<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 28, 1997.
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
incorporation or organization) Identification Number)
P.O. Box 24300
3401 West End Avenue
Nashville, Tennessee 37203
-------------------- -----
(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:
Name of each exchange
Title of Class: on which registered:
--------------- --------------------
Common stock, par value $.05 per share. New York Stock Exchange
Series A junior preferred stock purchase rights. New York Stock Exchange
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.
----
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 25, 1998, was $21,646,527, 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 25, 1998, was 5,421,298.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 Annual Meeting of
Shareholders to be held May 19, 1998, are incorporated by reference into Part
III.
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PART I
ITEM 1. BUSINESS
J. Alexander's Corporation (the "Company") operates as a proprietary
concept 19 J. Alexander's full-service, casual dining restaurants located in
Tennessee, Ohio, Florida, Kansas, Alabama, Michigan, Illinois, Colorado, Texas
and Kentucky. J. Alexander's is a traditional restaurant with an American menu
that features prime rib of beef; hardwood-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.
Prior to 1997, the Company was also 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. The six restaurants not acquired by
Wendy's International in November 1996 were sold or closed.
Unless the context requires otherwise, all references to the Company
include J. Alexander's Corporation and its subsidiaries.
J. ALEXANDER'S RESTAURANT OPERATIONS
General. J. Alexander's is a quality casual dining restaurant with a
contemporary American menu. 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 $20.95. The Company
estimates that the average check per customer, excluding alcoholic beverages, is
approximately $13.00. J. Alexander's net sales during fiscal 1997 were $57.1
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, five restaurants in
1996 and four restaurants in 1997. The Company plans to open two J. Alexander's
in 1998, one of which opened March 9, 1998 in Louisville, Kentucky.
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. 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, Corn-fed Choice Beef, aged a minimum of 21 days; 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.
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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
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 to 10 host persons and 6 to 8 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 of
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 factor
in 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 freestanding restaurant
building acquired by the Company. The J. Alexander's in Memphis, Tennessee
represents the Company's latest prototype design which it used for three of the
four 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 two J. Alexander's restaurants in 1998, one of
which opened March 9, 1998 in Louisville, Kentucky. The other new restaurant
scheduled to open in 1998 is currently under development in Baton Rouge,
Louisiana. The Company estimates that its capital expenditures for 1998 will be
$4,000,000 to $6,000,000, the variance depending primarily on the amount, if
any, spent for restaurants to be opened in 1999. 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. The cost of constructing a J.
Alexander's building averaged approximately $2,000,000 in 1997. The Company has
developed a lower cost building, anticipated to cost approximately $1,500,000,
for use in selected markets beginning with the Baton Rouge restaurant. The
Company estimates that
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the cost of equipping a J. Alexander's restaurant will range from $625,000 to
$675,000. 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 1997, the cost of land ranged from $800,000 to
$1,150,000. In addition, site preparation and improvement costs are expected to
range from approximately $275,000 to $350,000 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. Alexander's operations. Once a
prospective site is identified and 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.
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 28, 1997, 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 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.
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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 nineteen J. Alexander's restaurants, of which only nine have
been open for more than two years. 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. Difficulties or failure in
obtaining required licensing or other regulatory approvals could delay or
prevent the opening of a new J. 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 new restaurants.
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ITEM 2. PROPERTIES
As of December 28, 1997, the Company had eighteen J. Alexander's casual
dining restaurants in operation and two J. Alexander's restaurants under
construction. 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 Space
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 1 0 1 2
Ohio 3 1 0 4
Tennessee 3 0 1 4
Texas 0 1 0 1
Kentucky 0 1 0 1
Louisiana 0 1 0 1
- - - -
Total 13 5 2 20
== = = ==
</TABLE>
(a) In addition to the above, the Company leases five of its former Wendy's
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 25, 1998, 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 1997.
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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, 51 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. Gregor Lewis, 45 Chief Financial Officer since July 1986; Vice
President of Finance and Secretary since August 1984.
J. Michae Moore, 38 Vice-President of Human Resources and Administration
since November, 1997; Director of Human Resources and
Administration from August 1996 to November, 1997;
Director of Operations of Pioneer Music Group, a
Nashville-based record label, April, 1996 to August,
1996; Director of Operations, J. Alexander's
Restaurants, Inc. from March, 1993 to April, 1996.
Mark A. Parkey, 35 Controller of the Company since May 1997; Director of
Finance from January, 1993 to May, 1997.
Lonnie J Stout II, 51 Chairman since July 1990; Director, President and
Chief Executive Officer since May 1986.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of J. Alexander's Corporation is listed on the New
York Stock Exchange under the symbol JAX. The approximate number of record
holders of the Company's common stock at December 28, 1997, was 1,900. The
following table summarizes the price range of the Company's common stock for
each quarter of 1997 and 1996, as reported from price quotations from the New
York Stock Exchange:
<TABLE>
<CAPTION>
1997 1996
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Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C>
1st Quarter $8 $9 7/8 $8 5/8 $ 9 3/4
2nd Quarter 7 5/8 9 8 5/8 11 1/4
3rd Quarter 6 3/4 8 1/4 8 3/4 11 1/2
4th Quarter 4 5/16 7 1/4 7 5/8 9 1/8
</TABLE>
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.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial data for each of
the years in the five-year period ended December 28, 1997:
<TABLE>
<CAPTION>
Years Ended
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 28 December 29 December 31 January 1 January 2
(Dollars in thousands, except per share data) 1997 1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 57,138 90,879 79,288 65,695 60,574
Income from restaurant operations $ 5,114 12,216 11,711 10,375 9,787
General and administrative expenses $ 5,793 7,100 6,778 6,249 5,361
Pre-opening expense $ 1,580 1,503 658 342 322
Net income (loss) $ (5,991)(1) 7,208(3) 5,016(4) 4,830(5) 4,301(6)
Depreciation and amortization $ 3,057 (2) 4,674 3,644 2,760 2,394
Cash flow from operations $ (2,150) 3,393 7,586 5,706 5,050
Capital expenditures $ 16,619 22,589 20,255 11,276 3,479
FINANCIAL POSITION
- -------------------------------------------------------------------------------------------------------------------
Cash and investments $ 134 12,549 2,739 16,312 20,772
Property and equipment, net $ 60,573 47,016 46,915 29,776 20,989
Total assets $ 64,421 66,827 60,140 53,306 46,419
Long-term obligations $ 20,231 15,930 18,512 18,847 19,250
Stockholders' equity $ 34,995 40,461 32,975 27,304 21,700
PER SHARE DATA
- -------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (1.11) 1.36 .95 .93 .98
Diluted earnings (loss) per share $ (1.11) 1.26 .92 .90 .93
Stockholders' equity $ 6.45 7.60 6.25 5.21 4.24
Market price at year end $ 4.81 8.50 9.50 6.00 11.00
J. ALEXANDER'S RESTAURANT DATA
- -------------------------------------------------------------------------------------------------------------------
Net sales $ 57,138 42,105 25,594 14,704 10,816
Weighted average annual sales per restaurant $ 3,772 3,885 3,980 3,735 3,605
Units open at year end 18 14 9 5 3
</TABLE>
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(1) Includes an $885 charge to earnings to reflect the cumulative effect of
the change in the Company's accounting policy for pre-opening costs to
expense them as incurred. Also includes deferred tax expense of $2,393
related to an adjustment of the Company's beginning of the year valuation
allowance for deferred taxes in accordance with Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No.
109) and a pre-tax gain of $669 related to the Company's divestiture of
its Wendy's restaurants in 1996.
(2) Excludes pre-opening expense which was expensed as incurred effective
with the beginning of fiscal 1997.
(3) Includes pre-tax gain of $9,400 related to the Company's divestiture of
its Wendy's restaurants during 1996.
(4) Includes tax benefit of $1,782 related to recognition of deferred tax
assets in accordance with SFAS No. 109.
(5) Includes tax benefit of $2,100 related to recognition of deferred tax
assets in accordance with SFAS No. 109.
(6) Includes tax benefit of $1,500 related to recognition of deferred tax
assets in accordance with SFAS No. 109.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
J. Alexander's Corporation operated 18 J. Alexander's full-service,
casual dining restaurants at December 28, 1997. During the fourth quarter of
1996 the Company sold substantially all of the assets of its franchised Wendy's
Old Fashioned Hamburgers restaurant operations. The Company's Wendy's
restaurants generated restaurant operating income of $7,170,000 on sales of
$48,774,000 in 1996, and restaurant operating income of $8,092,000 on sales of
$53,694,000 in 1995. As a result of the divestiture, the Company's sales and
income from restaurant operations were significantly reduced in 1997.
A loss of $2,421,000 before income taxes and cumulative effect of
change in accounting principle was incurred in 1997. This compares to income
before income taxes of $11,451,000 in 1996. The 1996 results included a gain
from the divestiture of the Wendy's division of $9,400,000. An additional gain
of $669,000 was recorded on the divestiture in 1997. Income before the Wendy's
gains, income taxes and cumulative effect adjustment decreased by $5,141,000 in
1997 compared to 1996; a nominal increase in 1997 in restaurant operating income
from J. Alexander's restaurants combined with decreases in general and
administrative expenses and in net interest expense were not adequate to offset
the loss of restaurant operating income resulting from the Wendy's divestiture.
The Company's net loss of $5,991,000 for 1997 included an increase of $2,393,000
in the valuation allowance for deferred tax assets and an $885,000 charge to
reflect the cumulative effect of a change in the Company's accounting principle
for pre-opening costs to expense them as incurred.
For fiscal 1996, income before income taxes and the $9,400,000 gain on
the Wendy's divestiture was $2,051,000 as compared to income before income taxes
of $3,458,000 for 1995. Restaurant operating income in the J. Alexander's
division increased by $1,427,000, or 39%, in 1996. However, this increase was
not enough to offset the combined effect of a decline of $922,000 in the Wendy's
division and increased general and administrative expenses, pre-opening cost
amortization and other expense (net interest expense plus other income). Net
income in 1996 included a federal income tax provision approximating the federal
statutory rate, whereas net income for 1995 reflected deferred income tax
benefits of $1,782,000 associated with the recognition of deferred tax assets
for financial reporting purposes.
Management reached the decision to sell the Wendy's operations in 1996
because it believed that focusing all of the Company's capital and resources
exclusively on its casual dining business offered the greatest potential for
long-term return for its shareholders. However, the divestiture is expected to
continue to have a negative impact on earnings until the lost revenue and
operating income from the Wendy's operations can be replaced by the successful
development and operation of J. Alexander's restaurants.
J. ALEXANDER'S RESTAURANT OPERATIONS
The Company operated 18 J. Alexander's restaurants at December 28,
1997, compared with 14 at December 29, 1996, and nine at December 31, 1995.
Results of the J. Alexander's restaurant operations before allocation of general
and administrative expenses, pre-opening costs and net interest expense were as
follows:
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<TABLE>
<CAPTION>
Years Ended
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) DECEMBER 28, 1997 December 29, 1996 December 31, 1995
- -------------------------------------------------------------------------------------------------------------------
AMOUNT % OF SALES Amount % of Sales Amount % of Sales
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $57,138 100.0% $42,105 100.0% $25,594 100.0%
Restaurant costs and expenses:
Cost of sales 19,480 34.1 14,711 34.9 9,095 35.5
Labor and related costs 18,871 33.0 13,152 31.2 7,748 30.3
Depreciation and amortization of
restaurant property and
equipment 2,860 5.0 1,884 4.5 1,033 4.0
Other operating expenses 10,813 18.9 7,312 17.4 4,099 16.0
- -------------------------------------------------------------------------------------------------------------------
52,024 91.0 37,059 88.0 21,975 85.9
- -------------------------------------------------------------------------------------------------------------------
Restaurant operating income $ 5,114 9.0% $ 5,046 12.0% $ 3,619 14.1%
===================================================================================================================
</TABLE>
Total sales from J. Alexander's restaurants increased in both 1997 and
1996 compared to the prior years primarily as a result of new restaurant
openings. However, average weekly sales per restaurant decreased to $72,500 in
1997 from $74,600 in 1996 and $76,400 in 1995 as a result of lower sales from
new restaurants.
