<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For quarterly period ended March 29, 1998
------------------------------------------------
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)
<TABLE>
<CAPTION>
Tennessee 62-0854056
--------- ----------
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
3401 West End Avenue, Suite 260, P.O. Box 24300, Nashville, Tennessee 37202
---------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(615)269-1900
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
----- -----
Common Stock Outstanding - 5,421,298 shares at May 11, 1998.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
MARCH 29 December 28
1998 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................. $ 916 $ 134
Accounts and notes receivable, including current portion of
direct financing leases ................................. 160 241
Inventories ............................................... 697 689
Deferred income taxes ..................................... 400 400
Prepaid expenses and other current assets ................. 474 387
Net assets held for disposal .............................. 156 156
------- -------
TOTAL CURRENT ASSETS .................................... 2,803 2,007
OTHER ASSETS ................................................. 1,108 1,167
PROPERTY AND EQUIPMENT, at cost, less allowances for
depreciation and amortization of $8,183 and $7,322 at
March 29, 1998, and December 28, 1997, respectively ....... 61,170 60,573
DEFERRED CHARGES, less amortization .......................... 652 674
------- -------
$65,733 $64,421
======= =======
</TABLE>
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<PAGE> 3
<TABLE>
<CAPTION>
MARCH 29 December 28
1998 1997
-------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................. $ 3,748 $ 3,573
Accrued expenses and other current liabilities ................... 3,990 3,048
Current portion of long-term debt and obligations under
capital leases ................................................. 1,918 1,922
-------- --------
TOTAL CURRENT LIABILITIES ...................................... 9,656 8,543
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL
LEASES, net of portion classified as current ..................... 21,524 20,231
DEFERRED COMPENSATION AND OTHER DEFERRED CREDITS .................... 662 652
STOCKHOLDERS' EQUITY
Common Stock, par value $.05 per share: Authorized 10,000,000
shares; issued and outstanding 5,421,298 and 5,421,538 shares at
March 29, 1998, and December 28, 1997, respectively ............ 272 272
Preferred Stock, no par value: Authorized 1,000,000 shares; none
issued ......................................................... -- --
Additional paid-in capital ....................................... 29,909 29,909
Retained earnings ................................................ 4,653 5,757
-------- --------
34,834 35,938
Note receivable - Employee Stock Ownership Plan .................. (943) (943)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ..................................... 33,891 34,995
-------- --------
$ 65,733 $ 64,421
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
-3-
<PAGE> 4
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Quarter Ended
-------------
MARCH 29 March 30
1998 1997
-------- --------
<S> <C> <C>
Net sales ............................................. $ 17,512 $ 14,032
Costs and expenses:
Cost of sales ...................................... 6,192 4,759
Restaurant labor and related costs ................. 5,965 4,442
Depreciation and amortization of restaurant property
and equipment .................................... 853 642
Other operating expenses ........................... 3,364 2,475
-------- --------
Total restaurant operating expenses .............. 16,374 12,318
-------- --------
Income from restaurant operations ..................... 1,138 1,714
General and administrative expenses ................... 1,495 1,158
Pre-opening expense ................................... 311 220
-------- --------
Operating income (loss) ............................... (668) 336
-------- --------
Other income (expense):
Interest expense ................................... (418) (247)
Interest income .................................... -- 116
Other, net ......................................... (18) 22
-------- --------
Total other income (expense) ..................... (436) (109)
-------- --------
Income (loss) before income taxes ..................... (1,104) 227
Income tax provision .................................. -- 54
-------- --------
Income (loss) before cumulative effect of change in
accounting principle ............................... (1,104) 173
Cumulative effect of change in accounting principle ... -- (885)
-------- --------
Net loss .............................................. $ (1,104) $ (712)
======== ========
Basic earnings per share:
Income (loss) before accounting change ............. $ (.20) $ .03
Cumulative effect of change in accounting principle -- (.16)
-------- --------
Net loss ........................................... $ (.20) $ (.13)
======== ========
Diluted earnings per share:
Income (loss) before accounting change ............. $ (.20) $ .03
Cumulative effect of change in accounting principle -- (16)
-------- --------
Net loss ........................................... $ (.20) $ (.13)
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
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<PAGE> 5
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED IN THOUSANDS)
<TABLE>
<CAPTION>
Quarter Ended
MARCH 29 March 30
1998 1997
-------- --------
<S> <C> <C>
Net cash provided (used) by operating activities ....... $ 1,034 $ (231)
Net cash (used) by investing activities:
Purchase of property and equipment .................. (1,613) (4,206)
Other investing activities .......................... 72 (11)
------- --------
(1,541) (4,195)
Net cash provided by financing activities:
Payments on debt and obligations under capital leases (15) (13)
Proceeds under bank line of credit agreement......... 6,476 --
Payments under bank line of credit agreement......... (5,172) --
Other financing activities .......................... -- 232
------- --------
1,289 219
Increase (decrease) in Cash and Cash Equivalents ....... 782 (4,207)
Cash and cash equivalents at beginning of period ....... 134 12,549
------- --------
Cash and Cash Equivalents at End of Period ............. $ 916 $ 8,342
======= ========
</TABLE>
See notes to consolidated condensed financial statements.
