-----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, TM8DGoNA0tyYD+W0b/Nv/U9/lMFL8e7tMOOcvM+sqBJAWk4hvO8J7HI+T9/77hW0 AWE6sSaTsnBT9mzNrOcq7Q== 0000950144-98-003618.txt : 19980331 0000950144-98-003618.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950144-98-003618 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALEXANDERS J CORP 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-K SEC ACT: SEC FILE NUMBER: 001-08766 FILM NUMBER: 98578575 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: VOLUNTEER CAPITAL CORP / TN / DATE OF NAME CHANGE: 19920703 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-K 1 J. ALEXANDER CORP FORM 10K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934. For the fiscal year ended December 28, 1997. or Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______________ to ______________. Commission file number 1-8766 J. ALEXANDER'S CORPORATION -------------------------- (Exact name of Registrant as specified in its charter) Tennessee 62-0854056 --------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) P.O. Box 24300 3401 West End Avenue Nashville, Tennessee 37203 -------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (615)269-1900 ------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Class: on which registered: --------------- -------------------- Common stock, par value $.05 per share. New York Stock Exchange Series A junior preferred stock purchase rights. New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ---- The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the last sales price on the New York Stock Exchange of such stock as of March 25, 1998, was $21,646,527, assuming that (i) all shares beneficially held by members of the Company's Board of Directors are shares owned by "affiliates," a status which each of the directors individually disclaims and (ii) all shares held by the Trustee of the J. Alexander's Corporation Employee Stock Ownership Plan are shares owned by an "affiliate". The number of shares of the Company's Common Stock, $.05 par value, outstanding at March 25, 1998, was 5,421,298. DOCUMENT INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders to be held May 19, 1998, are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS J. Alexander's Corporation (the "Company") operates as a proprietary concept 19 J. Alexander's full-service, casual dining restaurants located in Tennessee, Ohio, Florida, Kansas, Alabama, Michigan, Illinois, Colorado, Texas and Kentucky. J. Alexander's is a traditional restaurant with an American menu that features prime rib of beef; hardwood-grilled steaks, seafood and chicken; pasta; salads and soups; assorted sandwiches, appetizers and desserts; and a full-service bar. Management believes quality food, outstanding service and value are critical to the success of J. Alexander's. Prior to 1997, the Company was also a major franchisee of Wendy's International, Inc. ("Wendy's International"). However, in November 1996, the Company sold 52 of its 58 Wendy's Old Fashioned Hamburgers restaurants ("Wendy's Restaurants") to Wendy's International. The six restaurants not acquired by Wendy's International in November 1996 were sold or closed. Unless the context requires otherwise, all references to the Company include J. Alexander's Corporation and its subsidiaries. J. ALEXANDER'S RESTAURANT OPERATIONS General. J. Alexander's is a quality casual dining restaurant with a contemporary American menu. J. Alexander's strategy is to provide a broad range of high-quality menu items that are intended to appeal to a wide range of consumer tastes and are served by a courteous, friendly and well-trained service staff. The Company believes that quality food, outstanding service and value are critical to the success of J. Alexander's. Each restaurant is open from 11:00 a.m. to 11:00 p.m. Sunday through Thursday and 11:00 a.m. to 12:00 midnight on Friday and Saturday. Entrees available at lunch and dinner range in price from $4.95 to $20.95. The Company estimates that the average check per customer, excluding alcoholic beverages, is approximately $13.00. J. Alexander's net sales during fiscal 1997 were $57.1 million, of which alcoholic beverage sales accounted for approximately 15%. The Company opened its first J. Alexander's restaurant in Nashville, Tennessee in May 1991. Since that time, the Company opened two restaurants in 1992, two restaurants in 1994, four restaurants in 1995, five restaurants in 1996 and four restaurants in 1997. The Company plans to open two J. Alexander's in 1998, one of which opened March 9, 1998 in Louisville, Kentucky. Menu. The J. Alexander's menu is designed to appeal to a wide variety of tastes and features prime rib of beef; hardwood-grilled steaks, seafood and chicken; pasta; salads and soups; and assorted sandwiches, appetizers and desserts. As a part of the Company's commitment to quality, soups, sauces, salsa, salad dressings and desserts are made daily from scratch; steaks, chicken and seafood are grilled over genuine hardwood; all steaks are U.S.D.A. Midwestern, Corn-fed Choice Beef, aged a minimum of 21 days; and imported Italian pasta, topped with fresh grated imported Reggiano Grassi parmesan cheese, is used. Emphasis on quality is present throughout the entire J. Alexander's menu. Milkshakes are made from Haagen-Dazs ice cream, with flavoring being the only addition. Desserts such as chocolate cake, carrot cake and cheesecake are prepared in-house, and each restaurant bakes its featured croissants. 2 3 Customer Service. Management believes that prompt, courteous and efficient service is an integral part of the J. Alexander's concept. The management staff of each restaurant are referred to as "coaches" and the other employees as "champions". The Company seeks to hire coaches who are committed to the principle that quality products and service are key factors to success in the restaurant industry. Each J. Alexander's restaurant typically employs five fully-trained concept coaches and two kitchen coaches. The coaches typically have previous experience in full-service restaurants and complete an intensive 19-week J. Alexander's development program involving all aspects of restaurant operations. Each J. Alexander's has approximately 45 to 65 service personnel, 25 to 30 kitchen employees, 8 to 10 host persons and 6 to 8 pubkeeps. The Company places significant emphasis on its initial training program. In addition, the coaches hold training breakfasts for the service staff to further enhance their product knowledge. Management believes J. Alexander's restaurants have a low table to server ratio, which is designed to provide better, more attentive service. The Company is committed to employee empowerment, and each member of the service staff is authorized to provide complimentary entrees in the event that a guest has an unsatisfactory dining experience or the food quality is not up to the Company's standards. Further, all members of the service staff are trained to know the Company's product specifications and to alert management of any potential problems. Quality Assurance. A key position in each J. Alexander's restaurant is the quality control coordinator. This position is staffed by a coach who inspects