-----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, MXHZXGDFE8Bu88+ukiEjeKdQSHoNmddN/gvBc19eBmNVFZZ0inb8DmpXrT6+Uflz GwKY9lkrfP/+UxxE72OGUg== 0000950144-97-003390.txt : 19970401 0000950144-97-003390.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950144-97-003390 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961229 FILED AS OF DATE: 19970331 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: 97569012 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 J. ALEXANDER'S CORPORATION FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934. For the fiscal year ended December 29, 1996. [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996] or Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______________ to ______________. Commission file number 1-8766 J. ALEXANDER'S CORPORATION -------------------------- (Exact name of Registrant as specified in its charter) Tennessee 62-0854056 --------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) P.O. Box 24300 3401 West End Avenue Nashville, Tennessee 37203 -------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (615)269-1900 ------------- Securities registered pursuant to Section 12(b) of the Act:
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 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sales price on the New York Stock Exchange of such stock as of March 24, 1997, was $42,083,670, assuming that (i) all shares beneficially held by members of the Company's Board of Directors are shares owned by "affiliates," a status which each of the directors individually disclaims and (ii) all shares held by the Trustee of the J. Alexander's Corporation Employee Stock Ownership Plan are shares owned by an "affiliate". The number of shares of the Company's Common Stock, $.05 par value, outstanding at March 24, 1997, was 5,382,994. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Annual Report to Shareholders for the fiscal year ended December 29, 1996, are incorporated by reference into Parts I and II. Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders to be held May 20, 1997, are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS J. Alexander's Corporation (the "Company", formerly Volunteer Capital Corporation) operates as a proprietary concept 14 J. Alexander's full-service, casual dining restaurants located in Tennessee, Ohio, Florida, Kansas, Alabama, Michigan and Illinois. J. Alexander's is a traditional restaurant with an American menu that features prime rib of beef; mesquite-grilled steaks, seafood and chicken; pasta; salads and soups; assorted sandwiches, appetizers and desserts; and a full-service bar. Management believes quality food, outstanding service and value are critical to the success of J. Alexander's. The Company has historically operated as a major franchisee of Wendy's International, Inc. ("Wendy's International"). However, in November 1996, the Company sold 52 of its 58 Wendy's Old Fashioned Hamburgers restaurants ("Wendy's Restaurants") to Wendy's International. Of the six restaurants not acquired by Wendy's International in November 1996, two were in operation at December 29, 1996. As of March 24, 1997 the Company has closed or sold all of its Wendy's restaurants. Management intends to concentrate on development of new J. Alexander's restaurants and may also consider use of the Company's capital resources for acquisitions of restaurants similar to J. Alexander's. Unless the context requires otherwise, all references to the Company include J. Alexander's Corporation and its subsidiaries. Information concerning net sales and operating results of the Company's J. Alexander's Restaurants and Wendy's Restaurants is set forth in "Management's Discussion and Analysis" on pages through of the Company's 1996 Annual Report to Shareholders. J. ALEXANDER'S RESTAURANT OPERATIONS General. J. Alexander's is a quality casual dinner house with an American theme. J. Alexander's strategy is to provide a broad range of high-quality menu items that are intended to appeal to a wide range of consumer tastes and are served by a courteous, friendly and well-trained service staff. The Company believes that quality food, outstanding service and value are critical to the success of J. Alexander's. Each restaurant is open from 11:00 a.m. to 11:00 p.m. Sunday through Thursday and 11:00 a.m. to 12:00 midnight on Friday and Saturday. Entrees available at lunch and dinner range in price from $4.95 to $18.45. The Company estimates that the average check per customer, excluding alcoholic beverages, is approximately $13.80. J. Alexander's net sales during fiscal 1996 were $42.1 million, of which alcoholic beverage sales accounted for approximately 15%. The Company opened its first J. Alexander's restaurant in Nashville, Tennessee in May 1991. Since that time, the Company opened two restaurants in 1992, two restaurants in 1994, four restaurants in 1995 and five restaurants in 1996. The Company plans to open five J. Alexander's in 1997, four of which are currently being developed in Tampa, Florida; Denver, Colorado; Livonia, Michigan; and San Antonio, Texas (a leased location). The Tampa restaurant is scheduled to open in the second quarter of 1997, the Denver restaurant is scheduled to open in the third quarter of 1997, and the Livonia and San Antonio restaurants, as well as a fifth new restaurant, are scheduled to open in the fourth quarter of 1997. Menu. The J. Alexander's menu is designed to appeal to a wide variety of tastes and features prime rib of beef; hardwood-grilled steaks, seafood and chicken; pasta; salads and soups; and assorted sandwiches, appetizers and desserts. 3 As a part of the Company's commitment to quality, soups, sauces, salsa, salad dressings and desserts are made daily from scratch; steaks, chicken and seafood are grilled over genuine hardwood; all steaks are U.S.D.A. Midwestern, Cornfed Choice Beef, aged a minimum of 21 days and cut by hand in the kitchen; and imported Italian pasta, topped with fresh grated imported Reggiano Grassi parmesan cheese, is used. Emphasis on quality is present throughout the entire J. Alexander's menu. Milkshakes are made from Haagen-Dazs ice cream, with flavoring being the only addition. Desserts such as chocolate cake, carrot cake and cheesecake are prepared in-house, and each restaurant bakes its featured croissants. Customer Service. Management believes that prompt, courteous and efficient service is an integral part of the J. Alexander's concept. The management staff of each restaurant are referred to as "coaches" and the other employees as "champions". The Company seeks to hire coaches who are committed to the principle that quality products and service are key factors to success in the restaurant industry. Each J. Alexander's restaurant typically employs five to six fully-trained concept coaches and two kitchen coaches. The coaches typically have previous experience in full-service restaurants and complete an intensive 19-week J. Alexander's development program involving all aspects of restaurant operations. Each J. Alexander's has approximately 45 to 65 service personnel, 25 to 30 kitchen employees, 8-10 host persons and six to eight pubkeeps. The Company places significant emphasis on its initial training program. In addition, the coaches hold training breakfasts for the service staff to further enhance their product knowledge. Management believes J. Alexander's restaurants have a low table to server ratio, which is designed to provide better, more attentive service. The Company is committed to employee empowerment, and each member of the service staff is authorized to provide complimentary entrees in the event that a guest has an unsatisfactory dining experience or the food quality is not up to the Company's standards. Further, all members of the service staff are trained to know the Company's product specifications and to alert management as to any potential problems. Quality Assurance. A key position in each J. Alexander's restaurant is the quality control coordinator. This position is staffed by a coach who inspects each plate of food before it is served to a guest. The Company believes that this product inspection by a member of management is a significant key to maintaining consistent, high food quality in its restaurants. Another important component of the quality assurance system is the preparation of taste plates. Certain menu items are taste-tested daily by a coach to ensure that only the highest quality food is served in the restaurant. The Company also uses a service evaluation program to monitor service staff performance, food quality and guest satisfaction. Restaurant and Site Selection. The J. Alexander's restaurants built from 1992 through 1996 have generally been freestanding structures that contain approximately 7,400 square feet and seat approximately 230 people. The exterior typically combines brick, fieldstone and copper with striped awnings covering the windows and entrance. The restaurants' interiors are designed to provide a comfortable dining experience and feature high ceilings, wooden trusses with exposed pipes and an open kitchen immediately adjacent to the reception area. Consistent with the Company's intent to develop different looks for different markets, the last three restaurants opened in 1996 represented a departure from the "warehouse" style building described above. The J. Alexander's in Troy, Michigan is located inside the prestigious Somerset Collection mall and features a very upscale, contemporary design. The Chattanooga, Tennessee J. Alexander's features a stucco style exterior and includes a number of other unique design features as the result of being converted from another free- standing restaurant building acquired by the Company. The J. Alexander's in Memphis, Tennessee represents the Company's latest prototype design which it expects to use for most of the restaurants opened in 1997. This building was designed to provide a high level of curb appeal using exterior craftsman-style architecture with unique natural materials such as stone, stained woods and weathering copper. The Company plans to open five J. Alexander's restaurants in 1997, four of which are currently under development in Tampa, Florida; Denver, Colorado; San Antonio, Texas; and Livonia, Michigan. The Company estimates that its capital expenditures for 1997 will total approximately $22,000,000. The capital expenditures for restaurants include the cost of constructing and equipping the restaurant and, if the land on which a restaurant is located is purchased, the cost of purchasing the land and associated site work. Based upon the Company's cost experience in developing restaurants and the Company's current estimates of cost levels, the Company believes that the cost of constructing a J. Alexander's building will range from approximately $1,650,000 to $1,850,000. The Company is also developing a lower cost building, anticipated to range from $1,300,000 to $1,400,000, for use in selected markets beginning in 1998. The Company estimates that the cost of equipping a J. Alexander's restaurant will range from $650,000 to $700,000. Currently, the principal variable in the cost of a restaurant is the decision to own or lease a restaurant site and if a decision is made to own the site, the cost of land in the proposed market. In general, the Company prefers to own its sites because of the long-term value of owning such an asset. For restaurants opened during 1996, the cost of land ranged from $800,000 to $1,200,000. In addition, site preparation and improvement costs are expected to range from approximately $275,000 to $350,000 per restaurant. Management estimates that pre-opening costs will range from $250,000 to $300,000 per restaurant. The Company is actively seeking to acquire additional sites for new J. Alexander's restaurants primarily in the midwestern and the southeastern areas of the United States. The timing of restaurant openings depends upon the selection and availability of suitable sites and other factors. The Company has no current plans to franchise J. Alexander's restaurants. The Company believes that its ability to select high profile restaurant sites is critical to the success of the J. 4 Alexander's operations. The Company employs a Director of Real Estate whose primary responsibilities are to seek out and evaluate possible restaurant locations in attractive mid-sized and larger metropolitan areas. After preliminary site analysis is performed and evaluated, members of the Company's senior management team visit the proposed location and evaluate the particular site and the surrounding area. The Company analyzes a variety of factors in the site selection process, including local market demographics, the number, type and success of competing restaurants in the immediate and surrounding area and accessibility to and visibility from major thoroughfares. The Company also obtains an independent market analysis to verify its own conclusion that a potential restaurant site meets the Company's criteria. The Company believes that this site selection strategy results in quality restaurant locations. WENDY'S RESTAURANT OPERATIONS Overview and Menu. In November 1996, the Company sold 52 of its 58 Wendy's restaurants to Wendy's International. The remaining six Wendy's Restaurants have been sold or closed. Each of the Company's Wendy's Restaurants offered a relatively standard menu, consisting of hamburgers, boneless breast of chicken sandwiches, the SuperBar (an all-you-can-eat hot and cold food buffet), chili, french fried and baked potatoes, prepared salads, a child's meal, Frosty Dairy Dessert, and an assortment of soft drinks and other non-alcoholic beverages. Agreements with Wendy's International. The Company and Wendy's International had previously executed Unit Franchise Agreements for each Wendy's Restaurant, granting the Company an exclusive franchise for that Wendy's Restaurant to use the trademarks, service marks and certain other rights of Wendy's International and obligating the Company to pay Wendy's International an initial franchise fee and a monthly fee equal to 4% of the restaurant's gross sales, as well as to spend 4% of the sales for each restaurant for advertising and promotion. In addition, the Company had previously agreed with Wendy's International that any proposed sale or transfer which would reduce the Company's direct or indirect ownership of its Wendy's Restaurants to less than 51% would be subject to a right of first refusal or, in certain circumstances, consent by Wendy's International. Finally, the Company had also granted to Wendy's International a right of first refusal or, in certain circumstances, consent in the event the Company were to receive an acceptable bona fide offer from a third party to acquire the Company's business through an exchange offer, merger, share exchange, sale of assets or other transaction of similar effect. Because the Company has now sold or closed all of its Wendy's Restaurants, the Unit Franchise Agreements are generally no longer in effect. Furthermore, in connection with the sale of 52 Wendy's Restaurants to Wendy's International in November 1996, Wendy's International expressly surrendered its right of first refusal or, in certain circumstances, consent in the event the Company receives an offer from a third party to acquire the Company's business. COMPETITION The restaurant industry is highly competitive. The Company believes that the principal competitive factors within the industry are site location, product quality, service and price; however, menu variety, attractiveness of facilities and customer recognition are also important factors. The Company's restaurants compete not only with numerous other casual dining restaurants with national or regional images, but also with other types of food service operations in the vicinity of each of the Company's restaurants. These include other restaurant chains or franchise operations with greater public recognition, substantially greater financial resources and higher total sales volume than the Company. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns and the type, number and location of competing restaurants. PERSONNEL As of December 29, 1996, the Company employed approximately 1,700 persons. The Company believes that its employee relations are good. It is not a party to any collective bargaining agreements. GOVERNMENT REGULATION Each of the Company's restaurants is subject to various federal, state and local laws, regulations and administrative practices relating to the sale of food and alcoholic beverages, and sanitation, fire and building codes. Restaurant operating costs are also affected by other governmental actions that are beyond the Company's control, which may include increases in the minimum hourly wage requirements, workers' compensation insurance rates and 5 unemployment and other taxes. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new restaurant. Alcoholic beverage control regulations require each of the Company's J. Alexander's restaurants to apply for and obtain from state authorities a license or permit to sell liquor on the premises and, in some states, to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. The failure of any restaurant to obtain or retain any required liquor licenses would adversely affect the restaurant's operations. In certain states, the Company may be subject to "dram-shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from the establishment which wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its comprehensive general liability insurance. The Americans with Disabilities Act ("ADA") prohibits discrimination on the basis of disability in public accommodations and employment. The ADA became effective as to public accommodations in January 1992 and as to employment in July 1992. Construction and remodeling projects since January 1992 have taken into account the requirements of the ADA; however, the Company could be required to further modify its restaurants' physical facilities to comply with the provisions of the ADA. RISK FACTORS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is including the following cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward looking statements of the Company made by, or on behalf of, the Company. Risks Associated with Growth. The Company's continued growth depends on its ability to open new J. Alexander's restaurants and to operate them profitably, which will depend on a number of factors, including the selection and availability of suitable locations, the hiring and training of sufficiently skilled management and other personnel and other factors, some of which are beyond the control of the Company. There can be no assurance that the Company will be able to open the anticipated number of J. Alexander's in a timely manner or that, if opened, those restaurants can be operated profitably. The Company currently operates fourteen J. Alexander's restaurants, of which only nine have been open for more than one year. Consequently, the earnings achieved to date by these J. Alexander's restaurants may not be indicative of future operating results. Furthermore, because of the Company's relatively small J. Alexander's restaurant base, an unsuccessful new restaurant could have a more adverse effect on the Company's results of operations than would be the case in a restaurant company with a greater number of restaurants. Competition. The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many well-established competitors with substantially greater financial and other resources than the Company. Some of the Company's competitors have been in existence for a substantially longer period than the Company and may be better established in markets where the Company's restaurants are or may be located. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns and the type, number and location of competing restaurants. Fluctuations in Quarterly Results. The Company's quarterly results of operations are affected by timing of the opening of new J. Alexander's restaurants, and fluctuations in the cost of food, labor, employee benefits, and similar costs over which the Company has limited or no control. The Company's business may also be affected by inflation. In the past, management has attempted to anticipate and avoid material adverse effects on the Company's profitability from increasing costs through its purchasing practices and menu price adjustments, but there can be no assurance that it will be able to do so in the future. Government Regulation. The restaurant industry is subject to extensive state and local government regulation relating to the sale of food and alcoholic beverages, and sanitation, fire and building codes. Termination of the liquor license for any J. Alexander's restaurant would adversely affect the revenues for the restaurant. Restaurant operating costs are also affected by other government actions that are beyond the Company's control, which may include increases in the minimum hourly wage requirements, workers' compensation insurance rates and unemployment and other taxes. Implementation of mandatory health care coverage could adversely affect the Company's operations. Difficulties or failure in obtaining required licensing or other regulatory approvals could delay or prevent the opening of a new J. 6 Alexander's restaurant. The suspension of, or inability to renew, a license could interrupt operations at an existing restaurant, and the inability to retain or renew such licenses would adversely affect the operations of the restaurants. ITEM 2. PROPERTIES As of December 29, 1996, the Company had fourteen J. Alexander's casual dining restaurants in operation and two J. Alexander's restaurants under construction. As a result of the sale of substantially all of its Wendy's restaurant operations to Wendy's International in November 1996, the Company had two Wendy's restaurants in operation at December 29, 1996. The following table gives the locations of, and describes the Company's interest in, the land and buildings used in connection with the above:
Site Leased Site and Building and Building Site and Building Owned by the Owned by the Leased to the Company Company Company Total ------- ------- ------- ----- J. Alexander's Restaurants: Alabama 1 0 0 1 Colorado 1 0 0 1 Florida 2 1 0 3 Illinois 1 0 0 1 Kansas 1 0 0 1 Michigan 0 1 0 1 Ohio 3 1 0 4 Tennessee 3 0 1 4 - - - - 12 3 1 16 -- - - -- Wendy's Restaurants: Louisiana 2 0 0 2 -- - - -- Total 14 3 1 18 == = = ==
(a) In addition to the above, the Company leases five properties which are in turn leased to others. (b) See Item 1. for additional information concerning the Company's restaurants. All of the Company's restaurant lease agreements may be renewed at the end of the initial term (generally 15 to 25 years) for periods ranging from five to 10 years. Certain of these leases provide for minimum rentals plus additional rent based on a percentage of the restaurant's gross sales in excess of specified amounts. These leases usually require the Company to pay all real estate taxes, insurance premiums and maintenance expenses with respect to the leased premises. Corporate offices for the Company are located in leased office space in Nashville, Tennessee. ITEM 3. LEGAL PROCEEDINGS As of March 24, 1997, the Company was not a party to any pending legal proceedings material to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1996. 7 EXECUTIVE OFFICERS OF THE COMPANY The following list includes names and ages of all of the executive officers of the Company indicating all positions and offices with the Company held by each such person and each such person's principal occupations or employment during the past five years. All such persons have been appointed to serve until the next annual appointment of officers and until their successors are appointed, or until their earlier resignation or removal. Name and Age Background Information Ronald E. Farmer, 50 Vice-President of Development since May, 1996; Director of Development from October, 1993 to May, 1996; President of Dinelite Corporation, a franchisee of Po Folks Restaurants, from 1987 to 1993. R. Gregory Lewis, 44 Chief Financial Officer since July 1986; Vice President of Finance and Secretary since August 1984. Mark A. Parkey, 34 Director of Finance of the Company since January 1993; Audit Manager with Steele, Carter and Martin, a public accounting firm, from June 1991 to January 1993. Lonnie J. Stout II, 50 Chairman since July 1990; Director, President and Chief Executive Officer since May 1986. 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required under this item in incorporated by reference to the section entitled "Price Range of Common Stock" on page 44 and the Note to the "Five-Year Financial Summary" on page 42 of the Company's Annual Report to Shareholders for the fiscal year ended December 29, 1996. ITEM 6. SELECTED FINANCIAL DATA The information required under this item is incorporated by reference to the section entitled "Five-Year Financial Summary" on page 42 of the Company's Annual Report to Shareholders for the fiscal year ended December 29, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required under this item is incorporated by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 17 through 23 of the Company's Annual Report to Shareholders for the fiscal year ended December 29, 1996. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required under this item is incorporated by reference to the "Consolidated Financial Statements" of the Company and its subsidiaries on pages 24 through 39 and the "Quarterly Results of Operations" on page 41 of the Company's Annual Report to Shareholders for the fiscal year ended December 29, 1996. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required under this item with respect to directors of the Company is incorporated herein by reference to the "Proposal No. 1: Election of Directors" section and the "Compliance with Section 16(a) of the Securities Exchange Act of 1934" section of the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders to be held May 20, 1997. (See also "Executive Officers of the Company" under Part I of this Form 10-K.) ITEM 11. EXECUTIVE COMPENSATION The information required under this item is incorporated herein by reference to the "Executive Compensation" section of the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders to be held May 20, 1997. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this item is incorporated herein by reference to the "Security Ownership of Certain Beneficial Owners and Management" section of the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders to be held May 20, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this item is incorporated herein by reference to the "Certain Relationships and Related Transactions" section of the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders to be held May 20, 1997. 