Same store sales and restaurant operating income, which include
comparable results for all restaurants open for more than twelve months,
increased in both 1997 and 1996 as compared to the prior year. Same store sales
for 1997 on a base of thirteen restaurants increased by 1.2% to an average of
$75,700 per week from $74,800 in 1996. For this same group of restaurants,
restaurant operating income as a percentage of sales increased to 12.9% from
12.3%. Same store sales for 1996 averaged $81,400 per week on a base of eight
restaurants, a 5.9% increase over $76,900 for 1995. Operating margins for this
group of restaurants improved to 16.9% in 1996 from 14.7% in 1995.
J. Alexander's overall financial performance has been significantly
affected by the number of new restaurants opened during the last three years
during which the number of restaurants increased from five to 18. 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 sales over a long period of time.
However, because this approach often results in slow sales growth until a new
restaurant's reputation grows and because of the expenses associated with the
Company's emphasis on training and quality of operations during the opening
months of operation, the financial performance of newer 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.
In addition, some of the Company's newer restaurants have not experienced the
increases in sales expected by management, thus compounding the effect of these
new restaurants on financial performance. Restaurant operating income as a
percentage of sales decreased in 1997 as compared to 1996 and in 1996 as
compared to 1995 as a result of these effects. To illustrate the effects of new
restaurants on results of operations, losses incurred at the restaurant level in
the year of opening totaled approximately $900,000 for the four restaurants
opened in 1997 and $300,000 for the five restaurants opened in 1996. The four
restaurants opened in 1995 operated at approximately a breakeven level on this
basis. Generally results in the Company's restaurants improve significantly
after their first full year of operations.
Largely due to the effects of new restaurant openings, all categories
of costs and expenses, with the exception of cost of sales, increased as a
percentage of sales in 1997 as compared to 1996 and in 1996 as compared to 1995.
Cost of sales, which includes food and alcoholic beverage costs, decreased as a
percentage of sales in both 1997 and 1996 as compared to the prior years due
primarily to management emphasis on cost controls in this area. Also, this
expense category is less sensitive to the effect of lower sales volumes than the
other categories which have large fixed components.
Of the 14 restaurants which had been open for at least one full year at
December 28, 1997, management considers eight of them to be at acceptable sales
levels which averaged $83,600 per restaurant per week in 1997. The remaining six
restaurants, three of which were opened in 1995 and three in 1996, are below
sales levels which management considers acceptable and averaged $61,600 per week
in 1997. In order to meet the Company's long term profitability objectives, all
J. Alexander's restaurants need to reach or exceed approximately the level of
sales
10
<PAGE> 11
of the eight restaurants discussed above. All of the Company's under-performing
restaurants discussed above currently have positive sales trends and management
believes that all or virtually all of the Company's restaurants have the
potential over time to reach satisfactory sales levels.
Because the breakeven point for J. Alexander's is relatively high due
to the high fixed costs necessary to deliver and sustain the high levels of food
quality, service and ambiance which are critical components of the J.
Alexander's concept, management believes that the primary issue faced by the
Company in returning it to profitability is the improvement of sales in several
of its restaurants, particularly its newer restaurants. In 1997 guest service
support was increased in some of the Company's newer restaurants in order to
ensure the highest quality of operations. Additionally menu prices were reduced
in some of the restaurants which were not posting satisfactory guest count
increases. While these strategies increased the Company's losses for 1997, guest
counts to date have increased significantly in these restaurants. In March of
1998 the Company increased menu prices in all of its restaurants by an average
of approximately 3%. Some additional, but smaller, menu price increases are
planned for the summer of 1998. Other actions which should improve 1998 results
include the implementation of operational systems designed to provide quicker
service and increase table turns and the negotiation of national contracts for
purchase of certain of the Company's food items.
The Company has lowered its development plans for 1998 and 1999 to two
restaurants to allow management to focus intently on improving sales and profits
in its existing restaurants while maintaining operational excellence. The lower
expansion rate will also reduce start-up related expenses.
Management remains optimistic about the long-term prospects for J.
Alexander's. It believes that actions taken in 1997 and the recent menu price
increase will have a positive impact on financial performance for 1998. However,
only modest improvements are expected in the first quarter of 1998 as compared
to the fourth quarter of 1997 as the price increase was not implemented until
late in the first quarter. Further improvements are expected throughout the
remainder of 1998; however, based on its current assessment of the Company's
business, management does not believe the Company will be profitable before the
fourth quarter of 1998.
WENDY'S RESTAURANT OPERATIONS
Results of the Company's Wendy's restaurant operations before
allocation of general and administrative expenses, pre-opening costs 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
- -------------------------------------------------------------------------------------------------------------------
Amount % of Sales Amount % of Sales
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $48,774 100.0% $53,694 100.0%
Restaurant costs and expenses:
Cost of sales 17,258 35.4 18,612 34.7
Labor and related costs 14,222 29.2 15,407 28.7
Depreciation and amortization of
restaurant property and equipment 1,074 2.2 1,907 3.5
Royalties 1,952 4.0 2,149 4.0
Other operating expenses 7,098 14.6 7,527 14.0
- -------------------------------------------------------------------------------------------------------------------
41,604 85.3 45,602 84.9
- -------------------------------------------------------------------------------------------------------------------
Restaurant operating income $7,170 14.7% $8,092 15.1%
===================================================================================================================
</TABLE>
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 the long-term debt
totaling approximately $2.5 million. The remaining six restaurants have been
sold or closed. The Company operated 58 Wendy's restaurants at December 31,
1995.
Total Wendy's sales decreased by $4,920,000, or 9.2%, in 1996 compared
to 1995, due primarily to the sale referenced in the preceding paragraph.
Weighted average sales per unit decreased by 0.7% in 1996. Competition in the
quick-service restaurant industry in general and intense retail price
competition by other major hamburger chains, combined with 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 its Wendy's business.
As a percentage of sales, restaurant operating income in the Wendy's
division decreased to 14.7% in 1996 from 15.1% in 1995, as increases in cost of
sales, labor and other operating expenses more than offset a decrease in
11
<PAGE> 12
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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, which include management training
costs and all other costs above the restaurant level for J. Alexander's (and,
before 1997, Wendy's) operations, decreased by $1,307,000, or 18.4%, in 1997
compared to 1996 due to the disposition of the Wendy's operations. As expected,
however, general and administrative expenses increased as a percentage of sales
to 10.1% in 1997 from 7.8% in 1996, because these expenses did not decrease in
proportion to the reduction in revenues resulting from the Wendy's divestiture;
a large portion of these costs is related to the operation and development of J.
Alexander's restaurants. General and administrative expenses are expected to
decrease as a percentage of sales in 1998 as compared to 1997 due to the higher
sales levels for the Company resulting from new J. Alexander's restaurants
opened in 1997 and 1998.
General and administrative expenses as a percentage of sales decreased
to 7.8% in 1996 from 8.5% in 1995 due to the higher total sales level for the
Company.
PRE-OPENING EXPENSE
In 1997 the Company changed its accounting policy to expense all
pre-opening costs as incurred rather than deferring and amortizing them over a
period of twelve months from each restaurant's opening. This change resulted in
a charge of $885,000 to record the cumulative effect as of the beginning of
1997. In 1996 the Company changed its amortization period for pre-opening costs
from twenty-four months to twelve months. Due to the change in accounting
principle and the lowering of the Company's development rate to two restaurants
for 1998, pre-opening expenses, which management estimates will be approximately
$350,000 per restaurant, should be significantly less in 1998 than in 1997, both
in terms of the dollar amount and as a percentage of sales.
INTEREST INCOME AND EXPENSE
Interest expense decreased by $617,000 in 1997 compared to 1996 due to
the elimination of long-term obligations associated with the Company's Wendy's
restaurant operations and a reduction in average balances outstanding under the
Company's line of credit as a result of the use of a portion of the proceeds
from the Wendy's divestiture to retire the outstanding balance at that time and
to fund a portion of the Company's capital needs for 1997. Interest expense
increased by $231,000 in 1996 compared to 1995, as interest related to
borrowings under the Company's line of credit more than offset an increase in
interest expense capitalized in connection with new restaurant development.
Interest income increased by $79,000 in 1997 compared to 1996 due to
increased investment balances resulting from the Wendy's divestiture. Interest
income decreased by $472,000 in 1996 compared to 1995 primarily due to lower
investment balances resulting from the development of new restaurants.
INCOME TAXES
Under the provisions of SFAS No. 109 "Accounting for Income Taxes", the
Company had gross deferred tax assets of $5,213,000 and $4,285,000 and gross
deferred tax liabilities of $948,000 and $1,492,000 at December 28, 1997 and
December 29, 1996, respectively. The deferred tax assets at December 28, 1997
relate primarily to $6,226,000 of net operating loss carryforwards and
$1,982,000 of tax credit carryforwards available to reduce future federal income
taxes.
The recognition of deferred tax assets depends on the likelihood of
taxable income in future periods in amounts sufficient to realize the assets.
The deferred tax assets must be reduced to the extent future income is not
likely to be generated. In 1995, management concluded that future taxable income
should be sufficient to realize all of the Company's deferred tax assets and
reduced the beginning of the year valuation allowance by $2,085,000 (of which
$303,000 was credited to additional paid-in capital). No allowance was deemed
necessary during 1996 and earnings for the year were taxed at an effective rate
of 37.1%.
Due to the loss incurred in 1997 and because the Company operates with
a high degree of financial and operating leverage, with a significant portion of
operating costs being fixed or semi-fixed in nature, management was unable to
conclude that it was more likely than not that its existing deferred tax assets
would be realized and in the fourth quarter of 1997 increased the beginning of
the year valuation allowance for these assets by $2,393,000. At December 28,
1997, the Company has recorded a valuation allowance for deferred tax assets of
$3,865,000. Approximately $12 million of future taxable income would be needed
to realize the Company's tax credit and net
12
<PAGE> 13
operating loss carryforwards at December 28, 1997. These carryforwards expire in
the years 1998 through 2012. Approximately $2,250,000 of taxable income would be
needed to realize the carryforwards which expire in 1998 and $2,000,000 to use
those which expire in 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for capital has historically been and is
expected to continue to be capital expenditures for the development of new
restaurants. Capital expenditures totaled $16,619,000, $22,589,000 and
$20,255,000 for 1997, 1996 and 1995, respectively, and were primarily for the
development of new J. Alexander's restaurants. Also included in these amounts
were capital expenditures for the Wendy's division of $1,717,000 for 1996 and
$4,640,000 for 1995 which included facilities upgrades and miscellaneous
equipment replacements as well as the development of three new restaurants in
1995. The Company's capital expenditures for new restaurants have significantly
exceeded the cash flow generated from operations for the last three years, with
the difference being funded primarily by the use of funds on hand at the
beginning of 1995, proceeds from the sale of the Company's Wendy's operations in
1996 and use of the Company's bank line of credit.
The Company plans to continue to develop new J. Alexander's
restaurants, but at a reduced rate, at least for the present. Two restaurants,
both of which will be on leased land, will be opened in 1998 and a like number
is tentatively planned for 1999. The average cost of constructing a J.
Alexander's building in 1997 was approximately $2,000,000. A lower cost
building, which is expected to cost approximately $1,500,000, has been developed
by the Company for use in selected markets. The first of these buildings is
under construction and will open in 1998. The cost of equipping a J. Alexander's
restaurant is approximately $625,000 to $675,000. The principal variable in the
cost of a restaurant is the decision of whether to own or lease a restaurant
site and, if the decision is to own, the cost of land in the particular market.
In general, the Company prefers to own its sites because of the long-term value
of owning the assets. For restaurants opened during 1997, the cost of land
ranged from $800,000 to $1,150,000. In addition, site preparation and
improvement costs are expected to range from approximately $275,000 to $350,000
per restaurant.
Management estimates that total capital expenditures for the Company
for 1998 will be $4 million to $6 million, the variance depending primarily on
the amount, if any, spent for restaurants to be opened in 1999.