each plate of food before it is served to a guest. The Company believes that this product inspection by a member of management is a significant factor in maintaining consistent, high food quality in its restaurants. Another important component of the quality assurance system is the preparation of taste plates. Certain menu items are taste-tested daily by a coach to ensure that only the highest quality food is served in the restaurant. The Company also uses a service evaluation program to monitor service staff performance, food quality and guest satisfaction. Restaurant and Site Selection. The J. Alexander's restaurants built from 1992 through 1996 have generally been freestanding structures that contain approximately 7,400 square feet and seat approximately 230 people. The exterior typically combines brick fieldstone and copper with striped awnings covering the windows and entrance. The restaurants' interiors are designed to provide a comfortable dining experience and feature high ceilings, wooden trusses with exposed pipes and an open kitchen immediately adjacent to the reception area. Consistent with the Company's intent to develop different looks for different markets, the last three restaurants opened in 1996 represented a departure from the "warehouse" style building described above. The J. Alexander's in Troy, Michigan is located inside the prestigious Somerset Collection mall and features a very upscale, contemporary design. The Chattanooga, Tennessee J. Alexander's features a stucco style exterior and includes a number of other unique design features as the result of being converted from another freestanding restaurant building acquired by the Company. The J. Alexander's in Memphis, Tennessee represents the Company's latest prototype design which it used for three of the four restaurants opened in 1997. This building was designed to provide a high level of curb appeal using exterior craftsman-style architecture with unique natural materials such as stone, stained woods and weathering copper. The Company plans to open two J. Alexander's restaurants in 1998, one of which opened March 9, 1998 in Louisville, Kentucky. The other new restaurant scheduled to open in 1998 is currently under development in Baton Rouge, Louisiana. The Company estimates that its capital expenditures for 1998 will be $4,000,000 to $6,000,000, the variance depending primarily on the amount, if any, spent for restaurants to be opened in 1999. The capital expenditures for restaurants include the cost of constructing and equipping the restaurant and, if the land on which a restaurant is located is purchased, the cost of purchasing the land and associated site work. The cost of constructing a J. Alexander's building averaged approximately $2,000,000 in 1997. The Company has developed a lower cost building, anticipated to cost approximately $1,500,000, for use in selected markets beginning with the Baton Rouge restaurant. The Company estimates that 3 4 the cost of equipping a J. Alexander's restaurant will range from $625,000 to $675,000. Currently, the principal variable in the cost of a restaurant is the decision to own or lease a restaurant site and if a decision is made to own the site, the cost of land in the proposed market. In general, the Company prefers to own its sites because of the long-term value of owning such an asset. For restaurants opened during 1997, the cost of land ranged from $800,000 to $1,150,000. In addition, site preparation and improvement costs are expected to range from approximately $275,000 to $350,000 per restaurant. The Company is actively seeking to acquire additional sites for new J. Alexander's restaurants primarily in the midwestern and the southeastern areas of the United States. The timing of restaurant openings depends upon the selection and availability of suitable sites and other factors. The Company has no current plans to franchise J. Alexander's restaurants. The Company believes that its ability to select high profile restaurant sites is critical to the success of the J. Alexander's operations. Once a prospective site is identified and preliminary site analysis is performed and evaluated, members of the Company's senior management team visit the proposed location and evaluate the particular site and the surrounding area. The Company analyzes a variety of factors in the site selection process, including local market demographics, the number, type and success of competing restaurants in the immediate and surrounding area and accessibility to and visibility from major thoroughfares. The Company also obtains an independent market analysis to verify its own conclusion that a potential restaurant site meets the Company's criteria. The Company believes that this site selection strategy results in quality restaurant locations. COMPETITION The restaurant industry is highly competitive. The Company believes that the principal competitive factors within the industry are site location, product quality, service and price; however, menu variety, attractiveness of facilities and customer recognition are also important factors. The Company's restaurants compete not only with numerous other casual dining restaurants with national or regional images, but also with other types of food service operations in the vicinity of each of the Company's restaurants. These include other restaurant chains or franchise operations with greater public recognition, substantially greater financial resources and higher total sales volume than the Company. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns and the type, number and location of competing restaurants. PERSONNEL As of December 28, 1997, the Company employed approximately 1,700 persons. The Company believes that its employee relations are good. It is not a party to any collective bargaining agreements. GOVERNMENT REGULATION Each of the Company's restaurants is subject to various federal, state and local laws, regulations and administrative practices relating to the sale of food and alcoholic beverages, and sanitation, fire and building codes. Restaurant operating costs are also affected by other governmental actions that are beyond the Company's control, which may include increases in the minimum hourly wage requirements, workers' compensation insurance rates and unemployment and other taxes. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of a new restaurant. Alcoholic beverage control regulations require each of the Company's J. Alexander's restaurants to apply for and obtain from state authorities a license or permit to sell liquor on the premises and, in some states, to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. The failure of any restaurant to obtain or retain any required liquor licenses would adversely affect the restaurant's operations. In certain states, the Company may be subject to "dram-shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from the establishment which wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its comprehensive general liability insurance. 