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<PAGE> 6
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Certain reclassifications have been made in
the prior year's consolidated condensed financial statements to conform to the
1998 presentation. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 29, 1998, are
not necessarily indicative of the results that may be expected for the fiscal
year ending January 3, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended December 28, 1997.
NOTE B - SALE OF WENDY'S RESTAURANT OPERATIONS
In connection with the sale of its Wendy's restaurants in 1996, the
Company established various accruals for termination benefits and other costs
associated with its exit from the Wendy's business. At March 29, 1998, the
Company continues to maintain accruals related to the exit of the Wendy's
business totaling $474,000.
NOTE C - PRE-OPENING COSTS
Effective with the beginning of fiscal 1997, the Company changed its
method of accounting for pre-opening costs from amortizing such costs over 12
months subsequent to the restaurant's opening date to expensing 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 the
first quarter of fiscal 1997, as restated. The impact of this change in the
first quarter of fiscal 1997, in addition to the cumulative effect, was to
decrease the net loss by $110,000 ($.02 per share). 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.
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<PAGE> 7
NOTE D - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Quarter Ended
MARCH 29 March 30
1998 1997
-------- --------
<S> <C> <C>
NUMERATOR:
Income (loss) before cumulative effect of change in
accounting principle ............................... $(1,104) $ 173
Cumulative effect of change in accounting principle ..... -- (885)
------- -------
Net loss (numerator for basic earnings per share) ....... (1,104) (712)
Effect of dilutive securities ........................... -- --
------- -------
Net loss after assumed conversions (numerator for diluted
earnings per share) ................................ $(1,104) $ (712)
======= =======
DENOMINATOR:
Weighted average shares (denominator for basic earnings
per share) ......................................... 5,421 5,356
Effect of dilutive securities:
Employee stock options ............................. -- 139
------- -------
Adjusted weighted average shares and assumed conversions
(denominator for diluted earnings per share) ....... 5,421 5,495
======= =======
Basic earnings per share:
Income (loss) before accounting change ............. $ (.20) $ .03
Cumulative effect of change in accounting principle -- (.16)
------- -------
Net loss ........................................... $ (.20) $ (.13)
======= =======
Diluted earnings per share:
Income (loss) before accounting change ............. $ (.20) $ .03
Cumulative effect of change in accounting principle -- (.16)
------- -------
Net loss ........................................... $ (.20) $ (.13)
======= =======
</TABLE>
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 for the quarter ended March 29, 1998,
all 662,650 options outstanding were excluded from the computation of diluted
earnings per share. For the quarter ended March 30, 1997, options to purchase
235,850 shares of common stock, ranging in price from $9.75 to $13.00, were
excluded from the computation of diluted earnings per share due to their
antidilutive effect.
NOTE E: COMPREHENSIVE INCOME
As of December 29, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components. The adoption of this Statement had no impact on the
Company's results of operations or shareholders' equity. During the first
quarter of 1998 and 1997, total comprehensive income amounted to losses of
$1,104,000 and $712,000, respectively.
