agreement may be revoked by me at
any time during the seven (7) day period after I have signed it. This Agreement
shall not become effective until after the revocation period has expired and no
payment is required to be made until such period has expired.
DATED THIS 17th day of October, 1996.
By: /s/ Lonnie J. Stout II October 1, 1996
---------------------- ----------------
Lonnie J. Stout II Date
/s/ Richard D. May October 17, 1996
---------------------- ----------------
Richard D. May Date
2
<PAGE> 1
EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS J. ALEXANDER'S
CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------
DECEMBER 29 December 31 January 1
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Earnings per common and dilutive common equivalent share
Net income ............................................................. $7,208,000 $5,016,000 $4,830,000
========== ========== ==========
Adjustment of shares outstanding:
Weighted average shares outstanding .................................. 5,303,000 5,257,000 5,187,000
Net additional shares issuable, based on the treasury
stock method ....................................................... 167,000 221,000 194,000
---------- ---------- ----------
Adjusted shares outstanding .......................................... 5,470,000 5,478,000 5,381,000
========== ========== ==========
Per share amount ....................................................... $ 1.32 $ .92 $ .90
========== ========== ==========
Earnings per common share, assuming full dilution
Adjustment of net income:
Actual net income .................................................... $7,208,000 $5,016,000 $4,830,000
Add convertible subordinated debentures interest,
net of taxes ....................................................... 799,000 -- --
---------- ---------- ----------
Adjusted net income .................................................. $8,007,000 $5,016,000 $4,830,000
========== ========== ==========
Adjustment of shares outstanding:
Actual weighted average shares outstanding ........................... 5,303,000 5,257,000 5,187,000
Net additional shares issuable, based on the treasury
stock method ....................................................... 167,000 222,000 194,000
Assumed conversion of convertible subordinated
debentures ......................................................... 880,000 -- --
---------- ---------- ----------
Adjusted shares outstanding .......................................... 6,350,000 5,479,000 5,381,000
========== ========== ==========
Per share amount ....................................................... $ 1.26 $ .92 $ .90
========== ========== ==========
</TABLE>
(1) The computations of earnings per common and dilutive common equivalent
share and earnings per common share, assuming full dilution, are based
on the weighted average number of common shares outstanding each period
after considering the effect of stock options using the treasury stock
method. Earnings per common share assuming full dilution also include
the assumption, when dilutive, that convertible subordinated debentures
were converted at the beginning of the period, and net earnings were
adjusted for the interest thereon net of its tax effect (the
if-converted method). The if-converted method was not utilized for the
1995 and 1994 calculations, as its impact would have been
anti-dilutive.
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
J. Alexander's Corporation (formerly Volunteer Capital Corporation)
operated 14 J. Alexander's full-service,casual dining restaurants at December
29, 1996. During 1996 the Company sold substantially all the assets of its
Wendy's Old Fashioned Hamburgers restaurants. This included the sale of 52 of
its 58 Wendy's restaurants to Wendy's International, Inc. in November 1996.
The remaining six restaurants have been sold or closed.
Income before income taxes of $11,451,000 for 1996 included a $9,400,000
gain on the divestiture of the Company's Wendy's operations. Income before
income taxes for 1995 was $3,458,000. Restaurant operating income in the J.
Alexander's division increased by $1,427,000, or 39%, in 1996, more than
offsetting a $922,000 decline in the Wendy's division during the same period.
This net increase in restaurant operating income combined with the gain on
the sale of the Wendy's restaurant operations, more than offset $1,167,000 of
increased general and administrative expenses and $745,000 of additional
other expense (net interest expense plus other income). Net income in 1996
included a federal income tax provision approximating the federal statutory
rate.
Income before income taxes increased by $400,000, or 13%, in fiscal 1995
as compared to 1994. Restaurant operating income in the J. Alexander's
division increased by $1,643,000, or 83%, over 1994, more than offsetting a
$307,000 decline in the Wendy's division during the same period, $845,000 of
increased general and administrative expenses and $91,000 of additional other
expenses. Net income for 1995 and 1994 included deferred income tax benefits
totalling $1,782,000 and $2,100,000, respectively, associated with the
recognition of deferred tax assets for financial reporting purposes.
Following the divestiture of the Wendy's restaurant operations, the
operating revenues of the Company will be significantly reduced. As indicated
in the tables below, the Wendy's division generated restaurant operating
income of $7,170,000 on sales of $48,774,000 for 1996. Management reached the
decision to sell the Wendy's operations because it believed focusing all of
the Company's capital and resources exclusively on casual dining offers the
greatest potential for long-term return for its shareholders. However, the
divestiture is expected to have a negative impact on earnings for the next
twelve to eighteen months before the lost revenue and operating income from
the Wendy's operations can be replaced by the development of new J.
Alexander's restaurants. Also, general and administrative expenses are not
expected to decrease in proportion to the reduction in revenues and operating
profits from the Wendy's divestiture since a large portion of these costs is
related to the ongoing development of J. Alexander's restaurants.
J. ALEXANDER'S RESTAURANT OPERATIONS
The Company operated fourteen J. Alexander's restaurants at December 29,
1996, compared with nine at December 31, 1995, and five at January 1, 1995.
J. Alexander's Corporation and Subsidiaries
17
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company intends to continue to develop new J. Alexander's restaurants at a
significant rate. It is management's objective, however, to manage this growth
at a pace which can be supported not only by the Company's ability to locate
and acquire acceptable sites and provide the long-term capital resources needed
for development, but also by its ability to recruit and develop highly
qualified management personnel capable of providing the outstanding levels of
food and service which management believes are critical to J. Alexander's
success.
Results of the J. Alexander's restaurant operations before allocation of
other income, corporate overhead and net interest expense were as follows:
<TABLE>
<CAPTION>
Years Ended
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 29, 1996 December 31, 1995 January 1, 1995
- -----------------------------------------------------------------------------------------------------------
% % %
Amount of Sales Amount of Sales Amount of Sales
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $42,105 100.0% $25,594 100.0% $14,704 100.0%
Restaurant costs and expenses:
Cost of sales 14,711 34.9 9,095 35.5 5,244 35.7
Labor and related costs 13,152 31.2 7,748 30.3 4,581 31.2
Depreciation and amortization of restaurant
property and equipment 1,884 4.5 1,033 4.0 540 3.6
Other operating expenses 7,312 17.4 4,099 16.0 2,363 16.1
- -----------------------------------------------------------------------------------------------------------
37,059 88.0 21,975 85.9 12,728 86.6
- -----------------------------------------------------------------------------------------------------------
Restaurant operating income $5,046 12.0% $ 3,619 14.1% $ 1,976 13.4%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
1996 COMPARED TO 1995
Net sales for the J. Alexander's restaurants increased 65% in 1996 as
compared to 1995, due primarily to the opening of new restaurants. Same store
sales, which include comparable sales for all restaurants open for more than
twelve months, averaged $81,400 per restaurant per week in 1996 on a base of
eight restaurants, a 5.9% increase over $76,900 in 1995. The Company
estimates that menu prices increased approximately 5% in 1996 and believes that
the sales increases noted above reflect continued acceptance and recognition by
consumers of the high level of food quality and service which J. Alexander's
provides its guests.
Restaurant operating margins for the eight restaurants open for more
than twelve months showed significant improvement to 16.9% in 1996 from
14.7% in 1995. This improvement was primarily due to lower food and labor costs
achieved as sales volumes increased and operations of the restaurants matured
and became more efficient. Restaurant operating margins for all restaurants
decreased from 14.1% in 1995 to 12.0% in 1996 due to the effect of new
restaurants. In order to maximize the quality of guest service and successfully
complete the extensive training and support of J. Alexander's staff, there is
typically little or no advertising or promotion of new J. Alexander's restaurant
openings. Management believes that this "quiet opening" approach enhances guest
experiences and contributes significantly to increases in same store sales over
a long period of time. Due to the slow building nature of sales and the emphasis
placed on training and quality of operations during the opening months of
operation, the financial performance of new restaurants typically trails that of
more mature restaurants and the Company expects newly opened restaurants to
experience operating losses in their initial months of operation. As a result,
all operating cost categories, with the exception of food cost, increased as a
percentage of sales in 1996, as compared to 1995, due to the effect of the five
new restaurants which opened in 1996. Food costs decreased as a percentage of
sales in 1996, as compared to 1995, due primarily to management emphasis on
cost control which included negotiated purchases of beef and other foods at
lower prices in 1996.