4 5 The Americans with Disabilities Act ("ADA") prohibits discrimination on the basis of disability in public accommodations and employment. The ADA became effective as to public accommodations in January 1992 and as to employment in July 1992. Construction and remodeling projects since January 1992 have taken into account the requirements of the ADA; however, the Company could be required to further modify its restaurants' physical facilities to comply with the provisions of the ADA. RISK FACTORS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is including the following cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward looking statements of the Company made by, or on behalf of, the Company. Risks Associated with Growth. The Company's continued growth depends on its ability to open new J. Alexander's restaurants and to operate them profitably, which will depend on a number of factors, including the selection and availability of suitable locations, the hiring and training of sufficiently skilled management and other personnel and other factors, some of which are beyond the control of the Company. There can be no assurance that the Company will be able to open the anticipated number of J. Alexander's in a timely manner or that, if opened, those restaurants can be operated profitably. The Company currently operates nineteen J. Alexander's restaurants, of which only nine have been open for more than two years. Consequently, the earnings achieved to date by these J. Alexander's restaurants may not be indicative of future operating results. Furthermore, because of the Company's relatively small J. Alexander's restaurant base, an unsuccessful new restaurant could have a more adverse effect on the Company's results of operations than would be the case in a restaurant company with a greater number of restaurants. Competition. The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many well-established competitors with substantially greater financial and other resources than the Company. Some of the Company's competitors have been in existence for a substantially longer period than the Company and may be better established in markets where the Company's restaurants are or may be located. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns and the type, number and location of competing restaurants. Fluctuations in Quarterly Results. The Company's quarterly results of operations are affected by timing of the opening of new J. Alexander's restaurants, and fluctuations in the cost of food, labor, employee benefits, and similar costs over which the Company has limited or no control. The Company's business may also be affected by inflation. In the past, management has attempted to anticipate and avoid material adverse effects on the Company's profitability from increasing costs through its purchasing practices and menu price adjustments, but there can be no assurance that it will be able to do so in the future. Government Regulation. The restaurant industry is subject to extensive state and local government regulation relating to the sale of food and alcoholic beverages, and sanitation, fire and building codes. Termination of the liquor license for any J. Alexander's restaurant would adversely affect the revenues for the restaurant. Restaurant operating costs are also affected by other government actions that are beyond the Company's control, which may include increases in the minimum hourly wage requirements, workers' compensation insurance rates and unemployment and other taxes. Difficulties or failure in obtaining required licensing or other regulatory approvals could delay or prevent the opening of a new J. Alexander's restaurant. The suspension of, or inability to renew, a license could interrupt operations at an existing restaurant, and the inability to retain or renew such licenses would adversely affect the operations of the new restaurants. 5 6 ITEM 2. PROPERTIES As of December 28, 1997, the Company had eighteen J. Alexander's casual dining restaurants in operation and two J. Alexander's restaurants under construction. The following table gives the locations of, and describes the Company's interest in, the land and buildings used in connection with the above:
Site Leased Site and Building and Building Space 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 1 0 1 2 Ohio 3 1 0 4 Tennessee 3 0 1 4 Texas 0 1 0 1 Kentucky 0 1 0 1 Louisiana 0 1 0 1 - - - - Total 13 5 2 20 == = = ==
(a) In addition to the above, the Company leases five of its former Wendy's properties which are in turn leased to others. (b) See Item 1. for additional information concerning the Company's restaurants. All of the Company's restaurant lease agreements may be renewed at the end of the initial term (generally 15 to 25 years) for periods ranging from five to 10 years. Certain of these leases provide for minimum rentals plus additional rent based on a percentage of the restaurant's gross sales in excess of specified amounts. These leases usually require the Company to pay all real estate taxes, insurance premiums and maintenance expenses with respect to the leased premises. Corporate offices for the Company are located in leased office space in Nashville, Tennessee. ITEM 3. LEGAL PROCEEDINGS As of March 25, 1998, the Company was not a party to any pending legal proceedings material to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1997. 6 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, 51 Vice-President of Development since May, 1996; Director of Development from October, 1993 to May, 1996; President of Dinelite Corporation, a franchisee of Po Folks Restaurants, from 1987 to 1993. R. Gregor Lewis, 45 Chief Financial Officer since July 1986; Vice President of Finance and Secretary since August 1984. J. Michae Moore, 38 Vice-President of Human Resources and Administration since November, 1997; Director of Human Resources and Administration from August 1996 to November, 1997; Director of Operations of Pioneer Music Group, a Nashville-based record label, April, 1996 to August, 1996; Director of Operations, J. Alexander's Restaurants, Inc. from March, 1993 to April, 1996. Mark A. Parkey, 35 Controller of the Company since May 1997; Director of Finance from January, 1993 to May, 1997. Lonnie J Stout II, 51 Chairman since July 1990; Director, President and Chief Executive Officer since May 1986. 7 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of J. Alexander's Corporation is listed on the New York Stock Exchange under the symbol JAX. The approximate number of record holders of the Company's common stock at December 28, 1997, was 1,900. The following table summarizes the price range of the Company's common stock for each quarter of 1997 and 1996, as reported from price quotations from the New York Stock Exchange:
1997 1996 ---- ---- Low High Low High --- ---- --- ---- 1st Quarter $8 $9 7/8 $8 5/8 $ 9 3/4 2nd Quarter 7 5/8 9 8 5/8 11 1/4 3rd Quarter 6 3/4 8 1/4 8 3/4 11 1/2 4th Quarter 4 5/16 7 1/4 7 5/8 9 1/8
The Company has never paid cash dividends on its common stock. Payment of future dividends will be within the discretion of the Company's Board of Directors and will depend, among other factors, on earnings, capital requirements and the operating and financial condition of the Company. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth the selected financial data for each of the years in the five-year period ended December 28, 1997:
Years Ended - ------------------------------------------------------------------------------------------------------------------- DECEMBER 28 December 29 December 31 January 1 January 2 (Dollars in thousands, except per share data) 1997 1996 1995 1995 1994 - ------------------------------------------------------------------------------------------------------------------- OPERATIONS - ------------------------------------------------------------------------------------------------------------------- Net sales $ 57,138 90,879 79,288 65,695 60,574 Income from restaurant operations $ 5,114 12,216 11,711 10,375 9,787 General and administrative expenses $ 5,793 7,100 6,778 6,249 5,361 Pre-opening expense $ 1,580 1,503 658 342 322 Net income (loss) $ (5,991)(1) 7,208(3) 5,016(4) 4,830(5) 4,301(6) Depreciation and amortization $ 3,057 (2) 4,674 3,644 2,760 2,394 Cash flow from operations $ (2,150) 3,393 7,586 5,706 5,050 Capital expenditures $ 16,619 22,589 20,255 11,276 3,479 FINANCIAL POSITION - ------------------------------------------------------------------------------------------------------------------- Cash and investments $ 134 12,549 2,739 16,312 20,772 Property and equipment, net $ 60,573 47,016 46,915 29,776 20,989 Total assets $ 64,421 66,827 60,140 53,306 46,419 Long-term obligations $ 20,231 15,930 18,512 18,847 19,250 Stockholders' equity $ 34,995 40,461 32,975 27,304 21,700 PER SHARE DATA - ------------------------------------------------------------------------------------------------------------------- Basic earnings (loss) per share $ (1.11) 1.36 .95 .93 .98 Diluted earnings (loss) per share $ (1.11) 1.26 .92 .90 .93 Stockholders' equity $ 6.45 7.60 6.25 5.21 4.24 Market price at year end $ 4.81 8.50 9.50 6.00 11.00 J. ALEXANDER'S RESTAURANT DATA - ------------------------------------------------------------------------------------------------------------------- Net sales $ 57,138 42,105 25,594 14,704 10,816 Weighted average annual sales per restaurant $ 3,772 3,885 3,980 3,735 3,605 Units open at year end 18 14 9 5 3
8 9 (1) Includes an $885 charge to earnings to reflect the cumulative effect of the change in the Company's accounting policy for pre-opening costs to expense them as incurred. Also includes deferred tax expense of $2,393 related to an adjustment of the Company's beginning of the year valuation allowance for deferred taxes in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109) and a pre-tax gain of $669 related to the Company's divestiture of its Wendy's restaurants in 1996. (2) Excludes pre-opening expense which was expensed as incurred effective with the beginning of fiscal 1997. (3) Includes pre-tax gain of $9,400 related to the Company's divestiture of its Wendy's restaurants during 1996. (4) Includes tax benefit of $1,782 related to recognition of deferred tax assets in accordance with SFAS No. 109. (5) Includes tax benefit of $2,100 related to recognition of deferred tax assets in accordance with SFAS No. 109. (6) Includes tax benefit of $1,500 related to recognition of deferred tax assets in accordance with SFAS No. 109. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS GENERAL J. Alexander's Corporation operated 18 J. Alexander's full-service, casual dining restaurants at December 28, 1997. During the fourth quarter of 1996 the Company sold substantially all of the assets of its franchised Wendy's Old Fashioned Hamburgers restaurant operations. The Company's Wendy's restaurants generated restaurant operating income of $7,170,000 on sales of $48,774,000 in 1996, and restaurant operating income of $8,092,000 on sales of $53,694,000 in 1995. As a result of the divestiture, the Company's sales and income from restaurant operations were significantly reduced in 1997. A loss of $2,421,000 before income taxes and cumulative effect of change in accounting principle was incurred in 1997. This compares to income before income taxes of $11,451,000 in 1996. The 1996 results included a gain from the divestiture of the Wendy's division of $9,400,000. An additional gain of $669,000 was recorded on the divestiture in 1997. Income before the Wendy's gains, income taxes and cumulative effect adjustment decreased by $5,141,000 in 1997 compared to 1996; a nominal increase in 1997 in restaurant operating income from J. Alexander's restaurants combined with decreases in general and administrative expenses and in net interest expense were not adequate to offset the loss of restaurant operating income resulting from the Wendy's divestiture. The Company's net loss of $5,991,000 for 1997 included an increase of $2,393,000 in the valuation allowance for deferred tax assets and an $885,000 charge to reflect the cumulative effect of a change in the Company's accounting principle for pre-opening costs to expense them as incurred. For fiscal 1996, income before income taxes and the $9,400,000 gain on the Wendy's divestiture was $2,051,000 as compared to income before income taxes of $3,458,000 for 1995. Restaurant operating income in the J. Alexander's division increased by $1,427,000, or 39%, in 1996. However, this increase was not enough to offset the combined effect of a decline of $922,000 in the Wendy's division and increased general and administrative expenses, pre-opening cost amortization and other expense (net interest expense plus other income). Net income in 1996 included a federal income tax provision approximating the federal statutory rate, whereas net income for 1995 reflected deferred income tax benefits of $1,782,000 associated with the recognition of deferred tax assets for financial reporting purposes. Management reached the decision to sell the Wendy's operations in 1996 because it believed that focusing all of the Company's capital and resources exclusively on its casual dining business offered the greatest potential for long-term return for its shareholders. However, the divestiture is expected to continue to have a negative impact on earnings until the lost revenue and operating income from the Wendy's operations can be replaced by the successful development and operation of J. Alexander's restaurants. J. ALEXANDER'S RESTAURANT OPERATIONS The Company operated 18 J. Alexander's restaurants at December 28, 1997, compared with 14 at December 29, 1996, and nine at December 31, 1995. Results of the J. Alexander's restaurant operations before allocation of general and administrative expenses, pre-opening costs and net interest expense were as follows: 9 10
Years Ended - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) DECEMBER 28, 1997 December 29, 1996 December 31, 1995 - ------------------------------------------------------------------------------------------------------------------- AMOUNT % OF SALES Amount % of Sales Amount % of Sales - ------------------------------------------------------------------------------------------------------------------- Net sales $57,138 100.0% $42,105 100.0% $25,594 100.0% Restaurant costs and expenses: Cost of sales 19,480 34.1 14,711 34.9 9,095 35.5 Labor and related costs 18,871 33.0 13,152 31.2 7,748 30.3 Depreciation and amortization of restaurant property and equipment 2,860 5.0 1,884 4.5 1,033 4.0 Other operating expenses 10,813 18.9 7,312 17.4 4,099 16.0 - ------------------------------------------------------------------------------------------------------------------- 52,024 91.0 37,059 88.0 21,975 85.9 - ------------------------------------------------------------------------------------------------------------------- Restaurant operating income $ 5,114 9.0% $ 5,046 12.0% $ 3,619 14.1% ===================================================================================================================