9 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2) The information required under Item 14, subsections (a)(1) and (a)(2) is set forth in a supplement filed as part of this report beginning on page F-1. (a)(3) Exhibits: (3)(a)(1) Charter (Exhibit 3(a) of the Registrant's Report on Form 10-K for the year ended December 30, 1990, is incorporated herein by reference). (3)(a)(2) Amendment to Charter dated February 7, 1997. (3)(b) Bylaws as currently in effect (Exhibit 3(b) of the Registrant's Report on Form 10-K for the year ended December 30, 1990, is incorporated herein by reference). (4)(a) Form of Indenture dated as of May 19, 1983, between the Registrant and First American National Bank of Nashville, Trustee (Exhibit 4 of the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1983, is incorporated herein by reference). (4)(b) Rights Agreement dated May 16, 1989, by and between Registrant and NationsBank (formerly Sovran Bank/Central South) including Form of Rights Certificate and Summary of Rights (Exhibit 3 to the Report on Form 8-K dated May 16, 1989, is incorporated herein by reference). (10)(a) Employee Stock Ownership Plan (Exhibit 1 to the Registrant's Report on Form 8-K dated June 25, 1992, is incorporated herein by reference). (10)(b) Employee Stock Ownership Trust Agreement dated June 25, 1992 between Registrant and Third National Bank in Nashville. (Exhibit 2 to the Registrant's Report on Form 8-K dated June 25, 1992, is incorporated herein by reference). (10)(c) Secured Promissory Note dated June 25, 1992 from the Volunteer Capital Corporation Employee Stock Ownership Trust to Registrant (Exhibit 4 to the Registrant's Report on Form 8-K dated June 25, 1992, is incorporated herein by reference). (10)(d) Pledge and Security Agreement dated June 25, 1992, by and between Registrant and Third National Bank in Nashville as the Trustee for the Volunteer Capital Corporation Employee Stock Ownership Trust (Exhibit 5 to the Registrant's Report on Form 8-K dated June 25, 1992, is incorporated herein by reference). (10)(e) $30,000,000 Loan Agreement dated August 29, 1995 by and between Volunteer Capital Corporation, VCE Restaurants, Inc., Total Quality Management, Inc. and NationsBank of Tennessee, N.A. (Exhibit 10.1 of the Registrant's quarterly report on Form 10-Q for the quarter ended October 1, 1995 is incorporated herein by reference). (10)(f) $30,000,000 Line of Credit note dated August 29, 1995 by and between Volunteer Capital Corporation, VCE Restaurants, Inc., Total Quality Management, Inc. and NationsBank of Tennessee, N.A. (Exhibit 10.2 of the Registrant's quarterly report on Form 10-Q for the quarter ended October 1, 1995 is incorporated herein by reference). (10)(g) Asset Purchase Agreement dated October 25, 1996 by and between VCE Restaurants, Inc., Volunteer Capital Corporation and Wendy's International, Inc. (Exhibit 10.1 of the Registrant's quarterly report on Form 10-Q for the quarter ended September 29, 1996 is incorporated herein by reference). EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10 (10)(h) Written description of Salary Continuation Plan (description of Salary Continuation Plan included in the Registrant's Proxy Statement for Annual Meeting of Shareholders, May 10, 1994, is incorporated herein by reference). (10)(i) Form of Severance Benefits Agreement between the Registrant and Messrs. Stout and Lewis (Exhibit (10)(j) of the Registrant's Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference). (10)(j) 1982 Incentive Stock Option Plan (incorporated by reference to pages B-1 through B-6 of Registration Statement No 2-78140). (10)(k) Amended and restated 1982 Employee Stock Purchase Plan (incorporated by reference from the Registrant's Current Report on Form 8-K filed March 29, 1996). (10)(l) 1985 Stock Option Plan (incorporated by reference to pages 15 through 20 of the Registrant's Proxy Statement for Annual Meeting of Shareholders, May 8, 1985, and Exhibit A to the Registrant's Proxy Statement for Annual Meeting of Shareholders, May 11, 1993.) (10)(m) 1990 Stock Option Plan for Outside Directors (Exhibit A of the Registrant's Proxy Statement for Annual Meeting of Shareholders, May 8, 1990, is incorporated herein by reference). (10)(n) 1994 Employee Stock Incentive Plan (incorporated by reference to Exhibit 4(c) of Registration Statement No. 33-77476). (10)(o) Form of Separation Agreement and General Release between the Registrant and Mr. May dated October 17, 1996. (11) Statement regarding computation of per share earnings. (13) Portions of Annual Report to Shareholders of J. Alexander's Corporation for the year ended December 29, 1996 (21) List of subsidiaries of Registrant. (23) Consent of Independent Auditors. (b) Reports on Form 8-K: On November 27, 1996, the Company filed a current report on Form 8-K pursuant to the Item 2 thereof, reporting that the Company consummated the previously reported sale of substantially all of the assets of its Wendy's division to Wendy's International, Inc. and amended such report on February 4, 1997 to provide certain pro forma financial information. (c) Exhibits - The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this report. 11 SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. J. ALEXANDER'S CORPORATION Date: 3/26/97 By: /s/ Lonnie J. Stout II ------------------- -------------------------------- Lonnie J. Stout II Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Capacity Date - ------------------------------ -------------------------------------------- --------- /s/ Lonnie J. Stout II Chairman, President, Chief Executive Officer 3/26/97 - ------------------------------ and Director Lonnie J. Stout II /s/ R. Gregory Lewis Vice President and Chief Financial Officer 3/28/97 - ------------------------------ (Principal Financial Officer) --------- R. Gregory Lewis /s/ Mark A. Parkey Director of Finance 3/28/97 - ------------------------------ (Principal Accounting Officer) --------- Mark A. Parkey /s/ Earl Beasley, Jr. Director 3/26/97 - ------------------------------ --------- Earl Beasley, Jr. /s/ E. Townes Duncan Director 3/27/97 - ------------------------------ --------- E. Townes Duncan /s/ Garland G. Fritts Director 3/26/97 - ------------------------------ --------- Garland G. Fritts /s/ John L.M. Tobias Director 3/26/97 - ------------------------------ --------- John L.M. Tobias /s/ Toby S. Wilt Director 3/28/97 - ------------------------------ --------- Toby S. Wilt
12 ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) AND (2), (c) AND (d) INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FISCAL YEAR ENDED DECEMBER 29, 1996 J. ALEXANDER'S CORPORATION AND SUBSIDIARIES NASHVILLE, TENNESSEE 13 FORM 10-K-ITEM 14(a)(1) AND (2) J. ALEXANDER'S CORPORATION AND SUBSIDIARIES INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of J. Alexander's Corporation and subsidiaries, included in the annual report of the registrant to its shareholders for the fiscal year ended December 29, 1996, are incorporated by reference in Item 8: Consolidated statements of income - Years ended December 29, 1996, December 31, 1995 and January 1, 1995 Consolidated balance sheets - December 29, 1996 and December 31, 1995 Consolidated statements of cash flows - Years ended December 29, 1996, December 31, 1995 and January 1, 1995 Consolidated statements of stockholders' equity - Years ended December 29, 1996, December 31, 1995 and January 1, 1995 Notes to consolidated financial statements The following consolidated financial statement schedule of J. Alexander's Corporation and subsidiaries is included in Item 14(d): Schedule II - Valuation and qualifying accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 14 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS J. ALEXANDER'S 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 29, 1996: Valuation allowance for deferred tax assets $ 0 $ 0 Year ended December 31, 1995: Valuation allowance for deferred tax assets $3,071,000 $3,071,000(1) $ 0 Year ended January 1, 1995: Valuation allowance for deferred tax assets $5,730,000 $2,659,000(2) $3,071,000
(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. 15 J. ALEXANDER'S CORPORATION EXHIBIT INDEX
Reference Number Sequentially per Item 601 of Numbered Regulation S-K Description Page - -------------- ----------- ---- (3)(a)(2) Amendment to Charter dated February 7, 1997. (10)(o) Form of Separation Agreement and General Release between the Registrant and Mr. May dated October 17, 1996. (11) Statement regarding computation of per share earnings (13) Portions of Annual Report to Shareholders of J. Alexander's Corporation for the year ended December 29, 1996. (21) List of subsidiaries of Registrant. (23) Consent of Ernst & Young LLP, independent auditors (27) Financial Data Schedule (FOR SEC USE ONLY)
EX-3.A.2 2 AMENDMENT TO CHARTER 1 EXHIBIT (3)(a)(2) -- AMENDMENT TO CHARTER DATED FEBRUARY 7, 1997 ARTICLES OF AMENDMENT TO THE CHARTER OF VOLUNTEER CAPITAL CORPORATION Pursuant to the provisions of Section 48-20-106 of the Tennessee Business Corporation Act, the undersigned corporation adopts the following articles of amendment (the "Articles of Amendment") to its Charter (the "Charter"): 1. Name of Corporation. The name of the corporation is Volunteer Capital Corporation. 2. Section 1 of the Charter is hereby deleted in its entirety and replaced with the following: "1. The name of the corporation is J. Alexander's Corporation." 3. Adoption. These Articles of Amendment were duly adopted by the Board of Directors and the shareholders of the corporation. 4. Effective Date. These Articles of Amendment will be effective when filed with the Secretary of State. Dated: February 7, 1997. VOLUNTEER CAPITAL CORPORATION By: /s/ R. Gregory Lewis -------------------------- R. Gregory Lewis Secretary EX-10.O 3 FORM OF SEPARATION AGREEMENT 1 EXHIBIT 10(O) - FORM OF SEPARATION AGREEMENT AND GENERAL RELEASE BETWEEN THE REGISTRANT AND MR. MAY DATED OCTOBER 17, 1996. SEPARATION AGREEMENT AND GENERAL RELEASE In consideration for the payments and additional benefits to be paid by Volunteer Capital Corporation ("the Company"), I release the Company and its affiliates and all of its officers, directors, employees and agents from all claims or causes of action of whatever nature that I now may have and that I either know about or hereafter may learn about, arising from or during my employment or resulting from the termination of my employment. This means that I cannot and will not file any claim, charge, or lawsuit for the purpose of obtaining any monetary award above and beyond the amounts provided for in this Separation Agreement and General Release ("Agreement"), reinstatement of my employment or for any equitable relief. I acknowledge that this General Release includes, but is not limited to, all claims arising under federal, state or local laws prohibiting employment discrimination and all claims growing out of any legal restrictions on the Company's right to terminate its employees including any breach of contract claims. This General Release also specifically encompasses all claims of employment discrimination based on race, color, religion, sex, and national origin, as provided under Title VII of the Civil Rights Act of 1964, as amended, all claims of discrimination based on age, as provided under the Age Discrimination in Employment Act of 1967, as amended, all claims under the Employee Retirement Income Security Act (ERISA) and all claims of employment discrimination under the Americans with Disabilities Act (ADA) as well as claims under state law as provided under Tenn. Code Ann. Sections 8-50-103 and 4-21-401, et seq. and any other applicable state laws concerning my employment. I intend this Agreement to be binding upon myself, my estate, heirs and assignees. I understand and agree that if I breach this Agreement or if I file any claim or lawsuit against the Company seeking any equitable relief, all payments and benefits provided herein shall cease, and I or my estate shall be required to reimburse the Company for all payments and benefits I received under this Agreement prior to such time, including attorneys' fees incurred by the Company. In consideration of the foregoing, the Company hereby agrees and covenants: a. Upon the condition that I continue to satisfactorily complete my duties with the Company until, and if, I am not offered continued employment with the Company and my employment is thereafter terminated, the Company will pay me severance pay of twelve months at my regular salary, such payments to commence with the first regularly scheduled pay period following my separation date. b. To continue my group health insurance coverage at my current premium rate for a period of twelve months following my termination if I elect to continue such coverage under COBRA. Any applicable coverage available under COBRA subsequent to the initial 12 month period will be at my discretion and I will pay the prevailing COBRA premiums for such coverage. c. To provide me with up to 24 hours of outplacement service from Russell Montgomery. d. To pay all accrued but unused vacation pay owing to me. 2 e. To accelerate vesting of all stock options I may presently hold immediately subsequent to my separation date. I have carefully read and fully understand all the provisions of this Agreement, specifically including the general release of claims included in the Agreement. I further acknowledge that this Agreement sets forth the entire agreement between the Company and me. In addition, I acknowledge that I have been given a period of at least twenty-one (21) days to consider this Agreement and that I am advised that I have the right to consult with an attorney of my choice during this period. Finally, I acknowledge that, in considering whether to sign this Agreement, I have not relied upon any representation or statement by anyone, either written or oral, not set forth in this document and that I have not been threatened or coerced into signing this Agreement by any official of the Company and that I have read, understand and fully and voluntarily accept the terms of this Agreement. EFFECTIVE DATE: I understand that this Agreement may be revoked by me at any time during the seven (7) day period after I have signed it. This Agreement shall not become effective until after the revocation period has expired and no payment is required to be made until such period has expired. DATED THIS 17th day of October, 1996. By: /s/ Lonnie J. Stout II October 1, 1996 ---------------------- ---------------- Lonnie J. Stout II Date /s/ Richard D. May October 17, 1996 ---------------------- ---------------- Richard D. May Date 2 EX-11 4 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
Years Ended ------------------------------------------------ DECEMBER 29 December 31 January 1 1996 1995 1995 ---- ---- ---- Earnings per common and dilutive common equivalent share Net income ............................................................. $7,208,000 $5,016,000 $4,830,000 ========== ========== ========== Adjustment of shares outstanding: Weighted average shares outstanding .................................. 5,303,000 5,257,000 5,187,000 Net additional shares issuable, based on the treasury stock method ....................................................... 167,000 221,000 194,000 ---------- ---------- ---------- Adjusted shares outstanding .......................................... 5,470,000 5,478,000 5,381,000 ========== ========== ========== Per share amount ....................................................... $ 1.32 $ .92 $ .90 ========== ========== ========== Earnings per common share, assuming full dilution Adjustment of net income: Actual net income .................................................... $7,208,000 $5,016,000 $4,830,000 Add convertible subordinated debentures interest, net of taxes ....................................................... 799,000 -- -- ---------- ---------- ---------- Adjusted net income .................................................. $8,007,000 $5,016,000 $4,830,000 ========== ========== ========== Adjustment of shares outstanding: Actual weighted average shares outstanding ........................... 5,303,000 5,257,000 5,187,000 Net additional shares issuable, based on the treasury stock method ....................................................... 167,000 222,000 194,000 Assumed conversion of convertible subordinated debentures ......................................................... 880,000 -- -- ---------- ---------- ---------- Adjusted shares outstanding .......................................... 6,350,000 5,479,000 5,381,000 ========== ========== ========== Per share amount ....................................................... $ 1.26 $ .92 $ .90 ========== ========== ==========