J. Alexander's Corporation and Subsidiaries
18
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1995 COMPARED TO 1994
Net sales for the J. Alexander's restaurants increased 74% in 1995 as
compared to 1994, due primarily to the opening of new restaurants. Same
store sales, on a base of five restaurants, averaged $79,400 per week, a 9.4%
increase from $72,600 in 1994. The Company estimates that menu prices increased
approximately 5% in 1995.
Cost of sales decreased as a percentage of sales in 1995 compared to
1994, as the favorable effect of increased menu prices and improved
efficiency in the two restaurants opened in 1994 more than offset higher
costs associated with the start-up of operations at the four restaurants
which opened in 1995.
Restaurant labor and related costs decreased as a percentage of sales in
1995 compared to 1994, due in large part to the favorable effect of increased
menu prices. This factor, combined with the effect of sales increases at the
Columbus and Oak Brook restaurants which opened in 1994, more than offset
higher benefits expense and higher costs associated with the start-up of
operations at the restaurants opened in 1995.
Other restaurant operating expenses decreased slightly as a percentage of
sales in 1995, primarily reflecting operating efficiencies achieved at higher
sales levels and the favorable effects of increased menu prices, which more
than offset additional rent expense related to the Ft. Lauderdale and Toledo
restaurants and other operating expenses associated with the opening of the
four restaurants in 1995.
WENDY'S RESTAURANT OPERATIONS
Results of the Company's Wendy's restaurant operations before allocation
of other income, corporate overhead and net interest expense are set forth in
the following table. Results for 1996 include the period through November 21,
1996.
<TABLE>
<CAPTION>
Years Ended
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 29, 1996 December 31, 1995 January 1, 1995
- -----------------------------------------------------------------------------------------------------------
% % %
Amount of Sales Amount of Sales Amount of Sales
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $48,774 100.0% $53,694 100.0% $50,991 100.0%
Restaurant costs and expenses:
Cost of sales 17,258 35.4 18,612 34.7 17,583 34.5
Labor and related costs 14,222 29.2 15,407 28.7 14,391 28.3
Depreciation and amortization of restaurant
property and equipment 1,074 2.2 1,907 3.5 1,694 3.3
Royalties 1,952 4.0 2,149 4.0 2,041 4.0
Other operating expenses 7,098 14.6 7,527 14.0 6,883 13.5
- -----------------------------------------------------------------------------------------------------------
41,604 85.3 45,602 84.9 42,592 83.5
- -----------------------------------------------------------------------------------------------------------
Restaurant operating income $ 7,170 14.7% $ 8,092 15.1% $ 8,399 16.5%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
J. Alexander's Corporation and Subsidiaries
19
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In November 1996, the Company sold 52 of its Wendy's Old Fashioned
Hamburgers restaurants to Wendy's International, Inc. for $28.3 million in
cash plus the assumption of capitalized lease obligations and long-term
debt totalling approximately $2.5 million. The remaining six restaurants have
been sold or closed. The Company operated 58 Wendy's restaurants at December
31, 1995 and 55 restaurants at January 1, 1995.
Total Wendy's sales decreased by $4,920,000, or 9.2%, in 1996 as
compared to 1995, due primarily to the sale of substantially all of the
Wendy's restaurant operations in November 1996. Sales related to the Wendy's
restaurant operations increased by 5.3% in 1995 as compared to 1994, with the
increase attributable entirely to new units. Since mid-1994, continued
competition in the quick-service restaurant industry in general and intense
retail price competition by other major hamburger chains in particular
adversely impacted weighted average sales per unit which decreased by 0.7% in
1996 and 1.5% in 1995. The continuation of this trend, and the continued
development of new Wendy's restaurants by other franchisees in certain of the
Company's market areas were significant factors in management's decision to
divest of its Wendy's operations during 1996.
As a percentage of sales, restaurant operating income in the Wendy's
division decreased from 15.1% in 1995 to 14.7% in 1996, as increases in
cost of sales, labor and other operating expenses more than offset a decrease in
depreciation expense. Under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," no depreciation or amortization
expense related to the Wendy's assets held for disposal was recorded during the
last half of 1996. Restaurant operating income decreased from 16.5% of sales in
1994 to 15.1% in 1995, primarily due to an increase in the cost of paper
supplies, the combined effect of increased wages and a decline in weighted
average sales per unit, and increased rent associated with new unit development.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, which include all costs above the
restaurant level as well as amortization of pre-opening expenses for both
the Wendy's and J. Alexander's operations, were 9.5% of sales in 1996 and
9.4% of sales in 1995. Actual general and administrative expenditures increased
by $1,167,000 in 1996 as compared to 1995, primarily due to an increase of
approximately $950,000 in amortization of pre-opening costs associated with
development of new J. Alexander's restaurants. Approximately $450,000 of the
increase in pre-opening amortization was the result of a change in the
Company's amortization period for pre-opening costs from 24 months to 12 months
during the fourth quarter of 1996. Total pre-opening cost amortization was
$1,503,000, $658,000 and $342,000 for 1996, 1995 and 1994, respectively. As a
percent of sales, general and administrative expenses decreased to 9.4% in 1995
from 10.0% in 1994, principally reflecting efficiencies achieved at higher
sales levels. General and administrative expenses directly related to the
Company's Wendy's operations were $2,625,000, $2,999,000 and $2,913,000 in
1996, 1995 and 1994, respectively.
OTHER INCOME (EXPENSE)
Interest expense increased by $231,000 in 1996 as compared to 1995, as
interest related to borrowings under the Company's line of credit agreement
more than offset an increase in interest expense capitalized in connection
with new restaurant development. Interest expense decreased by $209,000 in
1995 as compared to 1994, principally due to an increase in capitalized
interest expense as a result of an increased number of store openings in
1995.
Interest income decreased by $472,000 in 1996 as compared to 1995, and
by $275,000 in 1995 as compared to 1994 primarily due to decreased investment
balances resulting from the development of new restaurants.
Expenses associated with the write-off of restaurant facilities and
equipment that have been replaced in connection with various remodeling
projects are reflected in "Other, net".
J. Alexander's Corporation and Subsidiaries
20
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities represents a primary source of
liquidity for the Company and is also expected to be a resource for meeting
future capital needs. The Company's cash flow from operations totalled
$3,393,000, $7,586,000 and $5,706,000 in fiscal years 1996, 1995 and 1994,
respectively. In addition, as a result of the sale of its Wendy's operations,
the Company had cash and cash equivalents of $12,549,000 at December 29, 1996.
The Company's primary investing activity has historically been capital
expenditures for the development and maintenance of its restaurants. Capital
expenditures totalled $22,589,000, $20,255,000 and $11,276,000 for 1996, 1995
and 1994, respectively.
Capital expenditures for J. Alexander's restaurants totalled $20,605,000,
$15,503,000 and $7,368,000 in 1996, 1995 and 1994, respectively, and were
primarily for the development of new restaurants. Capital expenditures for the
Wendy's division were $1,717,000, $4,640,000 and $3,868,000 for 1996, 1995 and
1994, respectively, and included facilities upgrades and miscellaneous
equipment replacements as well as the development of three new restaurants in
both 1995 and in 1994.
Management expects the primary needs for capital resources in the future
will be for the development of new J. Alexander's restaurants and for
the maintenance of existing restaurants. Management may also consider
acquisitions of additional restaurants similar to J. Alexander's.
The Company plans to open five J. Alexander's restaurants in 1997, four of
which are currently under development in Tampa, Florida; Denver, Colorado; San
Antonio, Texas; and Livonia, Michigan. The Company estimates that its capital
expenditures for 1997 will total approximately $22,000,000. The capital
expenditures for restaurants include the cost of constructing and equipping the
restaurant and, if the land on which a restaurant is located is purchased, the
cost of purchasing the land and associated site work. Based upon the Company's
cost experience in developing restaurants and the Company's current estimates
of cost levels, the Company believes that the cost of constructing a J.
