-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DCbQtyhdBERFmoFiEDkaS3it+6QjowRo9mFpSuNSKTw6/+CMDOk0EZTzf0I64vdN +Ydp+ok+x5ykIo0vq8XTkQ== 0000950144-96-001457.txt : 19960402 0000950144-96-001457.hdr.sgml : 19960402 ACCESSION NUMBER: 0000950144-96-001457 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VOLUNTEER CAPITAL CORP / TN / CENTRAL INDEX KEY: 0000103884 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 620854056 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08766 FILM NUMBER: 96542560 BUSINESS ADDRESS: STREET 1: 3401 WEST END AVE STREET 2: P O BOX 24300 CITY: NASHVILLE STATE: TN ZIP: 37202 BUSINESS PHONE: 6152691900 MAIL ADDRESS: STREET 1: 3401 WEST END AVE STREET 2: SUITE 260 CITY: NASHVILLE STATE: TN ZIP: 37202 FORMER COMPANY: FORMER CONFORMED NAME: WINNERS CORP DATE OF NAME CHANGE: 19890910 FORMER COMPANY: FORMER CONFORMED NAME: VOLUNTEER CAPITAL CORP DATE OF NAME CHANGE: 19820520 10-K405 1 VOLUNTEER CAPITAL CORP FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ Annual Report Pursuant to Section l3 or l5(d) of The Securities Exchange Act of l934 For the fiscal year ended December 31, 1995. or / / Transition Report pursuant to Section 13 or 15(d) of the Securities Exhange Act of 1934 For the transition period from to ---------------- ------------------- Commission file number 1-8766 VOLUNTEER CAPITAL 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 6l5/ 269-1900 ------------- Securities registered pursuant to Section 12(b) of the Act:
Title of Class: Name of each exchange 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 l2(g) of the Act: None Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section l3 or l5(d) of the Securities Exchange Act of l934 during the preceding l2 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sales price on the New York Stock Exchange of such stock as of March 25, 1996, was $42,267,960, 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 Volunteer Capital 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, 1996, was 5,276,972. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995, are incorporated by reference into Parts I and II. Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders to be held May 14, 1996, are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS Volunteer Capital Corporation (the "Company") operates 58 franchised Wendy's Old Fashioned Hamburgers restaurants ("Wendy's Restaurants") located in Louisiana, Massachusetts, North Carolina and South Carolina, making it a major franchisee of Wendy's International, Inc. ("Wendy's International"). The Company has been a franchisee of Wendy's International since 1975. Wendy's restaurants are quick-service, limited menu restaurants that feature hamburgers and boneless breast of chicken sandwiches, an all-you-can-eat food bar and complementary items. The Company also operates as a proprietary concept nine J. Alexander's full-service, casual dining restaurants located in Tennessee, Ohio, Florida, Kansas, Alabama and Illinois. J. Alexander's is a traditional restaurant with an American menu that features prime rib of beef; mesquite-grilled steaks, seafood and chicken; pasta; salads and soups; assorted sandwiches, appetizers and desserts; and a full-service bar. Management believes quality food, outstanding service and value are critical to the success of J. Alexander's. Management intends to concentrate on development of new J. Alexander's restaurants and may also consider use of the Company's capital resources for acquisitions of restaurants similar to J. Alexander's. Unless the context requires otherwise, all references to the Company include Volunteer Capital Corporation and its subsidiaries. Information concerning net sales and operating results of the Company's Wendy's Restaurants and J. Alexander's restaurants is set forth in "Management's Discussion and Analysis" on pages 16 through 23 of the Company's 1995 Annual Report to Shareholders. For information concerning business segments, see Note K on page 38 of the Company's 1995 Annual Report to Shareholders. WENDY'S RESTAURANT OPERATIONS Menu and Format. Each of the Company's Wendy's Restaurants offers a relatively standard menu. Hamburgers are prepared using only fresh beef and with the customer's choice of cheese, tomato and various condiments. Other menu items include boneless breast of chicken sandwiches, the SuperBar (an all-you-can-eat hot and cold food buffet), chili, french fried and baked potatoes, prepared salads, a child's meal, Frosty Dairy Dessert, and an assortment of soft drinks and other non-alcoholic beverages. Selected lower-priced menu items offered as the Super Value Menu constitute an important part of Wendy's product offerings. Specialty premium sandwiches are also featured as part of certain promotions. In addition, the Company has continued to promote its SuperBars, which feature a double-sided Garden Spot salad bar, a Mexican food section and an Italian-style pasta section, as one of its primary menu offerings. The Company currently operates 24 Wendy's Restaurants in the greater Greenville and Spartanburg, South Carolina/Asheville, North Carolina region; 11 restaurants in the greater Columbia, South Carolina area; seven restaurants in the Myrtle Beach, South Carolina area; 10 restaurants in Baton Rouge, Louisiana; and six restaurants in western Massachusetts. At current development costs and due to various restrictions placed upon the Company's Wendy's division as a franchisee, the Company is having difficulty locating sites which meet its investment criteria. For that reason, the Company does not presently anticipate developing any additional Wendy's restaurants in 1996. The Company anticipates that any future development and/or acquisition of Wendy's restaurants generally will occur in the market areas in which the Company currently operates. The Company believes that the clustering of Wendy's Restaurants in defined geographic markets allows the Company to take advantage of advertising, operating and administrative efficiencies. The Company has no exclusive development rights in any of its current market areas; however, it may develop and acquire additional Wendy's restaurants, subject to the approval of Wendy's International. 2 3 Agreements with Wendy's International. The Company and Wendy's International have executed a separate Unit Franchise Agreement for each Wendy's Restaurant, which grants the Company an exclusive franchise for that Wendy's Restaurant to use the trademarks, service marks and certain other rights of Wendy's International. Each Unit Franchise Agreement has a 20-year term (with varying renewal periods subject to certain conditions) and requires the Company to pay Wendy's International an initial franchise fee for that Wendy's Restaurant and a monthly fee equal to 4% of the restaurant's gross sales. Additionally, the Company must spend an amount equal to 4% of the sales of each restaurant for advertising and promotion, which includes the current 2.5% contribution to a national cooperative advertising fund. Under the terms of the Unit Franchise Agreements, Wendy's International agrees to provide certain ongoing services to the Company, including training programs, operations manuals and standard building plans and specifications. Wendy's International has the right to supervise, determine and approve the quality of service and food preparation at the Company's Wendy's Restaurants, which it periodically inspects for compliance with Wendy's established operating standards. Any continuing material noncompliance with these standards gives Wendy's International the right to terminate the Unit Franchise Agreement for that restaurant. The Company has never received any such notice from Wendy's International with respect to restaurants it operates. Termination of any single Unit Franchise Agreement would not affect the Company's rights under other Unit Franchise Agreements for its Wendy's Restaurants. The Company has agreed with Wendy's International that any proposed sale or transfer which would reduce the Company's direct or indirect ownership of its Wendy's Restaurants to less than 51% is subject to a right of first refusal or, in certain circumstances, consent, by Wendy's International. In addition, any sale, transfer, assignment or encumbrance of a Unit Franchise Agreement requires the prior written consent of Wendy's International. The Company has also granted to Wendy's International a right of first refusal or, in certain circumstances, consent, in the event that the Company receives an acceptable bona fide offer from a third party to acquire the Company's business through an exchange offer, merger, share exchange, sale of assets or other transaction of similar effect. These agreements, under certain circumstances, may discourage a third party from acquiring or attempting to acquire the Company. J. ALEXANDER'S RESTAURANT OPERATIONS General. J. Alexander's is a quality casual dinner house with an American theme. J. Alexander's strategy is to provide a broad range of high-quality menu items that are intended to appeal to a wide range of consumer tastes and are served by a courteous, friendly and well-trained service staff. The Company believes that quality food, outstanding service and value are critical to the success of J. Alexander's. Each restaurant is open from 11:00 a.m. to 11:00 p.m. Sunday through Thursday and 11:00 a.m. to 12:00 midnight on Friday and Saturday. Entrees available at lunch and dinner range in price from $5.75 to $24.95. The Company estimates that the average check per customer, excluding alcoholic beverages, is approximately $12.75. J. Alexander's net sales during fiscal 1995 were $25.6 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 following restaurants have been developed:
Location Date Opened -------- ----------- Franklin, Tennessee September, 1992 Dayton, Ohio December, 1992 Columbus, Ohio April, 1994 Oak Brook, Illinois October, 1994 Ft. Lauderdale, Florida February, 1995 Hoover, Alabama August, 1995 Toledo, Ohio November, 1995 Overland Park, Kansas December, 1995
The Company plans to open five J. Alexander's restaurants in 1996, four of which are currently being developed in Cleveland, Ohio; Plantation, Florida; Chattanooga, Tennessee; and Troy, Michigan, a leased location. The Cleveland restaurant is scheduled to open in the second quarter of 1996, with the remaining three restaurants scheduled for third quarter openings. A fifth new restaurant is expected to open before year-end along with a smaller test version of J. Alexander's which serves dinner only. 3 4 Menu. The J. Alexander's menu is designed to appeal to a wide variety of tastes and features prime rib of beef; mesquite-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, pasta sauces, salsa, salad dressings and desserts are made daily from scratch; steaks, chicken and seafood are grilled over genuine mesquite wood; all steaks are U.S.D.A. Choice Beef, aged a minimum of 21 days and cut by hand in the kitchen; and imported Italian pasta, topped with fresh grated imported Reggiano Grassi parmesan cheese, is used. Emphasis on quality is present throughout the entire J. Alexander's menu. Milkshakes are made from Haagen-Dazs ice cream, with flavoring being the only addition. Desserts such as chocolate cake, carrot cake and banana cream pie are prepared in-house, and each restaurant bakes its featured croissants. Each J. Alexander's also makes its own tortilla chips and prepares fresh tortilla strips and baked croutons for its salads. Customer Service. Management believes that prompt, courteous and efficient service is an integral part of the J. Alexander's concept. The management staff of each restaurant are referred to as "coaches" and the other employees as "champions". The Company seeks to hire coaches who are committed to the principle that quality products and service are key factors to success in the restaurant industry. Each J. Alexander's restaurant typically employs five to six fully-trained concept coaches and two kitchen coaches. The coaches typically have previous experience in full-service restaurants and complete an intensive 18-week J. Alexander's development program involving all aspects of restaurant operations. Coaches for each new J. Alexander's restaurant also train at an existing restaurant prior to the opening of a new J. Alexander's. Each J. Alexander's has approximately 55 to 70 service personnel, 25 to 30 kitchen employees, 10 hostpersons and six to eight bartenders. The Company places significant emphasis on its initial training program. In addition, the coaches hold training breakfasts for the service staff to further enhance their product knowledge. Management believes J. Alexander's restaurants have a low table to server ratio, which is designed to provide better, more attentive service. The Company is committed to employee empowerment, and each member of the service staff is authorized to provide complimentary entrees in the event that a guest has an unsatisfactory dining experience or the food quality is not up to the Company's standards. Further, all members of the service staff are trained to know the Company's product specifications and to alert management as to any potential problems. Quality Assurance. A key position in each J. Alexander's restaurant is the quality control coordinator. This position is staffed by a coach who inspects each plate of food before it is served to a guest. The Company believes that this product inspection by a member of management is a significant key to maintaining consistent, high food quality in its restaurants. Another important component of the quality assurance system is the preparation of taste plates. Certain menu items are periodically taste-tested by a coach to ensure that only the highest quality food is served in the restaurant. The Company also uses a mystery shopper program to monitor service staff performance, food quality and customer satisfaction. Restaurant and Site Selection. The J. Alexander's restaurants built from 1992 through 1995 are 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. The initial cost of developing the J. Alexander's restaurants, including land, building and equipment and excluding pre-opening costs, has ranged from approximately $2,300,000 to $3,900,000. While the cost of land has been a significant variable in development cost, costs related to site preparation and buildings have also varied considerably. Management is presently developing additional building images for J. Alexander's and expects that the cost of additional new units, including the cost of land, will be within the range of $3,000,000 to $3,800,000. Pre-opening costs are expected to be approximately $250,000 for each 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. 