(1) The computations of earnings per common and dilutive common equivalent share and earnings per common share, assuming full dilution, are based on the weighted average number of common shares outstanding each period after considering the effect of stock options using the treasury stock method. Earnings per common share assuming full dilution also include the assumption, when dilutive, that convertible subordinated debentures were converted at the beginning of the period, and net earnings were adjusted for the interest thereon net of its tax effect (the if-converted method). The if-converted method was not utilized for the 1995 and 1994 calculations, as its impact would have been anti-dilutive. EX-13 5 PORTIONS OF ANNUAL REPORT 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS OVERVIEW J. Alexander's Corporation (formerly Volunteer Capital Corporation) operated 14 J. Alexander's full-service,casual dining restaurants at December 29, 1996. During 1996 the Company sold substantially all the assets of its Wendy's Old Fashioned Hamburgers restaurants. This included the sale of 52 of its 58 Wendy's restaurants to Wendy's International, Inc. in November 1996. The remaining six restaurants have been sold or closed. Income before income taxes of $11,451,000 for 1996 included a $9,400,000 gain on the divestiture of the Company's Wendy's operations. Income before income taxes for 1995 was $3,458,000. Restaurant operating income in the J. Alexander's division increased by $1,427,000, or 39%, in 1996, more than offsetting a $922,000 decline in the Wendy's division during the same period. This net increase in restaurant operating income combined with the gain on the sale of the Wendy's restaurant operations, more than offset $1,167,000 of increased general and administrative expenses and $745,000 of additional other expense (net interest expense plus other income). Net income in 1996 included a federal income tax provision approximating the federal statutory rate. Income before income taxes increased by $400,000, or 13%, in fiscal 1995 as compared to 1994. Restaurant operating income in the J. Alexander's division increased by $1,643,000, or 83%, over 1994, more than offsetting a $307,000 decline in the Wendy's division during the same period, $845,000 of increased general and administrative expenses and $91,000 of additional other expenses. Net income for 1995 and 1994 included deferred income tax benefits totalling $1,782,000 and $2,100,000, respectively, associated with the recognition of deferred tax assets for financial reporting purposes. Following the divestiture of the Wendy's restaurant operations, the operating revenues of the Company will be significantly reduced. As indicated in the tables below, the Wendy's division generated restaurant operating income of $7,170,000 on sales of $48,774,000 for 1996. Management reached the decision to sell the Wendy's operations because it believed focusing all of the Company's capital and resources exclusively on casual dining offers the greatest potential for long-term return for its shareholders. However, the divestiture is expected to have a negative impact on earnings for the next twelve to eighteen months before the lost revenue and operating income from the Wendy's operations can be replaced by the development of new J. Alexander's restaurants. Also, general and administrative expenses are not expected to decrease in proportion to the reduction in revenues and operating profits from the Wendy's divestiture since a large portion of these costs is related to the ongoing development of J. Alexander's restaurants. J. ALEXANDER'S RESTAURANT OPERATIONS The Company operated fourteen J. Alexander's restaurants at December 29, 1996, compared with nine at December 31, 1995, and five at January 1, 1995. J. Alexander's Corporation and Subsidiaries 17 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company intends to continue to develop new J. Alexander's restaurants at a significant rate. It is management's objective, however, to manage this growth at a pace which can be supported not only by the Company's ability to locate and acquire acceptable sites and provide the long-term capital resources needed for development, but also by its ability to recruit and develop highly qualified management personnel capable of providing the outstanding levels of food and service which management believes are critical to J. Alexander's success. Results of the J. Alexander's restaurant operations before allocation of other income, corporate overhead and net interest expense were as follows:
Years Ended - ----------------------------------------------------------------------------------------------------------- (Dollars in thousands) December 29, 1996 December 31, 1995 January 1, 1995 - ----------------------------------------------------------------------------------------------------------- % % % Amount of Sales Amount of Sales Amount of Sales - ----------------------------------------------------------------------------------------------------------- Net sales $42,105 100.0% $25,594 100.0% $14,704 100.0% Restaurant costs and expenses: Cost of sales 14,711 34.9 9,095 35.5 5,244 35.7 Labor and related costs 13,152 31.2 7,748 30.3 4,581 31.2 Depreciation and amortization of restaurant property and equipment 1,884 4.5 1,033 4.0 540 3.6 Other operating expenses 7,312 17.4 4,099 16.0 2,363 16.1 - ----------------------------------------------------------------------------------------------------------- 37,059 88.0 21,975 85.9 12,728 86.6 - ----------------------------------------------------------------------------------------------------------- Restaurant operating income $5,046 12.0% $ 3,619 14.1% $ 1,976 13.4% - -----------------------------------------------------------------------------------------------------------
1996 COMPARED TO 1995 Net sales for the J. Alexander's restaurants increased 65% in 1996 as compared to 1995, due primarily to the opening of new restaurants. Same store sales, which include comparable sales for all restaurants open for more than twelve months, averaged $81,400 per restaurant per week in 1996 on a base of eight restaurants, a 5.9% increase over $76,900 in 1995. The Company estimates that menu prices increased approximately 5% in 1996 and believes that the sales increases noted above reflect continued acceptance and recognition by consumers of the high level of food quality and service which J. Alexander's provides its guests. Restaurant operating margins for the eight restaurants open for more than twelve months showed significant improvement to 16.9% in 1996 from 14.7% in 1995. This improvement was primarily due to lower food and labor costs achieved as sales volumes increased and operations of the restaurants matured and became more efficient. Restaurant operating margins for all restaurants decreased from 14.1% in 1995 to 12.0% in 1996 due to the effect of new restaurants. In order to maximize the quality of guest service and successfully complete the extensive training and support of J. Alexander's staff, there is typically little or no advertising or promotion of new J. Alexander's restaurant openings. Management believes that this "quiet opening" approach enhances guest experiences and contributes significantly to increases in same store sales over a long period of time. Due to the slow building nature of sales and the emphasis placed on training and quality of operations during the opening months of operation, the financial performance of new restaurants typically trails that of more mature restaurants and the Company expects newly opened restaurants to experience operating losses in their initial months of operation. As a result, all operating cost categories, with the exception of food cost, increased as a percentage of sales in 1996, as compared to 1995, due to the effect of the five new restaurants which opened in 1996. Food costs decreased as a percentage of sales in 1996, as compared to 1995, due primarily to management emphasis on cost control which included negotiated purchases of beef and other foods at lower prices in 1996. J. Alexander's Corporation and Subsidiaries 18 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1995 COMPARED TO 1994 Net sales for the J. Alexander's restaurants increased 74% in 1995 as compared to 1994, due primarily to the opening of new restaurants. Same store sales, on a base of five restaurants, averaged $79,400 per week, a 9.4% increase from $72,600 in 1994. The Company estimates that menu prices increased approximately 5% in 1995. Cost of sales decreased as a percentage of sales in 1995 compared to 1994, as the favorable effect of increased menu prices and improved efficiency in the two restaurants opened in 1994 more than offset higher costs associated with the start-up of operations at the four restaurants which opened in 1995. Restaurant labor and related costs decreased as a percentage of sales in 1995 compared to 1994, due in large part to the favorable effect of increased menu prices. This factor, combined with the effect of sales increases at the Columbus and Oak Brook restaurants which opened in 1994, more than offset higher benefits expense and higher costs associated with the start-up of operations at the restaurants opened in 1995. Other restaurant operating expenses decreased slightly as a percentage of sales in 1995, primarily reflecting operating efficiencies achieved at higher sales levels and the favorable effects of increased menu prices, which more than offset additional rent expense related to the Ft. Lauderdale and Toledo restaurants and other operating expenses associated with the opening of the four restaurants in 1995. WENDY'S RESTAURANT OPERATIONS Results of the Company's Wendy's restaurant operations before allocation of other income, corporate overhead and net interest expense are set forth in the following table. Results for 1996 include the period through November 21, 1996.
Years Ended - ----------------------------------------------------------------------------------------------------------- (Dollars in thousands) December 29, 1996 December 31, 1995 January 1, 1995 - ----------------------------------------------------------------------------------------------------------- % % % Amount of Sales Amount of Sales Amount of Sales - ----------------------------------------------------------------------------------------------------------- Net sales $48,774 100.0% $53,694 100.0% $50,991 100.0% Restaurant costs and expenses: Cost of sales 17,258 35.4 18,612 34.7 17,583 34.5 Labor and related costs 14,222 29.2 15,407 28.7 14,391 28.3 Depreciation and amortization of restaurant property and equipment 1,074 2.2 1,907 3.5 1,694 3.3 Royalties 1,952 4.0 2,149 4.0 2,041 4.0 Other operating expenses 7,098 14.6 7,527 14.0 6,883 13.5 - ----------------------------------------------------------------------------------------------------------- 41,604 85.3 45,602 84.9 42,592 83.5 - ----------------------------------------------------------------------------------------------------------- Restaurant operating income $ 7,170 14.7% $ 8,092 15.1% $ 8,399 16.5% - -----------------------------------------------------------------------------------------------------------
J. Alexander's Corporation and Subsidiaries 19 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In November 1996, the Company sold 52 of its Wendy's Old Fashioned Hamburgers restaurants to Wendy's International, Inc. for $28.3 million in cash plus the assumption of capitalized lease obligations and long-term debt totalling approximately $2.5 million. The remaining six restaurants have been sold or closed. The Company operated 58 Wendy's restaurants at December 31, 1995 and 55 restaurants at January 1, 1995. Total Wendy's sales decreased by $4,920,000, or 9.2%, in 1996 as compared to 1995, due primarily to the sale of substantially all of the Wendy's restaurant operations in November 1996. Sales related to the Wendy's restaurant operations increased by 5.3% in 1995 as compared to 1994, with the increase attributable entirely to new units. Since mid-1994, continued competition in the quick-service restaurant industry in general and intense retail price competition by other major hamburger chains in particular adversely impacted weighted average sales per unit which decreased by 0.7% in 1996 and 1.5% in 1995. The continuation of this trend, and the continued development of new Wendy's restaurants by other franchisees in certain of the Company's market areas were significant factors in management's decision to divest of its Wendy's operations during 1996. As a percentage of sales, restaurant operating income in the Wendy's division decreased from 15.1% in 1995 to 14.7% in 1996, as increases in cost of sales, labor and other operating expenses more than offset a decrease in depreciation expense. Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," no depreciation or amortization expense related to the Wendy's assets held for disposal was recorded during the last half of 1996. Restaurant operating income decreased from 16.5% of sales in 1994 to 15.1% in 1995, primarily due to an increase in the cost of paper supplies, the combined effect of increased wages and a decline in weighted average sales per unit, and increased rent associated with new unit development. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses, which include all costs above the restaurant level as well as amortization of pre-opening expenses for both the Wendy's and J. Alexander's operations, were 9.5% of sales in 1996 and 9.4% of sales in 1995. Actual general and administrative expenditures increased by $1,167,000 in 1996 as compared to 1995, primarily due to an increase of approximately $950,000 in amortization of pre-opening costs associated with development of new J. Alexander's restaurants. Approximately $450,000 of the increase in pre-opening amortization was the result of a change in the Company's amortization period for pre-opening costs from 24 months to 12 months during the fourth quarter of 1996. Total pre-opening cost amortization was $1,503,000, $658,000 and $342,000 for 1996, 1995 and 1994, respectively. As a percent of sales, general and administrative expenses decreased to 9.4% in 1995 from 10.0% in 1994, principally reflecting efficiencies achieved at higher sales levels. General and administrative expenses directly related to the Company's Wendy's operations were $2,625,000, $2,999,000 and $2,913,000 in 1996, 1995 and 1994, respectively. OTHER INCOME (EXPENSE) Interest expense increased by $231,000 in 1996 as compared to 1995, as interest related to borrowings under the Company's line of credit agreement more than offset an increase in interest expense capitalized in connection with new restaurant development. Interest expense decreased by $209,000 in 1995 as compared to 1994, principally due to an increase in capitalized interest expense as a result of an increased number of store openings in 1995. Interest income decreased by $472,000 in 1996 as compared to 1995, and by $275,000 in 1995 as compared to 1994 primarily due to decreased investment balances resulting from the development of new restaurants. Expenses associated with the write-off of restaurant facilities and equipment that have been replaced in connection with various remodeling projects are reflected in "Other, net". J. Alexander's Corporation and Subsidiaries 20 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities represents a primary source of liquidity for the Company and is also expected to be a resource for meeting future capital needs. The Company's cash flow from operations totalled $3,393,000, $7,586,000 and $5,706,000 in fiscal years 1996, 1995 and 1994, respectively. In addition, as a result of the sale of its Wendy's operations, the Company had cash and cash equivalents of $12,549,000 at December 29, 1996. The Company's primary investing activity has historically been capital expenditures for the development and maintenance of its restaurants. Capital expenditures totalled $22,589,000, $20,255,000 and $11,276,000 for 1996, 1995 and 1994, respectively. Capital expenditures for J. Alexander's restaurants totalled $20,605,000, $15,503,000 and $7,368,000 in 1996, 1995 and 1994, respectively, and were primarily for the development of new restaurants. Capital expenditures for the Wendy's division were $1,717,000, $4,640,000 and $3,868,000 for 1996, 1995 and 1994, respectively, and included facilities upgrades and miscellaneous equipment replacements as well as the development of three new restaurants in both 1995 and in 1994. Management expects the primary needs for capital resources in the future will be for the development of new J. Alexander's restaurants and for the maintenance of existing restaurants. Management may also consider acquisitions of additional restaurants similar to J. Alexander's. The Company plans to open five J. Alexander's restaurants in 1997, four of which are currently under development in Tampa, Florida; Denver, Colorado; San Antonio, Texas; and Livonia, Michigan. The Company estimates that its capital expenditures for 1997 will total approximately $22,000,000. The capital expenditures for restaurants include the cost of constructing and equipping the restaurant and, if the land on which a restaurant is located is purchased, the cost of purchasing the land and associated site work. Based upon the Company's cost experience in developing restaurants and the Company's current estimates of cost levels, the Company believes that the cost of constructing a J. Alexander's building will range from approximately $1,650,000 to $1,850,000. The Company is also developing a lower cost building, anticipated to range from $1,300,000 to $1,400,000, for use in selected markets beginning in 1998. The Company estimates that the cost of equipping a J. Alexander's restaurant will range from $650,000 to $700,000. Currently, the principal variable in the cost of a restaurant is the decision to own or lease a restaurant site and if a decision is made to own the site, the cost of land in the proposed market. In general, the Company prefers to own its sites because of the long-term value of owning such an asset. For restaurants opened during 1996, the cost of land ranged from $800,000 to $1,200,000. In addition, site preparation and improvement costs are expected to range from approximately $275,000 to $350,000 per restaurant. Management estimates that pre-opening costs will range from $250,000 to $300,000 per restaurant. J. Alexander's Corporation and Subsidiaries 21 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company does not have significant capital needs for purposes other than restaurant development. Maturities of long-term debt through 1997 are relatively small because the Company has previously purchased in the market a sufficient amount of its convertible subordinated debentures to meet sinking fund requirements through that date. Further, since requirements for funding accounts receivable and inventories are relatively small, the Company does not have significant working capital needs. The Company obtained a $30,000,000 line of credit during the third quarter of 1995 and began using a portion of this line to fund restaurant development during the first quarter of 1996. The Company utilized a portion of the $28,764,000 in proceeds from the sale of its Wendy's restaurant operations to pay off the $12,544,000 balance outstanding under the line of credit agreement and there was no balance outstanding as of December 29, 1996. Borrowings under the agreement become due on July 1, 1998 unless the Company exercises its option to convert amounts outstanding under the line of credit to a seven year term loan. The Company believes that existing cash and cash equivalents, together with cash flow from operations and amounts available for borrowing under its line of credit, will be sufficient to fund the development of its J. Alexander's restaurants for all of 1997 and a portion of 1998. INCOME TAXES Under the provisions of SFAS No. 109 "Accounting for Income Taxes", the Company had gross deferred tax assets of $4,285,000 and $6,006,000 and gross deferred tax liabilities of $1,492,000 and $470,000 at December 29, 1996 and December 31, 1995, respectively. The deferred tax assets at December 29, 1996 relate primarily to $2,846,000 of net operating loss carryforwards and $1,840,000 of tax credit carryforwards available to reduce future federal income taxes. The recognition of deferred tax assets depends on the anticipated existence of taxable income in future periods in amounts sufficient to realize the assets. A valuation allowance must be used to reduce the deferred tax asset if such future income is not likely to be generated. In 1995 and 1994, the beginning of the year valuation allowance was reduced by $2,085,000 (of which $303,000 was credited to additional paid-in capital) and $2,100,000, respectively, reflecting a change in circumstances which resulted in a judgment that a corresponding amount of the Company's deferred tax assets will be realized in future years. The valuation allowance decreased by $3,071,000 (including the $2,085,000 decrease discussed above) and $2,659,000 (including the $2,100,000 decrease discussed above) during 1995 and 1994, respectively, as the result of changes in the deferred tax items. In 1995, management concluded that future taxable income should be sufficient to realize all of the Company's deferred tax assets based on the projected future earnings of the Company, and therefore, a valuation allowance was not established as of December 31, 1995 and such an allowance has not been deemed necessary during 1996. Approximately $8.2 million of future taxable income would be needed to realize the $2,793,000 net deferred tax asset at December 29, 1996. The Company's tax credit carryforwards expire in the years 1998 through 2001 while the net operating loss carryforwards expire in the years 2000 through 2004. Due to the Company's having recognized all of its deferred tax assets in 1995, earnings for the year ended December 29, 1996 were taxed at an effective rate of 37.1%. As a result of the Wendy's disposal, and due to the impact of Federal FICA tax credits for tipped wages, management anticipates that earnings for 1997 will be taxed at an effective rate of approximately 25%. J. Alexander's Corporation and Subsidiaries 22 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IMPACT OF ACCOUNTING CHANGES There are no pending accounting pronouncements that, when adopted, are expected to have a material effect on the Company's results of operations or its financial condition. IMPACT OF INFLATION AND OTHER FACTORS Virtually all of the Company's costs and expenses are subject to normal inflationary pressures and the Company is continually seeking ways to cope with their impact. By owning a number of its properties, the Company avoids certain increases in occupancy costs. New and replacement assets will likely be acquired at higher costs but this will take place over many years. In general, the Company tries to offset increased costs and expenses through additional improvements in operating efficiencies and by increasing menu prices over time, as permitted by competition. RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS The foregoing discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. All references are to fiscal years unless otherwise noted.The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations relating to certain matters involve risks and uncertainties, including anticipated financial performance, business prospects, anticipated capital expenditures and other similar matters, which reflect management's best judgment based on factors currently known. Actual results and experience could differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements as a result of a number of factors, including but not limited to those discussed in the Company's Annual Report on Form 10-K. Forward-looking information provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. In addition, the Company disclaims any intent or obligation to update these forward-looking statements. J. Alexander's Corporation and Subsidiaries 23 8 CONSOLIDATED STATEMENTS OF INCOME
Years Ended - ---------------------------------------------------------------------------------- December 29 December 31 January 1 1996 1995 1995 - ---------------------------------------------------------------------------------- Net sales $90,879,000 $79,288,000 $65,695,000 Costs and expenses: Cost of sales 31,969,000 27,707,000 22,827,000 Restaurant labor and related costs 27,374,000 23,155,000 18,972,000 Depreciation and amortization of restaurant property and equipment 2,958,000 2,940,000 2,234,000 Royalties 1,952,000 2,149,000 2,041,000 Other operating expenses 14,410,000 11,626,000 9,246,000 - ---------------------------------------------------------------------------------- Total restaurant operating expenses 78,663,000 67,577,000 55,320,000 - ---------------------------------------------------------------------------------- Income from restaurant operations 12,216,000 11,711,000 10,375,000 General and administrative expenses 8,603,000 7,436,000 6,591,000 Gain on Wendy's disposition 9,400,000 -- -- - ---------------------------------------------------------------------------------- Operating income 13,013,000 4,275,000 3,784,000 - ---------------------------------------------------------------------------------- Other income (expense): Interest expense (1,647,000) (1,416,000) (1,625,000) Interest income 107,000 579,000 854,000 Other, net (22,000) 20,000 45,000 - ---------------------------------------------------------------------------------- Total other income (expense) (1,562,000) (817,000) (726,000) - ---------------------------------------------------------------------------------- Income before income taxes 11,451,000 3,458,000 3,058,000 Income tax (provision) benefit (4,243,000) 1,558,000 1,772,000 - ---------------------------------------------------------------------------------- Net income $ 7,208,000 $ 5,016,000 $ 4,830,000 - ---------------------------------------------------------------------------------- Earnings per share: Primary $ 1.32 $ .92 $ .90 Fully diluted $ 1.26 $ .92 $ .90 - ---------------------------------------------------------------------------------- Weighted average number of shares: Primary 5,470,000 5,478,000 5,381,000 Fully diluted 6,350,000 5,479,000 5,381,000 - ----------------------------------------------------------------------------------
See notes to consolidated financial statements. J. Alexander's Corporation and Subsidiaries 24 9 CONSOLIDATED BALANCE SHEETS