Alexander's building will range from approximately $1,650,000 to $1,850,000.
The Company is also developing a lower cost building, anticipated to range from
$1,300,000 to $1,400,000, for use in selected markets beginning in 1998.
The Company estimates that the cost of equipping a J. Alexander's restaurant
will range from $650,000 to $700,000. Currently, the principal variable in the
cost of a restaurant is the decision to own or lease a restaurant site and if a
decision is made to own the site, the cost of land in the proposed market. In
general, the Company prefers to own its sites because of the long-term value of
owning such an asset. For restaurants opened during 1996, the cost of land
ranged from $800,000 to $1,200,000. In addition, site preparation and
improvement costs are expected to range from approximately $275,000 to $350,000
per restaurant. Management estimates that pre-opening costs will range from
$250,000 to $300,000 per restaurant.
J. Alexander's Corporation and Subsidiaries
21
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company does not have significant capital needs for purposes other
than restaurant development. Maturities of long-term debt through 1997 are
relatively small because the Company has previously purchased
in the market a sufficient amount of its convertible subordinated debentures
to meet sinking fund requirements through that date. Further, since
requirements for funding accounts receivable and inventories are relatively
small, the Company does not have significant working capital needs. The
Company obtained a $30,000,000 line of credit during the third quarter of
1995 and began using a portion of this line to fund restaurant development
during the first quarter of 1996. The Company utilized a portion of the
$28,764,000 in proceeds from the sale of its Wendy's restaurant operations to
pay off the $12,544,000 balance outstanding under the line of credit
agreement and there was no balance outstanding as of December 29, 1996.
Borrowings under the agreement become due on July 1, 1998 unless the Company
exercises its option to convert amounts outstanding under the line of credit
to a seven year term loan.
The Company believes that existing cash and cash equivalents, together
with cash flow from operations and amounts available for borrowing under its
line of credit, will be sufficient to fund the development of its J.
Alexander's restaurants for all of 1997 and a portion of 1998.
INCOME TAXES
Under the provisions of SFAS No. 109 "Accounting for Income Taxes", the
Company had gross deferred tax assets of $4,285,000 and $6,006,000 and gross
deferred tax liabilities of $1,492,000 and $470,000 at December 29, 1996 and
December 31, 1995, respectively. The deferred tax assets at December 29, 1996
relate primarily to $2,846,000 of net operating loss carryforwards and
$1,840,000 of tax credit carryforwards available to reduce future federal
income taxes.
The recognition of deferred tax assets depends on the anticipated
existence of taxable income in future periods in amounts sufficient to
realize the assets. A valuation allowance must be used to reduce the deferred
tax asset if such future income is not likely to be generated. In 1995 and
1994, the beginning of the year valuation allowance was reduced by $2,085,000
(of which $303,000 was credited to additional paid-in capital) and
$2,100,000, respectively, reflecting a change in circumstances which resulted
in a judgment that a corresponding amount of the Company's deferred tax
assets will be realized in future years. The valuation allowance decreased
by $3,071,000 (including the $2,085,000 decrease discussed above) and
$2,659,000 (including the $2,100,000 decrease discussed above) during 1995
and 1994, respectively, as the result of changes in the deferred tax items.
In 1995, management concluded that future taxable income should be sufficient
to realize all of the Company's deferred tax assets based on the projected
future earnings of the Company, and therefore, a valuation allowance was not
established as of December 31, 1995 and such an allowance has not been deemed
necessary during 1996. Approximately $8.2 million of future taxable income
would be needed to realize the $2,793,000 net deferred tax asset at December
29, 1996. The Company's tax credit carryforwards expire in the years 1998
through 2001 while the net operating loss carryforwards expire in the years
2000 through 2004.
Due to the Company's having recognized all of its deferred tax assets in
1995, earnings for the year ended December 29, 1996 were taxed at an
effective rate of 37.1%. As a result of the Wendy's disposal, and due to the
impact of Federal FICA tax credits for tipped wages, management anticipates
that earnings for 1997 will be taxed at an effective rate of approximately
25%.
J. Alexander's Corporation and Subsidiaries
22
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
IMPACT OF ACCOUNTING CHANGES
There are no pending accounting pronouncements that, when adopted, are
expected to have a material effect on the Company's results of operations or
its financial condition.
IMPACT OF INFLATION AND OTHER FACTORS
Virtually all of the Company's costs and expenses are subject to normal
inflationary pressures and the Company is continually seeking ways to
cope with their impact. By owning a number of its properties, the Company avoids
certain increases in occupancy costs. New and replacement assets will likely be
acquired at higher costs but this will take place over many years. In general,
the Company tries to offset increased costs and expenses through additional
improvements in operating efficiencies and by increasing menu prices over time,
as permitted by competition.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis provides information which
management believes is relevant to an assessment and understanding of
the Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto. All references are to fiscal years unless
otherwise noted.The forward-looking statements included in Management's
Discussion and Analysis of Financial Condition and Results of Operations
relating to certain matters involve risks and uncertainties, including
anticipated financial performance, business prospects, anticipated capital
expenditures and other similar matters, which reflect management's best judgment
based on factors currently known. Actual results and experience could differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements as a result of a number of factors,
including but not limited to those discussed in the Company's Annual Report on
Form 10-K. Forward-looking information provided by the Company pursuant to the
safe harbor established under the Private Securities Litigation Reform Act of
1995 should be evaluated in the context of these factors. In addition, the
Company disclaims any intent or obligation to update these forward-looking
statements.
J. Alexander's Corporation and Subsidiaries
23
<PAGE> 8
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended
- ----------------------------------------------------------------------------------
December 29 December 31 January 1
1996 1995 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $90,879,000 $79,288,000 $65,695,000
Costs and expenses:
Cost of sales 31,969,000 27,707,000 22,827,000
Restaurant labor and related costs 27,374,000 23,155,000 18,972,000
Depreciation and amortization of restaurant
property and equipment 2,958,000 2,940,000 2,234,000
Royalties 1,952,000 2,149,000 2,041,000
Other operating expenses 14,410,000 11,626,000 9,246,000
- ----------------------------------------------------------------------------------
Total restaurant operating expenses 78,663,000 67,577,000 55,320,000
- ----------------------------------------------------------------------------------
Income from restaurant operations 12,216,000 11,711,000 10,375,000
General and administrative expenses 8,603,000 7,436,000 6,591,000
Gain on Wendy's disposition 9,400,000 -- --
- ----------------------------------------------------------------------------------
Operating income 13,013,000 4,275,000 3,784,000
- ----------------------------------------------------------------------------------
Other income (expense):
Interest expense (1,647,000) (1,416,000) (1,625,000)
Interest income 107,000 579,000 854,000
Other, net (22,000) 20,000 45,000
- ----------------------------------------------------------------------------------
Total other income (expense) (1,562,000) (817,000) (726,000)
- ----------------------------------------------------------------------------------
Income before income taxes 11,451,000 3,458,000 3,058,000
Income tax (provision) benefit (4,243,000) 1,558,000 1,772,000
- ----------------------------------------------------------------------------------
Net income $ 7,208,000 $ 5,016,000 $ 4,830,000
- ----------------------------------------------------------------------------------
Earnings per share:
Primary $ 1.32 $ .92 $ .90
Fully diluted $ 1.26 $ .92 $ .90
- ----------------------------------------------------------------------------------
Weighted average number of shares:
Primary 5,470,000 5,478,000 5,381,000
Fully diluted 6,350,000 5,479,000 5,381,000
- ----------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
J. Alexander's Corporation and Subsidiaries
24
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 29 December 31
1996 1995
- ------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $12,549,000 $ 2,234,000
Short-term investments -- 505,000
Accounts and notes receivable, including current portion of direct
financing leases, net of allowances for possible losses 120,000 313,000
Inventories at lower of cost (first-in, first-out method) or market 534,000 848,000