4 5 The Company believes that its ability to select high profile restaurant sites is critical to the success of the J. Alexander's operations. The Company employs a Director of Real Estate and a Manager of Real Estate whose primary responsibilities are to seek out and evaluate possible restaurant locations in attractive mid-sized and larger metropolitan areas. After preliminary site analysis is performed and evaluated, members of the Company's senior management team visit the proposed location and evaluate the particular site and the surrounding area. The Company analyzes a variety of factors in the site selection process, including local market demographics, the number, type and success of competing restaurants in the immediate and surrounding area and accessibility to and visibility from major thoroughfares. The Company also obtains an independent market analysis to verify its own conclusion that a potential restaurant site meets the Company's criteria. The Company believes that this site selection strategy results in quality restaurant locations. 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 quick-service and 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. SEASONALITY The business of the Company is moderately seasonal, primarily to the extent that sales and operating profits in the Wendy's Restaurants have traditionally been lower in the winter months (most notably January and February) than in other months. The Company's seven Wendy's restaurants in Myrtle Beach, South Carolina have historically experienced a significant increase in sales and operating profits during the months of June, July and August, and lower sales and operating profits during the fall and winter months, principally as a result of seasonal tourist traffic. PERSONNEL As of December 31, 1995, the Company employed approximately 2,900 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, in the case of J. Alexander's, 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. 5 6 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 to a large extent 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 nine J. Alexander's restaurants, of which only five have been open for more than one year. Consequently, the earnings achieved to date by these J. Alexander's restaurants may not be indicative of future operating results. Furthermore, because of the Company's relatively small J. Alexander's restaurant base, an unsuccessful new restaurant could have a more adverse effect on the Company's results of operations than would be the case in a restaurant company with a greater number of restaurants. Franchisee Relationship with Wendy's International. As a franchisee of Wendy's International, the success of the Company is, in large part, dependent upon the overall success of the Wendy's restaurant system, including the financial condition, management and marketing success of Wendy's International and the successful operation of Wendy's restaurants owned by other franchisees. Significant matters relating to the Company's growth and operational strategies must be coordinated with, and approved by, Wendy's International. In particular, Wendy's International must approve the opening by the Company of any new Wendy's restaurant. Under its franchise agreements with Wendy's International, the Company does not have exclusive development rights in its market areas. Wendy's International also maintains discretion over the menu items that may be offered in the Company's restaurants. By virtue of franchise and other agreements, the Company is required to pay to Wendy's International technical assistance fees upon the opening of new restaurants and monthly royalty and national advertising fees. These agreements also provide for the termination of the Company as a franchisee upon the failure of the Company to comply with certain restrictions and obligations imposed on the Company. The Company has agreed with Wendy's International that any proposed sale or transfer which would reduce the Company's direct or indirect ownership of its Wendy's restaurants to less than 51% is subject to a right of first refusal or, in certain circumstances, consent, by Wendy's International. In addition, any sale, transfer, assignment or encumbrance of an individual restaurant's Unit Franchise Agreement requires the prior written consent of Wendy's International. The Company has also granted to Wendy's International a right of first refusal or, in certain circumstances, consent, in the event that the Company receives an acceptable bona fide offer from a third party to acquire the Company's business through an exchange offer, merger, share exchange, sale of assets or other transaction of similar effect. 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 the 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. 6 7 Over most of the last two years, the Company's Wendy's division has been experiencing intense pressure as a result of the competition among the four big hamburger fast food chains (McDonald's, Burger King, Wendy's, and Hardee's). This competition has been reflected not only in the advertising campaigns of each chain, but also in significant price discounting. Because the Company's Wendy's division still accounts for a significant portion of the Company's revenues, the competitive pressures in the fast food industry can be expected to continue to have an impact on the Company's results of operations. Fluctuations in Quarterly Results. The Company's quarterly results of operations are affected by seasonality in the Company's business, timing of the opening of new J. Alexander's and Wendy's restaurants, and fluctuations in the cost of food, labor, employee benefits, and similar costs over which the Company has limited or no control. The Company's business may also be affected by inflation. In the past, management has attempted to anticipate and avoid material adverse effects on the Company's profitability from increasing costs through its purchasing practices and menu price adjustments, but there can be no assurance that it will be able to do so in the future. Government Regulation. The restaurant industry is subject to extensive state and local government regulation relating to the sale of food and alcoholic beverages, and sanitation, fire and building codes. Termination of the liquor license for any J. Alexander's restaurant would adversely affect the revenues for the restaurant. Restaurant operating costs are also affected by other government actions that are beyond the Company's control, which may include increases in the minimum hourly wage requirements, workers' compensation insurance rates and unemployment and other taxes. Implementation of mandatory health care coverage could adversely affect the Company's operations. Difficulties or failure in obtaining required licensing or other regulatory approvals could delay or prevent the opening of a new J. Alexander's or Wendy'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. ITEM 2. PROPERTIES As of December 31, 1995, the Company had 58 Wendy's Restaurants in operation, nine 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:
Site Leased Site and Building and Building Site and Building Owned by the Owned by the Leased to the Company Company Company Total Wendy's Restaurants: Louisiana 9 1 0 10 Massachusetts 5 0 1 6 North Carolina 1 1 3 5 South Carolina 7 6 24 37 ---- ---- ----- ----- 22 8 28 58 J. Alexander's Restaurants: Alabama 1 0 0 1 Florida 1 1 0 2 Illinois 1 0 0 1 Kansas 1 0 0 1 Ohio 3 1 0 4 Tennessee 1 0 1 2 ---- ---- ----- ----- 8 2 1 11 ---- ---- ----- ----- Total 30 10 29 69 ==== ==== ===== =====
(a) Certain of the Company's assets have been pledged as collateral under various debt agreements as detailed in "Note C - Long-Term Debt and Obligations Under Capital Leases" of the Company's 1995 Annual Report to Shareholders. (b) In addition to the above, the Company leases six properties which are in turn leased to others. (c) See Item 1. for additional information concerning the Company's restaurants. 7 8 Substantially 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 20 years. Most 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, except that in some of the Company's more recent leases a portion of such expenses will be credited against any additional rent based on a percentage of gross sales which may be due. Corporate offices for the Company are located in leased office space in Nashville, Tennessee. The Company leases offices in Greenville and Columbia, South Carolina; and Baton Rouge, Louisiana, from which administrative services are provided for the Company's Wendy's Restaurants in those market areas. ITEM 3. LEGAL PROCEEDINGS As of March 25, 1996, 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 1995. 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 - ------------ ---------------------- Dennis J. Cleary, 39 Vice President of Total Quality Management, Inc., a wholly-owned subsidiary of the Company, since January 1991; Vice President of the Company since July 1993. Management Partner of Grady's, Inc., a full-service, casual dining restaurant chain from 1982 to December 1990. R. Gregory Lewis, 43 Chief Financial Officer since July 1986; Vice President of Finance and Secretary since August 1984. Richard D. May, 43 President of VCE Restaurants, Inc., a wholly-owned subsidiary of the Company, since October 1989; Vice President of the Company since October 1986. Mark A. Parkey, 33 Director of Finance and Administration of the Company since January 1993; Audit Manager with Steele, Carter and Martin, a public accounting firm, from June 1991 to January 1993; Audit Manager with Ernst & Young LLP, a public accounting firm, from July 1984 to June 1991. Lonnie J. Stout II, 49 Chairman since July 1990; Director, President and Chief Executive Officer since May 1986.
8 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required under this item is incorporated by reference to the section entitled "Price Range of Common Stock" on page 43 and the Note to the "Five-Year Financial Summary" on page 41 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995. ITEM 6. SELECTED FINANCIAL DATA The information required under this item is incorporated by reference to the section entitled "Five-Year Financial Summary" on page 41 of the Company s Annual Report to Shareholders for the fiscal year ended December 31, 1995. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required under this item is incorporated by reference to the section entitled "Management's Discussion and Analysis" on pages 16 through 23 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required under this item is incorporated by reference to the "Consolidated Financial Statements" of the Company and its subsidiaries on pages 24 through 38 and the "Quarterly Results of Operations" on page 40 of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1995. 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 1996 Annual Meeting of Shareholders to be held May 14, 1996. (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 1996 Annual Meeting of Shareholders to be held May 14, 1996. 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 1996 Annual Meeting of Shareholders to be held May 14, 1996. 9 10 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 1996 Annual Meeting of Shareholders to be held May 14, 1996. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) and (2) The information required under Item 14, subsections (a)(1) and (a)(2) is set forth in a supplement filed as part of this report beginning on page F-1. (a) (3) Exhibits: (3)(a) Charter as currently in effect (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)(b) Bylaws as currently in effect (Exhibit 3(b) of the Registrant's Report on Form 10-K for the year ended December 30, 1990, is incorporated herein by reference). (4)(a) Form of Indenture dated as of May 19, 1983, between the Registrant and First American National Bank of Nashville, Trustee (Exhibit 4 of the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1983, is incorporated herein by reference). (4)(b) Rights Agreement dated May 16, 1989, by and between Registrant and NationsBank (formerly Sovran Bank/Central South) including Form of Rights Certificate and Summary of Rights (Exhibit 3 to the Report on Form 8-K dated May 16, 1989, is incorporated herein by reference). (10)(a) Form of Unit Franchise Agreement with Wendy's International, Inc. and Volunteer Quality Foods, Inc., Volunteer Louisiana, Inc. and Wendy's of South Carolina, Inc., respectively (Exhibit 13(a)-7 to Registration No. 2-61076 is incorporated herein by reference). (10)(b) Agreement between Registrant and Wendy's International, Inc. dated June 30, 1976 (Exhibit 5 to the Registrant's Report on Form 8-K dated August 1976 is incorporated herein by reference). (10)(c) Purchase Agreement between Registrant and Wendy's International, Inc. dated November 30,1982 (Exhibit 2(a) to the Registrant's Report on Form 8-K filed as of December 30, 1982, is incorporated herein by reference). (10)(d) Lease dated December 30, 1988, by and between Calendar Court Corporation and Volunteer Capital East, Inc. (Exhibit 10(p) of the Registrant's Report on Form 10-K for the year ended January 1, 1989, is incorporated herein by reference). (10)(e) Asset Purchase Agreement dated May 16, 1989, between Registrant, RTM Winners, L.P. and Winners Corp. of Georgia, Inc. (Appendix A of the Registrant's Proxy Statement for Special Meeting of Shareholders, August 18, 1989, is incorporated herein by reference). (10)(f) 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)(g) 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)(h) 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 11 (10)(i) 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)(j) $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. (10)(k) $30,000,000 Line of Credit note dated August 29, 1995 by and between Volunteer Capital Corporation, VCE Restaurants, Inc., Total Quality Management, Inc. and NationsBank of Tennessee, N.A. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS (10)(l) 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)(m) Form of Severance Benefits Agreement between the Registrant and Messrs. Stout, Lewis and May (exhibit (10)(j) of the Registrant's Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference). (10)(n) 1982 Incentive Stock Option Plan (incorporated by reference to pages B-1 through B-6 of Registration Statement No. 2-78140). (10)(o) 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)(p) 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)(q) 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)(r) 1994 Employee Stock Incentive Plan (incorporated by reference to Exhibit 4(c) of Registration Statement No. 33-77476). (11) Statement regarding computation of per share earnings. (13) Annual Report to Shareholders of Volunteer Capital Corporation for the year ended December 31, 1995 (furnished for the information of the Commission only and not deemed "filed" as part of this Report on Form 10-K except for those portions which are specifically incorporated herein by reference). (21) List of subsidiaries of Registrant. (23) Consent of Independent Auditors.