December 29 December 31 1996 1995 - ------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and cash equivalents $12,549,000 $ 2,234,000 Short-term investments -- 505,000 Accounts and notes receivable, including current portion of direct financing leases, net of allowances for possible losses 120,000 313,000 Inventories at lower of cost (first-in, first-out method) or market 534,000 848,000 Deferred income taxes 1,364,000 1,541,000 Net assets held for disposal 618,000 -- Prepaid expenses and other current assets 369,000 484,000 - ------------------------------------------------------------------------------------------------------------ Total Current Assets 15,554,000 5,925,000 OTHER ASSETS Direct financing leases, net of unearned income of $146,000 and $245,000 at December 29, 1996, and December 31, 1995, respectively, and current portion 293,000 379,000 Other 904,000 712,000 - ------------------------------------------------------------------------------------------------------------ 1,197,000 1,091,000 Property and Equipment, at cost, less allowances for depreciation and amortization 47,016,000 46,915,000 Deferred Income Taxes 1,429,000 3,995,000 Deferred Charges, less accumulated amortization of $2,326,000 and $2,008,000 at December 29, 1996, and December 31, 1995, respectively 1,631,000 2,214,000 - ------------------------------------------------------------------------------------------------------------ $66,827,000 $60,140,000 - ------------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 3,748,000 $ 3,704,000 Accrued expenses and other current liabilities 6,023,000 4,151,000 Current portion of long-term debt and obligations under capital leases 54,000 297,000 - ------------------------------------------------------------------------------------------------------------ Total Current Liabilities 9,825,000 8,152,000 Long-Term Debt and Obligations Under Capital Leases, (including $1,984,000 due to a related party at December 31, 1995) net of portion classified as current 15,930,000 18,512,000 Deferred Compensation and Other Deferred Credits 611,000 501,000 Stockholders' Equity Common Stock, par value $.05 per share: Authorized l0,000,000 shares; issued and outstanding 5,322,507 and 5,276,972 shares at December 29, 1996, and December 31, 1995, respectively 266,000 264,000 Preferred Stock, no par value: Authorized 1,000,000 shares; none issued -- -- Additional paid-in capital 29,475,000 29,199,000 Retained earnings 11,748,000 4,540,000 - ------------------------------------------------------------------------------------------------------------ 41,489,000 34,003,000 Note receivable -- Employee Stock Ownership Plan (1,028,000) (1,028,000) - ------------------------------------------------------------------------------------------------------------ Total Stockholders' Equity 40,461,000 32,975,000 Commitments and Contingencies - ------------------------------------------------------------------------------------------------------------ $66,827,000 $60,140,000 - ------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. J. Alexander's Corporation and Subsidiaries 25 10 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended - ------------------------------------------------------------------------------------------------- December 31 December 31, January 1 1996 1995 1995 - ------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 7,208,000 $ 5,016,000 $ 4,830,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property and equipment 3,096,000 3,033,000 2,317,000 Amortization of deferred charges 1,578,000 611,000 443,000 Employee Stock Ownership Plan expense -- 172,000 170,000 Gain on Wendy's disposition (9,400,000) -- -- Deferred income tax provision (benefit) 2,441,000 (1,782,000) (2,100,000) Other, net 195,000 192,000 172,000 Changes in assets and liabilities: Decrease (increase) in accounts receivable 135,000 (147,000) (80,000) Increase in inventories (78,000) (271,000) (70,000) Decrease (increase) in prepaid expenses and other current assets 115,000 (269,000) 63,000 Increase in deferred charges (1,377,000) (1,111,000) (773,000) Increase in accounts payable 4,000 615,000 511,000 (Decrease)increase in accrued expenses and other current liabilities (634,000) 1,432,000 207,000 Increase in deferred credits 110,000 95,000 16,000 - ------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 3,393,000 7,586,000 5,706,000 INVESTING ACTIVITIES Proceeds from maturities and sales of investments 505,000 1,005,000 1,507,000 Purchase of property and equipment (22,132,000) (20,909,000) (10,376,000) Proceeds from sale of Wendy's restaurant operations 28,764,000 -- -- Other, net (78,000) (37,000) (13,000) - ------------------------------------------------------------------------------------------------- Net Cash Provided (Used) by Investing Activities 7,059,000 (19,941,000) (8,882,000) FINANCING ACTIVITIES Proceeds under bank line of credit agreement 12,544,000 -- -- Payments under bank line of credit agreement (12,544,000) -- -- Payments on long-term debt and obligations under capital leases (415,000) (393,000) (381,000) Sale of stock and exercise of stock options 278,000 180,000 604,000 - ------------------------------------------------------------------------------------------------- Net Cash (Used) Provided by Financing Activities (137,000) (213,000) 223,000 Increase (Decrease) in Cash and Cash Equivalents 10,315,000 (12,568,000) (2,953,000) Cash and cash equivalents at beginning of year 2,234,000 14,802,000 17,755,000 - ------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 12,549,000 $ 2,234,000 $ 14,802,000 - -------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. J. Alexander's Corporation and Subsidiaries 26 11 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 2, 1994 5,117,249 $256,000 $28,120,000 $(5,306,000) $(1,370,000) $21,700,000 Exercise of stock options and sale of stock under Employee Stock Purchase Plan 123,232 6,000 598,000 -- -- 604,000 Reduction of note receivable -- Employee Stock Ownership Plan -- -- -- -- 170,000 170,000 Net income -- -- -- 4,830,000 -- 4,830,000 - --------------------------------------------------------------------------------------------------------- Balances at January 1, 1995 5,240,481 262,000 28,718,000 (476,000) (1,200,000) 27,304,000 Exercise of stock options, including tax benefits, and sale of stock under Employee Stock Purchase Plan 36,491 2,000 481,000 -- -- 483,000 Reduction of note receivable -- Employee Stock Ownership Plan -- -- -- -- 172,000 172,000 Net income -- -- -- 5,016,000 -- 5,016,000 - --------------------------------------------------------------------------------------------------------- Balances at December 31, 1995 5,276,972 264,000 29,199,000 4,540,000 (1,028,000) 32,975,000 Exercise of stock options, including tax benefits, and sale of stock under Employee Stock Purchase Plan 45,535 2,000 276,000 -- -- 278,000 Net income -- -- -- 7,208,000 -- 7,208,000 - --------------------------------------------------------------------------------------------------------- Balances at December 29, 1996 5,322,507 $266,000 $29,475,000 $11,748,000 $(1,028,000) $40,461,000 - ---------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. J. Alexander's Corporation and Subsidiaries 27 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A--SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made in the prior years' consolidated financial statements to conform to the l996 presentation. Fiscal Year: The Company's fiscal year ends on the Sunday closest to December 31 and each quarter consists of thirteen weeks. Cash Equivalents: Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. Investments: Short-term investments and investment securities consist primarily of obligations of the U.S. Government and its agencies and corporate notes and bonds with maturities of greater than three months. Investments with maturities of greater than one year are classified as long-term. The aggregate fair value of short-term investments and investment securities was approximately $511,000 at December 31, 1995. Cash equivalents of $10,066,000 and $1,005,000 at December 29, 1996, and December 31, 1995, respectively, consisted principally of commercial paper, banker's acceptances and federal government agency securities and were carried at cost, which approximates fair value. Property and Equipment: Depreciation and amortization are provided on the straight-line method over the following estimated useful lives: buildings-20 to 25 years, restaurant and other equipment-three to l0 years, and capital leases and leasehold improvements-lesser of life of assets or terms of leases. Deferred Charges: Costs in excess of net assets acquired are being amortized over periods of 20 to 40 years using the straight-line method. Debt issue costs are amortized principally by the interest method over the life of the related debt. Wendy's Old Fashioned Hamburgers franchise costs were amortized over 20 years using the straight-line method. Income Taxes: The Company accounts for income taxes under the liability method required by Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". SFAS No. 109 requires that deferred tax assets and liabilities be established based on the difference between the financial statement and income tax bases of assets and liabilities measured at tax rates that will be in effect when the differences reverse. Realization of deferred tax assets, which relate primarily to operating loss and tax credit carryforwards, is dependent on future earnings from existing and new restaurants. Earnings Per Share: The computations of earnings per share are based on the weighted average number of common shares outstanding after considering the effect of stock options using the treasury stock method. Shares issuable upon the conversion of convertible subordinated debentures were included in the 1996 computation of fully diluted earnings per share using the "if-converted" method. Such shares have not been included for 1995 and 1994 as the effect of their inclusion would be antidilutive. Pre-opening Costs: Costs of hiring and training personnel and certain other costs relating to a new restaurant have historically been capitalized and generally amortized over the restaurant's first 12 months (Wendy's) or 24 months (J. Alexander's) of operations. During the fourth quarter of 1996, the Company changed its amortization period from 24 months to 12 months relative to its J. Alexander's restaurants, resulting in approximately $450,000 of additional pre-opening amortization during 1996. At December 29, 1996, and December 31, 1995, pre-opening costs totalled $1,379,000 and $1,026,000, respectively, net of accumulated amortization of $493,000 and $651,000. J. Alexander's Corporation and Subsidiaries 28 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value. SHORT-TERM INVESTMENT: At December 31, 1995, this investment was classified as held to maturity and reported at amortized cost. Fair value was estimated from quoted market prices. LONG-TERM DEBT: The carrying amount of the Company's borrowings with variable interest rates approximates their fair value. The fair value of the Company's convertible subordinated debentures was determined based on quoted market prices (see Note D). Due to the immaterial amounts involved, fair value of other fixed rate long-term debt was estimated to approximate its carrying amount. CONTINGENT LIABILITIES: In connection with the sale of its Mrs. Winner's Chicken & Biscuit restaurant operations and the disposition of its Wendy's restaurant operations, the Company remains secondarily liable for certain real and personal property leases. The Company does not believe it is practicable to estimate the fair value of these contingencies and does not believe any significant loss is likely. DEVELOPMENT COSTS: Certain direct and indirect costs are capitalized in conjunction with acquiring and developing new J. Alexander's restaurant sites and amortized over the life of the related building. Development costs capitalized during 1996 and 1995 totalled $335,000 and $182,000, respectively. No such costs were capitalized relative to J. Alexander's prior to 1995. SELF-INSURANCE: The Company is generally self-insured, subject to stop-loss limitations, for losses and liabilities related to its group medical plan and, for portions of 1994 through 1996, except for the state of Ohio, for workers' compensation claims. Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred using certain estimation processes applicable to the insurance industry and, where applicable, based on Company experience. ADVERTISING COSTS: The Company charges costs of production and distribution of advertising to expense at the time the costs are incurred. Advertising expense was $1,778,000, $1,980,000 and $1,807,000 in 1996, 1995 and 1994, respectively. STOCK BASED COMPENSATION: The Company accounts for its stock compensation arrangements in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and, accordingly, typically recognizes no compensation expense for such arrangements. USE OF ESTIMATES IN FINANCIAL STATEMENTS: Judgment and estimation are utilized by management in certain areas in the preparation of the Company's financial statements. Some of the more significant areas include reserves for self-insurance of group medical claims and workers' compensation benefits and, for 1996, accruals related to the exit of the Wendy's business. Management believes that such estimates have been based on reasonable assumptions and that such reserves are adequate. IMPAIRMENT: In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Accordingly, when indicators of impairment are present, the Company periodically evaluates the carrying value of property and equipment and intangibles. J. Alexander's Corporation and Subsidiaries 29 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE B--SALE OF WENDY'S RESTAURANT OPERATIONS In November 1996, the Company sold 52 of its 58 Wendy's Old Fashioned Hamburgers restaurants to Wendy's International, Inc. (WI) for $28.3 million in cash plus the assumption of capitalized lease obligations and long-term debt totalling approximately $2.5 million. This transaction generated a pre-tax gain of $9.4 million. Of the six restaurants not sold as part of the November 1996 transaction, four were closed, one was destroyed by fire and one was purchased by WI in February 1997 for approximately $300,000 in cash. In accordance with Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity,"the Company recorded expenses totalling $542,000 during the third quarter of 1996 relative to accrued termination benefits ($450,000) and accrued liabilities associated with the settlement of lease obligations. Management provided for 21 employees eligible for termination benefits as a result of the Company's exit from the Wendy's business. The Company recorded additional costs during the fourth quarter of 1996 including provisions for additional sevrance, insurance claims and other expenses and contingencies totalling approximately $1,849,000 which were included in the determination of the gain on the sale of the Wendy's restaurant operations. During the fourth quarter of 1996, the Company paid $987,000 related to the exit of the Wendy's business. At December 29, 1996, the Company maintains accruals related to the exit of the Wendy's business totalling $2,029,000. In accordance with SFAS No. 121, the assets held for disposal have been measured at the lower of carrying amount or fair value less the estimated cost to sell. Under the provisions of SFAS No. 121, depreciation and amortization are not recorded during the period in which assets are being held for disposal. Accordingly, no depreciation expense was recorded subsequent to July 3, 1996, the measurement date for the transaction, relative to assets utilized in the Wendy's operations. The unaudited pro forma information for the periods set forth below give effect to the transaction as if it had occurred at the beginning of each period.The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the sale of Wendy's restaurant operations been consummated as of that time.