Deferred income taxes 1,364,000 1,541,000
Net assets held for disposal 618,000 --
Prepaid expenses and other current assets 369,000 484,000
- ------------------------------------------------------------------------------------------------------------
Total Current Assets 15,554,000 5,925,000
OTHER ASSETS
Direct financing leases, net of unearned income of $146,000 and $245,000 at
December 29, 1996, and December 31, 1995, respectively, and current portion 293,000 379,000
Other 904,000 712,000
- ------------------------------------------------------------------------------------------------------------
1,197,000 1,091,000
Property and Equipment, at cost, less allowances for depreciation and amortization 47,016,000 46,915,000
Deferred Income Taxes 1,429,000 3,995,000
Deferred Charges, less accumulated amortization of $2,326,000
and $2,008,000 at December 29, 1996, and December 31, 1995, respectively 1,631,000 2,214,000
- ------------------------------------------------------------------------------------------------------------
$66,827,000 $60,140,000
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
<S> <C> <C>
Current Liabilities
Accounts payable $ 3,748,000 $ 3,704,000
Accrued expenses and other current liabilities 6,023,000 4,151,000
Current portion of long-term debt and obligations under capital leases 54,000 297,000
- ------------------------------------------------------------------------------------------------------------
Total Current Liabilities 9,825,000 8,152,000
Long-Term Debt and Obligations Under Capital Leases, (including $1,984,000
due to a related party at December 31, 1995) net of portion classified as current 15,930,000 18,512,000
Deferred Compensation and Other Deferred Credits 611,000 501,000
Stockholders' Equity
Common Stock, par value $.05 per share: Authorized l0,000,000 shares;
issued and outstanding 5,322,507 and 5,276,972 shares at
December 29, 1996, and December 31, 1995, respectively 266,000 264,000
Preferred Stock, no par value: Authorized 1,000,000 shares; none issued -- --
Additional paid-in capital 29,475,000 29,199,000
Retained earnings 11,748,000 4,540,000
- ------------------------------------------------------------------------------------------------------------
41,489,000 34,003,000
Note receivable -- Employee Stock Ownership Plan (1,028,000) (1,028,000)
- ------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 40,461,000 32,975,000
Commitments and Contingencies
- ------------------------------------------------------------------------------------------------------------
$66,827,000 $60,140,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
J. Alexander's Corporation and Subsidiaries
25
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
- -------------------------------------------------------------------------------------------------
December 31 December 31, January 1
1996 1995 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,208,000 $ 5,016,000 $ 4,830,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 3,096,000 3,033,000 2,317,000
Amortization of deferred charges 1,578,000 611,000 443,000
Employee Stock Ownership Plan expense -- 172,000 170,000
Gain on Wendy's disposition (9,400,000) -- --
Deferred income tax provision (benefit) 2,441,000 (1,782,000) (2,100,000)
Other, net 195,000 192,000 172,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 135,000 (147,000) (80,000)
Increase in inventories (78,000) (271,000) (70,000)
Decrease (increase) in prepaid expenses and
other current assets 115,000 (269,000) 63,000
Increase in deferred charges (1,377,000) (1,111,000) (773,000)
Increase in accounts payable 4,000 615,000 511,000
(Decrease)increase in accrued expenses and other
current liabilities (634,000) 1,432,000 207,000
Increase in deferred credits 110,000 95,000 16,000
- -------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 3,393,000 7,586,000 5,706,000
INVESTING ACTIVITIES
Proceeds from maturities and sales of investments 505,000 1,005,000 1,507,000
Purchase of property and equipment (22,132,000) (20,909,000) (10,376,000)
Proceeds from sale of Wendy's restaurant operations 28,764,000 -- --
Other, net (78,000) (37,000) (13,000)
- -------------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 7,059,000 (19,941,000) (8,882,000)
FINANCING ACTIVITIES
Proceeds under bank line of credit agreement 12,544,000 -- --
Payments under bank line of credit agreement (12,544,000) -- --
Payments on long-term debt and obligations
under capital leases (415,000) (393,000) (381,000)
Sale of stock and exercise of stock options 278,000 180,000 604,000
- -------------------------------------------------------------------------------------------------
Net Cash (Used) Provided by Financing Activities (137,000) (213,000) 223,000
Increase (Decrease) in Cash and Cash Equivalents 10,315,000 (12,568,000) (2,953,000)
Cash and cash equivalents at beginning of year 2,234,000 14,802,000 17,755,000
- -------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 12,549,000 $ 2,234,000 $ 14,802,000
- -------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
J. Alexander's Corporation and Subsidiaries
26
<PAGE> 11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Note
Receivable--
Employee
Additional Retained Stock Total
Outstanding Common Paid-In Earnings Ownership Stockholders'
Shares Stock Capital (Deficit) Plan Equity
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances at
January 2, 1994 5,117,249 $256,000 $28,120,000 $(5,306,000) $(1,370,000) $21,700,000
Exercise of stock options
and sale of stock under
Employee Stock
Purchase Plan 123,232 6,000 598,000 -- -- 604,000
Reduction of note
receivable --
Employee Stock
Ownership Plan -- -- -- -- 170,000 170,000
Net income -- -- -- 4,830,000 -- 4,830,000
- ---------------------------------------------------------------------------------------------------------
Balances at
January 1, 1995 5,240,481 262,000 28,718,000 (476,000) (1,200,000) 27,304,000
Exercise of stock
options, including
tax benefits, and sale
of stock under
Employee Stock
Purchase Plan 36,491 2,000 481,000 -- -- 483,000
Reduction of note
receivable --
Employee Stock
Ownership Plan -- -- -- -- 172,000 172,000
Net income -- -- -- 5,016,000 -- 5,016,000
- ---------------------------------------------------------------------------------------------------------
Balances at
December 31, 1995 5,276,972 264,000 29,199,000 4,540,000 (1,028,000) 32,975,000
Exercise of stock options,
including tax benefits,
and sale of stock under
Employee Stock
Purchase Plan 45,535 2,000 276,000 -- -- 278,000
Net income -- -- -- 7,208,000 -- 7,208,000
- ---------------------------------------------------------------------------------------------------------
Balances at
December 29, 1996 5,322,507 $266,000 $29,475,000 $11,748,000 $(1,028,000) $40,461,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
J. Alexander's Corporation and Subsidiaries
27
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made in the prior years' consolidated
financial statements to conform to the l996 presentation.
Fiscal Year: The Company's fiscal year ends on the Sunday closest to
December 31 and each quarter consists of thirteen weeks.
Cash Equivalents: Cash equivalents consist of highly liquid investments
with an original maturity of three months or less when purchased.
Investments: Short-term investments and investment securities consist
primarily of obligations of the U.S. Government and its agencies and
corporate notes and bonds with maturities of greater than three months.
Investments with maturities of greater than one year are classified as
long-term.
The aggregate fair value of short-term investments and investment
securities was approximately $511,000 at December 31, 1995. Cash equivalents
of $10,066,000 and $1,005,000 at December 29, 1996, and December 31, 1995,
respectively, consisted principally of commercial paper, banker's acceptances
and federal government agency securities and were carried at cost, which
approximates fair value.
Property and Equipment: Depreciation and amortization are provided on
the straight-line method over the following estimated useful lives:
buildings-20 to 25 years, restaurant and other equipment-three to l0 years,
and capital leases and leasehold improvements-lesser of life of assets or
terms of leases.
Deferred Charges: Costs in excess of net assets acquired are being
amortized over periods of 20 to 40 years using the straight-line method. Debt
issue costs are amortized principally by the interest method over the life of
the related debt. Wendy's Old Fashioned Hamburgers franchise costs were
amortized over 20 years using the straight-line method.
Income Taxes: The Company accounts for income taxes under the liability
method required by Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes". SFAS No. 109 requires
that deferred tax assets and liabilities be established based on the
difference between the financial statement and income tax bases of assets and
liabilities measured at tax rates that will be in effect when the differences
reverse. Realization of deferred tax assets, which relate primarily to
operating loss and tax credit carryforwards, is dependent on future earnings
from existing and new restaurants.
Earnings Per Share: The computations of earnings per share are based on
the weighted average number of common shares outstanding after considering
the effect of stock options using the treasury stock method. Shares issuable
upon the conversion of convertible subordinated debentures were included in
the 1996 computation of fully diluted earnings per share using the
"if-converted" method. Such shares have not been included for 1995 and 1994
as the effect of their inclusion would be antidilutive.