(b) Reports on Form 8-K: The Company did not file any reports on Form 8-K during the last quarter of the period covered by this report. (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. 11 12 SIGNATURES Pursuant to the requirements of Section l3 or l5(d) of the Securities Exchange Act of l934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VOLUNTEER CAPITAL CORPORATION Date: 3/27/96 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 l934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Capacity Date - --------------------------- ---------------------------------------------- ------------ /s/Lonnie J. Stout II Chairman, President, Chief Executive Officer 3/27/96 - ---------------------------- and Director ------------ Lonnie J. Stout II /s/R. Gregory Lewis Vice President and Chief Financial Officer 3/27/96 - ---------------------------- (Principal Financial Officer) ------------ R. Gregory Lewis /s/Mark A. Parkey Director of Finance and Administration 3/27/96 - ---------------------------- (Principal Accounting Officer) ------------ Mark A. Parkey /s/Earl Beasley, Jr. Director 3/26/96 - ---------------------------- ------------ Earl Beasley, Jr. /s/E. Townes Duncan Director 3/26/96 - ---------------------------- ------------ E. Townes Duncan /s/Garland G. Fritts Director 3/26/96 - ---------------------------- ------------ Garland G. Fritts /s/ John L.M. Tobias Director 3/26/96 - ---------------------------- ------------ John L.M. Tobias /s/Toby S. Wilt Director 3/26/96 - ---------------------------- ------------ Toby S. Wilt
12 13 ANNUAL REPORT ON FORM 10-K ITEM 14(a)(l) AND (2), (c) AND (d) INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FISCAL YEAR ENDED DECEMBER 31, 1995 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES NASHVILLE, TENNESSEE 13 14 FORM 10-K--ITEM 14(A)(1) AND (2) VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of Volunteer Capital Corporation and subsidiaries, included in the annual report of the registrant to its shareholders for the fiscal year ended December 31, 1995, are incorporated by reference in Item 8: Consolidated statements of income--Years ended December 31, 1995, January 1, 1995 and January 2, 1994 Consolidated balance sheets--December 31, 1995 and January 1, 1995 Consolidated statements of cash flows--Years ended December 31, 1995, January 1, 1995 and January 2, 1994 Consolidated statements of stockholders equity--Years ended December 31, 1995, January 1, 1995 and January 2, 1994 Notes to consolidated financial statements The following consolidated financial statement schedule of Volunteer Capital Corporation and subsidiaries is included in Item l4(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 15 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES
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 - ------------------------------------------------ ---------- ---------- --------------- ----------- ------------ Year ended December 31, 1995: Valuation allowance for deferred tax assets.... $3,071,000 $3,071,000 (1) $ 0 Year ended January 1, 1995: Valuation allowance for deferred tax assets.... $5,730,000 $2,659,000 (2) $3,071,000 Year ended January 2, 1994: Valuation allowance for deferred tax assets.... $8,178,000 $2,448,000 (3) $5,730,000
(1) Includes a $2,085,000 reduction in the beginning of the year valuation allowance reflecting a change in circumstances which resulted in a judgement that a corresponding amount of the Company's deferred tax assets will be realized in future years. The remainder of the reduction results primarily from changes in the deferred tax items. (2) Includes a $2,100,000 reduction in the beginning of the year valuation allowance reflecting a change in circumstances which resulted in a judgement that a corresponding amount of the Company's deferred tax assets will be realized in future years. The remainder of the reduction results primarily from changes in the deferred tax items. (3) Includes a $1,500,000 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. 15 16 VOLUNTEER CAPITAL CORPORATION EXHIBIT INDEX
Reference Number per Item 601 of Regulation S-K Description - ---------------- ----------- (11) Statement regarding computation of per share earnings. (13) Portions of Annual Report to Shareholders of Volunteer Capital Corporation for the year ended December 31, 1995 (furnished for the information of the Commission only and not deemed "filed" as part of this Report on Form 10-K except for those portions which are specifically incorporated herein by reference). (21) List of subsidiaries of Registrant. (23) Consent of Ernst & Young LLP, independent auditors. (27) Financial Data Schedule (for SEC use only).
16 EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES
Years Ended ---------------------------------------------- DECEMBER 31 January 1 January 2 1995 1995 1994 ------------ ---------------- ----------- Earnings per common and dilutive common equivalent share Net income................................................. $5,016,000 $4,830,000 $4,301,000 ========== ========== ========== Adjustment of shares outstanding: Weighted average shares outstanding..................... 5,257,000 5,187,000 4,388,000 Net additional shares issuable, based on the treasury stock method........................................ 221,000 194,000 218,000 ---------- ---------- ---------- Adjusted shares outstanding............................. 5,478,000 5,381,000 4,606,000 ========== ========== ========== Per share amount............................................ $ .92 $ .90 $ .93 ========== ========== ========== Earnings per common share, assuming full dilution Net income............................................... $5,016,000 $4,830,000 $4,301,000 ========== ========== ========== Adjustment of shares outstanding: Weighted average shares outstanding.................... 5,257,000 5,187,000 4,388,000 Net additional shares issuable, based on the treasury stock method......................................... 222,000 194,000 238,000 ---------- ---------- ---------- Adjusted shares outstanding............................ 5,479,000 5,381,000 4,626,000 ========== ========== ========== Per share amount........................................... $ .92 $ .90 $ .93 ========== ========== ==========
(1) The computations of earnings per common and dilutive common equivalent share and earnings per common share, assuming full dilution, are base on the weighted average number of common shares outstanding each period after considering the effect of stock options using the treasury stock method. Shares issuable upon the conversion of convertible subordinated debentures have not been included as the effect of their inclusion would be antidilutive. EX-13 3 PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS OVERVIEW Volunteer Capital Corporation operated 58 franchised Wendy's Old Fashioned Hamburgers restaurants and nine proprietary J. Alexander's full-service, casual dining restaurants at December 31, 1995. Income before income taxes increased by $400,000, or 13%, in fiscal 1995 as compared to 1994. Restaurant operating income in the J. Alexander's division increased by $1,528,000, or 120%, over 1994, more than offsetting a $568,000 decline in the Wendy's division during the same period, $469,000 of increased general and administrative expenses and $91,000 of additional other expense (net interest expense plus other income). Net income for 1995 included a $1,782,000 credit to the deferred income tax provision associated with the recognition of all of the Company's remaining deferred tax assets for financial reporting purposes. Income before income taxes increased by $32,000 in fiscal 1994 as compared to 1993. Restaurant operating profit increased in both the Wendy's and J. Alexander's divisions ($82,000 and $199,000, respectively) and other expense decreased by $352,000, with the combined effect of these items more than offsetting an increase in general and administrative expenses of $601,000. Net income for 1994 included a $2,100,000 credit to the deferred income tax provision associated with the recognition of a portion of the Company's deferred tax assets for financial reporting purposes. WENDY'S RESTAURANT OPERATIONS Results of the Company's Wendy's restaurant operations before allocation of other income, corporate overhead and net interest expense were as follows:
Years Ended - --------------------------------------------------------------------------------------------------------------- (Dollars in thousands) DECEMBER 31, 1995 January 1, 1995 January 2, 1994 - --------------------------------------------------------------------------------------------------------------- % % % AMOUNT OF SALES Amount of Sales Amount of Sales - --------------------------------------------------------------------------------------------------------------- Net sales $53,694 100.0% $50,991 100.0% $49,758 100.0% Restaurant costs and expenses: Cost of sales 18,612 34.7 17,583 34.5 17,549 35.3 Labor and related costs 15,407 28.7 14,391 28.3 13,448 27.0 Depreciation and amortization of restaurant property and equipment 1,907 3.5 1,694 3.3 1,537 3.1 Royalties 2,149 4.0 2,041 4.0 1,992 4.0 Other operating expenses 9,841 18.3 8,936 17.5 8,968 18.0 - --------------------------------------------------------------------------------------------------------------- 47,916 89.2 44,645 87.6 43,494 87.4 - --------------------------------------------------------------------------------------------------------------- Restaurant operating income $ 5,778 10.8% $ 6,346 12.4% $ 6,264 12.6% - ---------------------------------------------------------------------------------------------------------------
16 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 2 MANAGEMENT'S DISCUSSION AND ANALYSIS The Company operated 58 Wendy's restaurants at December 31, 1995; 55 restaurants at January 1, 1995; and 52 restaurants at January 2, 1994. Weighted average sales per unit were as follows:
Period to Period Years Ended Increase (Decrease) - -------------------------------------------------------------------------------------------------------- DECEMBER 31 January 1 January 2 1995 1995 1994 1995-94 1994-93 - -------------------------------------------------------------------------------------------------------- Weighted, for all units $958,000 $973,000 $971,000 (1.5)% 0.2% - --------------------------------------------------------------------------------------------------------
Total Wendy's sales increased by 5.3% in fiscal 1995 as compared to fiscal 1994. This increase is attributable entirely to new units as sales in restaurants open for all of both 1995 and 1994 decreased by 1.9%. The Company estimates that menu prices, after considering promotional discounts, were relatively constant during 1995 as compared to 1994. Management has consistently focused its efforts for a number of years on several key areas in which it believes the Company, as a franchisee, can most directly influence sales trends and operating results. These include emphasis on quality of operations and guest service, consistent marketing efforts, competitive menu pricing and facility image and enhancements. However, continued competition in the quick-service restaurant industry in general and intense retail price competition by other major hamburger chains in particular have continued to adversely impact weighted average sales per unit since mid-1994. The Wendy's division results are directly affected by major competition among the big four hamburger chains (McDonald's, Burger King, Wendy's and Hardee's). Over the last ten years, almost all of the marketing efforts of the Wendy's system have been through national marketing campaigns. Conventional wisdom is that this is the best way to maximize marketing and advertising expenditures in a competitive environment. The Company's contribution to the national advertising co-operative represents 2.5% of the Wendy's division's sales, and contributions to various regional Wendy's co-operatives that buy television media to support the national marketing programs comprise a large portion of the Company's local advertising budget, demonstrating the importance of a successful national marketing campaign in meeting sales objectives. Although the Wendy's division was somewhat behind the Company's business plan through the first half of 1995, management believed the division could make up a significant portion of the shortfall in the last half of the year. However, after posting flat same store sales in the third quarter and an increase in October, the division had a major same store sales decline in both November and December and ended the year down approximately 2% in same store sales. Because of the tremendous amount of financial and operating leverage employed in the business, this resulted in a significant decline in division operating income (9.0%, or $568,000 for the year). The Company believes that most of its competitive sales problems are in direct relationship to the Burger King $.99 Whopper campaign that was present throughout most of 1995 and various value promotions employed by McDonald's during the year. The Wendy's system suffered an overall same store sales decline in the fourth quarter of 1995 reflecting, at least in part, weak national advertising during the period. 