Total sales from J. Alexander's restaurants increased in both 1997 and 1996 compared to the prior years primarily as a result of new restaurant openings. However, average weekly sales per restaurant decreased to $72,500 in 1997 from $74,600 in 1996 and $76,400 in 1995 as a result of lower sales from new restaurants. Same store sales and restaurant operating income, which include comparable results for all restaurants open for more than twelve months, increased in both 1997 and 1996 as compared to the prior year. Same store sales for 1997 on a base of thirteen restaurants increased by 1.2% to an average of $75,700 per week from $74,800 in 1996. For this same group of restaurants, restaurant operating income as a percentage of sales increased to 12.9% from 12.3%. Same store sales for 1996 averaged $81,400 per week on a base of eight restaurants, a 5.9% increase over $76,900 for 1995. Operating margins for this group of restaurants improved to 16.9% in 1996 from 14.7% in 1995. J. Alexander's overall financial performance has been significantly affected by the number of new restaurants opened during the last three years during which the number of restaurants increased from five to 18. In order to maximize the quality of guest service and successfully complete the extensive training and support of J. Alexander's staff, there is typically little or no advertising or promotion of new J. Alexander's restaurant openings. Management believes that this "quiet opening" approach enhances guest experiences and contributes significantly to increases in sales over a long period of time. However, because this approach often results in slow sales growth until a new restaurant's reputation grows and because of the expenses associated with the Company's emphasis on training and quality of operations during the opening months of operation, the financial performance of newer restaurants typically trails that of more mature restaurants and the Company expects newly opened restaurants to experience operating losses in their initial months of operation. In addition, some of the Company's newer restaurants have not experienced the increases in sales expected by management, thus compounding the effect of these new restaurants on financial performance. Restaurant operating income as a percentage of sales decreased in 1997 as compared to 1996 and in 1996 as compared to 1995 as a result of these effects. To illustrate the effects of new restaurants on results of operations, losses incurred at the restaurant level in the year of opening totaled approximately $900,000 for the four restaurants opened in 1997 and $300,000 for the five restaurants opened in 1996. The four restaurants opened in 1995 operated at approximately a breakeven level on this basis. Generally results in the Company's restaurants improve significantly after their first full year of operations. Largely due to the effects of new restaurant openings, all categories of costs and expenses, with the exception of cost of sales, increased as a percentage of sales in 1997 as compared to 1996 and in 1996 as compared to 1995. Cost of sales, which includes food and alcoholic beverage costs, decreased as a percentage of sales in both 1997 and 1996 as compared to the prior years due primarily to management emphasis on cost controls in this area. Also, this expense category is less sensitive to the effect of lower sales volumes than the other categories which have large fixed components. Of the 14 restaurants which had been open for at least one full year at December 28, 1997, management considers eight of them to be at acceptable sales levels which averaged $83,600 per restaurant per week in 1997. The remaining six restaurants, three of which were opened in 1995 and three in 1996, are below sales levels which management considers acceptable and averaged $61,600 per week in 1997. In order to meet the Company's long term profitability objectives, all J. Alexander's restaurants need to reach or exceed approximately the level of sales 10 11 of the eight restaurants discussed above. All of the Company's under-performing restaurants discussed above currently have positive sales trends and management believes that all or virtually all of the Company's restaurants have the potential over time to reach satisfactory sales levels. Because the breakeven point for J. Alexander's is relatively high due to the high fixed costs necessary to deliver and sustain the high levels of food quality, service and ambiance which are critical components of the J. Alexander's concept, management believes that the primary issue faced by the Company in returning it to profitability is the improvement of sales in several of its restaurants, particularly its newer restaurants. In 1997 guest service support was increased in some of the Company's newer restaurants in order to ensure the highest quality of operations. Additionally menu prices were reduced in some of the restaurants which were not posting satisfactory guest count increases. While these strategies increased the Company's losses for 1997, guest counts to date have increased significantly in these restaurants. In March of 1998 the Company increased menu prices in all of its restaurants by an average of approximately 3%. Some additional, but smaller, menu price increases are planned for the summer of 1998. Other actions which should improve 1998 results include the implementation of operational systems designed to provide quicker service and increase table turns and the negotiation of national contracts for purchase of certain of the Company's food items. The Company has lowered its development plans for 1998 and 1999 to two restaurants to allow management to focus intently on improving sales and profits in its existing restaurants while maintaining operational excellence. The lower expansion rate will also reduce start-up related expenses. Management remains optimistic about the long-term prospects for J. Alexander's. It believes that actions taken in 1997 and the recent menu price increase will have a positive impact on financial performance for 1998. However, only modest improvements are expected in the first quarter of 1998 as compared to the fourth quarter of 1997 as the price increase was not implemented until late in the first quarter. Further improvements are expected throughout the remainder of 1998; however, based on its current assessment of the Company's business, management does not believe the Company will be profitable before the fourth quarter of 1998. WENDY'S RESTAURANT OPERATIONS Results of the Company's Wendy's restaurant operations before allocation of general and administrative expenses, pre-opening costs and net interest expense are set forth in the following table. Results for 1996 include the period through November 21, 1996.