Years Ended ------------------------ December 29 December 31 1996 1995 - ------------------------------------------------------ Net sales $42,105,000 $25,594,000 Net (loss) income $ (956,000) $ 2,230,000 (Loss) earnings per share $ (.18) $ .41 - ------------------------------------------------------
J. Alexander's Corporation and Subsidiaries 30 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE C-PROPERTY AND EQUIPMENT Balances of major classes of property and equipment are as follows:
December 29 December 31 1996 1995 - --------------------------------------------------------------------------------------------- Land $ 9,696,000 $ 9,810,000 Buildings 21,482,000 22,049,000 Buildings under capital leases 276,000 3,193,000 Leasehold improvements 5,901,000 10,910,000 Restaurant and other equipment 10,165,000 17,119,000 Construction in progress (estimated additional cost to complete at December 29, 1996, $4,610,000) 4,063,000 4,495,000 - --------------------------------------------------------------------------------------------- 51,583,000 67,576,000 Less allowances for depreciation and amortization 4,567,000 20,661,000 - --------------------------------------------------------------------------------------------- $47,016,000 $46,915,000 - ---------------------------------------------------------------------------------------------
NOTE D--LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES Long-term debt and obligations under capital leases at December 29, 1996, and December 31, 1995, are summarized below:
December 29, 1996 December 31, 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, ranging from 9.75% to 12.00%, secured by properties with a carrying value of $2,655,000 at December 31, 1995 -- -- 33,000 2,011,000 Obligations under capital leases, 9.75% to 11.50% interest, payable through 2005 54,000 316,000 264,000 887,000 - ----------------------------------------------------------------------------------------------------- $54,000 $15,930,000 $297,000 $18,512,000 - -----------------------------------------------------------------------------------------------------
Required sinking fund payments for the five years succeeding December 29, 1996, are as follows: 1997 - none; 1998 - $1,864,000; 1999 - $1,875,000; 2000 - $1,875,000; 2001 - $1,875,000. The Convertible Subordinated Debentures due 2003 are convertible into common stock of the Company at any time prior to maturity at $17.75 per share, subject to adjustment in certain events. At December 29, 1996, 879,662 shares of common stock were reserved for issuance upon conversion of the outstanding debentures. The debentures are redeemable upon not less than 30 days' notice at the option of the Company, in whole or in part, at 100% of the principal amount, together with accrued interest to the redemption date. The effective interest rate on the debentures is 8.68%. The Debenture Indenture provides for annual sinking fund payments commencing June 1, 1993, which will retire at least 75% of the original $25,000,000 principal amount of debentures prior to maturity. The Company has previously purchased a portion of the debentures on the open market which, pursuant to the terms of the Debenture Indenture, will be used in satisfaction of future sinking fund requirements and are sufficient to satisfy those requirements through 1997. J. Alexander's Corporation and Subsidiaries 31 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During 1995, the Company entered into an unsecured bank line of credit agreement which provides for up to $30,000,000 of revolving credit for the purpose of financing future capital expenditures. Interest is payable monthly with the interest rate, at the Company's option, at the bank's prime rate or the bank's LIBOR rate plus 1.5% or 2.5%, depending on compliance with certain ratios set forth in the agreement. In addition, a fee of 1/4% on any unused portion of the facility is payable on a quarterly basis. All amounts due under the agreement become due July 1, 1998, unless the Company exercises its option to convert amounts outstanding under the line of credit to a seven year term loan. The agreement requires the Company to meet certain restrictive financial and other covenants, including limitation on other borrowing, all of which were met at both December 29, 1996 and December 31, 1995. No borrowings were outstanding under the agreement as of December 29, 1996 or December 31, 1995. Cash interest payments amounted to $2,033,000 , $1,732,000 and $1,728,000, in 1996, 1995 and 1994, respectively. Interest costs of $386,000, $316,000 and $118,000 were capitalized as part of building and leasehold costs in 1996, 1995, and 1994, respectively. The carrying value and estimated fair value of the Company's long-term debt totalled $15,614,000 and $15,146,000, respectively, at December 29, 1996. NOTE E -- LEASES At December 29, 1996, the Company was lessee under both ground leases (the Company leases the land and builds its own buildings) and improved leases (lessor owns the land and buildings) for restaurant locations. These leases are operating leases except for the building portions of the improved leases which are typically capital leases. Real estate lease terms are generally for 15 to 25 years and, in many cases, provide for rent escalations and for one or more five-year renewal options. The Company is generally obligated for the cost of property taxes, insurance and maintenance. Certain real property leases provide for contingent rentals based upon 5% of net sales. In addition, the Company is lessee under other noncancelable operating leases, principally for office space. Accumulated amortization of buildings under capital leases totalled $201,000 at December 29, 1996, and $2,736,000 at December 31, 1995. Amortization of leased assets is included in depreciation and amortization expense. Total rental expense amounted to:
Years Ended - ------------------------------------------------------------------------------ December 29 December 31 January 1 1996 1995 1995 - ----------------------------------------------------------------------------- Minimum rentals under operating leases $1,996,000 $1,800,000 $1,292,000 Contingent rentals 366,000 395,000 404,000 Less: Sublease rentals (264,000) (313,000) (314,000) - ------------------------------------------------------------------------------ $2,098,000 $1,882,000 $1,382,000 - ------------------------------------------------------------------------------
J. Alexander's Corporation and Subsidiaries 32 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 29, 1996, future minimum lease payments under capital leases and noncancelable operating leases with initial terms of one year or more are as follows:
Capital Operating Leases Leases - ------------------------------------------------------------------------------- 1997 $ 92,000 $ 934,000 1998 89,000 940,000 1999 69,000 915,000 2000 56,000 922,000 2001 56,000 932,000 Thereafter 173,000 8,960,000 - ------------------------------------------------------------------------------- Total minimum payments 535,000 $13,603,000 - ------------------------------------------------------------------------------- Less imputed interest (165,000) - ------------------------------------------------------------------------------- Present value of minimum rental payments 370,000 - ------------------------------------------------------------------------------- Less current maturities at December 29, 1996 (54,000) - ------------------------------------------------------------------------------- Long-term obligations at December 29, 1996 $ 316,000 - -------------------------------------------------------------------------------
Minimum future rentals receivable under subleases for operating leases at December 29, 1996, amounted to $2,004,000. In addition to the leases summarized above, the Company historically leased five previously owned Wendy's restaurant properties from a corporation principally owned by a Director of the Company and his wife at an aggregate minimum annual rental of approximately $265,000 plus contingent rentals based on sales. Contingent rent payments totalled $43,000, $49,000 and $54,000 in 1996, 1995 and 1994, respectively. These leases were assigned to WI in November 1996. NOTE F -- INCOME TAXES At December 29, 1996, the Company had net operating loss carryforwards of $2,846,000 for income tax purposes that expire in the years 2000 through 2004. Tax credit carryforwards (consisting primarily of investment tax credits which expire in the years 1998 through 2001) of $1,840,000 are also available to reduce future federal income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 29, 1996, and December 31, 1995, are as follows: J. Alexander's Corporation and Subsidiaries 33 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 29 December 31 1996 1995 - ---------------------------------------------------------- Deferred tax liabilities: Tax over book depreciation $ 653,000 $ 26,000 Pre-opening costs 301,000 368,000 Other -- net 538,000 76,000 - ---------------------------------------------------------- Total deferred tax liabilities 1,492,000 470,000 - ---------------------------------------------------------- Deferred tax assets: Capital/finance leases 8,000 107,000 Deferred compensation accruals 178,000 158,000 Self-insurance accruals 67,000 58,000 Wendy's disposition accruals 927,000 -- Net operating loss carryforwards 968,000 3,410,000 Tax credit carryforwards 1,840,000 1,999,000 Other -- net 297,000 274,000 - ---------------------------------------------------------- Total deferred tax assets 4,285,000 6,006,000 - ---------------------------------------------------------- Net deferred tax assets $2,793,000 $5,536,000 - ----------------------------------------------------------
Management has evaluated the need for a valuation allowance for all, or a portion of, the deferred tax assets for 1996 and believes that all of the deferred tax assets will more likely than not be realized through the future reversal of existing taxable temporary differences within the carryforward period and the future earnings of the Company. In 1995 and 1994, the beginning of the year valuation allowance was reduced by $2,085,000 (of which $303,000 was credited to additional paid-in capital) and $2,100,000, respectively, reflecting a change in circumstances which resulted in a judgment that a corresponding amount of the Company's deferred tax assets will be realized in future years. The valuation allowance decreased by $3,071,000 (including the $2,085,000 decrease discussed above) and $2,659,000 (including the $2,100,000 decrease discussed above) during 1995 and 1994, respectively, as the result of changes in the deferred tax items. Significant components of the income tax provision (benefit) are as follows:
Years Ended - ---------------------------------------------------------------------------- December 29 December 31 January 1 1996 1995 1995 - ---------------------------------------------------------------------------- Currently payable: Federal $1,100,000 $ 80,000 $ 66,000 State 702,000 144,000 262,000 - ---------------------------------------------------------------------------- Total 1,802,000 224,000 328,000 Deferred 2,441,000 (1,782,000) (2,100,000) - ---------------------------------------------------------------------------- Income tax provision (benefit) $4,243,000 $(1,558,000) $(1,772,000) - ----------------------------------------------------------------------------
J. Alexander's Corporation and Subsidiaries 34 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's consolidated effective tax rate differed from the federal statutory rate as set forth in the following table:
Years Ended - ---------------------------------------------------------------------------------------------------- December 29 December 31 January 1 1996 1995 1995 - ---------------------------------------------------------------------------------------------------- Tax expense computed at federal statutory rate (34%) $3,893,000 $ 1,176,000 $ 1,040,000 State and local income taxes 463,000 144,000 262,000 Alternative minimum tax -- 80,000 66,000 Non-deductible expenses 121,000 19,000 23,000 Benefit of net operating loss carryforwards and tax credits (234,000) (1,195,000) (1,063,000) Recognition of deferred tax assets -- (1,782,000) (2,100,000) - ---------------------------------------------------------------------------------------------------- Income tax provision (benefit) $4,243,000 $(1,558,000) $(1,772,000) - ----------------------------------------------------------------------------------------------------
Income tax payments were $1,098,000, $175,000 and $338,000 in 1996, 1995 and 1994, respectively. NOTE G -- STOCK OPTIONS AND BENEFIT PLANS Under the Company's 1994 Employee Stock Incentive Plan, officers and key employees of the Company may be granted options to purchase shares of the Company's common stock. In addition, the 1990 Stock Option Plan for Outside Directors provides for the granting of options to purchase the Company's common stock at the fair market price at the date of the grant to members of the Company's Board of Directors who are not employees. Options to purchase the Company's common stock also remain outstanding under the Company's 1982 Incentive Stock Option Plan and 1985 Stock Option Plan, although the Company no longer has the ability to issue additional shares under these plans. A summary of options under the Company's option plans is as follows:
Weighted Average Exercise Options Shares Option Prices Price - ----------------------------------------------------------------------------------------------- Outstanding at January 2, 1994 427,056 $1.38-$10.50 $4.88 Issued 121,100 7.25-13.00 7.68 Exercised (106,366) 1.38-5.88 4.61 Expired or cancelled (366) 1.38-10.38 6.29 - ----------------------------------------------------------------------------------------------- Outstanding at January 1, 1995 441,424 1.38-13.00 5.71 Issued 146,700 7.56-9.75 9.63 Exercised (15,166) 1.38-7.63 1.95 Expired or cancelled (10,250) 7.25-11.50 9.39 - ----------------------------------------------------------------------------------------------- Outstanding at December 31, 1995 562,708 1.38-13.00 6.85 Issued 5,000 9.88 9.88 Exercised (26,521) 1.38-7.25 4.96 Expired or cancelled (11,900) 7.25-10.38 9.20 - ----------------------------------------------------------------------------------------------- Outstanding at December 29, 1996 529,287 $1.38-$13.00 $6.83 - -----------------------------------------------------------------------------------------------
J. Alexander's Corporation and Subsidiaries 35 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Options exercisable and shares available for future grant are as follows:
December 29 December 31 January 1 1996 1995 1995 - ------------------------------------------------------------------------------------------------------------- Options exercisable 380,734 313,393 257,109 Shares available for grant 228,850 226,450 368,100 - -------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 29, 1996:
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------------------------------------- Number Number Outstanding At Weighted Weighted Exercisable at Weighted Range of December 29, Average Remaining Average Exercise December 29, Average Exercise Prices 1996 Contractual Life Price 1996 Exercise Price - ------------------------------------------------------------------------------------------------------------- $1.38-$3.81 172,503 2.5 years $ 1.97 172,503 $ 1.97 7.25- 7.88 120,934 6.2 years 7.43 67,996 7.45 9.75- 10.50 229,350 6.3 years 10.04 134,235 10.24 11.69- 13.00 6,500 7.3 years 11.99 6,000 11.91 - ------------------------------------------------------------------------------------------------------------- $1.38-$13.00 529,287 380,734 - -------------------------------------------------------------------------------------------------------------