17 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 3 MANAGEMENT'S DISCUSSION AND ANALYSIS The development of new Wendy's restaurants by other franchisees in certain of the Company's market areas, and to a lesser degree the opening of new restaurants by the Company near its existing restaurants, have also negatively affected the Company's sales in certain locations. Sales declines have been most pronounced in the Company's North and South Carolina markets, which represent 42 of its 58 Wendy's units. A number of programs and products have been targeted at these markets by the Company in an attempt to reverse the declining sales trends. In addition, the Company has initiated major remodeling projects at a number of its restaurants in these markets. During the last half of 1995, six restaurants were closed for an average of almost two weeks each relative to this effort. Management estimates these closings had a negative short-term impact on sales of approximately $200,000 and on division operating income of approximately $100,000, but believes the remodeling program is essential to maintaining a strong competitive position in these markets. Management continues to believe that aggressive core product discounting is counterproductive because of its negative impact on margins. The Company's same store sales trends have remained down through the first two months of 1996, and management believes sales trends could remain under considerable pressure for an indefinite period, especially if major competitors continue to aggressively discount their products. In 1994, total Wendy's sales increased by 2.5% as compared to fiscal 1993, with the increase attributable entirely to new units. Sales in restaurants open for all of both 1994 and 1993 decreased by 0.1%. The Company estimates that menu prices, after considering promotional discounts, increased by approximately 1.2% during 1994 as compared to 1993. Cost of sales, which includes the cost of food and paper supplies, increased as a percentage of sales from 1994 to 1995 primarily due to the increased cost of paper supplies. Ground beef costs remained favorable in 1995, but were somewhat offset by higher produce costs during the year. Cost of sales decreased as a percentage of sales from 1993 to 1994 due to decreases in raw food costs, primarily ground beef, and the effect of higher menu prices. Restaurant labor and related costs as a percentage of sales increased in 1995 as compared to 1994, reflecting the combined effect of higher wages and the decline in weighted average sales per unit. Restaurant labor and related costs as a percentage of sales increased in 1994 as compared to 1993 reflecting increased staffing in 1994 designed to continue to improve the level and speed of service to guests, as well as higher pay rates and the relatively high start-up labor costs at the three restaurants which opened in 1994, which more than offset the effect of higher menu prices. Depreciation and amortization of restaurant property and equipment increased as a percentage of sales from 1994 to 1995 and from 1993 to 1994, principally reflecting the impact of higher depreciation associated with both new and remodeled restaurants and, with respect to the 1995 increase, the impact of decreased same store sales. Other restaurant operating expenses consist of expenses incurred at the unit level as well as costs associated with supervising and supporting restaurant operations. These costs principally include supervisory salaries, advertising, rent, utilities, taxes, insurance, maintenance and supplies. These costs, as a percentage of sales, increased from 1994 to 1995 reflecting increased rent and amortization of pre-opening costs associated with new unit development, as well as increased local advertising and a decline in same store sales. Other restaurant operating expenses, as a percentage of sales, decreased from 1993 to 1994 due primarily to lower advertising costs resulting from a more favorable cooperating advertising arrangement negotiated with the Company's primary soft drink supplier. 18 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 4 MANAGEMENT'S DISCUSSION AND ANALYSIS J. ALEXANDER'S RESTAURANT OPERATIONS The Company operated nine J. Alexander's restaurants at December 31, 1995, compared with five at January 1, 1995, and three at January 2, 1994. The sixth J. Alexander's restaurant opened February 13, 1995, in Ft. Lauderdale, Florida; the seventh August 28, 1995, in Hoover, Alabama; the eighth November 13, 1995, in Toledo, Ohio; and the ninth December 4, 1995, in Overland Park, Kansas. Given the success of the Company's J. Alexander's restaurants to date and the opportunities it believes exist in the casual dining segment of the food service industry, the Company intends to continue to develop new J. Alexander's restaurants at a significant rate. It is management's objective, however, to manage this growth at a pace which can be supported not only by the Company's ability to locate and acquire acceptable sites and provide the long-term capital resources needed for development, but also by its ability to recruit and develop highly qualified management personnel capable of providing the outstanding levels of food quality and service which management believes are critical to J. Alexander's success. Results of the J. Alexander's restaurant operations before allocation of other income, corporate overhead and net interest expense were as follows:
Years Ended - ----------------------------------------------------------------------------------------------------------------- (Dollars in thousands) DECEMBER 31, 1995 January 1, 1995 January 2, 1994 - ------------------------------------------------------------------------------------------------------------------ % % % AMOUNT OF SALES Amount of Sales Amount of Sales - ------------------------------------------------------------------------------------------------------------------ Net sales $25,594 100.0% $14,704 100.0% $10,816 100.0% Restaurant costs and expenses: Cost of sales 9,095 35.5 5,244 35.7 3,817 35.3 Labor and related costs 7,748 30.3 4,581 31.2 3,297 30.5 Depreciation and amortization of restaurant property and equipment 1,033 4.0 540 3.6 366 3.3 Other operating expenses 4,913 19.2 3,062 20.8 2,258 20.9 - ------------------------------------------------------------------------------------------------------------------ 22,789 89.0 13,427 91.3 9,738 90.0 - ------------------------------------------------------------------------------------------------------------------ Restaurant operating income $ 2,805 11.0% $ 1,277 8.7% $ 1,078 10.0% - -------------------------------------------------------------------------------------------------------------------
Net sales for the J. Alexander's division increased 74% in 1995 as compared to 1994, due primarily to the opening of new restaurants. Same store sales, which include comparable sales for all restaurants open for more than 12 months, averaged $80,000 per week in 1995, a 9.4% increase from $73,100 in 1994. The Company estimates that menu prices increased approximately 5% in 1995, after no significant increase in 1994, and believes that the sales increases noted above reflect acceptance and recognition by consumers of the high level of food quality and service which J. Alexander's provides its guests. Net sales for the J. Alexander's division increased 35.9% in 1994 as compared to 1993. Same store sales per unit averaged $74,600 per week during 1994, a 7.0% increase from $69,700 during 1993. Cost of sales decreased as a percentage of sales in 1995 compared to 1994, as the favorable effect of increased menu prices and improved efficiency in the two restaurants opened in 1994 more than offset higher costs associated with the start-up of operations at the four restaurants which opened in 1995. The Company expects newly opened restaurants to experience operating losses in their initial months of operation prior to becoming profitable. Cost of sales increased as a percentage of sales from 1993 to 1994, reflecting higher costs associated with the start-up of operations at the two restaurants which opened during 1994. 19 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 5 MANAGEMENT'S DISCUSSION AND ANALYSIS Restaurant labor and related costs decreased as a percentage of sales in 1995 compared to 1994, due in large part to the favorable effect of increased menu prices. This factor, combined with the effect of sales increases at the Columbus and Oak Brook restaurants which opened in 1994, more than offset higher benefits expense and higher costs associated with the start-up of operations at the restaurants opened in 1995. Restaurant labor and related costs increased as a percentage of sales from 1993 to 1994, reflecting higher costs associated with the start-up of operations at the two restaurants which opened during 1994. Other restaurant operating expenses decreased as a percentage of sales from 1994 to 1995, and from 1993 to 1994. The 1995 decrease primarily reflects reduced training costs, operating efficiencies achieved at higher sales levels and the favorable effects of increased menu prices, which more than offset additional rent expense related to the Ft. Lauderdale and Toledo restaurants and other operating expenses associated with the opening of the four restaurants in 1995. The 1994 decrease primarily reflects reduced amortization of pre-opening costs and operating efficiencies achieved at higher revenue levels, which more than offset an increase in training costs and additional supervisory expenses incurred as a result of new store openings. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses, which include certain costs related to both the Wendy's and J. Alexander's operations, decreased to 5.4% of revenues in 1995 from 5.8% of revenues in 1994. Actual general and administrative expenditures increased by $469,000 in 1995 as compared to 1994, primarily due to the addition of personnel and other activities associated with the expanded J. Alexander's operations. General and administrative expenses directly associated with J. Alexander's were approximately $1,150,000 in 1995, up from approximately $735,000 in 1994. As a percentage of sales, general and administrative expenses increased from 5.3% in 1993 to 5.8% in 1994, principally due to the addition of personnel associated with expanding the J. Alexander's division. OTHER INCOME (EXPENSE) Interest expense decreased by $209,000 in 1995 as compared to 1994, and by $119,000 in 1994 as compared to 1993, principally due to increases in interest expense capitalized in connection with new restaurant development. Interest income decreased by $275,000 in 1995 as compared to 1994 due to the net effect of decreased investment balances, resulting primarily from the development of new restaurants, and increased interest rates. Interest income increased by $213,000 in 1994 as compared to 1993 due principally to the net effect of increased investment balances as a result of the proceeds from the sale of stock by the Company through an underwritten public offering in September 1993 and lower interest rates. Expenses associated with the write-off of restaurant facilities and equipment that have been replaced in connection with various remodeling projects are reflected in "Other, net". LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities represents a primary source of liquidity for the Company and is also expected to be a resource for meeting future capital needs. The Company's cash flow from operations has increased during each of the last three fiscal years, totaling $7,586,000, $5,706,000 and $5,050,000 in fiscal years 1995, 1994 and 1993, respectively. In addition, the Company had cash and marketable securities of $2,739,000 on hand at December 31, 1995. The Company's primary investing activity has historically been capital expenditures for the development and maintenance of its restaurants. Capital expenditures totaled $20,255,000, $11,276,000 and $3,479,000 for 1995, 1994 and 1993, respectively. 