Years Ended - ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) December 29, 1996 December 31, 1995 - ------------------------------------------------------------------------------------------------------------------- Amount % of Sales Amount % of Sales - ------------------------------------------------------------------------------------------------------------------- Net sales $48,774 100.0% $53,694 100.0% Restaurant costs and expenses: Cost of sales 17,258 35.4 18,612 34.7 Labor and related costs 14,222 29.2 15,407 28.7 Depreciation and amortization of restaurant property and equipment 1,074 2.2 1,907 3.5 Royalties 1,952 4.0 2,149 4.0 Other operating expenses 7,098 14.6 7,527 14.0 - ------------------------------------------------------------------------------------------------------------------- 41,604 85.3 45,602 84.9 - ------------------------------------------------------------------------------------------------------------------- Restaurant operating income $7,170 14.7% $8,092 15.1% ===================================================================================================================
In November 1996, the Company sold 52 of its Wendy's Old Fashioned Hamburgers restaurants to Wendy's International, Inc. for $28.3 million in cash plus the assumption of capitalized lease obligations and the long-term debt totaling approximately $2.5 million. The remaining six restaurants have been sold or closed. The Company operated 58 Wendy's restaurants at December 31, 1995. Total Wendy's sales decreased by $4,920,000, or 9.2%, in 1996 compared to 1995, due primarily to the sale referenced in the preceding paragraph. Weighted average sales per unit decreased by 0.7% in 1996. Competition in the quick-service restaurant industry in general and intense retail price competition by other major hamburger chains, combined with the continued development of new Wendy's restaurants by other franchisees in certain of the Company's market areas, were significant factors in management's decision to divest its Wendy's business. As a percentage of sales, restaurant operating income in the Wendy's division decreased to 14.7% in 1996 from 15.1% in 1995, as increases in cost of sales, labor and other operating expenses more than offset a decrease in 11 12 depreciation expense. Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", no depreciation or amortization expense related to the Wendy's assets held for disposal was recorded during the last half of 1996. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses, which include management training costs and all other costs above the restaurant level for J. Alexander's (and, before 1997, Wendy's) operations, decreased by $1,307,000, or 18.4%, in 1997 compared to 1996 due to the disposition of the Wendy's operations. As expected, however, general and administrative expenses increased as a percentage of sales to 10.1% in 1997 from 7.8% in 1996, because these expenses did not decrease in proportion to the reduction in revenues resulting from the Wendy's divestiture; a large portion of these costs is related to the operation and development of J. Alexander's restaurants. General and administrative expenses are expected to decrease as a percentage of sales in 1998 as compared to 1997 due to the higher sales levels for the Company resulting from new J. Alexander's restaurants opened in 1997 and 1998. General and administrative expenses as a percentage of sales decreased to 7.8% in 1996 from 8.5% in 1995 due to the higher total sales level for the Company. PRE-OPENING EXPENSE In 1997 the Company changed its accounting policy to expense all pre-opening costs as incurred rather than deferring and amortizing them over a period of twelve months from each restaurant's opening. This change resulted in a charge of $885,000 to record the cumulative effect as of the beginning of 1997. In 1996 the Company changed its amortization period for pre-opening costs from twenty-four months to twelve months. Due to the change in accounting principle and the lowering of the Company's development rate to two restaurants for 1998, pre-opening expenses, which management estimates will be approximately $350,000 per restaurant, should be significantly less in 1998 than in 1997, both in terms of the dollar amount and as a percentage of sales. INTEREST INCOME AND EXPENSE Interest expense decreased by $617,000 in 1997 compared to 1996 due to the elimination of long-term obligations associated with the Company's Wendy's restaurant operations and a reduction in average balances outstanding under the Company's line of credit as a result of the use of a portion of the proceeds from the Wendy's divestiture to retire the outstanding balance at that time and to fund a portion of the Company's capital needs for 1997. Interest expense increased by $231,000 in 1996 compared to 1995, as interest related to borrowings under the Company's line of credit more than offset an increase in interest expense capitalized in connection with new restaurant development. Interest income increased by $79,000 in 1997 compared to 1996 due to increased investment balances resulting from the Wendy's divestiture. Interest income decreased by $472,000 in 1996 compared to 1995 primarily due to lower investment balances resulting from the development of new restaurants. INCOME TAXES Under the provisions of SFAS No. 109 "Accounting for Income Taxes", the Company had gross deferred tax assets of $5,213,000 and $4,285,000 and gross deferred tax liabilities of $948,000 and $1,492,000 at December 28, 1997 and December 29, 1996, respectively. The deferred tax assets at December 28, 1997 relate primarily to $6,226,000 of net operating loss carryforwards and $1,982,000 of tax credit carryforwards available to reduce future federal income taxes. The recognition of deferred tax assets depends on the likelihood of taxable income in future periods in amounts sufficient to realize the assets. The deferred tax assets must be reduced to the extent future income is not likely to be generated. In 1995, management concluded that future taxable income should be sufficient to realize all of the Company's deferred tax assets and reduced the beginning of the year valuation allowance by $2,085,000 (of which $303,000 was credited to additional paid-in capital). No allowance was deemed necessary during 1996 and earnings for the year were taxed at an effective rate of 37.1%. Due to the loss incurred in 1997 and because the Company operates with a high degree of financial and operating leverage, with a significant portion of operating costs being fixed or semi-fixed in nature, management was unable to conclude that it was more likely than not that its existing deferred tax assets would be realized and in the fourth quarter of 1997 increased the beginning of the year valuation