In 1997 the Company utilized most of its cash and cash equivalents on
hand at the beginning of the year and a portion of its line of credit for the
development of new restaurants. The use of substantial amounts of cash and cash
equivalents for new restaurant development in 1997 resulted in a working capital
deficit of $6,536,000 at December 28, 1997. In 1997 the Company had a cash flow
deficit from operations of $2,150,000 primarily resulting from payment of
accrued expenses associated with the Wendy's operations and the results of
operations of the Company's J. Alexander's restaurants. The Company does not
believe that this deficit impairs the overall financial condition of the Company
because it expects cash flow from operations to improve as its results from
operations improve and to be adequate to meet current obligations, including a
scheduled sinking fund payment of $1,864,000 in 1998 on its Convertible
Subordinated Debentures. Certain of the Company's expenses, particularly
depreciation and amortization, do not require current outlays of cash. Also,
requirements for funding accounts receivable and inventories are relatively
insignificant; thus virtually all cash generated by operations is available to
meet current obligations.
The Company maintains a bank line of credit which is expected to be
used as the Company's primary means for funding of capital expenditures in 1998
and 1999 and which will also provide liquidity for meeting working capital or
other needs. At December 28, 1997, borrowings outstanding under this line of
credit were $6,223,000. As a result of the reduction in the Company's plans for
new restaurant development, the Company's loan agreement was amended in March of
1998 to reduce the commitment amount from $30 million to $20 million. In
addition, because the Company would not have complied with one of the covenants
in the credit agreement, that covenant was deleted. In its place, the Company
and the bank lender agreed on certain new covenants which require the Company to
achieve specified results of operations and specified levels of EBITDA (earnings
before interest, taxes, depreciation and amortization) to senior debt. Based on
the Company's current assessment of its business, the Company believes it will
comply with those new covenants. The amendments to the credit agreement contain
certain limitations on capital expenditures and restaurant development by the
Company (generally limiting the Company to the development of two new
restaurants per year) and restrict the Company's ability to incur additional
debt outside the bank line of credit. The interest rate on borrowings under the
line of credit following the execution of the amendment will be LIBOR plus three
percent. The line of credit was extended through July 1, 2000 and includes an
option to convert outstanding borrowings to a term loan at that time. The
Company believes that amounts available for borrowing under the line of credit
will be sufficient to fund the development of J. Alexander's restaurants for
1998 and 1999.
13
<PAGE> 14
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 THE YEAR 2000 ISSUE
The Company has completed an initial assessment of its Year 2000
information systems compliance issues and is in the process of implementing a
plan to deal with these issues. Since most of the Company's internal computer
applications have been recently developed or upgraded and none are main frame
driven, management believes that they generally are or will be Year 2000
compliant. The Company does not expect that the cost of Year 2000 compliance
issues will have a material impact on its results of operations.
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 and market conditions.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 15
Consolidated statements of operations - Years ended December 28, 1997,
December 29, 1996 and December 31, 1995. 16
Consolidated balance sheets - December 28, 1997 and December 29, 1996 17
Consolidated statements of cash flows - Years ended December 28, 1997,
December 29, 1996 and December 31, 1995 18
Consolidated statements of stockholders' equity - Years ended December 28, 1997,
December 29, 1996 and December 31, 1995 19
Notes to consolidated financial statements 20-30
</TABLE>
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.
14
<PAGE> 15
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 and subsidiaries as of December 28, 1997 and December
29, 1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three fiscal years in the period ended
December 28, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule 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 28, 1997 and December 29,
1996, and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended December 28, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note A to the financial statements, the Company changed
its method of accounting for pre-opening costs in 1997.
Ernst & Young LLP
Nashville, Tennessee
March 27, 1998
15
<PAGE> 16
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 28 December 29 December 31
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $57,138,000 $90,879,000 $79,288,000
Costs and expenses:
Cost of sales 19,480,000 31,969,000 27,707,000
Restaurant labor and related costs 18,871,000 27,374,000 23,155,000
Depreciation and amortization of restaurant
property and equipment 2,860,000 2,958,000 2,940,000
Royalties - 1,952,000 2,149,000
Other operating expenses 10,813,000 14,410,000 11,626,000
- ----------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 52,024,000 78,663,000 67,577,000
- ----------------------------------------------------------------------------------------------------------------
Income from restaurant operations 5,114,000 12,216,000 11,711,000
General and administrative expenses 5,793,000 7,100,000 6,778,000
Pre-opening expense 1,580,000 1,503,000 658,000
Gain on Wendy's disposition 669,000 9,400,000 -
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) (1,590,000) 13,013,000 4,275,000
- ----------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (1,030,000) (1,647,000) (1,416,000)
Interest income 186,000 107,000 579,000
Other, net 13,000 (22,000) 20,000
- ----------------------------------------------------------------------------------------------------------------
Total other income (expense) (831,000) (1,562,000) (817,000)
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,421,000) 11,451,000 3,458,000
Income tax (provision) benefit (2,685,000) (4,243,000) 1,558,000
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principle (5,106,000) 7,208,000 5,016,000
Cumulative effect of change in accounting principle (885,000) - -
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $(5,991,000) $ 7,208,000 $ 5,016,000
================================================================================================================
Basic earnings per share:
Income (loss) before accounting change $ (.95) $ 1.36 $ .95
Cumulative effect of change in accounting principle (.16) - -
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1.11) $ 1.36 $ .95
================================================================================================================
Diluted earnings per share:
Income (loss) before accounting change $ (.95) $ 1.26 $ .92
Cumulative effect of change in accounting principle (.16) - -
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (1.11) $ 1.26 $ .92
================================================================================================================
</TABLE>
See notes to consolidated financial statements.
16
<PAGE> 17
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 28 December 29
1997 1996
- ------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $134,000 $12,549,000
Accounts and notes receivable, including current portion of
direct financing leases, net of allowances for possible losses 241,000 120,000
Inventories at lower of cost (first-in, first-out method) or market 689,000 534,000
Deferred income taxes 400,000 1,364,000
Net assets held for disposal 156,000 618,000
Prepaid expenses and other current assets 387,000 369,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 2,007,000 15,554,000
OTHER ASSETS
Direct financing leases, net of unearned income of $142,000 and $146,000 at
December 28, 1997, and December 29, 1996, respectively, and current portion 236,000 293,000
Other 931,000 904,000
- ------------------------------------------------------------------------------------------------------------------
1,167,000 1,197,000
PROPERTY AND EQUIPMENT, at cost, less allowances for depreciation
and amortization 60,573,000 47,016,000
DEFERRED INCOME TAXES - 1,429,000
DEFERRED CHARGES, less accumulated amortization of $875,000 and
$2,326,000 at December 28, 1997, and December 29, 1996, respectively 674,000 1,631,000
- ------------------------------------------------------------------------------------------------------------------
$64,421,000 $66,827,000
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $3,573,000 $3,748,000
Accrued expenses and other current liabilities 3,048,000 6,023,000
Current portion of long-term debt and obligations under capital leases 1,922,000 54,000
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 8,543,000 9,825,000
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES, net of portion
classified as current 20,231,000 15,930,000
DEFERRED COMPENSATION AND OTHER DEFERRED CREDITS 652,000 611,000
STOCKHOLDERS' EQUITY
Common Stock, par value $.05 per share: Authorized 10,000,000
shares; issued and outstanding 5,421,538 and 5,322,507 shares at
December 28, 1997, and December 29, 1996, respectively 272,000 266,000
Preferred Stock, no par value: Authorized 1,000,000 shares; none issued - -
Additional paid-in capital 29,909,000 29,475,000
Retained earnings 5,757,000 11,748,000
- ------------------------------------------------------------------------------------------------------------------
35,938,000 41,489,000
Note receivable - Employee Stock Ownership Plan (943,000) (1,028,000)
- ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 34,995,000 40,461,000
Commitments and Contingencies
- ------------------------------------------------------------------------------------------------------------------
$64,421,000 $66,827,000
==================================================================================================================
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 18
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 28 December 29 December 31
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(5,991,000) $7,208,000 $5,016,000
Adjustments to reconcile net income to net cash (used)
provided by operating activities:
Depreciation and amortization of property and equipment 3,004,000 3,096,000 3,033,000
Cumulative effect of change in accounting principle 885,000 - -
Amortization of deferred charges 134,000 1,578,000 611,000
Employee Stock Ownership Plan expense 85,000 - 172,000
Gain on Wendy's disposition (669,000) (9,400,000) -
Deferred income tax provision (benefit) 2,393,000 2,441,000 (1,782,000)
Other, net 41,000 195,000 192,000
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (58,000) 135,000 (147,000)
Increase in inventories (155,000) (78,000) (271,000)
(Increase) decrease in prepaid expenses and
other current assets (18,000) 115,000 (269,000)
Increase in deferred charges (61,000) (1,377,000) (1,111,000)
Increase in accounts payable 687,000 4,000 615,000
(Decrease) increase in accrued expenses and other
current liabilities (2,468,000) (634,000) 1,432,000
Increase in deferred credits 41,000 110,000 95,000
- ----------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (2,150,000) 3,393,000 7,586,000
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (17,481,000) (22,132,000) (20,909,000)
Proceeds from sale of Wendy's restaurant operations 625,000 28,764,000 -
Proceeds from maturities and sales of investments - 505,000 1,005,000
Other, net (17,000) (78,000) (37,000)
- ----------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing activities (16,873,000) 7,059,000 (19,941,000)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under bank line of credit agreement 11,614,000 12,544,000 -
Payments under bank line of credit agreement (5,391,000) (12,544,000) -
Payments on long-term debt and obligations
under capital leases (55,000) (415,000) (393,000)
Sale of stock and exercise of stock options 440,000 278,000 180,000
- ----------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 6,608,000 (137,000) (213,000)
- ----------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (12,415,000) 10,315,000 (12,568,000)
Cash and cash equivalents at beginning of year 12,549,000 2,234,000 14,802,000
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 134,000 $12,549,000 $2,234,000
================================================================================================================
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 19
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 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
Exercise of stock options,
including tax benefits, and
sale of stock under Employee
Stock Purchase Plan 99,031 6,000 434,000 - - 440,000
Reduction of note receivable-
Employee Stock Ownership
Plan - - - - 85,000 85,000
Net loss - - - (5,991,000) - (5,991,000)
- -------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 28, 1997 5,421,538 $272,000 $29,909,000 $5,757,000 $(943,000) $34,995,000
===================================================================================================================
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 20
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 1997 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. Cash equivalents of
$10,066,000 at December 29, 1996 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 10 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 40 years using the straight-line method. Debt issue costs are amortized
principally by the interest method over the life of the related debt.
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.
EARNINGS PER SHARE: In 1997, the Financial Accounting Standards Board issued
SFAS No. 128 "Earnings Per Share". SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented and,
where appropriate, restated to conform to the requirements of SFAS No. 128.
PRE-OPENING COSTS: Effective December 30, 1996, the Company changed its method
of accounting for pre-opening costs to expense these costs as incurred and
recorded the cumulative effect of this change in accounting principle resulting
in an after tax charge of $885,000 ($.16 per share) in fiscal 1997. The impact
in fiscal 1997 in addition to the cumulative effect was to decrease net income
by $282,000 ($.05 per share). The pro forma effect of the change in accounting
for pre-opening costs would have been to decrease net income by $511,000 ($.09
per share) for the year ended December 29, 1996 and increase net income by
$93,000 ($.02 per share) for the year ended December 31, 1995. The Company
believes expensing pre-opening costs as incurred is preferable because the
future economic benefits resulting from costs of pre-opening activities have
indeterminate lives and, therefore, any related amortization periods would be
arbitrary.
Prior to fiscal 1996, pre-opening costs associated with the start-up of
new restaurants were deferred and 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 period of amortization 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.
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.
20
<PAGE> 21
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 E). 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 of
$307,000, $335,000 and $182,000 were capitalized during 1997, 1996 and 1995,
respectively.
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 1995 through 1997, 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 $255,000, $1,778,000 and $1,980,000 in 1997, 1996 and 1995, 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 the valuation allowance
relative to the Company's deferred tax assets, reserves for self-insurance of
group medical claims and workers' compensation benefits and, for 1996 and 1997,
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: SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of", 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.