Options exercisable at December 31, 1995 and January 1, 1995 had weighted average exercise prices of $4.94 and $3.67, respectively. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock Based Compensation". This new standard defines a fair value based method of accounting for an employee stock option or similar equity instrument. This statement gives entities a choice of recognizing related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees," the former standard. The Company has elected to follow APB No. 25 and related Interpretations in accounting for its stock compensation plans because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively: risk-free interest rates of 6.85% and 6.43%; no annual dividend yield; volatility factors of .3812 and .3849 based on monthly closing prices since August, 1990; and an expected option life of 10 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. J. Alexander's Corporation and Subsidiaries 36 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
Years Ended ------------------------ December 29 December 31 1996 1995 - ------------------------------------------------------ Pro forma net income $7,009,000 $4,889,000 Pro forma earnings per share Primary $ 1.28 $ .89 Fully diluted $ 1.23 $ .89
Because SFAS No. 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1997. The weighted average fair value per share for options granted during 1996 and 1995 totaled $6.27 and $6.05, respectively. The Company has an Employee Stock Purchase Plan under which 91,307 shares of the Company's common stock are available for issuance. Shares issued under the plan totaled 19,014, 21,335 and 16,877, in 1996, 1995 and 1994, respectively. The Company has a Salary Continuation Plan which provides retirement and death benefits to certain key employees. The expense recognized under this plan was $67,000, $61,000 and $54,000 in 1996, 1995 and 1994, respectively. The Company has a Savings Incentive and Salary Deferral Plan under Section 401(k) of the Internal Revenue Code which allows qualifying employees to defer a portion of their income on a pre-tax basis through contributions to the plan. All Company employees with at least 1,000 hours of service during the twelve month period subsequent to their hire date, or any calendar year thereafter, and who are at least 21 years of age are eligible to participate. For each dollar of participant contributions, up to 3% of each participant's salary, the Company makes a minimum 10% matching contribution to the plan. For 1996, 1995 and 1994, the Company made a 20% matching contribution to the plan and recognized expense of $24,000, $23,000 and $19,000, respectively. NOTE H -- EMPLOYEE STOCK OWNERSHIP PLAN In 1992, the Company established an Employee Stock Ownership Plan (ESOP) by purchasing 457,055 shares of Company common stock from the Massey Company, a trust created by the late Jack C. Massey, the Company's former Board Chairman, and the Jack C. Massey Foundation at $3.75 per share for an aggregate purchase price of $1,714,000. The Company funded the ESOP by loaning it an amount equal to the purchase price, with the loan secured by a pledge of the unallocated stock held by the ESOP. Terms of the original ESOP note call for repayment in ten annual principal payments of approximately $172,000 plus interest on the outstanding principal balance at an annual rate of 9%. The Company made contributions to the ESOP in 1995 and 1994, allowing the ESOP to make its scheduled loan repayments to the Company and resulting in annual net compensation expense to the Company of $172,000 and $170,000, respectively, with corresponding reductions in the ESOP note receivable. The note receivable from the ESOP has been reported as a reduction from the Company's stockholders' equity. Due to the sale of its Wendy's restaurant operations, the Company is in the process of modifying its loan to the ESOP and elected not to make a contribution to the ESOP in 1996. As a result, no ESOP expense was reflected in 1996. J. Alexander's Corporation and Subsidiaries 37 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS All company employees with at least 1,000 hours of service during the twelve month period subsequent to their hire date, or any calendar year thereafter, and who are at least 21 years of age are eligible to participate. The ESOP generally requires five years of service with the Company in order for an ESOP participant's account to vest. Allocation of stock is made to participants' accounts as the ESOP's loan is repaid and is in proportion to each participant's compensation for each year. At December 29, 1996, and December 31, 1995, 182,822 shares were allocated under the ESOP. For purposes of computing earnings per share, the shares originally purchased by the ESOP are included as outstanding shares in the weighted average share calculation. NOTE I -- SHAREHOLDER RIGHTS PLAN The Company's Board of Directors has adopted a shareholder rights plan to protect the interests of the Company's shareholders if the Company is confronted with coercive or unfair takeover tactics by encouraging third parties interested in acquiring the Company to negotiate with the Board of Directors. The shareholder rights plan is a plan by which the Company has distributed rights ("Rights") to purchase (at the rate of one Right per share of common stock) one-hundredth of a share of no par value Series A Junior Preferred (a "Unit") at an exercise price of $12.00 per Unit. The Rights are attached to the common stock and may be exercised only if a person or group acquires 20% of the outstanding common stock or initiates a tender or exchange offer that would result in such person or group acquiring 10% or more of the outstanding common stock. Upon such an event, the Rights "flip-in" and each holder of a Right will thereafter have the right to receive, upon exercise, common stock having a value equal to two times the exercise price. All Rights beneficially owned by the acquiring person or group triggering the "flip-in" will be null and void. Additionally, if a third party were to take certain action to acquire the Company, such as a merger or other business combination, the Rights would "flip-over" and entitle the holder to acquire shares of the acquiring person with a value of two times the exercise price. The Rights are redeemable by the Company at any time before they become exercisable for $0.01 per Right and expire in 1999. In order to prevent dilution, the exercise price and number of Rights per share of common stock will be adjusted to reflect splits and combinations of, and common stock dividends on, the common stock. NOTE J -- COMMITMENTS AND CONTINGENCIES As a result of the disposition of its Wendy's operations in 1996, the Company remains secondarily liable for certain real property leases with remaining terms of one to nineteen years. The total amount of lease payments remaining on these leases at December 29, 1996 was approximately $6.6 million. In connection with the sale of its Mrs. Winner's Chicken & Biscuit restaurant operations in 1989 and certain previous dispositions, the Company remains secondarily liable for certain real and personal property leases with remaining terms of one to nine years. The total amount of lease payments remaining on these leases at December 29, 1996, was approximately $3.4 million. Additionally, in connection with the previous disposition of certain other Wendy's restaurant operations, primarily the southern California Wendy's restaurants in 1982, the Company remains secondarily liable for certain real property leases with remaining terms of three to ten years. The total amount of lease payments remaining on these leases as of December 29, 1996, was approximately $2.0 million. The Company is a party to legal proceedings incidental to its business. In the opinion of management, the ultimate liability with respect to these actions will not materially affect the operating results or the financial position of the Company. J. Alexander's Corporation and Subsidiaries 38 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE K -- ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities included the following:
December 29 December 31 1996 1995 - ------------------------------------------------------------------------------------------------ Taxes, other than income taxes $ 802,000 $1,062,000 Salaries and wages 322,000 686,000 Insurance 754,000 710,000 Interest 120,000 120,000 Wendy's disposition accruals 2,029,000 -- Other 1,996,000 1,573,000 - ------------------------------------------------------------------------------------------------ $6,023,000 $4,151,000 - ------------------------------------------------------------------------------------------------
NOTE L -- BUSINESS SEGMENTS For the years ended December 29, 1996, December 31, 1995, and January 1, 1995, retail food operations constituted a dominant segment in accordance with SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." J. Alexander's Corporation and Subsidiaries 39 24 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders J. Alexander's Corporation We have audited the accompanying consolidated balance sheets of J. Alexander's Corporation (formerly Volunteer Capital Corporation) and subsidiaries as of December 29, 1996 and December 31, 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three fiscal years in the period ended December 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of J. Alexander's Corporation and subsidiaries at December 29, 1996 and December 31, 1995, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 29, 1996 in conformity with generally accepted accounting principles. Ernst & Young LLP Nashville, Tennessee March 4, 1997 J. Alexander's Corporation and Subsidiaries 40 25 QUARTERLY RESULTS OF OPERATIONS The following is a summary of the quarterly results of operations for the years ended December 29, 1996, and December 31, 1995 (dollars in thousands, except per share amounts):
1996 Quarters Ended - -------------------------------------------------------------------------------------- March 31 June 30 September 29 December 29 - -------------------------------------------------------------------------------------- Net sales $21,687 $23,369 $25,584 $20,239 Income from restaurant operations 2,792 3,233 3,812 2,379 Net income 306 525 370 (1) 6,007 (2) Earnings per share: Primary $ .06 $ .10 $ .07 $ 1.10 Fully diluted $ .06 $ .10 $ .07 $ .98
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 2,684 2,940 3,090 2,997 Net income 688 913 984 2,431 (3) Earnings per share: Primary $ .13 $ .17 $ .18 $ .44 Fully diluted $ .13 $ .17 $ .18 $ .43
(1) Includes expenses of $542 related to the disposal of Wendy's restaurant operations. Also includes no depreciation for the Wendy's restaurants, in accordance with Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," a reduction in expense of $542. (2) Includes pretax gain of $9,942 related to disposal of Wendy's restaurant operations. Also includes no depreciation for the Wendy's restaurants, a reduction in expense of $316, and an additional $458 in pre-opening expense related a change in the amortization period for such costs, from 24 months to 12 months, during the fourth quarter of 1996. (3) Includes tax benefit of $1,782 related to recognition of deferred tax assets in accordance with SFAS No. 109 "Accounting for Income Taxes." J. Alexander's Corporation and Subsidiaries 41 26 FIVE-YEAR FINANCIAL SUMMARY
Years Ended - ------------------------------------------------------------------------------------------------------------ December 29 December 31 January 1 January 2 January 3 (Dollars in thousands, except per share data) 1996 1995 1995 1994 1993(5) - ------------------------------------------------------------------------------------------------------------ Operations - ------------------------------------------------------------------------------------------------------------ Net sales $90,879 79,288 65,695 60,574 50,092 Income from restaurant operations $12,216 11,711 10,375 9,787 7,701 General and administrative expenses $ 8,603 7,436 6,591 5,683 5,057 Net income $ 7,208 (1) 5,016 (2) 4,830 (3) 4,301 (4) 2,064 Depreciation and amortization $ 4,674 3,644 2,760 2,394 1,942 Cash flow from operations $ 3,393 7,586 5,706 5,050 3,590 Capital expenditures $22,589 20,255 11,276 3,479 7,105 Financial Position - ------------------------------------------------------------------------------------------------------------ Cash and investments $12,549 2,739 16,312 20,772 10,904 Property and equipment, net $47,016 46,915 29,776 20,989 19,604 Total assets $66,827 60,140 53,306 46,419 33,979 Long--term obligations $15,930 18,512 18,847 19,250 19,633 Stockholders' equity $40,461 32,975 27,304 21,700 7,950 Per Share Data - ------------------------------------------------------------------------------------------------------------ Earnings per share -- primary $ 1.32 .92 .90 .93 .48 Earnings per share -- assuming full dilution $ 1.26 .92 .90 .93 .47 Stockholders' equity $ 7.60 6.25 5.21 4.24 1.94 Market price at year end $ 8 1/2 9 1/2 6 11 6 3/4 J. Alexander's Restaurant Data - ------------------------------------------------------------------------------------------------------------ Net sales $42,105 25,594 14,704 10,816 3,545 Weighted average annual sales per unit $ 3,885 3,980 3,735 3,605 2,608 Units open at year end 14 9 5 3 3
(1) Includes pre-tax gain of $9,400 related to the Company's divestiture of its Wendy's restaurants during 1996. (2) Includes tax benefit of $1,782 related to recognition of deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109). (3) Includes tax benefit of $2,100 related to recognition of deferred tax assets in accordance with SFAS No. 109. (4) Includes tax benefit of $1,500 related to recognition of deferred tax assets in accordance with SFAS No. 109. (5) Due to the Company's fiscal year policy, fiscal year 1992 includes 53 weeks as compared to 52 weeks for the other years presented. Note: The Company has never paid cash dividends on its common stock. Payment of future dividends will be within the discretion of the Company's Board of Directors and will depend, among other factors, on earnings, capital requirements and the operating and financial condition of the Company. J. Alexander's Corporation and Subsidiaries 42 EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 -- SUBSIDIARIES OF J. ALEXANDER'S CORPORATION
STATE OF SUBSIDIARY INCORPORATION - ---------- ------------- VCE Restaurants, Inc. Tennessee J. Alexander's Restaurants, Inc. Tennessee J. Alexander's Restaurants of Kansas, Inc. Kansas
EX-23 7 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 J. Alexander's Corporation of our report dated March 4, 1997, included in the 1996 Annual Report to Shareholder's of J. Alexander's Corporation. Our audits also include the financial statement schedule of J. Alexander's Corporation listed in Item 14(a). The schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein. We also consent to the incorporation by reference in the following J. Alexander's Corporation Registration Statements: a. Form S-8 Registration Statement (No. 33-77478) pertaining to the 1985 Stock Option Plan, filed on May 25, 1994; b. Form S-8 Registration Statement (No. 33-77476) pertaining to the 1994 Employee Stock Incentive Plan, filed on April 6, 1994; c. Form S-8 Registration Statement (No. 33-39870) pertaining to the 1990 Stock Option Plan for Outside Directors, filed April 9, 1991; d. Form S-8 Registration Statement (No. 33-4483) pertaining to the 1985 Stock Option Plan, filed on April 1, 1986; e. Form S-8 Registration Statement (No. 2-78140) pertaining to the 1982 Incentive Stock Option Plan, filed on June 25, 1982; and f. Form S-8 Registration Statement (No. 2-78139) pertaining to the 1982 Employee Stock Purchase Plan, filed on June 25, 1982; of our report dated March 4, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of J. Alexander's Corporation. ERNST & YOUNG LLP Nashville, Tennessee March 26, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-29-1996 JAN-01-1996 DEC-29-1996 12,549 0 120 0 534 15,554 51,583 4,567 66,827 9,825 15,930 0 0 266 40,195 66,827 90,879 90,879 31,969 59,343 19,320 0 1,647 11,451 4,243 7,208 0 0 0 7,208 1.32 1.26
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