allowance for these assets by $2,393,000. At December 28, 1997, the Company has recorded a valuation allowance for deferred tax assets of $3,865,000. Approximately $12 million of future taxable income would be needed to realize the Company's tax credit and net 12 13 operating loss carryforwards at December 28, 1997. These carryforwards expire in the years 1998 through 2012. Approximately $2,250,000 of taxable income would be needed to realize the carryforwards which expire in 1998 and $2,000,000 to use those which expire in 1999. LIQUIDITY AND CAPITAL RESOURCES The Company's primary need for capital has historically been and is expected to continue to be capital expenditures for the development of new restaurants. Capital expenditures totaled $16,619,000, $22,589,000 and $20,255,000 for 1997, 1996 and 1995, respectively, and were primarily for the development of new J. Alexander's restaurants. Also included in these amounts were capital expenditures for the Wendy's division of $1,717,000 for 1996 and $4,640,000 for 1995 which included facilities upgrades and miscellaneous equipment replacements as well as the development of three new restaurants in 1995. The Company's capital expenditures for new restaurants have significantly exceeded the cash flow generated from operations for the last three years, with the difference being funded primarily by the use of funds on hand at the beginning of 1995, proceeds from the sale of the Company's Wendy's operations in 1996 and use of the Company's bank line of credit. The Company plans to continue to develop new J. Alexander's restaurants, but at a reduced rate, at least for the present. Two restaurants, both of which will be on leased land, will be opened in 1998 and a like number is tentatively planned for 1999. The average cost of constructing a J. Alexander's building in 1997 was approximately $2,000,000. A lower cost building, which is expected to cost approximately $1,500,000, has been developed by the Company for use in selected markets. The first of these buildings is under construction and will open in 1998. The cost of equipping a J. Alexander's restaurant is approximately $625,000 to $675,000. The principal variable in the cost of a restaurant is the decision of whether to own or lease a restaurant site and, if the decision is to own, the cost of land in the particular market. In general, the Company prefers to own its sites because of the long-term value of owning the assets. For restaurants opened during 1997, the cost of land ranged from $800,000 to $1,150,000. In addition, site preparation and improvement costs are expected to range from approximately $275,000 to $350,000 per restaurant. Management estimates that total capital expenditures for the Company for 1998 will be $4 million to $6 million, the variance depending primarily on the amount, if any, spent for restaurants to be opened in 1999. In 1997 the Company utilized most of its cash and cash equivalents on hand at the beginning of the year and a portion of its line of credit for the development of new restaurants. The use of substantial amounts of cash and cash equivalents for new restaurant development in 1997 resulted in a working capital deficit of $6,536,000 at December 28, 1997. In 1997 the Company had a cash flow deficit from operations of $2,150,000 primarily resulting from payment of accrued expenses associated with the Wendy's operations and the results of operations of the Company's J. Alexander's restaurants. The Company does not believe that this deficit impairs the overall financial condition of the Company because it expects cash flow from operations to improve as its results from operations improve and to be adequate to meet current obligations, including a scheduled sinking fund payment of $1,864,000 in 1998 on its Convertible Subordinated Debentures. Certain of the Company's expenses, particularly depreciation and amortization, do not require current outlays of cash. Also, requirements for funding accounts receivable and inventories are relatively insignificant; thus virtually all cash generated by operations is available to meet current obligations. The Company maintains a bank line of credit which is expected to be used as the Company's primary means for funding of capital expenditures in 1998 and 1999 and which will also provide liquidity for meeting working capital or other needs. At December 28, 1997, borrowings outstanding under this line of credit were $6,223,000. As a result of the reduction in the Company's plans for new restaurant development, the Company's loan agreement was amended in March of 1998 to reduce the commitment amount from $30 million to $20 million. In addition, because the Company would not have complied with one of the covenants in the credit agreement, that covenant was deleted. In its place, the Company and the bank lender agreed on certain new covenants which require the Company to achieve specified results of operations and specified levels of EBITDA (earnings before interest, taxes, depreciation and amortization) to senior debt. Based on the Company's current assessment of its business, the Company believes it will comply with those new covenants. The amendments to the credit agreement contain certain limitations on capital expenditures and restaurant development by the Company (generally limiting the Company to the development of two new restaurants per year) and restrict the Company's ability to incur additional debt outside the bank line of credit. The interest rate on borrowings under the line of credit following the execution of the amendment will be LIBOR plus three percent. The line of credit was extended through July 1, 2000 and includes an option to convert outstanding borrowings to a term loan at that time. The Company believes that amounts available for borrowing under the line of credit will be sufficient to fund the development of J. Alexander's restaurants for 1998 and 1999. 