20 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 6 MANAGEMENT'S DISCUSSION AND ANALYSIS During 1995, capital expenditures of $4,640,000 for the Wendy's division included completion of three new restaurants (all of which were ground leases), facilities upgrades (including significant remodeling projects at six restaurants in Columbia, South Carolina) and miscellaneous equipment replacements. Capital expenditures for J. Alexander's restaurants were $15,503,000 and consisted primarily of completion of the restaurant in Ft. Lauderdale, Florida; acquisition of property and construction of restaurants in Hoover, Alabama and Overland Park, Kansas; construction of the restaurant in Toledo, Ohio; and acquisition of property and partial completion of restaurants in Cleveland, Ohio and Plantation, Florida (a suburb of Ft. Lauderdale). The Ft. Lauderdale and Toledo restaurants are ground leases. During 1994, capital expenditures of $3,868,000 for the Wendy's division included completion of three new restaurants (two of which were ground leases), facilities upgrades and miscellaneous equipment replacements. Capital expenditures for J. Alexander's restaurants were $7,368,000 and consisted primarily of completion of the restaurant in Columbus, Ohio, acquisition of property and construction of the restaurant in Oak Brook, Illinois, and partial completion of the restaurant in Ft. Lauderdale, Florida. During 1993, capital expenditures of $1,912,000 for the Wendy's division included completion of a new restaurant, facilities upgrades and miscellaneous equipment replacements. Capital expenditures for J. Alexander's restaurants were $1,525,000 and consisted primarily of acquisition of property and related construction in progress at the Columbus, Ohio restaurant. During 1993, the Company sold an additional 1,000,000 shares of common stock at $10 per share in an underwritten public offering. Net proceeds from the stock offering totaled $9,176,000. Management expects the primary needs for capital resources in the future will be for the development of new J. Alexander's restaurants and for the maintenance of existing restaurants. Management may also consider acquisitions of additional Wendy's restaurants and restaurants similar to J. Alexander's. The Company's planned capital expenditures for 1996 total approximately $23,500,000. The Company plans to open five J. Alexander's restaurants in 1996, four of which are currently being developed in Cleveland, Ohio; Plantation, Florida; Chattanooga, Tennessee; and Troy, Michigan, a leased location. The Cleveland restaurant is scheduled to open in the second quarter of 1996, with the remaining three restaurants scheduled for third quarter openings. A fifth new restaurant is expected to open before year-end along with a smaller test version of J. Alexander's which serves dinner only. The initial cost of developing new J. Alexander's restaurants, including the cost of land, has ranged from $2,300,000 to $3,900,000, excluding pre-opening costs. While the cost of land has been a significant variable in development cost, costs related to site preparation and buildings have also varied considerably. Management is presently developing additional building images for J. Alexander's and expects that the cost of additional new units, including the cost of land, will be within the range of $3,000,000 to $3,800,000. The initial capital investment required for opening a new J. Alexander's restaurant would be significantly lower than indicated above, however, if property is leased rather than purchased. Management estimates that pre-opening costs will be approximately $250,000 for each restaurant. With respect to building additional Wendy's restaurants, management seeks investments that strategically enhance operations and offer cash returns that exceed the Company's long-term after-tax weighted average cost of capital, estimated by management to be approximately 14%. With a build-out cost of $900,000 to $1,000,000 (assuming the land for the restaurant is purchased), and considering the restrictions placed upon the Company's Wendy's division as a franchisee (both financial as well as operating), the Company is having difficulty locating sites which meet its investment criteria. For that reason, the Company does not presently anticipate developing any additional Wendy's restaurants in 1996. It is expected that because of their age, up to $3,000,000 of capital expenditures will be required annually to maintain and improve the Company's existing Wendy's restaurants for 1996 and 1997. 21 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 7 MANAGEMENT'S DISCUSSION AND ANALYSIS The Company does not have significant capital needs for purposes other than restaurant development. Maturities of long-term debt through 1997 are relatively small because the Company has previously purchased in the market a sufficient amount of its convertible subordinated debentures to meet sinking fund requirements on that issue through that date. Even though working capital decreased from $10,699,000 at January 1, 1995, to a deficit of $2,227,000 at December 31, 1995, primarily as the result of the use of a substantial portion of the Company's cash and cash equivalents to fund restaurant development, requirements for funding accounts receivable and inventories are relatively small and the Company does not have significant working capital needs. The Company obtained a $30,000,000 line of credit during the third quarter of 1995 and expects this credit line, together with internal cash flow, to be adequate to fund the Company's development program for 1996 and part, if not all, of 1997. Management will also be reviewing additional alternatives throughout 1996 which it believes could be available for financing its development plan. INCOME TAXES Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," the Company had gross deferred tax assets of $6,006,000 and $6,962,000 and gross deferred tax liabilities of $470,000 and $440,000 at December 31, 1995, and January 1, 1995, respectively. The deferred tax assets at December 31, 1995, relate primarily to $10,031,000 of net operating loss carryforwards and $1,999,000 of tax credit carryforwards available to reduce future federal income taxes. Realization of the deferred tax assets is dependent principally on future earnings from existing and new restaurants. Prior to 1995, a valuation allowance responsive to uncertainties associated with future earnings was established. No such allowance was deemed necessary as of December 31, 1995. Prior to 1993, the valuation allowance was established at an amount necessary to fully reserve the net deferred tax asset balances, after giving consideration to deferred tax assets that were realizable through offsets to existing taxable temporary differences. Although the Company has been profitable since 1990, it incurred operating losses for certain years prior to that time. Further, the Company's principal business is operating restaurants in the highly competitive quick-service segment of the restaurant industry as a franchisee which does not have strategic control over its business. The Company also operates with a high degree of financial and operating leverage, with a significant portion of operating costs being fixed or semi-fixed in nature. Any significant decrease in same store sales has a compounding effect in decreasing operating income. Because of these factors and the Company's involvement with the start-up of its J.Alexander's restaurant operations which incurred operating losses from 1990 through 1992, management was unable to conclude prior to 1993 that it was more likely than not that the net deferred tax assets would be utilized. In 1993, the Company completed another profitable year, reported operating profits from its J. Alexander's operations and raised additional equity capital. Because of these factors, management further assessed the likelihood of realization of its deferred tax assets, using as its principal basis its forecast of future taxable income which was adjusted by applying varying probability factors to the achievement of this forecast. As the result of this assessment, the beginning of the year valuation allowance was reduced by $1,500,000 in the fourth quarter of 1993, with a corresponding credit to deferred tax expense. 22 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 8 MANAGEMENT'S DISCUSSION AND ANALYSIS In 1994, the Company was profitable for the fifth consecutive year and was successful in developing its fourth and fifth J. Alexander's restaurants. As a result, management reduced the beginning of the year valuation allowance by $2,100,000 in the fourth quarter of 1994, with a corresponding credit to deferred tax expense. In 1995, the Company again increased its profitability and successfully expanded its J. Alexander's division to nine restaurants from a base of five restaurants. Based upon these factors and its forecast of future taxable income, management concluded during the fourth quarter of 1995 that it was more likely than not that the Company's net deferred tax assets would ultimately be realized. Accordingly, the beginning of the year valuation allowance was reduced by $2,085,000 in the fourth quarter of 1995, resulting in a credit to deferred tax expense of $1,782,000 and a credit to additional paid-in capital, representing the income tax benefit associated with the exercise or disposition of certain employee stock options, of $303,000. Approximately $16,300,000 of future taxable income would be needed to realize the $5,536,000 net deferred tax asset at December 31, 1995. None of the Company's carryforwards expire until 1998. IMPACT OF ACCOUNTING CHANGES There are no pending accounting pronouncements that, when adopted, are expected to have a material effect on the Company's results of operations or its financial condition. IMPACT OF INFLATION AND OTHER FACTORS Virtually all of the Company's costs and expenses are subject to normal inflationary pressures and the Company is continually seeking ways to cope with their impact. By owning a number of its properties, the Company avoids certain increases in occupancy costs. New and replacement assets will likely be acquired at higher costs but this will take place over many years. In general, the Company tries to pass on increased costs and expenses by increasing menu prices over time, as permitted by competition. However, the Company believes its flexibility in increasing menu prices in its Wendy's restaurants is limited because of the competitive state of the quick-service restaurant industry and the value pricing strategies adopted by Wendy's and most of its major competitors. The Clinton administration continues to analyze and propose new legislation which could adversely impact the entire business community. Minimum wage measures, if passed, could increase the Company's operating costs. The Company would attempt to offset increased costs through additional improvements in operating efficiencies and menu price increases. 23 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 9 CONSOLIDATED STATEMENTS OF INCOME
Years Ended - ------------------------------------------------------------------------------------------------------------------- DECEMBER 31 January 1 January 2 1995 1995 1994 - ------------------------------------------------------------------------------------------------------------------- Net sales $79,288,000 $65,695,000 $60,574,000 Costs and expenses: Cost of sales 27,707,000 22,827,000 21,366,000 Restaurant labor and related costs 23,155,000 18,972,000 16,745,000 Depreciation and amortization of restaurant property and equipment 2,940,000 2,234,000 1,903,000 Royalties 2,149,000 2,041,000 1,992,000 Other operating expenses 14,754,000 11,998,000 11,226,000 - ------------------------------------------------------------------------------------------------------------------- Total restaurant operating expenses 70,705,000 58,072,000 53,232,000 - ------------------------------------------------------------------------------------------------------------------- Income from restaurant operations 8,583,000 7,623,000 7,342,000 General and administrative expenses 4,308,000 3,839,000 3,238,000 - ------------------------------------------------------------------------------------------------------------------- Operating income 4,275,000 3,784,000 4,104,000 - ------------------------------------------------------------------------------------------------------------------- Other income (expense): Interest expense (1,416,000) (1,625,000) (1,744,000) Interest income 579,000 854,000 641,000 Other, net 20,000 45,000 25,000 - ------------------------------------------------------------------------------------------------------------------- Total other income (expense) (817,000) (726,000) (1,078,000) - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 3,458,000 3,058,000 3,026,000 Income tax benefit 1,558,000 1,772,000 1,275,000 - ------------------------------------------------------------------------------------------------------------------- Net income $ 5,016,000 $ 4,830,000 $ 4,301,000 - ------------------------------------------------------------------------------------------------------------------- Earnings per share: Primary $ .92 $ .90 $ .93 Fully diluted $ .92 $ .90 $ .93 - ------------------------------------------------------------------------------------------------------------------- Weighted average number of shares: Primary 5,478,000 5,381,000 4,606,000 Fully diluted 5,479,000 5,381,000 4,626,000 - -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 24 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 10 CONSOLIDATED BALANCE SHEETS