NOTE B - SALE OF WENDY'S RESTAURANT OPERATIONS
In 1996, the Company sold 52 of its 58 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 totaling
approximately $2.5 million. This transaction generated a pre-tax gain of $9.4
million in 1996. The six restaurants not sold as part of the November 1996
transaction were sold or closed.
In connection with the sale of its Wendy's restaurants, the Company
established various accruals for termination benefits and other costs associated
with its exit from the Wendy's business, with such accruals totaling $2,029,000
at December 29, 1996. During 1997, the Company made net cash payments of
$833,000 related to these accruals. In addition, the Company recognized $669,000
in additional gains related to the Wendy's divestiture during 1997, primarily
due to the sale of two properties for amounts greater than their carrying
values, a favorable insurance settlement and other adjustments to the accruals
established during 1996. At December 28, 1997, the Company continues to maintain
accruals related to the exit of the Wendy's business totaling $527,000.
21
<PAGE> 22
NOTE C - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 28 December 29 December 31
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMERATOR:
Income (loss) before cumulative effect of change in accounting
principle $(5,106,000) $7,208,000 $5,016,000
Cumulative effect of change in accounting principle (885,000) - -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) (numerator for basic
earnings per share) (5,991,000) 7,208,000 5,016,000
Effect of dilutive securities - 799,000 -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) after assumed conversions (numerator
for diluted earnings per share) $(5,991,000) $8,007,000 $5,016,000
===================================================================================================================
DENOMINATOR:
Weighted average shares (denominator for basic earnings
per share) 5,409,000 5,303,000 5,257,000
Effect of dilutive securities:
Employee stock options - 167,000 221,000
Convertible debentures - 880,000 -
- -------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares - 1,047,000 221,000
- -------------------------------------------------------------------------------------------------------------------
Adjusted weighted average shares and assumed conversions
(denominator for diluted earnings per share) 5,409,000 6,350,000 5,478,000
===================================================================================================================
Basic earnings per share:
Income (loss) before accounting change $(0.95) $1.36 $0.95
Cumulative effect of change in accounting principle (0.16) - -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $(1.11) $1.36 $0.95
===================================================================================================================
Diluted earnings per share:
Income (loss) before accounting change $(0.95) $1.26 $0.92
Cumulative effect of change in accounting principle (0.16) - -
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $(1.11) $1.26 $0.92
===================================================================================================================
</TABLE>
For additional disclosures regarding the Convertible Subordinated
Debentures and the employee stock options, see Notes E and H, respectively.
In situations where the exercise price of outstanding options is
greater than the average market price of common shares, such options are
excluded from the computation of diluted earnings per share because of their
antidilutive impact. Due to the net loss in 1997, all 664,650 options
outstanding were excluded from the computation of diluted earnings per share.
For 1996 and 1995, options to purchase approximately 203,000 and 64,000 shares
of common stock, respectively, ranging in price from $7.50 to $13.00, were
excluded from the computation of diluted earnings per share due to their
antidilutive effect.
NOTE D - PROPERTY AND EQUIPMENT
Balances of major classes of property and equipment are as follows:
22
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 28 December 29
1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $13,033,000 $ 9,696,000
Buildings 30,637,000 21,482,000
Buildings under capital leases 276,000 276,000
Leasehold improvements 8,284,000 5,901,000
Restaurant and other equipment 12,612,000 10,165,000
Construction in progress (estimated additional cost
to complete at December 28, 1997, $2,208,000) 3,053,000 4,063,000
- -------------------------------------------------------------------------------------------------------------------
67,895,000 51,583,000
Less allowances for depreciation and amortization 7,322,000 4,567,000
- -------------------------------------------------------------------------------------------------------------------
$60,573,000 $47,016,000
===================================================================================================================
</TABLE>
NOTE E - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt and obligations under capital leases at December 28,
1997, and December 29, 1996, are summarized below:
<TABLE>
<CAPTION>
DECEMBER 28, 1997 December 29, 1996
- -------------------------------------------------------------------------------------------------------------------
CURRENT LONG-TERM Current Long-Term
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Convertible Subordinated Debentures, 8.25%, due 2003 $1,864,000 $13,750,000 $ - $15,614,000
Bank credit agreement, at variable interest rates ranging
from 7.14% to 7.19%, available through 07/01/2000 - 6,223,000 - -
Obligations under capital leases, 9.75% to 11.50%
interest, payable through 2005 58,000 258,000 54,000 316,000
- -------------------------------------------------------------------------------------------------------------------
$1,922,000 $20,231,000 $54,000 $15,930,000
===================================================================================================================
</TABLE>
Aggregate maturities of long-term debt, including required sinking fund
payments, for the five years succeeding December 28, 1997, are as follows: 1998
- - $1,864,000; 1999 - $1,875,000; 2000 - $8,098,000; 2001 - $1,875,000; 2002 -
$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 28, 1997, 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, were used in
satisfaction of sinking fund requirements and were sufficient to satisfy those
requirements through 1997.
During 1995, the Company entered into an unsecured bank line of credit
agreement for up to $30,000,000 of revolving credit for the purpose of financing
future capital expenditures. At December 28, 1997, borrowings outstanding under
this line of credit totaled $6,223,000. No borrowings were outstanding under the
agreement at December 29, 1996.
As a result of the reduction in the Company's plans for new restaurant
development, the original loan agreement was amended in March of 1998 to reduce
the commitment amount from $30 million to $20 million. In addition, because the
Company would not have complied with one of the covenants in the credit
agreement, that covenant was deleted. In its place, the Company and the bank
lender agreed on certain new covenants which
23
<PAGE> 24
require the Company to achieve specified results of operations and specified
levels of EBITDA (earnings before interest, taxes, depreciation and
amortization) to senior debt. The amendment to the credit agreement also
contains certain limitations on capital expenditures and restaurant development
by the Company (generally limiting the Company to the development of two new
restaurants per year) and restricts the Company's ability to incur additional
debt outside the bank line of credit. The interest rate on borrowings under the
line of credit following the execution of the amendment is LIBOR plus three
percent. In addition, a fee of 1/2% on any unused portion of the facility is
payable on a quarterly basis. The line of credit was extended through July 1,
2000 and includes an option to convert outstanding borrowings to a term loan at
that time.
Cash interest payments amounted to $1,483,000, $2,033,000 and
$1,732,000, in 1997, 1996 and 1995, respectively. Interest costs of $453,000,
$386,000 and $316,000 were capitalized as part of building and leasehold costs
in 1997, 1996, and 1995, respectively.
The carrying value and estimated fair value of the Company's long-term
debt totaled $15,614,000 and $14,053,000, respectively, at December 28, 1997.
NOTE F - LEASES
At December 28, 1997, 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
generally operating 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 noncancellable operating leases, principally for office space.
Accumulated amortization of buildings under capital leases totaled
$215,000 at December 28, 1997, and $201,000 at December 29, 1996. Amortization
of leased assets is included in depreciation and amortization expense.
Total rental expense amounted to:
<TABLE>
<CAPTION>
Years Ended
- --------------------------------------------------------------------------------------------------------------
DECEMBER 28 December 29 December 31
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals under operating leases $1,218,000 $1,996,000 $1,800,000
Contingent rentals 63,000 366,000 395,000
Less: Sublease rentals (260,000) (264,000) (313,000)
- --------------------------------------------------------------------------------------------------------------
$1,021,000 $2,098,000 $1,882,000
==============================================================================================================
</TABLE>
At December 28, 1997, future minimum lease payments under capital
leases and noncancellable operating leases with initial terms of one year or
more are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $89,000 $1,393,000
1999 69,000 1,399,000
2000 56,000 1,415,000
2001 56,000 1,434,000
2002 55,000 1,353,000
Thereafter 118,000 12,252,000
- --------------------------------------------------------------------------------------------------------------
Total minimum payments 443,000 $19,246,000
- --------------------------------------------------------------------------------------------------------------
Less imputed interest (127,000)
- --------------------------------------------------------------------------------------------------------------
Present value of minimum rental payments 316,000
Less current maturities at December 28, 1997 (58,000)
- --------------------------------------------------------------------------------------------------------------
Long-term obligations at December 28, 1997 $258,000
==============================================================================================================
</TABLE>
24
<PAGE> 25
Minimum future rentals receivable under subleases for operating leases
at December 28, 1997, amounted to $1,743,000.
In addition to the leases summarized above, the Company previously
leased five 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 totaled $43,000 and $49,000 in 1996 and 1995, respectively. These
leases were assigned to Wendy's International, Inc. in November 1996.
NOTE G - INCOME TAXES
At December 28, 1997, the Company had net operating loss carryforwards
of $6,226,000 for income tax purposes that expire in the years 2000 through
2012. Tax credit carryforwards (consisting primarily of investment and jobs tax
credits which expire in the years 1998 through 2001 and FICA tips credits which
expire in the years 2009 through 2012) of $1,982,000 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
28, 1997, and December 29, 1996, are as follows:
<TABLE>
<CAPTION>
DECEMBER 28 December 29
1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 423,000 $ 653,000
Pre-opening costs - 301,000
Other - net 525,000 538,000
- --------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 948,000 1,492,000
- --------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Capital/finance leases 7,000 8,000
Deferred compensation accruals 172,000 178,000
Self-insurance accruals 99,000 67,000
Wendy's disposition accruals 60,000 927,000
Net operating loss carryforwards 2,117,000 968,000
Tax credit carryforwards 1,982,000 1,840,000
Other - net 776,000 297,000
- --------------------------------------------------------------------------------------------------------------
Total deferred tax assets 5,213,000 4,285,000
Valuation allowance for deferred tax assets (3,865,000) -
- --------------------------------------------------------------------------------------------------------------
1,348,000 4,285,000
- --------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 400,000 $2,793,000
==============================================================================================================
</TABLE>
SFAS No. 109 establishes procedures to measure deferred tax assets and
liabilities and assess whether a valuation allowance relative to existing
deferred tax assets is necessary. Prior to 1993, the Company maintained a
valuation allowance at an amount necessary to fully reserve its net deferred tax
asset balances, after giving consideration to deferred tax assets that can be
realized through offsets to existing taxable temporary differences. In the
fourth quarter of 1995, 1994 and 1993, the beginning of the year valuation
allowance was reduced in order to reflect a change in circumstances which
resulted in a judgment that a corresponding amount of the Company's deferred tax
assets would be realized in future years. The 1995 adjustment totaled
$2,085,000, of which $303,000 was credited to additional paid-in capital.
Management evaluated the need for a valuation allowance for deferred
tax assets for 1996 and concluded that all of the deferred tax assets would more
likely than not be realized through the future reversal of existing taxable
temporary differences within their carryforward period and the future earnings
of the Company and, as a result, a valuation allowance was not considered
appropriate as of December 29, 1996.
25
<PAGE> 26
In the fourth quarter of 1997, management concluded that, based upon
results of operations during 1997 and its near-term forecast of future taxable
earnings, a valuation allowance was appropriate relative to its deferred tax
assets as of December 28, 1997. The beginning of the year valuation allowance
was increased by $2,393,000 which, when combined with the impact of 1997's
operations, resulted in a valuation allowance of $3,865,000 at December 28,
1997. Net deferred tax assets of $400,000 as of December 28, 1997 represent
estimated refunds available through carryback of net operating losses generated
in fiscal 1997.
Significant components of the income tax provision (benefit) are as
follows:
<TABLE>
<CAPTION>
Years Ended
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 28 December 29 December 31
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $31,000 $1,100,000 $80,000
State 261,000 702,000 144,000
- -------------------------------------------------------------------------------------------------------------------
Total 292,000 1,802,000 224,000
Deferred 2,393,000 2,441,000 (1,782,000)
- -------------------------------------------------------------------------------------------------------------------
Income tax provision (benefit) $2,685,000 $4,243,000 $(1,558,000)
===================================================================================================================
</TABLE>
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 28 December 29 December 31
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense (benefit) computed at federal statutory rate (34%) $(1,124,000) $3,893,000 $1,176,000
State and local income taxes 172,000 463,000 144,000
Alternative minimum tax - - 80,000
Non-deductible expenses 98,000 121,000 19,000
Benefit of net operating loss carryforwards and tax credits (326,000) (234,000) (1,195,000)
Valuation (recognition) of deferred tax assets 3,865,000 - (1,782,000)
- -------------------------------------------------------------------------------------------------------------------
Income tax provision (benefit) $ 2,685,000 $4,243,000 $(1,558,000)
===================================================================================================================
</TABLE>
Income tax payments were $1,126,000, $1,098,000 and $175,000 in 1997,
1996 and 1995, respectively.