Pre-opening Costs: Costs of hiring and training personnel and certain
other costs relating to a new restaurant have historically been capitalized
and generally amortized over the restaurant's first 12 months (Wendy's) or 24
months (J. Alexander's) of operations. During the fourth quarter of 1996, the
Company changed its amortization period from 24 months to 12 months relative
to its J. Alexander's restaurants, resulting in approximately $450,000 of
additional pre-opening amortization during 1996. At December 29, 1996, and
December 31, 1995, pre-opening costs totalled $1,379,000 and $1,026,000,
respectively, net of accumulated amortization of $493,000 and $651,000.
J. Alexander's Corporation and Subsidiaries
28
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and
assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the
balance sheet for cash and cash equivalents approximates fair value.
SHORT-TERM INVESTMENT: At December 31, 1995, this investment was
classified as held to maturity and reported at amortized cost. Fair value
was estimated from quoted market prices.
LONG-TERM DEBT: The carrying amount of the Company's borrowings with
variable interest rates approximates their fair value. The fair value of
the Company's convertible subordinated debentures
was determined based on quoted market prices (see Note D). Due to the
immaterial amounts involved,
fair value of other fixed rate long-term debt was estimated to approximate
its carrying amount.
CONTINGENT LIABILITIES: In connection with the sale of its Mrs.
Winner's Chicken & Biscuit restaurant operations and the disposition of
its Wendy's restaurant operations, the Company remains secondarily
liable for certain real and personal property leases. The Company does not
believe it is practicable to estimate the fair value of these
contingencies and does not believe any significant loss is likely.
DEVELOPMENT COSTS: Certain direct and indirect costs are capitalized in
conjunction with acquiring and developing new J. Alexander's restaurant sites
and amortized over the life of the related building. Development costs
capitalized during 1996 and 1995 totalled $335,000 and $182,000,
respectively. No such costs were capitalized relative to J. Alexander's prior
to 1995.
SELF-INSURANCE: The Company is generally self-insured, subject to
stop-loss limitations, for losses and liabilities related to its group
medical plan and, for portions of 1994 through 1996, except for the state of
Ohio, for workers' compensation claims. Losses are accrued based upon the
Company's estimates of the aggregate liability for claims incurred using certain
estimation processes applicable to the insurance industry and, where applicable,
based on Company experience.
ADVERTISING COSTS: The Company charges costs of production and
distribution of advertising to expense at the time the costs are incurred.
Advertising expense was $1,778,000, $1,980,000 and $1,807,000 in 1996, 1995
and 1994, respectively.
STOCK BASED COMPENSATION: The Company accounts for its stock
compensation arrangements in accordance with Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees" and, accordingly,
typically recognizes no compensation expense for such arrangements.
USE OF ESTIMATES IN FINANCIAL STATEMENTS: Judgment and estimation are
utilized by management in certain areas in the preparation of the Company's
financial statements. Some of the more significant areas include reserves for
self-insurance of group medical claims and workers' compensation benefits and,
for 1996, accruals related to the exit of the Wendy's business. Management
believes that such estimates have been based on reasonable assumptions and that
such reserves are adequate.
IMPAIRMENT: In March 1995, the FASB issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (SFAS No. 121), which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Accordingly, when indicators
of impairment are present, the Company periodically evaluates the carrying
value of property and equipment and intangibles.
J. Alexander's Corporation and Subsidiaries
29
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B--SALE OF WENDY'S RESTAURANT OPERATIONS
In November 1996, the Company sold 52 of its 58 Wendy's Old Fashioned
Hamburgers restaurants to Wendy's International, Inc. (WI) for $28.3 million
in cash plus the assumption of capitalized lease obligations and long-term
debt totalling approximately $2.5 million. This transaction generated a
pre-tax gain of $9.4 million. Of the six restaurants not sold as part of the
November 1996 transaction, four were closed, one was destroyed by fire and
one was purchased by WI in February 1997 for approximately $300,000 in cash.
In accordance with Emerging Issues Task Force Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity,"the Company recorded expenses totalling $542,000 during the
third quarter of 1996 relative to accrued termination benefits ($450,000) and
accrued liabilities associated with the settlement of lease obligations.
Management provided for 21 employees eligible for termination benefits as a
result of the Company's exit from the Wendy's business. The Company recorded
additional costs during the fourth quarter of 1996 including provisions for
additional sevrance, insurance claims and other expenses and contingencies
totalling approximately $1,849,000 which were included in the determination of
the gain on the sale of the Wendy's restaurant operations. During the fourth
quarter of 1996, the Company paid $987,000 related to the exit of the Wendy's
business. At December 29, 1996, the Company maintains accruals related to the
exit of the Wendy's business totalling $2,029,000.
In accordance with SFAS No. 121, the assets held for disposal have been
measured at the lower of carrying amount or fair value less the estimated cost
to sell. Under the provisions of SFAS No. 121, depreciation and amortization
are not recorded during the period in which assets are being held for disposal.
Accordingly, no depreciation expense was recorded subsequent to July 3, 1996,
the measurement date for the transaction, relative to assets utilized in the
Wendy's operations.
The unaudited pro forma information for the periods set forth below give
effect to the transaction as if it had occurred at the beginning of each
period.The pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the sale of Wendy's restaurant operations been
consummated as of that time.
<TABLE>
<CAPTION>
Years Ended
------------------------
December 29 December 31
1996 1995
- ------------------------------------------------------
<S> <C> <C>
Net sales $42,105,000 $25,594,000
Net (loss) income $ (956,000) $ 2,230,000
(Loss) earnings per share $ (.18) $ .41
- ------------------------------------------------------
</TABLE>
J. Alexander's Corporation and Subsidiaries
30
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C-PROPERTY AND EQUIPMENT
Balances of major classes of property and equipment are as follows:
<TABLE>
<CAPTION>
December 29 December 31
1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 9,696,000 $ 9,810,000
Buildings 21,482,000 22,049,000
Buildings under capital leases 276,000 3,193,000
Leasehold improvements 5,901,000 10,910,000
Restaurant and other equipment 10,165,000 17,119,000
Construction in progress (estimated additional cost to complete at
December 29, 1996, $4,610,000) 4,063,000 4,495,000
- ---------------------------------------------------------------------------------------------
51,583,000 67,576,000
Less allowances for depreciation and amortization 4,567,000 20,661,000
- ---------------------------------------------------------------------------------------------
$47,016,000 $46,915,000
- ---------------------------------------------------------------------------------------------
</TABLE>
NOTE D--LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and obligations under capital leases at December 29,
1996, and December 31, 1995, are summarized below:
<TABLE>
<CAPTION>
December 29, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------
Current Long-Term Current Long-Term
<S> <C> <C> <C> <C>
Convertible Subordinated Debentures,
8.25%, due 2003 $ -- $15,614,000 $ -- $15,614,000
Mortgage and installment notes, at fixed and variable
interest rates, ranging from 9.75% to 12.00%,
secured by properties with a carrying value
of $2,655,000 at December 31, 1995 -- -- 33,000 2,011,000
Obligations under capital leases, 9.75% to
11.50% interest, payable through 2005 54,000 316,000 264,000 887,000
- -----------------------------------------------------------------------------------------------------
$54,000 $15,930,000 $297,000 $18,512,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
Required sinking fund payments for the five years succeeding December
29, 1996, are as follows: 1997 - none; 1998 - $1,864,000; 1999 - $1,875,000;
2000 - $1,875,000; 2001 - $1,875,000.
The Convertible Subordinated Debentures due 2003 are convertible into
common stock of the Company at any time prior to maturity at $17.75 per
share, subject to adjustment in certain events. At December 29, 1996, 879,662
shares of common stock were reserved for issuance upon conversion of the
outstanding debentures. The debentures are redeemable upon not less than 30
days' notice at the option of the Company, in whole or in part, at 100% of
the principal amount, together with accrued interest to the redemption date.
The effective interest rate on the debentures is 8.68%. The Debenture
Indenture provides for annual sinking fund payments commencing June 1, 1993,
which will retire at least 75% of the original $25,000,000 principal amount
of debentures prior to maturity. The Company has previously purchased a
portion of the debentures on the open market which, pursuant to the terms of
the Debenture Indenture, will be used in satisfaction of future sinking fund
requirements and are sufficient to satisfy those requirements through 1997.