DECEMBER 31 January 1 1995 1995 - ------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 2,234,000 $14,802,000 Short-term investments 505,000 1,000,000 Accounts and notes receivable, including current portion of direct financing leases, net of allowances for possible losses 313,000 155,000 Inventories at lower of cost (first-in, first-out method) or market 848,000 577,000 Deferred income taxes 1,541,000 699,000 Prepaid expenses and other current assets 484,000 215,000 - ------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 5,925,000 17,448,000 INVESTMENT SECURITIES -- 510,000 OTHER ASSETS Direct financing leases, net of unearned income of $245,000 and $305,000 at December 31, 1995, and January 1, 1995, respectively, and current portion 379,000 434,000 Other 712,000 672,000 - ------------------------------------------------------------------------------------------------------------------ 1,091,000 1,106,000 PROPERTY AND EQUIPMENT, at cost, less allowances for depreciation and amortization 46,915,000 29,776,000 DEFERRED INCOME TAXES 3,995,000 2,752,000 DEFERRED CHARGES, less accumulated amortization of $2,008,000 and $1,397,000 at December 31, 1995, and January 1, 1995, respectively 2,214,000 1,714,000 - ------------------------------------------------------------------------------------------------------------------ $60,140,000 $53,306,000 - ------------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 3,704,000 $ 3,089,000 Accrued expenses and other current liabilities 4,151,000 3,310,000 Current portion of long-term debt and obligations under capital leases 297,000 350,000 - ------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 8,152,000 6,749,000 LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES, (including $1,984,000 and $2,048,000 due to a related party at December 31, 1995, and January 1, 1995, respectively) net of portion classified as current 18,512,000 18,847,000 DEFERRED COMPENSATION AND OTHER DEFERRED CREDITS 501,000 406,000 STOCKHOLDERS' EQUITY Common Stock, par value $.05 per share: Authorized l0,000,000 shares; issued 5,276,972 and 5,240,481 shares at December 31, 1995, and January 1, 1995, respectively 264,000 262,000 Preferred Stock, no par value: Authorized 1,000,000 shares; none issued -- -- Additional paid-in capital 29,199,000 28,718,000 Retained earnings (accumulated deficit) 4,540,000 (476,000) - ------------------------------------------------------------------------------------------------------------------ 34,003,000 28,504,000 Note receivable--Employee Stock Ownership Plan (1,028,000) (1,200,000) - ------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 32,975,000 27,304,000 COMMITMENTS AND CONTINGENCIES - ------------------------------------------------------------------------------------------------------------------ $60,140,000 $53,306,000 - ------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 25 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 11 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended - ------------------------------------------------------------------------------------------------------------------- DECEMBER 31 January 1 January 2 1995 1995 1994 - -------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 5,016,000 $ 4,830,000 $ 4,301,000 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization of property and equipment 3,033,000 2,317,000 1,990,000 Amortization of deferred charges 611,000 443,000 404,000 Employee Stock Ownership Plan expense 172,000 170,000 172,000 Deferred income tax benefit (1,782,000) (2,100,000) (1,500,000) Other, net 192,000 172,000 (3,000) Changes in assets and liabilities: (Increase) decrease in accounts receivable (147,000) (80,000) 65,000 Increase in inventories (271,000) (70,000) (59,000) (Increase) decrease in prepaid expenses and other current assets (269,000) 63,000 12,000 Increase in deferred charges (1,111,000) (773,000) (204,000) Increase (decrease) in accounts payable 615,000 511,000 (269,000) Increase in accrued expenses and other current liabilities 1,432,000 207,000 101,000 Increase in deferred credits 95,000 16,000 40,000 - ------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,586,000 5,706,000 5,050,000 INVESTING ACTIVITIES Proceeds from maturities and sales of investments 1,005,000 1,507,000 6,132,000 Purchase of property and equipment (20,909,000) (10,376,000) (4,163,000) Other, net (37,000) (29,000) (70,000) - ------------------------------------------------------------------------------------------------------------------- NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (19,941,000) (8,882,000) 1,903,000 FINANCING ACTIVITIES Payments on and retirement of debt and obligations under capital leases (393,000) (381,000) (282,000) Sale of stock and exercise of stock options 180,000 604,000 9,277,000 - ------------------------------------------------------------------------------------------------------------------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (213,000) 223,000 8,995,000 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,568,000) (2,953,000) 15,948,000 Cash and cash equivalents at beginning of year 14,802,000 17,755,000 1,807,000 - ------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,234,000 $14,802,000 $17,755,000 - -------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 26 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 12 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Note Receivable- Employee Additional Retained Stock Total Outstanding Common Paid-In Earnings Ownership Stockholders' Shares Stock Capital (Deficit) Plan Equity - --------------------------------------------------------------------------------------------------------------------- BALANCES AT JANUARY 3, 1993 4,092,489 $205,000 $18,894,000 $(9,607,000) $(1,542,000) $ 7,950,000 Exercise of stock options and sale of stock under Employee Stock Purchase Plan 24,760 1,000 100,000 -- -- 101,000 Shares issued through public offering 1,000,000 50,000 9,126,000 -- -- 9,176,000 Reduction of note receivable-- Employee Stock Ownership Plan -- -- -- -- 172,000 172,000 Net income -- -- -- 4,301,000 -- 4,301,000 - --------------------------------------------------------------------------------------------------------------------- BALANCES AT JANUARY 2, 1994 5,117,249 256,000 28,120,000 (5,306,000) (1,370,000) 21,700,000 Exercise of stock options and sale of stock under Employee Stock Purchase Plan 123,232 6,000 598,000 -- -- 604,000 Reduction of note receivable-- Employee Stock Ownership Plan -- -- -- -- 170,000 170,000 Net income -- -- -- 4,830,000 -- 4,830,000 - --------------------------------------------------------------------------------------------------------------------- BALANCES AT JANUARY 1, 1995 5,240,481 262,000 28,718,000 (476,000) (1,200,000) 27,304,000 Exercise of stock options, including tax benefits, and sale of stock under Employee Stock Purchase Plan 36,491 2,000 481,000 -- -- 483,000 Reduction of note receivable-- Employee Stock Ownership Plan -- -- -- -- 172,000 172,000 Net income -- -- -- 5,016,000 -- 5,016,000 - --------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1995 5,276,972 $264,000 $29,199,000 $ 4,540,000 $(1,028,000) $32,975,000 - ---------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 27 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 13 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 1995 presentation. FISCAL YEAR: The Company's fiscal year ends on the Sunday closest to December 31 and each quarter consists of thirteen weeks. CASH EQUIVALENTS: Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. INVESTMENTS: Short-term investments and investment securities consist primarily of obligations of the U.S. Government and its agencies and corporate notes and bonds with maturities of greater than three months. Investments with maturities of greater than one year are classified as long-term. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain Investments in Debt and Equity Securities" in 1994. The Company's investments are classified as "held to maturity" investments and reported at amortized cost. The aggregate market value of short-term investments and investment securities was approximately $511,000 at December 31, 1995, and $1,507,000 at January 1, 1995. Cash equivalents of $1,005,000 and $13,736,000 at December 31, 1995, and January 1, 1995, respectively, consisted principally of commercial paper, banker's acceptances and federal government agency securities and were carried at cost, which approximates fair market value. PROPERTY AND EQUIPMENT: Depreciation and amortization are provided on the straight-line method over the following estimated useful lives: buildings-20 to 25 years, restaurant and other equipment-three to l0 years, and capital leases and leasehold improvements-lesser of life of assets or terms of leases. DEFERRED CHARGES: Costs in excess of net assets acquired are being amortized over periods of 20 to 40 years using the straight-line method. Debt issue costs are amortized principally by the interest method over the life of the related debt. Wendy's Old Fashioned Hamburgers franchise costs are being amortized over 20 years using the straight-line method. INCOME TAXES: The Company accounts for income taxes under the liability method required by 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 using existing tax rates. Realization of deferred tax assets, which relate primarily to operating loss and tax credit carryforwards, is dependent on future earnings from existing and new restaurants. Prior to 1995, a valuation allowance responsive to uncertainties associated with future earnings was established. No such allowance was deemed necessary as of December 31, 1995. EARNINGS PER SHARE: The computations of earnings per share are based on the weighted average number of common shares outstanding after considering the effect of stock options using the treasury stock method. Shares issuable upon the conversion of convertible subordinated debentures have not been included as the effect of their inclusion would be antidilutive. 28 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PRE-OPENING COSTS: Costs of hiring and training personnel and certain other costs relating to a new restaurant are capitalized and generally amortized over the restaurant's first 12 months (Wendy's) or 24 months (J. Alexander's) of operations. At December 31, 1995, and January 1, 1995, pre-opening costs totaled $1,026,000 and $611,000, respectively, net of accumulated amortization of $651,000 and $143,000. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value. Short-term investment: At December 31, 1995, this investment is classified as held to maturity and reported at amortized cost in accordance with SFAS No. 115. Fair value is estimated from quoted market prices. Long-term debt: The carrying amount of the Company's borrowings with variable interest rates approximates their fair value. The fair value of the Company's convertible subordinated debentures was determined based on quoted market prices. 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 certain 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 exposure to significant loss is likely. DEVELOPMENT COSTS: Certain direct and indirect costs are capitalized in conjunction with acquiring and developing new J. Alexander's restaurant sites and amortized over the life of the related building. Development costs capitalized during 1995 totaled $182,000. No development costs were capitalized relative to J. Alexander's prior to 1995. SELF-INSURANCE: The Company is generally self-insured, subject to stop-loss limitations, for losses and liabilities related to its group medical plan and, 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. STOCK BASED COMPENSATION: The Company accounts for its stock compensation arrangements in accordance with APB Opinion No. 25 "Accounting for Stock Issued to Employees" and intends to continue to do so. ADOPTION OF NEW ACCOUNTING RULES: In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt SFAS No. 121 in the first quarter of fiscal 1996 and, based on current circumstances, does not believe the effect of adoption will be material. 29 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS USE OF ESTIMATES IN FINANCIAL STATEMENTS: Judgment and estimation are utilized by management in certain areas in the preparation of the Company's financial statements. Some of the more significant areas include reserves for self-insurance of group medical claims and workers' compensation benefits. Management believes that such estimates have been based on reasonable assumptions and that such estimates are adequate. NOTE B--PROPERTY AND EQUIPMENT Balances of major classes of property and equipment are as follows:
DECEMBER 31 January 1 1995 1995 - ---------------------------------------------------------------------------------------------------------- Land $ 9,810,000 $ 7,669,000 Buildings 22,049,000 15,875,000 Buildings under capital leases 2,917,000 2,917,000 Leasehold improvements 11,186,000 5,873,000 Restaurant and other equipment 17,119,000 13,496,000 Construction in progress (estimated additional cost to complete at December 31, 1995, $3,750,000) 4,495,000 2,061,000 - ---------------------------------------------------------------------------------------------------------- 67,576,000 47,891,000 Less allowances for depreciation and amortization 20,661,000 18,115,000 - ---------------------------------------------------------------------------------------------------------- $46,915,000 $29,776,000 - ----------------------------------------------------------------------------------------------------------
NOTE C--LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES Long-term debt and obligations under capital leases at December 31, 1995, and January 1, 1995, are summarized below:
December 31, 1995 January 1, 1995 Current Long-Term Current Long-Term - --------------------------------------------------------------------------------------------------------------- Convertible Subordinated Debentures, 8.25%, due 2003 $ -- $15,614,000 $ -- $15,614,000 Mortgage and installment notes, at fixed and variable interest rates, currently 9.75% to 12.00%, secured by properties with a carrying value of $2,655,000 at December 31, 1995, payable through 2003 33,000 2,011,000 30,000 2,093,000 Obligations under capital leases, 8.12% to 13.36% interest, payable through 2008 264,000 887,000 320,000 1,140,000 - --------------------------------------------------------------------------------------------------------------- $297,000 $18,512,000 $350,000 $18,847,000 - ---------------------------------------------------------------------------------------------------------------