NOTE H - 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 grant additional options 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> <C>
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 canceled (10,250) 7.25- 11.50 9.39
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
<TABLE>
<S> <C> <C> <C> <C>
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 canceled (11,900) 7.25- 10.38 9.20
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 29, 1996 529,287 1.38- 13.00 6.83
Issued 326,600 5.69- 8.75 6.79
Exercised (93,419) 1.38- 7.63 4.19
Expired or canceled (97,818) 7.38- 11.69 7.58
- -------------------------------------------------------------------------------------------------------------------
Outstanding at December 28, 1997 664,650 $1.50- $13.00 $6.75
===================================================================================================================
</TABLE>
Options exercisable and shares available for future grant are as
follows:
<TABLE>
<CAPTION>
DECEMBER 28 December 29 December 31
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Options exercisable 269,439 380,734 313,393
Shares available for grant 218,384 228,850 226,450
===================================================================================================================
</TABLE>
The following table summarizes information about stock options
outstanding at December 28, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------ --------------------------------
Number Number
Outstanding at Weighted Weighted Exercisable at Weighted
Range of December 28 Average Remaining Average Exercise December 28 Average
Exercise Prices 1997 Contractual Life Price 1997 Exercise Price
- ------------------------------------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
$1.50- $3.81 111,500 2.2 years $1.69 111,500 $1.69
5.69 204,250 9.9 years 5.69 - -
7.25- 7.88 79,750 6.6 years 7.43 69,756 7.43
8.19- 8.75 117,350 9.2 years 8.64 - -
9.75- 10.50 146,300 6.9 years 10.00 82,683 10.20
11.69- 13.00 5,500 6.3 years 12.05 5,500 12.05
- ------------------------------------------------------------------------------ --------------------------------
$ 1.50- $13.00 664,650 269,439
============================================================================== ================================
</TABLE>
Options exercisable at December 29, 1996 and December 31, 1995 had
weighted average exercise prices of $6.02 and $4.94, respectively.
In 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock Based Compensation". This 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 1997, 1996 and 1995, respectively: risk-free interest rates of
6.04%, 6.85% and 6.43%; no annual dividend yield; volatility factors of .3619,
.3812 and .3849 based on monthly closing prices since August, 1990; and an
expected option life of 10 years.
27
<PAGE> 28
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.
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 28 December 29 December 31
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income (loss) $(6,503,000) $7,009,000 $4,889,000
Pro forma earnings per share
Basic $ (1.20) $ 1.32 $ .93
Diluted $ (1.20) $ 1.23 $ .89
</TABLE>
The weighted average fair value per share for options granted during
1997, 1996 and 1995 was $4.09, $6.27 and $6.05, respectively.
The Company has an Employee Stock Purchase Plan under which 75,547
shares of the Company's common stock are available for issuance. Shares issued
under the plan totaled 15,760, 19,014 and 21,355, in 1997, 1996, and 1995,
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 $113,000, $67,000 and $61,000 in 1997, 1996 and 1995, 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. The
Company's matching contribution for 1997 totaled $22,000, or 25% of eligible
participant contributions. For 1996 and 1995, the Company made a 20% matching
contribution to the plan and recognized expense of $24,000 and $23,000,
respectively.
NOTE I - 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. The note receivable from the ESOP has been
reported as a reduction from the Company's stockholders' equity. Terms of the
original ESOP note called 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 a contribution to the ESOP in 1995, allowing
the ESOP to make its scheduled loan repayment to the Company and resulting in
net compensation expense to the Company of $172,000 with a corresponding
reduction in the ESOP note receivable. Due to the sale of its Wendy's restaurant
operations, the Company elected not to make a contribution to the ESOP in 1996.
As a result, no ESOP expense was reflected for that year.
In 1997, the Company modified its loan to the ESOP and made a
contribution to the ESOP, allowing the ESOP to make its scheduled loan repayment
to the Company. This contribution resulted in net compensation expense to the
Company of $85,000, with a corresponding reduction in the ESOP note receivable.
The terms of the modified ESOP note call for interest at an annual rate of 10%
and for repayment of the ESOP note's remaining principal in annual amounts
ranging from $122,000 to $197,000 over the period 1998 through 2003.
28
<PAGE> 29
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. Shares allocated under the ESOP were
229,606 and 182,822 at December 28, 1997 and December 29, 1996, respectively.
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 J - 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 K - 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 eighteen years. The total amount of lease payments
remaining on these leases at December 28, 1997 was approximately $5.7 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 eight years. The total amount of lease payments remaining on
these leases at December 28, 1997, was approximately $2.7 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 two to nine years. The total amount of lease payments
remaining on these leases as of December 28, 1997, was approximately $1.5
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.
NOTE L - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities included the following:
<TABLE>
<CAPTION>
DECEMBER 28 December 29
1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Taxes, other than income taxes $961,000 $ 802,000
Salaries and wages 324,000 322,000
Insurance 905,000 754,000
Interest 120,000 120,000
Wendy's disposition accruals 527,000 2,029,000
Other 211,000 1,996,000
- --------------------------------------------------------------------------------------------------
$3,048,000 $6,023,000
==================================================================================================
</TABLE>
29
<PAGE> 30
NOTE M - BUSINESS SEGMENTS
For the years ended December 28, 1997, December 29, 1996, and December
31, 1995, retail food operations constituted a dominant segment in accordance
with SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise".
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for
the years ended December 28, 1997, and December 29, 1996 (dollars in thousands,
except per share amounts):
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
- -------------------------------------------------------------------------------------------------------------------
MARCH 30(1) JUNE 29(1) SEPTEMBER 28(1) DECEMBER 28
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $14,032 $13,459 $14,143 $15,504
Income from restaurant operations 1,714 1,416 1,094 890
Net income $ (712)(2) $ (45)(3) $ (599)(4) $(4,635)(5)
Basic earnings per share:
Income (loss) before accounting change $ .03 $ (.01) $ (.11) $ (.85)
Cumulative effect of change in accounting
principle (.16) - - -
- -------------------------------------------------------------------------------------------------------------------
Net loss $ (.13) $ (.01) $ (.11) $ (.85)
===================================================================================================================
Diluted earnings per share:
Income (loss) before accounting change $ .03 $ (.01) $ (.11) $ (.85)
Cumulative effect of change in accounting
principle (.16) - - -
- -------------------------------------------------------------------------------------------------------------------
Net loss $ (.13) $ (.01) $ (.11) $ (.85)
===================================================================================================================
</TABLE>
<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(6) 6,007(7)
Basic earnings per share $ .06 $ .10 $ .07 $ 1.13
Diluted earnings per share $ .06 $ .10 $ .07 $ .98
</TABLE>
(1) Restated to reflect the change in the Company's accounting policy for
pre-opening costs to expense them as incurred effective with the beginning
of fiscal 1997.
(2) Includes an $885 charge to earnings to reflect the cumulative effect of the
change in the Company's accounting policy for pre-opening costs to expense
them as incurred.
(3) Includes pretax gain of $369 related to disposal of Wendy's restaurant
operations in 1996.
(4) Includes pretax gain of $300 related to disposal of Wendy's restaurant
operations in 1996.
(5) Includes deferred tax expense of $2,393 related to an adjustment of the
Company's beginning of the year valuation allowance for deferred taxes in
accordance with Statement of Financial Account Standards (SFAS) No.
109.
(6) 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 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.
(7) 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 to a change in the amortization period for such costs, from 24
months to 12 months, during the fourth quarter of 1996.
30
<PAGE> 31
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 1998
Annual Meeting of Shareholders to be held May 19, 1998. (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
1998 Annual Meeting of Shareholders to be held May 19, 1998.
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 1998 Annual Meeting of Shareholders to
be held May 19, 1998.
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 1998 Annual Meeting of Shareholders to be held May 19,
1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) See Item 8.
(a)(2) The information required under Item 14, subsection (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 (Exhibit
(3)(a)(2) of the Registrant's Report on Form 10-K for the
year ended December 29, 1996 is incorporated herein by
reference).
(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).
31
<PAGE> 32
(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) 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).
(10)(g) Amended and restated secured promissory note dated
November 21, 1997 from the J. Alexander's Corporation
Employee Stock Ownership Trust to Registrant.
(10)(h) Amendment to Loan Agreement dated March 27, 1998, by and
between J. Alexander's Corporation, J. Alexander's
Restaurants, Inc. and NationsBank of Tennessee, N.A.
(10)(i) Line of Credit note dated March 27, 1998, by and between
J. Alexander's Corporation, J. Alexander's Restaurants,
Inc. and NationsBank of Tennessee, N.A.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
(10)(j) 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)(k) 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).
32
<PAGE> 33
(10)(l) 1982 Incentive Stock Option Plan (incorporated by
reference to pages B-1 through B-6 of Registration
Statement No 2-78140).
(10)(m) 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)(n) 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)(o) 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)(p) 1994 Employee Stock Incentive Plan (incorporated by
reference to Exhibit 4(c) of Registration Statement
No. 33-77476).
(10)(q) Amendment to 1994 Employee Stock Incentive Plan (Appendix
A of the Registrant's Proxy Statement for Annual Meeting
of Shareholders, May 20, 1997, is incorporated herein by
reference).
(18) Letter from Independent Auditors addressing the Company's
change of accounting principle related to pre-opening
costs.
(21) List of subsidiaries of Registrant.
(23) Consent of Independent Auditors.
(b) Reports on Form 8-K:
During the quarter ended December 28, 1997, the Company filed no reports on
Form 8-K.
(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.
33
<PAGE> 34
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 3/27/98
---------------
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 3/27/98
- --------------------------------- and Director
Lonnie J. Stout II
/s/R. Gregory Lewis Vice President and Chief Financial Officer 3/27/98
- --------------------------------- (Principal Financial Officer)
R. Gregory Lewis
/s/Mark A. Parkey Controller
- --------------------------------- (Principal Accounting Officer) 3/27/98
Mark A. Parkey
/s/Earl Beasley, Jr. Director 3/27/98
- ---------------------------------
Earl Beasley, Jr.
/s/E. Townes Duncan Director 3/27/98
- ---------------------------------
E. Townes Duncan
Director
- ---------------------------------
Garland G. Fritts
/s/John L.M. Tobias Director 3/27/98
- ---------------------------------
John L.M. Tobias
</TABLE>
34
<PAGE> 35
ANNUAL REPORT ON FORM 10-K
ITEM 14(A)(2), (C) AND (D)
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FISCAL YEAR ENDED DECEMBER 28, 1997
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
NASHVILLE, TENNESSEE
35
<PAGE> 36
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> <C> <C>
Year ended December 28, 1997:
Valuation allowance for deferred tax assets $0 $3,865,000(1) $0 $0 $3,865,000
Year ended December 29, 1996:
Valuation allowance for deferred tax assets $0 $0 $0 $0 $0
Year ended December 31, 1995:
Valuation allowance for deferred tax assets $3,071,000 $0 $0 $3,071,000(2) $0
</TABLE>
(1) Includes a $2,393,000 increase to the beginning of the year valuation
allowance reflecting a change in circumstances which resulted in a
judgement that a 100% valuation allowance, after making allowance for
$400,000 in estimated refunds available through carryback of net operating
losses generated in 1997, was appropriate as of December 28, 1997.
(2) 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.
36
<PAGE> 37
J. ALEXANDER'S CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Reference Number
per Item 601 of
Regulation S-K Description
- -------------- -----------
<S> <C>
(10)(g) Amended and restated secured promissory note
dated November 21, 1997 from the J. Alexander's
Corporation Employee Stock Ownership Trust to
Registrant
(10)(h) Amendment to Loan Agreement dated March 27, 1998,
by and between J. Alexander's Corporation, J.