J. Alexander's Corporation and Subsidiaries
31
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1995, the Company entered into an unsecured bank line of credit
agreement which provides for up to $30,000,000 of revolving credit for the
purpose of financing future capital expenditures. Interest is payable monthly
with the interest rate, at the Company's option, at the bank's prime rate or
the bank's LIBOR rate plus 1.5% or 2.5%, depending on compliance with certain
ratios set forth in the agreement. In addition, a fee of 1/4% on any unused
portion of the facility is payable on a quarterly basis. All amounts due
under the agreement become due July 1, 1998, unless the Company exercises its
option to convert amounts outstanding under the line of credit to a seven
year term loan. The agreement requires the Company to meet certain
restrictive financial and other covenants, including limitation on other
borrowing, all of which were met at both December 29, 1996 and December 31,
1995. No borrowings were outstanding under the agreement as of December 29,
1996 or December 31, 1995.
Cash interest payments amounted to $2,033,000 , $1,732,000 and
$1,728,000, in 1996, 1995 and 1994, respectively. Interest costs of $386,000,
$316,000 and $118,000 were capitalized as part of building and leasehold
costs in 1996, 1995, and 1994, respectively.
The carrying value and estimated fair value of the Company's long-term
debt totalled $15,614,000 and $15,146,000, respectively, at December 29,
1996.
NOTE E -- LEASES
At December 29, 1996, the Company was lessee under both ground leases
(the Company leases the land and builds its own buildings) and improved
leases (lessor owns the land and buildings) for restaurant locations. These
leases are operating leases except for the building portions of the improved
leases which are typically capital leases.
Real estate lease terms are generally for 15 to 25 years and, in many
cases, provide for rent escalations and for one or more five-year renewal
options. The Company is generally obligated for the cost of property taxes,
insurance and maintenance. Certain real property leases provide for contingent
rentals based upon 5% of net sales. In addition, the Company is lessee under
other noncancelable operating leases, principally for office space.
Accumulated amortization of buildings under capital leases totalled
$201,000 at December 29, 1996, and $2,736,000 at December 31, 1995.
Amortization of leased assets is included in depreciation and amortization
expense.
Total rental expense amounted to:
<TABLE>
<CAPTION>
Years Ended
- ------------------------------------------------------------------------------
December 29 December 31 January 1
1996 1995 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals under operating leases $1,996,000 $1,800,000 $1,292,000
Contingent rentals 366,000 395,000 404,000
Less: Sublease rentals (264,000) (313,000) (314,000)
- ------------------------------------------------------------------------------
$2,098,000 $1,882,000 $1,382,000
- ------------------------------------------------------------------------------
</TABLE>
J. Alexander's Corporation and Subsidiaries
32
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 29, 1996, future minimum lease payments under capital leases
and noncancelable operating leases with initial terms of one year or more are
as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
- -------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 92,000 $ 934,000
1998 89,000 940,000
1999 69,000 915,000
2000 56,000 922,000
2001 56,000 932,000
Thereafter 173,000 8,960,000
- -------------------------------------------------------------------------------
Total minimum payments 535,000 $13,603,000
- -------------------------------------------------------------------------------
Less imputed interest (165,000)
- -------------------------------------------------------------------------------
Present value of minimum rental payments 370,000
- -------------------------------------------------------------------------------
Less current maturities at December 29, 1996 (54,000)
- -------------------------------------------------------------------------------
Long-term obligations at December 29, 1996 $ 316,000
- -------------------------------------------------------------------------------
</TABLE>
Minimum future rentals receivable under subleases for operating leases
at December 29, 1996, amounted to $2,004,000.
In addition to the leases summarized above, the Company historically
leased five previously owned Wendy's restaurant properties from a corporation
principally owned by a Director of the Company and his wife at an aggregate
minimum annual rental of approximately $265,000 plus contingent rentals based
on sales. Contingent rent payments totalled $43,000, $49,000 and $54,000 in
1996, 1995 and 1994, respectively. These leases were assigned to WI in
November 1996.
NOTE F -- INCOME TAXES
At December 29, 1996, the Company had net operating loss carryforwards
of $2,846,000 for income tax purposes that expire in the years 2000 through
2004. Tax credit carryforwards (consisting primarily of investment tax
credits which expire in the years 1998 through 2001) of $1,840,000 are also
available to reduce future federal income taxes.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax liabilities and assets
as of December 29, 1996, and December 31, 1995, are as follows:
J. Alexander's Corporation and Subsidiaries
33
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 29 December 31
1996 1995
- ----------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 653,000 $ 26,000
Pre-opening costs 301,000 368,000
Other -- net 538,000 76,000
- ----------------------------------------------------------
Total deferred tax liabilities 1,492,000 470,000
- ----------------------------------------------------------
Deferred tax assets:
Capital/finance leases 8,000 107,000
Deferred compensation accruals 178,000 158,000
Self-insurance accruals 67,000 58,000
Wendy's disposition accruals 927,000 --
Net operating loss carryforwards 968,000 3,410,000
Tax credit carryforwards 1,840,000 1,999,000
Other -- net 297,000 274,000
- ----------------------------------------------------------
Total deferred tax assets 4,285,000 6,006,000
- ----------------------------------------------------------
Net deferred tax assets $2,793,000 $5,536,000
- ----------------------------------------------------------
</TABLE>
Management has evaluated the need for a valuation allowance for all, or
a portion of, the deferred tax assets for 1996 and believes that all of the
deferred tax assets will more likely than not be realized through the future
reversal of existing taxable temporary differences within the carryforward
period and the future earnings of the Company.
In 1995 and 1994, the beginning of the year valuation allowance was
reduced by $2,085,000 (of which $303,000 was credited to additional
paid-in capital) and $2,100,000, respectively, reflecting a change in
circumstances which resulted in a judgment that a corresponding amount of the
Company's deferred tax assets will be realized in future years. The valuation
allowance decreased by $3,071,000 (including the $2,085,000 decrease discussed
above) and $2,659,000 (including the $2,100,000 decrease discussed above) during
1995 and 1994, respectively, as the result of changes in the deferred tax items.
Significant components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
Years Ended
- ----------------------------------------------------------------------------
December 29 December 31 January 1
1996 1995 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $1,100,000 $ 80,000 $ 66,000
State 702,000 144,000 262,000
- ----------------------------------------------------------------------------
Total 1,802,000 224,000 328,000
Deferred 2,441,000 (1,782,000) (2,100,000)
- ----------------------------------------------------------------------------
Income tax provision (benefit) $4,243,000 $(1,558,000) $(1,772,000)
- ----------------------------------------------------------------------------
</TABLE>
J. Alexander's Corporation and Subsidiaries
34
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's consolidated effective tax rate differed from the federal
statutory rate as set forth in the following table:
<TABLE>
<CAPTION>
Years Ended
- ----------------------------------------------------------------------------------------------------
December 29 December 31 January 1
1996 1995 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense computed at federal statutory rate (34%) $3,893,000 $ 1,176,000 $ 1,040,000
State and local income taxes 463,000 144,000 262,000
Alternative minimum tax -- 80,000 66,000
Non-deductible expenses 121,000 19,000 23,000
Benefit of net operating loss carryforwards and tax credits (234,000) (1,195,000) (1,063,000)
Recognition of deferred tax assets -- (1,782,000) (2,100,000)
- ----------------------------------------------------------------------------------------------------
Income tax provision (benefit) $4,243,000 $(1,558,000) $(1,772,000)
- ----------------------------------------------------------------------------------------------------
</TABLE>
Income tax payments were $1,098,000, $175,000 and $338,000 in 1996, 1995
and 1994, respectively.
NOTE G -- STOCK OPTIONS AND BENEFIT PLANS
Under the Company's 1994 Employee Stock Incentive Plan, officers and key
employees of the Company may be granted options to purchase shares of the
Company's common stock. In addition, the 1990 Stock Option Plan for Outside
Directors provides for the granting of options to purchase the Company's
common stock at the fair market price at the date of the grant to members of
the Company's Board of Directors who are not employees. Options to purchase
the Company's common stock also remain outstanding under the Company's 1982
Incentive Stock Option Plan and 1985 Stock Option Plan, although the Company
no longer has the ability to issue additional shares under these plans.