Maturities of long-term debt and estimated sinking fund payments, excluding obligations under capital leases, for the five years succeeding December 31, 1995, are as follows: 1996-$33,000; 1997-$36,000; 1998-$1,864,000; 1999-$1,875,000; 2000-$1,875,000. 30 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 31, 1995, 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 debentures prior to maturity. The Company has previously purchased a portion of the debentures on the open market which, pursuant to the terms of the Debenture Indenture, will be used in satisfaction of future sinking fund requirements and are sufficient to satisfy those requirements through 1997. During 1995, the Company entered into an unsecured bank line of credit agreement which provides for up to $30,000,000 of revolving credit for the purpose of financing future capital expenditures. Interest is payable monthly with the interest rate, at the Company's option, at the bank's prime rate or the bank's LIBOR rate plus 1.5% or 2.5%, depending on compliance with certain ratios set forth in the agreement. In addition, a fee of 1/4% on any unused portion of the facility is payable on a quarterly basis. All outstanding principal, interest and expenses under the agreement become due July 1, 1998, unless the Company exercises its option to convert amounts outstanding under the line of credit to a seven year term loan. The agreement requires the Company to meet certain restrictive financial and other covenants, including limitations on other borrowing, all of which were met as of December 31, 1995. No borrowings were outstanding under the agreement as of December 31, 1995. Cash interest payments amounted to $1,732,000 , $1,728,000 and $1,776,000, in 1995, 1994 and 1993, respectively. Interest costs of $316,000, $118,000 and $31,000 were capitalized as part of building and leasehold costs in 1995, 1994, and 1993, respectively. The carrying value and estimated fair value of the Company's long-term debt are summarized in the following table (see Note A):
December 31, 1995 - ----------------------------------------------------------------------------------------------------------- Estimated Carrying Value Fair Value - ----------------------------------------------------------------------------------------------------------- Convertible subordinated debentures $15,614,000 $15,028,000 Mortgage and installment notes 2,044,000 2,044,000 - ----------------------------------------------------------------------------------------------------------- Total $17,658,000 $17,072,000 - -----------------------------------------------------------------------------------------------------------
31 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE D--LEASES At December 31, 1995, the Company was lessee under both ground leases (the Company leases the land and builds its own buildings) and improved leases (lessor owns the land and buildings) for restaurant locations. These leases are operating leases except for the building portions of the improved leases which are typically capital leases. Real estate lease terms are generally for 15 to 25 years and, in many cases, provide for rent escalations and for one or more five-year renewal options. The Company is generally obligated for the cost of property taxes, insurance and maintenance. Certain real property leases (both capitalized and operating) provide for contingent rentals based upon 5%-7% of net sales. In addition, the Company is lessee under other noncancelable operating leases, principally for office space. Accumulated amortization of buildings under capital leases totaled $2,549,000 at December 31, 1995, and $2,406,000 at January 1, 1995. Amortization of leased assets is included in depreciation and amortization expense. Total rental expense amounted to:
Years Ended - ---------------------------------------------------------------------------------------------------------- DECEMBER 31 January 1 January 2 1995 1995 1994 - ---------------------------------------------------------------------------------------------------------- Minimum rentals under operating leases $1,800,000 $1,292,000 $1,247,000 Contingent rentals 395,000 404,000 414,000 Less: Sublease rentals (313,000) (314,000) (314,000) - ---------------------------------------------------------------------------------------------------------- $1,882,000 $1,382,000 $1,347,000 - ----------------------------------------------------------------------------------------------------------
At December 31, 1995, future minimum lease payments under capital leases and noncancelable operating leases with initial terms of one year or more are as follows:
Capital Operating Leases Leases - --------------------------------------------------------------------------------------------------------- 1996 $ 376,000 $ 1,612,000 1997 313,000 1,492,000 1998 204,000 1,377,000 1999 147,000 1,279,000 2000 113,000 1,144,000 Thereafter 461,000 9,153,000 - --------------------------------------------------------------------------------------------------------- Total minimum payments 1,614,000 $16,057,000 - --------------------------------------------------------------------------------------------------------- Less imputed interest (463,000) - --------------------------------------------------------------------------------------------------------- Present value of minimum rental payments 1,151,000 - --------------------------------------------------------------------------------------------------------- Less current maturities at December 31, 1995 (264,000) - --------------------------------------------------------------------------------------------------------- Long-term obligations at December 31, 1995 $ 887,000 - ---------------------------------------------------------------------------------------------------------
Minimum future rentals receivable under subleases for operating leases at December 31, 1995, amounted to $2,545,000. 32 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In addition to the leases summarized above, the Company leases five previously owned Wendy's restaurant properties from a corporation principally owned by a Director of the Company and his wife at an aggregate minimum annual rental of approximately $265,000, which is subject to adjustment in certain events, plus contingent rentals based on sales. The leases are renewable at the Company's option for two additional five year periods. The Company also has an option to repurchase the properties throughout the terms of the leases. As a result of this option to purchase, the transaction has been recorded as a financing rather than as a sale, in compliance with SFAS No. 98. Accordingly, the assets sold continue to be carried on the Company's Consolidated Balance Sheet and the original proceeds of $2,180,000, reduced for contingent rent payments, have been recorded as long-term debt on the balance sheet. Contingent rent payments totaled $49,000, $54,000 and $68,000 in 1995, 1994 and 1993, respectively. The future minimum lease payments, which will be recorded principally as interest expense, under the terms of the related lease agreements are as follows:
--------------------------------------------------- 1996 $ 265,000 1997 265,000 1998 265,000 1999 265,000 2000 265,000 Thereafter 795,000 --------------------------------------------------- $2,120,000 ---------------------------------------------------
The Company leases one additional Wendy's restaurant from affiliates of the Director referenced above. This agreement calls for annual lease payments of approximately $17,000 through June 1997. NOTE E--INCOME TAXES At December 31, 1995, the Company had net operating loss carryforwards of $10,031,000 for income tax purposes that expire in the years 2000 through 2004. Tax credit carryforwards (consisting primarily of investment tax credits which expire in the years 1998 through 2001) of $1,999,000 are also available to reduce future federal income taxes. 33 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 31, 1995, and January 1, 1995, are as follows:
- ---------------------------------------------------------------------------------------------------------- DECEMBER 31 January 1 1995 1995 - ---------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Tax over book depreciation $ 26,000 $ 133,000 Pre-opening costs 368,000 232,000 Other--net 76,000 75,000 - ---------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 470,000 440,000 - ---------------------------------------------------------------------------------------------------------- Deferred tax assets: Capital/finance leases 107,000 146,000 Deferred compensation accruals 158,000 139,000 Self-insurance accruals 58,000 78,000 Net operating loss carryforwards 3,410,000 4,605,000 Tax credit carryforwards 1,999,000 1,800,000 Other--net 274,000 194,000 - ---------------------------------------------------------------------------------------------------------- Total deferred tax assets 6,006,000 6,962,000 Valuation allowance for deferred tax assets -- (3,071,000) - ---------------------------------------------------------------------------------------------------------- 6,006,000 3,891,000 - ---------------------------------------------------------------------------------------------------------- Net deferred tax assets $5,536,000 $3,451,000 - ----------------------------------------------------------------------------------------------------------
Prior to 1993, the valuation allowance was established at an amount necessary to fully reserve the 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 by $2,085,000 (of which $303,000 was credited to additional paid-in capital), $2,100,000 and $1,500,000, respectively, reflecting a change in circumstances which resulted in a judgment that a corresponding amount of the Company's deferred tax assets will be realized in future years. The valuation allowance decreased by $3,071,000 (including the $2,085,000 decrease discussed above), $2,659,000 (including the $2,100,000 decrease discussed above) and $2,448,000 (including the $1,500,000 decrease discussed above) during 1995, 1994 and 1993, respectively, as the result of changes in the deferred tax items. 34 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Significant components of the Company's income tax benefit are as follows:
Years Ended - ---------------------------------------------------------------------------------------------------------- DECEMBER 31 January 1 January 2 1995 1995 1994 - ---------------------------------------------------------------------------------------------------------- Currently payable: Federal $ 80,000 $ 66,000 $ 61,000 State 144,000 262,000 164,000 - ---------------------------------------------------------------------------------------------------------- Total 224,000 328,000 225,000 Deferred (1,782,000) (2,100,000) (1,500,000) - ---------------------------------------------------------------------------------------------------------- Income tax benefit $(1,558,000) $(1,772,000) $(1,275,000) - ----------------------------------------------------------------------------------------------------------
The Company's consolidated effective tax rate differed from the federal statutory rate as set forth in the following table:
Years Ended - ---------------------------------------------------------------------------------------------------------- December 31 January 1 January 2 1995 1995 1994 - ---------------------------------------------------------------------------------------------------------- Tax expense computed at federal statutory rate (34%) $ 1,176,000 $ 1,040,000 $ 1,029,000 State and local income taxes 144,000 262,000 164,000 Alternative minimum tax 80,000 66,000 61,000 Non-deductible expenses 19,000 23,000 6,000 Benefit of net operating loss carryforwards (1,195,000) (1,063,000) (1,035,000) Recognition of deferred tax assets (1,782,000) (2,100,000) (1,500,000) - ---------------------------------------------------------------------------------------------------------- Income tax benefit $(1,558,000) $(1,772,000) $(1,275,000) - ----------------------------------------------------------------------------------------------------------
Income tax payments were $175,000, $338,000 and $214,000 in 1995, 1994 and 1993, respectively. NOTE F--STOCK OPTIONS AND BENEFIT PLANS Under the Company's 1994 Employee Stock Incentive Plan, officers and key employees of the Company may be granted options to purchase shares of the Company's common stock. In addition, the 1990 Stock Option Plan for Outside Directors provides for the granting of options to purchase the Company's common stock at the fair market price at the date of the grant to members of the Company's Board of Directors who are not employees. Options to purchase the Company's common stock also remain outstanding under the Company's 1982 Incentive Stock Option Plan and 1985 Stock Option Plan, although the Company no longer has the ability to issue additional shares under these plans. 35 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of options under the Company's option plans is as follows:
- ------------------------------------------------------------------------------------------------------------ Options Shares Option Prices - ------------------------------------------------------------------------------------------------------------ Outstanding at January 3, 1993 333,356 $1.38-$ 5.88 Issued 108,950 7.50- 10.50 Exercised (13,966) 1.38- 3.00 Expired or cancelled (1,284) 1.38- 10.38 - ---------------------------------------------------------------------------------------- Outstanding at January 2, 1994 427,056 1.38- 10.50 Issued 121,100 7.25- 13.00 Exercised (106,366) 1.38- 5.88 Expired or cancelled (366) 1.38- 10.38 - ---------------------------------------------------------------------------------------- Outstanding at January 1, 1995 441,424 1.38- 13.00 Issued 146,700 7.56- 9.75 Exercised (15,166) 1.38- 7.63 Expired or cancelled (10,250) 7.25- 11.50 - ---------------------------------------------------------------------------------------- Outstanding at December 31, 1995 562,708 $1.38-$13.00 - ----------------------------------------------------------------------------------------