-7-
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, (i) the
percentages which the items in the Company's Consolidated Statements of
Operations bear to total net sales, and (ii) other selected operating data:
<TABLE>
<CAPTION>
Quarter Ended
MARCH 29 March 30
1998 1997
-------- --------
<S> <C> <C>
Net sales .................................................... 100.0% 100.0%
Costs and expenses:
Cost of sales ........................................... 35.4 33.9
Restaurant labor and related costs ...................... 34.1 31.7
Depreciation and amortization of restaurant property and
equipment ........................................... 4.9 4.6
Other operating expenses ................................ 19.2 17.6
------- -------
Total restaurant operating expenses ................. 93.5 87.8
Income from restaurant operations ............................ 6.5 12.2
General and administrative expenses .......................... 8.5 8.3
Pre-opening expense .......................................... 1.8 1.6
------- -------
Operating income (loss) ...................................... (3.8) 2.4
Other income (expense):
Interest expense ........................................ (2.4) (1.8)
Interest income ......................................... -- 0.8
Other, net .............................................. (0.1) 0.2
------- -------
Total other income (expense) ........................ (2.5) (0.8)
Income (loss) before income taxes ............................ (6.3) 1.6
Income tax provision ......................................... -- 0.4
------- -------
Income (loss) before cumulative effect of change in accounting
principle ............................................... (6.3) 1.2
Cumulative effect of change in accounting principle .......... -- (6.3)
------- -------
Net loss ..................................................... (6.3)% (5.1)%
======= =======
Restaurants open at end of period ............................ 19 14
======= =======
Weighted average weekly sales per restaurant:
All restaurants ......................................... $73,900 $77,100
Same store restaurants .................................. 76,900 77,100
</TABLE>
-8-
<PAGE> 9
NET SALES
Net sales increased $3,480,000, or 24.8%, for the first quarter of
1998, as compared to the same period of 1997, due to the opening of new
restaurants. Same store sales, which include comparable sales for the 14
restaurants open for more than 12 months, decreased by .3% for the quarter.
Weighted average weekly sales for all restaurants declined by 4.2% as compared
to the first quarter of 1997 primarily as a result of lower sales volumes in new
restaurants.
Sales volumes in several of the Company's restaurants, including three
opened in 1997, are currently below management's expectations. The Company has
undertaken a number of initiatives to improve sales in these restaurants and
most of them are currently showing positive sales trends. Steps taken to improve
sales include increased emphasis on improving service levels to the very high
standards set by the Company and the implementation of operational systems
designed to provide quicker service and increase table turns. A menu price
increase of approximately 3% was implemented in March of 1998 and a similar
increase is planned for May 1998. Same store sales have continued to strengthen
in the second quarter and were up approximately 2% for the month of April.
COSTS AND EXPENSES
Restaurant costs and expenses increased to 93.5% of net sales for the
first quarter of 1998, compared to 87.8% for the corresponding quarter of 1997,
primarily due to the effects of new restaurant openings as described above.
Consequently, restaurant operating income as a percentage of sales decreased to
6.5% from 12.2%. Restaurant operating income for the 1998 same store group of 14
restaurants decreased to 11.3% of sales in 1998 from 12.2% in the first quarter
of 1997. An increase in the other operating expenses category accounted for most
of the decrease in the same store operating margin, which was attributable to
increases in repair and maintenance expenditures, property taxes and certain
other expenses.
Because of the high level of costs necessary to deliver and sustain the
high levels of food quality, service and ambiance which are components of the J.
Alexander's concept, management believes that it is critical that sales be
improved significantly in a number of the Company's restaurants in order to
achieve an acceptable level of profitability. Management believes that all or
virtually all of the Company's restaurants have the potential over time to reach
satisfactory sales levels.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, which include management training
costs and all other costs above the restaurant level, were 8.5% of sales for the
first quarter of 1998, compared to 8.3% of sales for the same period of the
prior year. Relocation of restaurant management personnel and increased
corporate office rent resulting from the expiration and renegotiation of the
Company's office space lease in mid-1997 were two of the primary factors
contributing to this increase. General and administrative expenses are not
expected to increase significantly for the remainder of 1998 and, as a
percentage of sales, are expected to be below the 1997 level for the remainder
of the year.
-9-
<PAGE> 10
PRE-OPENING EXPENSE
In 1997 the Company changed its accounting policy for pre-opening costs
to expense them as incurred, rather than deferring and amortizing them over a
period of 12 months from each restaurant's opening. This change was effective as
of the beginning of 1997 and resulted in a charge of $885,000 in the first
quarter of 1997 to record its cumulative effect. The increase in pre-opening
expense in the first quarter of 1998 compared to the first quarter of 1997, as
restated to reflect the new accounting policy, was due to the timing of
restaurant openings and related costs in the respective periods.