A summary of options under the Company's option plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Shares Option Prices Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 2, 1994 427,056 $1.38-$10.50 $4.88
Issued 121,100 7.25-13.00 7.68
Exercised (106,366) 1.38-5.88 4.61
Expired or cancelled (366) 1.38-10.38 6.29
- -----------------------------------------------------------------------------------------------
Outstanding at January 1, 1995 441,424 1.38-13.00 5.71
Issued 146,700 7.56-9.75 9.63
Exercised (15,166) 1.38-7.63 1.95
Expired or cancelled (10,250) 7.25-11.50 9.39
- -----------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 562,708 1.38-13.00 6.85
Issued 5,000 9.88 9.88
Exercised (26,521) 1.38-7.25 4.96
Expired or cancelled (11,900) 7.25-10.38 9.20
- -----------------------------------------------------------------------------------------------
Outstanding at December 29, 1996 529,287 $1.38-$13.00 $6.83
- -----------------------------------------------------------------------------------------------
</TABLE>
J. Alexander's Corporation and Subsidiaries
35
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options exercisable and shares available for future grant are as follows:
<TABLE>
<CAPTION>
December 29 December 31 January 1
1996 1995 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options exercisable 380,734 313,393 257,109
Shares available for grant 228,850 226,450 368,100
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding at
December 29, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------
Number Number
Outstanding At Weighted Weighted Exercisable at Weighted
Range of December 29, Average Remaining Average Exercise December 29, Average
Exercise Prices 1996 Contractual Life Price 1996 Exercise Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.38-$3.81 172,503 2.5 years $ 1.97 172,503 $ 1.97
7.25- 7.88 120,934 6.2 years 7.43 67,996 7.45
9.75- 10.50 229,350 6.3 years 10.04 134,235 10.24
11.69- 13.00 6,500 7.3 years 11.99 6,000 11.91
- -------------------------------------------------------------------------------------------------------------
$1.38-$13.00 529,287 380,734
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Options exercisable at December 31, 1995 and January 1, 1995 had
weighted average exercise prices of $4.94 and $3.67, respectively.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock Based Compensation". This new standard
defines a fair value based method of accounting for an employee stock option or
similar equity instrument. This statement gives entities a choice of recognizing
related compensation expense by adopting the new fair value method or to
continue to measure compensation using the intrinsic value approach under
Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to
Employees," the former standard. The Company has elected to follow APB No. 25
and related Interpretations in accounting for its stock compensation plans
because, as discussed below, the alternative fair value accounting provided for
under SFAS No. 123 requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1995, respectively: risk-free
interest rates of 6.85% and 6.43%; no annual dividend yield; volatility
factors of .3812 and .3849 based on monthly closing prices since August,
1990; and an expected option life of 10 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.
J. Alexander's Corporation and Subsidiaries
36
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
Years Ended
------------------------
December 29 December 31
1996 1995
- ------------------------------------------------------
<S> <C> <C>
Pro forma net income $7,009,000 $4,889,000
Pro forma earnings per share
Primary $ 1.28 $ .89
Fully diluted $ 1.23 $ .89
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
1997. The weighted average fair value per share for options granted during
1996 and 1995 totaled $6.27 and $6.05, respectively.
The Company has an Employee Stock Purchase Plan under which 91,307
shares of the Company's common stock are available for issuance. Shares
issued under the plan totaled 19,014, 21,335 and 16,877, in 1996, 1995 and
1994, respectively.
The Company has a Salary Continuation Plan which provides retirement and
death benefits to certain key employees. The expense recognized under this
plan was $67,000, $61,000 and $54,000 in 1996, 1995 and 1994, respectively.
The Company has a Savings Incentive and Salary Deferral Plan under
Section 401(k) of the Internal Revenue Code which allows qualifying employees
to defer a portion of their income on a pre-tax basis through contributions
to the plan. All Company employees with at least 1,000 hours of service
during the twelve month period subsequent to their hire date, or any calendar
year thereafter, and who are at least 21 years of age are eligible to
participate. For each dollar of participant contributions, up to 3% of each
participant's salary, the Company makes a minimum 10% matching contribution
to the plan. For 1996, 1995 and 1994, the Company made a 20% matching
contribution to the plan and recognized expense of $24,000, $23,000 and
$19,000, respectively.
NOTE H -- EMPLOYEE STOCK OWNERSHIP PLAN
In 1992, the Company established an Employee Stock Ownership Plan (ESOP)
by purchasing 457,055 shares of Company common stock from the Massey Company,
a trust created by the late Jack C. Massey, the Company's former Board
Chairman, and the Jack C. Massey Foundation at $3.75 per share for an
aggregate purchase price of $1,714,000. The Company funded the ESOP by
loaning it an amount equal to the purchase price, with the loan secured by a
pledge of the unallocated stock held by the ESOP. Terms of the original ESOP
note call for repayment in ten annual principal payments of approximately
$172,000 plus interest on the outstanding principal balance at an annual rate
of 9%. The Company made contributions to the ESOP in 1995 and 1994, allowing
the ESOP to make its scheduled loan repayments to the Company and resulting
in annual net compensation expense to the Company of $172,000 and $170,000,
respectively, with corresponding reductions in the ESOP note receivable. The
note receivable from the ESOP has been reported as a reduction from the
Company's stockholders' equity.
Due to the sale of its Wendy's restaurant operations, the Company is in
the process of modifying its loan to the ESOP and elected not to make a
contribution to the ESOP in 1996. As a result, no ESOP expense was reflected
in 1996.
J. Alexander's Corporation and Subsidiaries
37
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All company employees with at least 1,000 hours of service during the
twelve month period subsequent to their hire date, or any calendar year
thereafter, and who are at least 21 years of age are eligible to participate.
The ESOP generally requires five years of service with the Company in order
for an ESOP participant's account to vest. Allocation of stock is made to
participants' accounts as the ESOP's loan is repaid and is in proportion to
each participant's compensation for each year. At December 29, 1996, and
December 31, 1995, 182,822 shares were allocated under the ESOP.
For purposes of computing earnings per share, the shares originally
purchased by the ESOP are included as outstanding shares in the weighted
average share calculation.
NOTE I -- SHAREHOLDER RIGHTS PLAN
The Company's Board of Directors has adopted a shareholder rights plan
to protect the interests of the Company's shareholders if the Company is
confronted with coercive or unfair takeover tactics by encouraging third
parties interested in acquiring the Company to negotiate with the Board of
Directors.
The shareholder rights plan is a plan by which the Company has
distributed rights ("Rights") to purchase (at the rate of one Right per
share of common stock) one-hundredth of a share of no par value Series A Junior
Preferred (a "Unit") at an exercise price of $12.00 per Unit. The Rights are
attached to the common stock and may be exercised only if a person or group
acquires 20% of the outstanding common stock or initiates a tender or exchange
offer that would result in such person or group acquiring 10% or more of the
outstanding common stock. Upon such an event, the Rights "flip-in" and each
holder of a Right will thereafter have the right to receive, upon exercise,
common stock having a value equal to two times the exercise price. All Rights
beneficially owned by the acquiring person or group triggering the "flip-in"
will be null and void. Additionally, if a third party were to take certain
action to acquire the Company, such as a merger or other business combination,
the Rights would "flip-over" and entitle the holder to acquire shares of the
acquiring person with a value of two times the exercise price. The Rights are
redeemable by the Company at any time before they become exercisable for $0.01
per Right and expire in 1999. In order to prevent dilution, the exercise price
and number of Rights per share of common stock will be adjusted to reflect
splits and combinations of, and common stock dividends on, the common stock.
NOTE J -- COMMITMENTS AND CONTINGENCIES
As a result of the disposition of its Wendy's operations in 1996, the
Company remains secondarily liable for certain real property leases with
remaining terms of one to nineteen years. The total amount of lease payments
remaining on these leases at December 29, 1996 was approximately $6.6
million. In connection with the sale of its Mrs. Winner's Chicken & Biscuit
restaurant operations in 1989 and certain previous dispositions, the Company
remains secondarily liable for certain real and personal property leases with
remaining terms of one to nine years. The total amount of lease payments
remaining on these leases at December 29, 1996, was approximately $3.4 million.