Alexander's Restaurants, Inc. and NationsBank of
Tennessee, N.A.
(10)(i) Line of Credit note dated March 27, 1998, by and
between J. Alexander's Corporation, J. Alexander's
Restaurants, Inc. and NationsBank of Tennessee, N.A.
(18) Letter from Ernst & Young LLP, independent auditors,
addressing the Company's change of accounting
principle related to pre-opening costs.
(21) List of subsidiaries of Registrant.
(23) Consent of Ernst & Young LLP, independent auditors
(27) Financial Data Schedule (FOR SEC USE ONLY)
</TABLE>
37
<PAGE> 1
Exhibit (10)(g)
Exhibit(10)(g) Amended and restated secured promissory note dated November 21,
1997 from the J. Alexander's Corporation Employee Stock
Ownership Trust to Registrant.
AMENDED AND RESTATED
SECURED PROMISSORY NOTE
Original Principal Amount: Date of Restatement:
$1,713,956.25 Nashville, Tennessee November 21, 1997
RECITALS
On June 25, 1992, Volunteer Capital Corporation loaned the sum of
$1,713,956.25 to the Volunteer Capital Corporation Employee Stock Ownership
Trust as evidenced by a promissory note dated June 25, 1992 (the "Original
Note"). The name of Volunteer Capital Corporation has subsequently been changed
to J. Alexander's Corporation. The parties desire to extend the maturity date of
the note to November 30, 2003, increase the interest rate from 9% to 10% and
change the payment schedule to level payments of principal and interest
commencing on November 30, 1998. In consideration of the foregoing, effective as
of November 21, 1997, the parties amend and restate the Original Note as
follows:
AMENDED AND RESTATED NOTE
FOR VALUE RECEIVED, the undersigned J. ALEXANDER'S CORPORATION EMPLOYEE
STOCK OWNERSHIP TRUST, a Tennessee trust established for the benefit of the J.
Alexander's Corporation Employee Stock Ownership Plan ("Maker"), promises to pay
to the order of J. Alexander's Corporation ("Payee"; Payee and any subsequent
holder[s] hereof are hereinafter referred to collectively as "Holder"), without
grace, at the office of Payee at 3401 West End Avenue, Nashville, Tennessee
37203, or at such other place as Holder may designate to Maker in writing from
time to time, the original principal sum of One Million Seven Hundred Thirteen
Thousand Nine Hundred Fifty-six and 25/100 Dollars ($1,713,956.25), or so much
thereof as may be advanced here against, together with interest on the
outstanding principal balance hereof from June 25, 1992, at an annual rate equal
to nine percent (9%) until November 21, 1997, and ten percent (10%) thereafter.
As of November 21, 1997, the effective date of this amendment and restatement of
the Original Note, the outstanding principal balance is $1,028,373.73 and the
accrued but unpaid interest is $183,078.70.
Interest on the outstanding principal balance hereof was due and
payable annually, in arrears, with the first installment being payable on
November 30, 1992, and subsequent installments being payable on each November 30
thereafter until November 30, 1996. Principal was due and payable in equal
annual installments of One Hundred Seventy One Thousand Three Hundred
Ninety-five and 63/100 Dollars ($171,395.63) each, with the first installment
being payable on November 30, 1992, and subsequent installments on each November
30 thereafter until and including November 30, 1995. No principal payment was
due on November 30, 1996.
<PAGE> 2
After November 21, 1997, the effective date of this amendment and restatement,
principal shall be due and payable as follows:
November 30, 1997 $82,464.28
November 30, 1998 122,629.37
November 30, 1999 134,892.31
November 30, 2000 148,192.94
November 30, 2001 163,200.84
November 30, 2002 179,520.92
November 30, 2003 197,473.01
It is intended that the total payment of principal and interest due on
November 30, 1997, shall be equal to $268,078.70, and that the total payment of
principal and interest due on each November 30 thereafter until November 30,
2003 shall be equal to $217,220.32. On November 30, 2003 (the "Maturity Date"),
the entire outstanding principal balance, together with all accrued and unpaid
interest, shall be immediately due and payable in full.
Time is of the essence of this Note.
In the event this Note is placed in the hands of an attorney for
collection or for enforcement or protection of the security, or if Holder incurs
any costs incident to the collection of the indebtedness evidenced hereby or the
enforcement or protection of the security, Maker and any endorsers hereof agree
to pay a reasonable attorney's fee, all court and other costs, and the
reasonable costs of any other collection efforts.
Presentment for payment, demand, protest and notice of demand, protest
and nonpayment are hereby waived by Maker and all other parties hereto. No
acceptance of a past-due installment or other indulgences granted from time to
time shall be construed as a novation of this Note or as a waiver of the right
of Holder thereafter to insist upon strict compliance with the terms of this
Note or to prevent the exercise of any right granted hereunder or by applicable
laws. Unless otherwise specifically agreed by Holder in writing, the liability
of Maker and all other persons now or hereafter liable for payment of the
indebtedness evidenced hereby, or any portion thereof, shall not be affected by
(a) any renewal hereof or other extension of the time for payment of the
indebtedness evidenced hereby or any amount due in respect thereof, (b) the
release of all or any part of any collateral now or hereafter securing the
payment of the indebtedness evidenced hereby or any portion thereof, or (c) the
release of or resort to any evidenced hereby or any portion thereof. This Note
may not be changed orally, but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification or discharge
is sought.
2
<PAGE> 3
Any renewal or extension hereof in whole or in part may provide for a
rate of interest not exceeding the greater of (a) the maximum rate of interest
from time to time allowed by applicable law (the "Maximum Rate") in effect as of
the date of this Note, or (b) the Maximum Rate in effect at the time of such
extension or renewal.
As security for the indebtedness and other obligations evidenced by
this Amended and Restated Note, the Holder shall continue to possess a security
interest in pledged common stock of the Holder pursuant to a Pledge and Security
Agreement between the parties dated June 25, 1992, with respect to the Original
Note, and such security interest shall continue until released in accordance
with such Pledge and Security Agreement. Reference to the foregoing document is
made for a statement of the additional rights and obligations of the parties
hereto as set forth in said document.
All agreements herein made are expressly limited so that in no event
whatsoever, whether by reason of advancement of proceeds hereof, or otherwise,
shall the interest and loan charges agreed to be paid to Holder for the use of
the money advanced or to be advanced hereunder exceed the maximum amounts
collectible under applicable laws in effect from time to time. If for any reason
whatsoever the interest or loan charges paid or contracted to be paid in respect
of the indebtedness evidenced hereby shall exceed the maximum amounts
collectible under applicable laws in effect from time to time, then, ipso facto,
the obligation to pay such interest and/or loan charges shall be reduced to the
maximum amounts collectible under applicable laws in effect time to time, and
any amounts collected by Holder that exceed such maximum amounts shall be
applied to the reduction of the principal balance remaining unpaid hereunder
and/or refunded to Maker so that at no time shall the interest or loan charges
paid or payable in respect of the indebtedness evidenced hereby exceed the
maximum amounts permitted from time to time by applicable law. This provision
shall control every other provision in any and all other agreements and
instruments now existing or hereafter arising between Maker and Holder with
respect to the indebtedness evidenced hereby.
Notwithstanding any provision herein to the contrary, Holder shall have
no right to assets of Maker other than the collateral described in the Pledge
Agreement, contributions (other than contributions of securities of the Payee)
that are made to Maker to meet its obligations under this Note and earnings
attributable to such collateral and the investment of such contributions.
This Note has been negotiated, executed and delivered in the State of
Tennessee, and is intended as a contract under and shall be construed and
enforceable in accordance with the laws of said state, except to the extent that
Federal law may be applicable to the determination of the Maximum Rate.
This Note may be prepaid at any time prior to the Maturity Date in
whole or in part without any penalty.
3
<PAGE> 4
As used herein, the terms "Maker" and "Holder" shall be deemed to
include their respective successors, legal representatives and assigns, whether
by voluntary action of the parties or by operation of law. In the event that
more than one person, firm or entity is a maker hereunder, then all references
to "Maker" shall be deemed to refer equally to each of said persons, firms
and/or entities, all of whom shall be jointly and severally liable for all of
the obligations of Maker hereunder.
MAKER:
SUNTRUST BANK, NASHVILLE, N.A.
as trustee of the J. Alexander's
Corporation Employee Stock
Ownership Trust
By: /s/ Robert G. Mayer
------------------------------------------
Title: Vice President
---------------------------------------
4
<PAGE> 1
Exhibit 10(h)
Exhibit 10(h) Amendment to Loan Agreement dated March 27, 1998 by and between J.
Alexander's Corporation, J. Alexander's Restaurants, Inc. and
NationsBank of Tennessee, N.A.
AMENDMENT TO LOAN AGREEMENT
THIS AMENDMENT TO LOAN AGREEMENT entered into this 27th day of March,
1998, by and among J. ALEXANDER'S CORPORATION (f/k/a VOLUNTEER CAPITAL
CORPORATION), J. ALEXANDER'S RESTAURANTS, INC. (f/k/a TOTAL QUALITY MANAGEMENT,
INC.), Tennessee corporations (collectively referred to as the "Borrower"), and
NATIONSBANK OF TENNESSEE, N.A., a national banking association ("Lender").
W I T N E S S E T H
WHEREAS, Borrower and Lender entered into that Loan Agreement dated
August 29, 1995 ("Loan Agreement") and that Line of Credit Note dated August 29,
1995 in the maximum principal amount of Thirty Million and 00/100 Dollars
($30,000,000.00) ("$30,000,000 Note"); and
WHEREAS, Volunteer Capital Corporation has changed its name to J.
Alexander's Corporation and Total Quality Management, Inc. has changed its name
to J. Alexander's Restaurants, Inc.; and
WHEREAS, Borrower and Lender desire to amend the Loan Agreement as
provided herein; and
WHEREAS, in connection therewith, Borrower has executed that Line of
Credit Note of even date herewith in the maximum principal amount of $20,000,000
payable to the order of Lender ("Line of Credit Note");
NOW, THEREFORE, for the mutual promises contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Sections l.a., b. & c. of the Loan Agreement shall be deleted in
their entirety and in their place the following shall be inserted:
a. Amount. The principal indebtedness of Borrower to Lender
under the Line of Credit shall not exceed Twenty Million and No/100
Dollars ($20,000,000).
b. Interest Rate. From the date hereof until December 31,
1998, interest shall accrue at the LIBOR Rate plus a spread of 3.0%.
Beginning on January 1, 1999 until the stated maturity of the Note,
interest shall accrue at, for any given period of 30 days (a "LIBOR
Period") the LIBOR Rate plus a spread of 2.0%, 2.25%, 2.5% or 3.0%
depending on the Senior Debt Coverage Ratio ("SDCR") as further
provided herein. If the SDCR is less than or equal to 2.75 but greater
than 2.5, the LIBOR spread will be 3.0%; if the SDCR is less than or
equal to 2.5 but
<PAGE> 2
greater than 2.25, the LIBOR spread will be 2.5%; if the SDCR is less
than or equal to 2.25 but greater than 2.0, the LIBOR spread will be
2.25%; if the SDCR is less than or equal to 2.0, the LIBOR spread will
be 2.0%:
i. As used in this Agreement, Lender's "Prime Rate" is the fluctuating
rate of interest established by Lender from time to time as its "Prime
Rate", whether or not such rate shall be otherwise published. Such
Prime Rate is established by Lender as an index or base rate and may or
may not at any time be the best or lowest rate charged by Lender on any
loan. If at any time or from time to time the Prime Rate increases or
decreases, then the rate of interest hereunder shall be correspondingly
increased or decreased effective on the day on which any such increase
or decrease of the Prime Rate changes, unless otherwise herein
provided. In the event that Lender, during the term hereof, shall
abolish or abandon the practice of establishing a Prime Rate, or should
the same become unascertainable, Lender shall designate a reasonably
comparable reference rate which shall be deemed to be the Prime Rate.
ii. For purposes hereof, the Senior Debt Coverage Ratio, ("SDCR") is
defined as Senior Funded Debt (as defined herein) divided by EBITDA,
all measured on a trailing four-quarter basis. Senior Funded Debt means
all long-term debt, the current portion of long-term debt, obligations
under Leases (both long-term and current), any notes payable or other
borrowed money, but Senior Funded Debt does not include any
subordinated or convertible debt.
iii. For purposes hereof, the "LIBOR Rate" shall mean the rate per
annum announced by Lender as its LIBOR Rate for a period equal to the
length of such LIBOR Period as adjusted, without duplication, to
reflect Lender's reserve requirements, all as calculated and announced
from time to time by Lender, whose announcement shall be binding
absent manifest error. To elect the LIBOR Rate for a LIBOR Period,
Borrower shall deliver a written election to Lender at least two (2)
business days in advance of the effective date of such election, which
notice shall specify which LIBOR Period is selected and the amount of
the Line of Credit that is to bear interest based upon the LIBOR Rate.