OTHER INCOME (EXPENSE)
Interest expense increased by $171,000 during the first quarter of 1998
compared to the same period of the prior year due to the use of the Company's
line of credit to fund development of new restaurants in 1997 and due to lower
amounts of capitalized interest resulting from the Company's lower new unit
development rate for 1998.
There was no interest income for the first quarter of 1998 compared to
$116,000 for the same period of 1997 due to the use in 1997 of the remaining
proceeds from the Company's Wendy's divestiture in 1996 to fund a portion of the
cost of developing new J. Alexander's restaurants.
INCOME TAXES
No income tax benefit was recorded on the pre-tax loss for the first
quarter of 1998 as management was unable to conclude that it was more likely
than not that the carryforwards generated by this and previous losses would be
realized. A tax provision of 23.8% of pre-tax income was recorded for the first
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, the Company had cash flow from
operations of $1,034,000 as compared to a cash flow deficit from operations of
$231,000 in the first quarter of 1997. Cash and cash equivalents increased from
$134,000 at year end 1997 to $916,000 at March 29, 1998.
The Company's primary need for capital is expected to continue to be
capital expenditures for the development and maintenance of its J. Alexander's
restaurants. In addition, on June 1, 1998, the Company will be required to meet
an annual sinking fund payment of approximately $1,875,000 in connection with
its Convertible Subordinated Debentures, a portion of which will be satisfied
through the delivery of bonds purchased in the open market subsequent to the end
of the first quarter.
The Company opened one new restaurant in March of 1998 and plans to
open one additional restaurant during the year. Capital expenditures for the
first quarter of 1998 were $1,487,000. For the full year, management estimates
that capital expenditures will be $4 million to $6 million, the variance
depending primarily on the amount, if any, expended for restaurants to be opened
in 1999.
-10-
<PAGE> 11
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 March 29, 1998, borrowings outstanding under this line of credit
were approximately $7,500,000. 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.
FORWARD-LOOKING STATEMENTS
Certain information contained in this Form 10-Q, particularly
information regarding future economic performance and finances, development
plans, and objectives of management is forward-looking information that involves
risks, uncertainties and other factors that could cause actual results to differ
materially from those expressed or implied by forward-looking statements.
Factors which could affect actual results include, but are not limited to, the
Company's ability to increase sales in certain of its restaurants; the Company's
ability to recruit and train qualified restaurant management personnel;
competition within the casual dining industry, which is very intense; changes in
business and economic conditions; changes in consumer tastes; and government
regulations.
-11-
<PAGE> 12
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit (27) Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed for the quarter ended March 29,
1998.
-12-
<PAGE> 13
SIGNATURES
Pursuant to the requirements 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
/s/ Lonnie J. Stout II
-----------------------------------------------
Lonnie J. Stout II
Chairman, President and Chief Executive Officer
/s/ R. Gregory Lewis
-----------------------------------------------
R. Gregory Lewis
Vice-President and Chief Financial Officer
Date: May 12, 1998
-13-
<PAGE> 14
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Page No.
- ----------- --------
<S> <C> <C>
(27) Financial Data Schedules (For SEC Use Only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTH PERIOD
ENDED MARCH 29, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 916
<SECURITIES> 0
<RECEIVABLES> 160
<ALLOWANCES> 0
<INVENTORY> 697
<CURRENT-ASSETS> 2,803
<PP&E> 69,353
<DEPRECIATION> 8,183
<TOTAL-ASSETS> 65,733
<CURRENT-LIABILITIES> 9,656
<BONDS> 21,524
0
0
<COMMON> 272
<OTHER-SE> 33,619
<TOTAL-LIABILITY-AND-EQUITY> 65,733
<SALES> 17,512
<TOTAL-REVENUES> 17,512
<CGS> 6,192
<TOTAL-COSTS> 12,157
<OTHER-EXPENSES> 4,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 418
<INCOME-PRETAX> (1,104)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,104)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,104)
<EPS-PRIMARY> $(.20)
<EPS-DILUTED> $(.20)
</TABLE>