Additionally, in connection with the previous disposition of certain other
Wendy's restaurant operations, primarily the southern California Wendy's
restaurants in 1982, the Company remains secondarily liable for certain real
property leases with remaining terms of three to ten years. The total amount of
lease payments remaining on these leases as of December 29, 1996, was
approximately $2.0 million.
The Company is a party to legal proceedings incidental to its business.
In the opinion of management, the ultimate liability with respect to these
actions will not materially affect the operating results or the financial
position of the Company.
J. Alexander's Corporation and Subsidiaries
38
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities included the following:
<TABLE>
<CAPTION>
December 29 December 31
1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Taxes, other than income taxes $ 802,000 $1,062,000
Salaries and wages 322,000 686,000
Insurance 754,000 710,000
Interest 120,000 120,000
Wendy's disposition accruals 2,029,000 --
Other 1,996,000 1,573,000
- ------------------------------------------------------------------------------------------------
$6,023,000 $4,151,000
- ------------------------------------------------------------------------------------------------
</TABLE>
NOTE L -- BUSINESS SEGMENTS
For the years ended December 29, 1996, December 31, 1995, and January 1,
1995, retail food operations constituted a dominant segment in accordance
with SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise."
J. Alexander's Corporation and Subsidiaries
39
<PAGE> 24
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
J. Alexander's Corporation
We have audited the accompanying consolidated balance sheets of J.
Alexander's Corporation (formerly Volunteer Capital Corporation) and
subsidiaries as of December 29, 1996 and December 31, 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three fiscal years in the period ended December 29, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of J.
Alexander's Corporation and subsidiaries at December 29, 1996 and December
31, 1995, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended December 29,
1996 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Nashville, Tennessee
March 4, 1997
J. Alexander's Corporation and Subsidiaries
40
<PAGE> 25
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for
the years ended December 29, 1996, and December 31, 1995 (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 Quarters Ended
- --------------------------------------------------------------------------------------
March 31 June 30 September 29 December 29
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $21,687 $23,369 $25,584 $20,239
Income from restaurant operations 2,792 3,233 3,812 2,379
Net income 306 525 370 (1) 6,007 (2)
Earnings per share:
Primary $ .06 $ .10 $ .07 $ 1.10
Fully diluted $ .06 $ .10 $ .07 $ .98
</TABLE>
<TABLE>
<CAPTION>
1995 Quarters Ended
- -----------------------------------------------------------------------------------
April 2 July 2 October 1 December 31
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $18,100 $20,005 $20,550 $20,633
Income from restaurant operations 2,684 2,940 3,090 2,997
Net income 688 913 984 2,431 (3)
Earnings per share:
Primary $ .13 $ .17 $ .18 $ .44
Fully diluted $ .13 $ .17 $ .18 $ .43
</TABLE>
(1) Includes expenses of $542 related to the disposal of Wendy's
restaurant operations. Also includes no depreciation for the Wendy's
restaurants, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," a reduction in
expense of $542.
(2) Includes pretax gain of $9,942 related to disposal of Wendy's
restaurant operations. Also includes no depreciation for the Wendy's
restaurants, a reduction in expense of $316, and an additional $458 in
pre-opening expense related a change in the amortization period for such
costs, from 24 months to 12 months, during the fourth quarter of 1996.
(3) Includes tax benefit of $1,782 related to recognition of deferred tax
assets in accordance with SFAS No. 109 "Accounting for Income Taxes."
J. Alexander's Corporation and Subsidiaries
41
<PAGE> 26
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Years Ended
- ------------------------------------------------------------------------------------------------------------
December 29 December 31 January 1 January 2 January 3
(Dollars in thousands, except per share data) 1996 1995 1995 1994 1993(5)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations
- ------------------------------------------------------------------------------------------------------------
Net sales $90,879 79,288 65,695 60,574 50,092
Income from restaurant operations $12,216 11,711 10,375 9,787 7,701
General and administrative expenses $ 8,603 7,436 6,591 5,683 5,057
Net income $ 7,208 (1) 5,016 (2) 4,830 (3) 4,301 (4) 2,064
Depreciation and amortization $ 4,674 3,644 2,760 2,394 1,942
Cash flow from operations $ 3,393 7,586 5,706 5,050 3,590
Capital expenditures $22,589 20,255 11,276 3,479 7,105
Financial Position
- ------------------------------------------------------------------------------------------------------------
Cash and investments $12,549 2,739 16,312 20,772 10,904
Property and equipment, net $47,016 46,915 29,776 20,989 19,604
Total assets $66,827 60,140 53,306 46,419 33,979
Long--term obligations $15,930 18,512 18,847 19,250 19,633
Stockholders' equity $40,461 32,975 27,304 21,700 7,950
Per Share Data
- ------------------------------------------------------------------------------------------------------------
Earnings per share -- primary $ 1.32 .92 .90 .93 .48
Earnings per share -- assuming full dilution $ 1.26 .92 .90 .93 .47
Stockholders' equity $ 7.60 6.25 5.21 4.24 1.94
Market price at year end $ 8 1/2 9 1/2 6 11 6 3/4
J. Alexander's Restaurant Data
- ------------------------------------------------------------------------------------------------------------
Net sales $42,105 25,594 14,704 10,816 3,545
Weighted average annual sales per unit $ 3,885 3,980 3,735 3,605 2,608
Units open at year end 14 9 5 3 3
</TABLE>
(1) Includes pre-tax gain of $9,400 related to the Company's divestiture of
its Wendy's restaurants during 1996.
(2) Includes tax benefit of $1,782 related to recognition of deferred tax
assets in accordance with Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" (SFAS No. 109).
(3) Includes tax benefit of $2,100 related to recognition of deferred tax
assets in accordance with SFAS No. 109.
(4) Includes tax benefit of $1,500 related to recognition of deferred tax
assets in accordance with SFAS No. 109.
(5) Due to the Company's fiscal year policy, fiscal year 1992 includes 53
weeks as compared to 52 weeks for the other years presented.
Note: The Company has never paid cash dividends on its common stock. Payment of
future dividends will be within the discretion of the Company's Board of
Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company.
J. Alexander's Corporation and Subsidiaries
42
<PAGE> 1
EXHIBIT 21 -- SUBSIDIARIES OF J. ALEXANDER'S CORPORATION
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY INCORPORATION
- ---------- -------------
<S> <C>
VCE Restaurants, Inc. Tennessee
J. Alexander's Restaurants, Inc. Tennessee
J. Alexander's Restaurants of Kansas, Inc. Kansas
</TABLE>
<PAGE> 1
EXHIBIT 23
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of J. Alexander's Corporation of our report dated March 4, 1997, included in the
1996 Annual Report to Shareholder's of J. Alexander's Corporation.
Our audits also include the financial statement schedule of J. Alexander's
Corporation listed in Item 14(a). The schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
We also consent to the incorporation by reference in the following J.
Alexander's Corporation Registration Statements:
a. Form S-8 Registration Statement (No. 33-77478) pertaining to the 1985 Stock
Option Plan, filed on May 25, 1994;
b. Form S-8 Registration Statement (No. 33-77476) pertaining to the 1994
Employee Stock Incentive Plan, filed on April 6, 1994;
c. Form S-8 Registration Statement (No. 33-39870) pertaining to the 1990 Stock
Option Plan for Outside Directors, filed April 9, 1991;
d. Form S-8 Registration Statement (No. 33-4483) pertaining to the 1985 Stock
Option Plan, filed on April 1, 1986;
e. Form S-8 Registration Statement (No. 2-78140) pertaining to the 1982
Incentive Stock Option Plan, filed on June 25, 1982; and
f. Form S-8 Registration Statement (No. 2-78139) pertaining to the 1982
Employee Stock Purchase Plan, filed on June 25, 1982;
of our report dated March 4, 1997, with respect to the consolidated financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included
in this Annual Report (Form 10-K) of J. Alexander's Corporation.
ERNST & YOUNG LLP
Nashville, Tennessee
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 29, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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0
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