Interest hereunder shall be calculated based upon a 360-day year and
actual days elapsed. If the adoption of or change in any applicable
legal requirement or any change in the interpretation or
administration thereof by any governmental authority or compliance by
the Lender with any request or directive (whether or not having the
force of law) from any central bank or other governmental authority,
shall at any time as a result of any portion of the principal balance
of this Note being maintained on the LIBOR Rate:
A. Subject the Lender to any tax (including without limitation
any United States Interest Equalization Tax), levy, impost, duty,
charge, fee (collectively "Taxes"), other than income and franchise
taxes of the United States and its political subdivisions; or
2
<PAGE> 3
B. Change the basis of taxation on payments due from the
Borrower to the Lender under any LIBOR Rate Borrowing (otherwise than
by a change in the rate of taxation of the overall net income of the
Lender); or
C. Impose, modify, increase or make applicable any reserve
requirement, special deposit requirement or similar requirement
(including, but not limited to, state law requirements and Regulation
D) against assets held by the Lender, or against deposits or accounts
in or for the account of the Lender, or against any loans made by the
Lender, or against any other funds, obligations or other property owned
or held by Lender; or
D. Impose on the Lender any other condition regarding any
LIBOR Rate Borrowing;
and the result of any of the foregoing is to increase the cost to the
Lender of agreeing to make or of making, renewing or maintaining such
borrowing on the basis of the LIBOR Rate, or reduce the amount of
principal or interest received by the Lender, then, upon demand by the
Lender, the Borrower shall pay to the Lender, from time to time as
specified by the Lender, additional amounts which shall reasonably
compensate the Lender for such increased cost or reduced amount
relating to LIBOR Rate Borrowings outstanding after Lender's demand.
The Lender's reasonable determination of the amount of any such
increased cost, increased reserve requirement or reduced amount shall
be conclusive and binding, absent manifest error.
iv. In no event shall the interest rate charged on the Line of Credit
exceed the maximum rate allowed under applicable law. Any amounts paid
in excess of the maximum lawful rate shall be applied to reduce the
principal amount of Borrower's obligations to Lender or shall be
refunded to Borrower, at Lender's election. After maturity (by
acceleration or otherwise), the principal amount under the Line of
Credit shall bear interest at the rate of interest in effect
immediately before maturity plus three percent (3%).
c. Payments. Payment of all obligations arising under the Line
of Credit shall be made as follows:
(1) Interest. Interest on the outstanding principal
balance under the Line of Credit shall be paid in arrears on
the first (1st) day of each month beginning on April 1, 1998.
(2) Voluntary Prepayment. Voluntary prepayments of
principal or accrued interest may be made, in whole or in
part, at any time without penalty.
3
<PAGE> 4
(3) Mandatory Prepayment. Borrower must immediately
prepay, any amount by which the principal balance of the Line
of Credit exceeds $20,000,000.
(4) All Amounts Due. All remaining principal,
interest and expenses outstanding under the Line of Credit
shall become due July 1, 2000, unless the borrower exercises
its option to extend for a seven (7) year term, in which case
all remaining principle, interest and expenses outstanding
under the Line of Credit shall become due July 1, 2007.
(5) Conversion to Term Loan. Subject to the
provisions contained herein, Borrower has the option to
convert this Line of Credit Note to a Term Note. Providing
that Borrower is not then in default hereunder, Borrower may
make a written election to convert the Line of Credit Note to
a Term Note any time prior to July 1, 2000. The written
election must be delivered to Payee at least thirty (30) days
prior to the conversion date. After receipt of the election,
Payee has sole discretion to determine what collateral will be
required of Maker to provide security for the term loan. Payee
will notify Maker whether or in what manner the term loan
shall be securitized within fifteen (15) days after receiving
the election. Upon conversion, there will be a conversion fee
equal to one-quarter (1/4) of one percent (1%) of the then
outstanding principal balance. The unpaid principal balance
will then be repayable in eighty-four (84) equal monthly
installments of principal with the first principal payment due
thirty (30) days following the conversion date. Interest will
continue to be paid monthly at the same time as the principal
payment is due. Interest shall accrue on the Term Note at the
NationsBank Prime Rate, as it may change from time to time or
the LIBOR Rate discussed above (subject to the restriction on
the number of LIBOR borrowings discussed above) or at a fixed
rate to be determined by Payee at the time of receiving the
written election. Maker shall specify the interest rate option
(Prime Rate, LIBOR Rate or fixed) to be used in the conversion
election.
2. The first sentence of Section 1.e. of the Loan Agreement shall be
deleted and in its place the following shall be inserted:
During the term of this Agreement, Borrower may from time to time
request, repay and reborrow advances under the Line of Credit, provided
that the total principal amount outstanding under the Line of Credit
shall not at any time exceed $20,000,000 and that no event of default
or any event which with the giving of notice, the passage of time, or
both, would constitute an event of default, then exists hereunder.
3. The term Loan Documents (defined in Section 2 of the Loan Agreement)
shall include the Line of Credit Note.
4
<PAGE> 5
4. Section 30.a(4) is hereby deleted.
5. Section 30.g. shall be deleted in its entirety and in its place the
following shall be inserted:
g. Store Openings. Without the prior written approval of Lender, open
more than two (2) J. Alexander stores in any one calendar year.
6. The following shall be added as Section 30.1.:
1. Capital Expenditures. Make capital expenditures (including
capitalized leases) during fiscal year 1998 exceeding in the aggregate
$6,500,000.00, during fiscal year 1999 exceeding in the aggregate
$8,500,000 and during fiscal year 2000 exceeding in the aggregate
$8,500,000.
7 The following shall be added as Section 31.e.:
e. Profit/Loss. For the first quarter of fiscal year 1998, Borrower's
pretax loss shall not exceed $1,500,000; for the second quarter of
fiscal year 1998, Borrower's pretax loss shall not exceed $400,000 and
Borrower's cumulative pretax loss for the first two quarters of fiscal
year 1998 shall not exceed $1,700,000; for the third quarter of fiscal
year 1998, Borrower's pretax loss shall not exceed $400,000 and
Borrower's cumulative pretax loss for the first three quarters of
fiscal year 1998 shall not exceed $2,000,000; for the fourth quarter of
fiscal year 1998, Borrower's pretax profit shall exceed $200,000 and
Borrower's cumulative pretax loss for fiscal year 1998 shall not exceed
$1,500,000.
8. Section 31.c. shall be deleted in its entirety effective December
31, 1997 and in its place the following shall be inserted:
c. Senior Funded Debt to EBITDA Ratio. For the quarter ending December
31, 1998 and each quarter thereafter, Borrower's SDCR shall be less
than or equal to 2.75 to 1.0, calculated on a trailing four quarter
basis.
9. Except as amended herein, the provisions contained in the Loan
Agreement shall remain in full force and effect.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this document through
authorized agents on the day and date first above written.
NATIONSBANK OF TENNESSEE, N.A.
By: /s/ William H. Diehl
---------------------------------
Title: Senior Vice President
------------------------------
J. ALEXANDER'S CORPORATION
(f/k/a VOLUNTEER CAPITAL CORPORATION)
By: /s/ R. Gregory Lewis
---------------------------------
Title: Vice President and Chief
Financial Officer
------------------------------
J. ALEXANDER'S RESTAURANTS, INC.
(f/k/a TOTAL QUALITY MANAGEMENT, INC.)
By: /s/ R. Gregory Lewis
---------------------------------
Title: Vice President -- Finance
------------------------------
6
<PAGE> 1
Exhibit 10(i)
Exhibit 10(i) Line of Credit Note dated March 27, 1998 by and between J.
Alexander's Corporation, J. Alexander's Restaurants, Inc. and
NationsBank of Tennessee, N.A.
LINE OF CREDIT NOTE
$20,000,000.00 Nashville, Tennessee March 27, 1998
FOR VALUE RECEIVED, J. ALEXANDER'S CORPORATION (f/k/a VOLUNTEER CAPITAL
CORPORATION) and J. ALEXANDER'S RESTAURANTS, INC. (f/k/a TOTAL QUALITY
MANAGEMENT, INC.), Tennessee corporations (the "Maker"), jointly and severally
promise to pay to the order of NATIONSBANK OF TENNESSEE, N.A. ("Payee" or
"NationsBank"), the sum of Twenty Million and No/100 Dollars ($20,000,000.00),
or as much thereof as may be outstanding from time to time, together with
interest thereon as set forth below.
Advances under this Note shall be governed by that certain Loan
Agreement dated August 29, 1995, as amended by that Amendment to Loan Agreement
of even date herewith ("Loan Agreement"). Subject to the provisions of the Loan
Agreement, Maker may borrow, repay and reborrow and there is no limit on the
number of advances against this Note as long as the total unpaid principal
balance at any time outstanding does not exceed Twenty Million and No/100
Dollars ($20,000,000.00).
From the date hereof until December 31, 1998, interest shall accrue at
the LIBOR Rate plus a spread of 3.0%. Beginning on January 1, 1999 until the
stated maturity of this Note, interest shall accrue at, for any given period of
30 days (a "LIBOR Period") the LIBOR Rate plus a spread of 2.0%, 2.25%, 2.5% or
3.0% depending on the Senior Debt Coverage Ratio ("SDCR") as further provided in
the Loan Agreement.
From the date hereof until December 31, 1998, a non-usage fee of .50%
will be paid quarterly in arrears. Beginning on January 1, 1999 until the stated
maturity of this Note, a non-usage fee of either .25%, .35% or .50% based upon
the daily average unused amount and based on the SDCR will be paid quarterly in
arrears. If the SDCR is less than or equal to 2.75 but greater than 2.5, the fee
will be .50%; if the SDCR is less than or equal to 2.5 but greater than 2.25,
the fee will be .35%; if the SDCR is less than or equal to 2.25, the fee will be
.25%.
Interest in arrears shall be due and payable on the first (1st) day of
each month beginning on April 1, 1998. All remaining principal and interest
shall become due on July 1, 2000 under the three year revolver, or July 1, 2007
if the option to convert to an additional seven (7) year term loan is exercised.
Subject to the provisions contained herein, Maker has the option to
convert this Line of Credit Note to a Term Note. Providing that Borrower is not
then in default hereunder, Borrower may make a written election to convert the
Line of Credit Note to a Term Note any time prior to July 1, 2000. The written
election must be delivered to Payee at least thirty (30) days prior to the
conversion date. After receipt of the election, Payee has sole discretion to
determine what collateral will be required of Maker to provide security for the
term loan. Payee will notify Maker whether or in what manner the term loan shall
be securitized within fifteen (15) days after receiving the election. Upon
conversion, there will be a conversion fee equal to one-quarter (1/4) of one
percent (1%) of the then outstanding principal balance. The unpaid principal
balance will then be repayable in eighty-four (84) equal monthly installments of
principal with the first principal payment due thirty (30) days following the
conversion date. Interest will continue to be paid monthly at the same time as
the principal payment is due. Interest shall accrue on the Term Note at the
NationsBank Prime Rate, as it may change from time to time or the LIBOR Rate
discussed above (subject to the
<PAGE> 2
restriction on the number of LIBOR borrowings discussed above) or at a fixed
rate to be determined by Payee at the time of receiving the written election.