Options exercisable and shares available for future grant are as follows:
- ---------------------------------------------------------------------------------------------------------- DECEMBER 31 January 1 1995 1995 - ---------------------------------------------------------------------------------------------------------- Options exercisable 313,393 257,109 Shares available for grant 226,450 368,100 - ----------------------------------------------------------------------------------------------------------
The Company has an Employee Stock Purchase Plan under which 110,324 shares of the Company's common stock are available for issuance. Shares issued under the plan totaled 21,335, 16,877 and 10,794, in 1995, 1994 and 1993, respectively. The Company has a Salary Continuation Plan which provides retirement and death benefits to certain officers. The expense recognized under this plan was $61,000, $54,000 and $55,000 in 1995, 1994 and 1993, respectively. The Company has a Savings Incentive and Salary Deferral Plan under Section 401(k) of the Internal Revenue Code which allows qualifying employees to defer a portion of their income on a pre-tax basis through contributions to the plan. All Company employees with at least 1,000 hours of service during the twelve month period subsequent to their hire date, or any calendar year thereafter, and who are at least 21 years of age are eligible to participate. For each dollar of participant contributions, up to 3% of each participant's salary, the Company makes a minimum 10% matching contribution to the plan. For 1995, 1994 and 1993, the Company made a 20% matching contribution to the plan and recognized expense of $23,000, $19,000 and $15,000, respectively. 36 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE G--EMPLOYEE STOCK OWNERSHIP PLAN The Company has established an Employee Stock Ownership Plan (ESOP) for the purpose of enabling employees of the Company to share in its growth and prosperity and to accumulate capital for their future economic security. In 1992, the ESOP purchased 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. The loan is secured by a pledge of the unallocated stock held by the ESOP and is to be repaid in ten annual principal payments of approximately $172,000 plus interest on the outstanding principal balance at an annual rate of 9%. The Company expects to continue making annual contributions to the ESOP which will allow the ESOP to repay the Company and which will result in annual net expense to the Company of approximately $172,000. The Company recorded ESOP expense, and a corresponding reduction in the ESOP note receivable, of $172,000 in 1995, $170,000 in 1994 and $172,000 in 1993. The note receivable from the ESOP has been reported as a reduction from the Company's stockholders' equity. 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 being made to participants' accounts annually over a ten-year period as the ESOP's loan is repaid and is in proportion to each participant's compensation for each year. At December 31, 1995, and January 1, 1995, shares allocated under the ESOP totaled 182,822 and 137,117, respectively. For purposes of computing earnings per share, the 457,055 shares originally purchased by the ESOP are included as outstanding shares in the weighted average share calculation. NOTE H--SHAREHOLDER RIGHTS PLAN During 1989, the Board of Directors adopted a shareholder rights plan for the Company. The purpose of the shareholder rights plan is 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. 37 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE I--COMMITMENTS AND CONTINGENCIES 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 10 years. The total amount of lease payments remaining on these leases at December 31, 1995, was approximately $4 million. Additionally, in connection with the disposition of certain 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 four to 11 years. The total amount of lease payments remaining on these leases as of December 31, 1995, was approximately $2.6 million. NOTE J--ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities included the following:
- ---------------------------------------------------------------------------------------------------------- December 31 January 1 1995 1995 - ---------------------------------------------------------------------------------------------------------- Taxes, other than income taxes $1,062,000 $ 811,000 Salaries and wages 686,000 641,000 Insurance 710,000 313,000 Interest 120,000 136,000 Other 1,573,000 1,409,000 - ---------------------------------------------------------------------------------------------------------- $4,151,000 $3,310,000 - ----------------------------------------------------------------------------------------------------------
NOTE K--BUSINESS SEGMENTS For the years ended December 31, 1995, January 1, 1995, and January 2, 1994, retail food operations constituted a dominant segment in accordance with SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise." 38 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 24 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND STOCKHOLDERS VOLUNTEER CAPITAL CORPORATION We have audited the accompanying consolidated balance sheets of Volunteer Capital Corporation and subsidiaries as of December 31, 1995 and January 1, 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Volunteer Capital Corporation and subsidiaries at December 31, 1995 and January 1, 1995, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Nashville, Tennessee /s/ Ernst & Young LLP February 19, 1996 --------------------- Ernst & Young LLP 39 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 25 QUARTERLY RESULTS OF OPERATIONS The following is a summary of the quarterly results of operations for the years ended December 31, 1995, and January 1, 1995 (dollars in thousands, except per share amounts):
1995 Quarters Ended - ------------------------------------------------------------------------------------------------------------ APRIL 2 JULY 2 OCTOBER 1 DECEMBER 31 - ------------------------------------------------------------------------------------------------------------ Net sales $18,100 $20,005 $20,550 $20,633 Income from restaurant operations 1,949 2,196 2,317 2,121 Net income 688 913 984 2,431(1) Earnings per share: Primary $.13 $.17 $.18 $.44 Fully diluted $.13 $.17 $.18 $.43
1994 Quarters Ended - ------------------------------------------------------------------------------------------------------------ April 3 July 3 October 2 January 1 - ------------------------------------------------------------------------------------------------------------ Net sales $14,944 $16,998 $16,872 $16,881 Income from restaurant operations 1,589 2,039 2,035 1,960 Net income 512 723 819 2,776(2) Earnings per share: Primary $ .10 $ .13 $ .15 $ .52 Fully diluted $ .10 $ .13 $ .15 $ .49
(1) Includes tax benefit of $1,782 related to recognition of deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes"(SFAS No. 109). (2) Includes tax benefit of $2,100 related to recognition of deferred tax assets in accordance with SFAS No. 109. 40 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 26 FIVE-YEAR FINANCIAL SUMMARY
(Dollars in thousands, except per share data) Years Ended - ------------------------------------------------------------------------------------------------------------ DECEMBER 31 January 1 January 2 January 3 December 29 1995 1995 1994 1993(1) 1991 - ------------------------------------------------------------------------------------------------------------ OPERATIONS - ------------------------------------------------------------------------------------------------------------ Net sales $79,288 65,695 60,574 50,092 42,467 Income from restaurant operations $ 8,583 7,623 7,342 5,535 4,320 General and administrative expenses $ 4,308 3,839 3,238 2,891 2,559 Income before extraordinary item $ 5,016(2) 4,830(3) 4,301(4) 2,064 1,194 Net income $ 5,016(2) 4,830(3) 4,301(4) 2,064 3,380 Depreciation and amortization $ 3,644 2,760 2,394 1,942 1,615 Cash flow from operations $ 7,586 5,706 5,050 3,590 3,159 Capital expenditures $20,255 11,276 3,479 7,105 1,701 FINANCIAL POSITION - ------------------------------------------------------------------------------------------------------------ Cash and investments $ 2,739 16,312 20,772 10,904 15,724 Property and equipment, net $46,915 29,776 20,989 19,604 14,310 Total assets $60,140 53,306 46,419 33,979 33,405 Long-term obligations $18,512 18,847 19,250 19,633 19,949 Stockholders' equity $32,975 27,304 21,700 7,950 7,881 PER SHARE DATA - ------------------------------------------------------------------------------------------------------------ Earnings per share-primary: Income before extraordinary item $ .92 .90 .93 .48 .27 Net income $ .92 .90 .93 .48 .72 Earnings per share-assuming full dilution: Income before extraordinary item $ .92 .90 .93 .47 .27 Net income $ .92 .90 .93 .47 .72 Stockholders' equity $ 6.25 5.21 4.24 1.94 1.96 Market price at year end $ 9 1/2 6 11 6 3/4 2 5/8 WENDY'S RESTAURANT DATA - ------------------------------------------------------------------------------------------------------------ Net sales $53,694 50,991 49,758 46,547 41,014 Weighted average annual sales per unit $ 958 973 971 923 818 Units open at year end 58 55 52 51 51 J. ALEXANDER'S RESTAURANT DATA - ------------------------------------------------------------------------------------------------------------ Net sales $25,594 14,704 10,816 3,545 1,453 Weighted average annual sales per unit $ 3,980 3,735 3,605 2,608 2,015 Units open at year end 9 5 3 3 1
(1) Due to the Company's fiscal year policy, fiscal year 1992 includes 53 weeks as compared to 52 weeks for the other years presented. (2) Includes tax benefit of $1,782 related to recognition of deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109). (3) Includes tax benefit of $2,100 related to recognition of deferred tax assets in accordance with SFAS No. 109. (4) Includes tax benefit of $1,500 related to recognition of deferred tax assets in accordance with SFAS No. 109. Note: The Company has never paid cash dividends on its common stock. Payment of future dividends will be within the discretion of the Company's Board of Directors and will depend, among other factors, on earnings, capital requirements and the operating and financial condition of the Company. 41 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES 27 CORPORATE INFORMATION TRANSFER AGENT AND REGISTRAR SunTrust Bank, Nashville, N.A. c/o SunTrust Bank, Atlanta, N.A. P.O. Box 4625 Atlanta, Georgia 30302 (800) 568-3476 INDEPENDENT AUDITORS Ernst & Young LLP Nashville, Tennessee CORPORATE OFFICES 3401 West End Avenue P.O. Box 24300 Nashville, Tennessee 37202 (615) 269-1900 NYSE SYMBOL VCC ANNUAL MEETING The Annual Meeting of Shareholders will be held May 14, 1996, at 9:30 a.m., Nashville time, at the Nashville City Club, SunTrust Bank Building, 201 Fourth Avenue North, Nashville, Tennessee. FORM 10-K A copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K may be obtained without charge by any stockholder by writing directly to: R. Gregory Lewis Vice President and Chief Financial Officer 3401 West End Avenue P.O. Box 24300 Nashville, Tennessee 37202 PRICE RANGE OF COMMON STOCK The common stock of Volunteer Capital Corporation is listed on the New York Stock Exchange under the symbol VCC. The approximate number of record holders of the Company's common stock at December 31, 1995, was 1,500. The following table summarizes the price range of the Company's common stock for each quarter of 1995 and 1994, as reported from price quotations from the New York Stock Exchange:
1995 1994 ------------------ -------------------- Low High Low High ------ ------ ------- ------- 1st Quarter $6 1/8 $ 8 1/4 $10 1/2 $14 2nd Quarter 7 3/8 10 9 1/2 13 3rd Quarter 9 1/8 12 1/2 6 1/2 10 4th Quarter 8 3/8 12 3/8 5 5/8 8 1/2
43 VOLUNTEER CAPITAL CORPORATION AND SUBSIDIARIES EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21--SUBSIDIARIES OF VOLUNTEER CAPITAL CORPORATION
STATE OF NAME UNDER WHICH SUBSIDIARY INCORPORATION BUSINESS IS DONE - ---------- ------------- ----------------- VCE Restaurants, Inc. Tennessee Wendy's Old Fashioned Hamburgers Total Quality Management, Inc. Tennessee J. Alexander's Restaurant M & W Management Corporation Kansas J. Alexander's Restaurant
EX-23 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23--CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Volunteer Capital Corporation of our report dated February 19, 1996, included in the 1995 Annual Report to Shareholders of Volunteer Capital Corporation. Our audits also included the financial statement schedule of Volunteer Capital Corporation listed in Item 14(a). The schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the following Volunteer Capital 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 Registation 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 February 19, 1996, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Volunteer Capital Corporation. ERNST & YOUNG LLP Nashville, Tennessee March 27, 1996 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 JAN-02-1995 DEC-31-1995 2,234 505 313 0 848 5,925 67,576 20,661 60,140 8,152 18,512 0 0 264 32,711 60,140 79,288 79,288 27,707 50,862 19,843 0 1,416 3,458 (1,558) 5,016 0 0 0 5,016 .92 .92
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