Maker shall specify the interest rate option (Prime Rate, LIBOR Rate or fixed)
to be used in the conversion election.
As used herein, the term "NationsBank Prime Rate" shall mean the
fluctuating rate of interest established by NationsBank from time to time as its
"Prime Rate", whether or not such rate shall be otherwise published. Such Prime
Rate is established by NationsBank as an index or base rate and may or may not
at any time be the best or lowest rate charged by NationsBank on any loan. If at
any time or from time to time the Prime Rate increases or decreases, then the
rate of interest hereunder shall be correspondingly increased or decreased
effective on the day on which any such increase or decrease of the Prime Rate
changes, unless otherwise herein provided. In the event that NationsBank, during
the term hereof, shall abolish or abandon the practice of establishing a Prime
Rate, or should the same become unascertainable, NationsBank shall designate a
comparable reference rate which shall be deemed to be the Prime Rate for
purposes hereof.
For purposes hereof, the "LIBOR Rate" shall mean the rate per annum
announced by NationsBank as its LIBOR Rate for a period equal to the length of
such LIBOR Period and in an amount comparable to the then aggregate unpaid
principal balance hereunder (or will be outstanding by the commencement of the
LIBOR Period requested by Maker) as adjusted to reflect NationsBank's reserve
requirements, all as calculated and announced from time to time by Payee, whose
announcement shall be binding absent manifest error.
Interest hereunder shall be calculated based upon a 360 day year and
actual days elapsed. The interest rate required hereby shall not exceed the
maximum rate permissible under applicable law, and any amounts paid in excess of
such rate shall be applied to reduce the principal amount hereof or shall be
refunded to Maker, at the option of the holder of this Note.
All amounts due under this Note are payable at par in lawful money of
the United States of America, at the principal place of business of Payee in
Nashville, Tennessee, or at such other address as the Payee or other holder
hereof (herein "Holder") may direct.
Any payment not made within fifteen (15) days of its due date will be
subject to assessment of a late charge equal to five percent (5%) of such
payment. Holder's right to impose a late charge does not evidence a grace period
for the making of payments hereunder.
The occurrence of any of the following shall constitute an event of
default under this Note: (a) the failure of Maker to timely pay any amount due
Holder under this Note or any other obligation to Holder if such failure
continues for ten (10) days after notice of nonpayment from Holder to Maker
provided, however, that should Holder give Maker a notice of nonpayment, then
for the twelve month period following such notice of nonpayment, Holder shall
not be required to give Maker notice of nonpayment and Maker will be in default
if it fails to make a monetary payment within ten (10) days of the due date; (b)
the institution of proceedings by Maker under any state insolvency law or under
any federal bankruptcy law; (c) the institution of proceedings against Maker
under any state insolvency law or under any federal bankruptcy law, if such
proceedings are not dismissed within sixty (60) days; (d) Maker's becoming
insolvent or generally failing to pay its debts as they become due; (e) the
discovery by Holder that Maker has made a material misrepresentation of
financial condition in any written statement made to any present or previous
Holder which remains uncured for thirty (30) days; (f) the instigation of legal
proceedings against Maker for the violation of a material criminal statute; (g)
the issuance of an attachment against property of Maker unless removed, by bond
or otherwise, within ten (10) days; (h) the entry of a
2
<PAGE> 3
judgment against Maker that remains unsatisfied for thirty (30) days after
execution may first issue; (i) Maker's liquidation or cessation of business; (j)
the occurrence of a default under the terms of any loan agreement, security
agreement, deed of trust, or similar document to which Maker is a party or to
which any property securing this Note is subject which results in the
acceleration of an indebtedness of One Hundred Thousand and 00/100 Dollars
($100,000.00) or more; or (k) the occurrence of any of the foregoing with regard
to any surety, guarantor, endorser, or other person or entity primarily or
secondarily liable for the payment of the indebtedness evidenced by this Note.
Upon the occurrence of an event of default, as defined above, Holder
may, at its option and without notice, terminate any obligation to advance funds
under this Note, declare all principal and interest provided for under this
Note, and any other obligations of Maker to Holder; to be presently due and
payable, and Holder may enforce any remedies available to Holder under any
documents securing or evidencing debts of Maker to Holder. Holder may waive any
default before or after it occurs and may restore this Note in full effect
without impairing the right to declare it due for a subsequent default, this
right being a continuing one. Upon default, at Holder's election, the remaining
unpaid principal balance of the indebtedness evidenced hereby and all expenses
due Holder shall bear interest at the interest rate in effect immediately before
the default plus three percent (3%).
All amounts received for payment of this Note shall be first applied to
any expenses due Holder under this Note or under any other documents evidencing
or securing obligations of Maker to Holder, then to accrued interest, and
finally to the reduction of principal. Prepayment of principal or accrued
interest may be made, in whole or in part, at any time without penalty. Any
prepayment(s) shall reduce the final payment(s) and shall not reduce or defer
installments next due.
This Note may be freely transferred by Holder.
Maker and all sureties, guarantors, endorsers and other parties to this
instrument hereby consent to any and all renewals, waivers, modifications, or
extensions of time (of any duration) that may be granted by Holder with respect
to this Note and severally waive demand, presentment, protest, notice of
dishonor, and all other notices that might otherwise be required by law. All
parties hereto waive the defense of impairment of collateral and all other
defenses of suretyship.
Maker's performance under this Note is unsecured. There will be a
negative pledge on existing unencumbered assets, as further described in the
Loan Agreement.
Maker and all sureties, guarantors, endorsers and other parties hereto
agree to pay reasonable attorneys' fees and all court and other costs that
Holder may incur in the course of efforts to collect the debt evidenced hereby
or to protect Holder's interest in any collateral securing the same.
The validity and construction of this Note shall be determined
according to the laws of Tennessee applicable to contracts executed and
performed within that state. If any provision of this Note should for any reason
be invalid or unenforceable, the remaining provisions hereof shall remain in
full effect.
The provisions of this Note may be amended or waived only by instrument
in writing signed by the Holder and Maker and attached to this Note.
3
<PAGE> 4
Any controversy or claim between or among the parties to this Note or
any related loan or collateral agreements or instruments (collectively, "Loan
Documents"), including any claim based on or arising from an alleged tort, shall
be determined by binding arbitration in accordance with the Federal Arbitration
Act (or if not applicable, the applicable state law), the Rules of Practice and
Procedure for the arbitration of commercial disputes of Judicial Arbitration and
Mediation Services, Inc. (J.A.M.S.), and the "special rules" set forth below. In
the event of any inconsistency, the special rules shall control. Judgment upon
any arbitration award may be entered in any court having jurisdiction. Any party
to the Loan Documents may bring an action, including a summary or expedited
proceeding, to compel arbitration of any controversy or claim to which this
agreement applies in any court having jurisdiction over such action.
The following "Special Rules" shall apply. The arbitration shall be
conducted in Nashville, Tennessee and administered by J.A.M.S. who will appoint
an arbitrator; if J.A.M.S. is unable or legally precluded from administering the
arbitration, then the American Arbitration Association will serve. All
arbitration hearings will be commenced within 90 days of the demand for
arbitration; further, the arbitrator shall only, upon a showing of cause, be
permitted to extend the commencement of such hearing for up to an additional 60
days.
Nothing in foregoing arbitration shall be deemed to (i) limit the
applicability of any otherwise applicable statutes of limitation or repose and
any waivers contained in the Loan Documents; or (ii) be a waiver by NationsBank
of the protection afforded to it by 12 U.S.C. Sec. 91 or any substantially
equivalent state law; or (iii) limit the rights of NationsBank under the Loan
Documents (a) to exercise self help remedies such as (but not limited to)
set-off, or (b) to foreclose against any real or personal property collateral,
or (c) to obtain from a court provisional or ancillary remedies such as (but not
limited to) injunctive relief, possession of collateral or the appointment of a
receiver. NationsBank may exercise such self help rights, foreclose upon such
property, or obtain such provisional or ancillary remedies before, during or
after the pendency of any arbitration proceeding brought pursuant to the Loan
Documents. At NationsBank's option, foreclosure under a deed of trust or
mortgage may be accomplished by any of the following: the exercise of a power of
sale under the deed of trust or mortgage, or by judicial sale under the deed of
trust or mortgage, or by judicial foreclosure. Neither this exercise or self
help remedies nor the institution or maintenance of an action for foreclosure or
provisional or ancillary remedies shall constitute a waiver of the right of any
party, including the claimant in any such action, to arbitrate the merits of the
controversy or claim occasioning resort to such remedies.
4
<PAGE> 5
Words used herein indicating gender or number shall be read as context may
require.
J. ALEXANDER'S CORPORATION
(f/k/a VOLUNTEER CAPITAL CORPORATION)
By: /s/ R. Gregory Lewis
---------------------------------
Title: Vice President and Chief
Financial Officer
------------------------------
J. ALEXANDER'S RESTAURANTS, INC.
(f/k/a TOTAL QUALITY MANAGEMENT, INC.)
By: /s/ R. Gregory Lewis
---------------------------------
Title: Vice President -- Finance
------------------------------
5
<PAGE> 1
Exhibit 18
Exhibit 18 -- Letter from Independent Auditors addressing the Company's change
of accounting principle related to pre-opening costs.
March 27, 1998
Mr. R. Gregoary Lewis
Vice President and Chief Financial Officer
J. Alexander's Corporation
3401 West End Avenue, Suite 260
Nashville, TN 37203
Dear Mr. Lewis:
The Summary of Significant Accounting Policies Note of Notes to the Consolidated
Financial Statements of J. Alexander's Corporation and Subsidiaries included in
its Form 10-K for the year ended December 28, 1997 describes a change in the
method of accounting for pre-opening costs from the deferral and amortization of
such costs over twelve months to expensing such costs as incurred. You have
advised us that you believe that the change is to a preferable method in your
circumstances because the future economic benefits resulting from costs of
pre-opening activities have indeterminate lives and, therefore, any related
amortization periods would be arbitrary.
There are no authoritative criteria for determining a "preferable" method of
accounting for pre-opening costs based on the particular circumstances, however,
we conclude that the change in the method of accounting for pre-opening costs is
to an acceptable alternative method which, based on your business judgment to
make this change for the reasons cited above, is preferable in your
circumstances.
Very truly yours,
Ernst & Young LLP
<PAGE> 1
EXHIBIT 21--SUBSIDIARIES OF J. ALEXANDER'S CORPORATION
<TABLE>
<CAPTION>
STATE OF NAME UNDER WHICH
SUBSIDIARY INCORPORATION BUSINESS IS DONE
- ---------- ------------- ----------------
<S> <C> <C>
J. Alexander's Restaurants, Inc. Tennessee J. Alexander's Restaurant
J. Alexander's Restaurants of Kansas, Inc. Kansas J. Alexander's Restaurant
J. Alexander's Restaurants of Texas, Inc. Texas J. Alexander's Restaurant
</TABLE>
<PAGE> 1
Exhibit 23
Consent of Ernst & Young LLP, Independent Auditors
We 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 27, 1998, with respect to the consolidated financial
statements and schedule of J. Alexander's Corporation included in the Annual
Report (Form 10-K) for the year ended December 28, 1997.
Ernst & Young LLP
Nashville, Tennessee
March 27, 1998
<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 28, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 134
<SECURITIES> 0
<RECEIVABLES> 241
<ALLOWANCES> 0
<INVENTORY> 689
<CURRENT-ASSETS> 2,007
<PP&E> 67,895
<DEPRECIATION> 7,322
<TOTAL-ASSETS> 64,421
<CURRENT-LIABILITIES> 8,543
<BONDS> 20,231
0
0
<COMMON> 272
<OTHER-SE> 34,723
<TOTAL-LIABILITY-AND-EQUITY> 64,421
<SALES> 57,138
<TOTAL-REVENUES> 57,138
<CGS> 19,480
<TOTAL-COSTS> 38,351
<OTHER-EXPENSES> 13,673
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,030
<INCOME-PRETAX> (2,421)
<INCOME-TAX> 2,685
<INCOME-CONTINUING> (5,106)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (885)
<NET-INCOME> (5,991)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