13 14 IMPACT OF ACCOUNTING CHANGES There are no pending accounting pronouncements that, when adopted, are expected to have a material effect on the Company's results of operations or its financial condition. IMPACT OF THE YEAR 2000 ISSUE The Company has completed an initial assessment of its Year 2000 information systems compliance issues and is in the process of implementing a plan to deal with these issues. Since most of the Company's internal computer applications have been recently developed or upgraded and none are main frame driven, management believes that they generally are or will be Year 2000 compliant. The Company does not expect that the cost of Year 2000 compliance issues will have a material impact on its results of operations. IMPACT OF INFLATION AND OTHER FACTORS Virtually all of the Company's costs and expenses are subject to normal inflationary pressures and the Company is continually seeking ways to cope with their impact. By owning a number of its properties, the Company avoids certain increases in occupancy costs. New and replacement assets will likely be acquired at higher costs but this will take place over many years. In general, the Company tries to offset increased costs and expenses through additional improvements in operating efficiencies and by increasing menu prices over time, as permitted by competition and market conditions. RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS The foregoing discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. All references are to fiscal years unless otherwise noted. The forward-looking statements included in Management's Discussion and Analysis of Financial Condition and Results of Operations relating to certain matters involve risks and uncertainties, including anticipated financial performance, business prospects, anticipated capital expenditures and other similar matters, which reflect management's best judgment based on factors currently known. Actual results and experience could differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements as a result of a number of factors, including but not limited to those discussed in the Company's Annual Report on Form 10-K. Forward-looking information provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. In addition, the Company disclaims any intent or obligation to update these forward-looking statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX OF FINANCIAL STATEMENTS
Page ---- Independent Auditors' Report 15 Consolidated statements of operations - Years ended December 28, 1997, December 29, 1996 and December 31, 1995. 16 Consolidated balance sheets - December 28, 1997 and December 29, 1996 17 Consolidated statements of cash flows - Years ended December 28, 1997, December 29, 1996 and December 31, 1995 18 Consolidated statements of stockholders' equity - Years ended December 28, 1997, December 29, 1996 and December 31, 1995 19 Notes to consolidated financial statements 20-30
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 15 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders J. Alexander's Corporation We have audited the accompanying consolidated balance sheets of J. Alexander's Corporation and subsidiaries as of December 28, 1997 and December 29, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended December 28, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of J. Alexander's Corporation and subsidiaries at December 28, 1997 and December 29, 1996, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note A to the financial statements, the Company changed its method of accounting for pre-opening costs in 1997. Ernst & Young LLP Nashville, Tennessee March 27, 1998 15 16 CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended - ---------------------------------------------------------------------------------------------------------------- DECEMBER 28 December 29 December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- Net sales $57,138,000 $90,879,000 $79,288,000 Costs and expenses: Cost of sales 19,480,000 31,969,000 27,707,000 Restaurant labor and related costs 18,871,000 27,374,000 23,155,000 Depreciation and amortization of restaurant property and equipment 2,860,000 2,958,000 2,940,000 Royalties - 1,952,000 2,149,000 Other operating expenses 10,813,000 14,410,000 11,626,000 - ---------------------------------------------------------------------------------------------------------------- Total restaurant operating expenses 52,024,000 78,663,000 67,577,000 - ---------------------------------------------------------------------------------------------------------------- Income from restaurant operations 5,114,000 12,216,000 11,711,000 General and administrative expenses 5,793,000 7,100,000 6,778,000 Pre-opening expense 1,580,000 1,503,000 658,000 Gain on Wendy's disposition 669,000 9,400,000 - - ---------------------------------------------------------------------------------------------------------------- Operating income (loss) (1,590,000) 13,013,000 4,275,000 - ---------------------------------------------------------------------------------------------------------------- Other income (expense): Interest expense (1,030,000) (1,647,000) (1,416,000) Interest income 186,000 107,000 579,000 Other, net 13,000 (22,000) 20,000 - ---------------------------------------------------------------------------------------------------------------- Total other income (expense) (831,000) (1,562,000) (817,000) - ---------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (2,421,000) 11,451,000 3,458,000 Income tax (provision) benefit (2,685,000) (4,243,000) 1,558,000 - ---------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of change in accounting principle (5,106,000) 7,208,000 5,016,000 Cumulative effect of change in accounting principle (885,000) - - - ---------------------------------------------------------------------------------------------------------------- Net income (loss) $(5,991,000) $ 7,208,000 $ 5,016,000 ================================================================================================================ Basic earnings per share: Income (loss) before accounting change $ (.95) $ 1.36 $ .95 Cumulative effect of change in accounting principle (.16) - - - ---------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1.11) $ 1.36 $ .95 ================================================================================================================ Diluted earnings per share: Income (loss) before accounting change $ (.95) $ 1.26 $ .92 Cumulative effect of change in accounting principle (.16) - - - ---------------------------------------------------------------------------------------------------------------- Net income (loss) $ (1.11) $ 1.26 $ .92 ================================================================================================================
See notes to consolidated financial statements. 16 17 CONSOLIDATED BALANCE SHEETS
DECEMBER 28 December 29 1997 1996 - ------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS Cash and cash equivalents $134,000 $12,549,000 Accounts and notes receivable, including current portion of direct financing leases, net of allowances for possible losses 241,000 120,000 Inventories at lower of cost (first-in, first-out method) or market 689,000 534,000 Deferred income taxes 400,000 1,364,000 Net assets held for disposal 156,000 618,000 Prepaid expenses and other current assets 387,000 369,000 - ------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 2,007,000 15,554,000 OTHER ASSETS Direct financing leases, net of unearned income of $142,000 and $146,000 at December 28, 1997, and December 29, 1996, respectively, and current portion 236,000 293,000 Other 931,000 904,000 - ------------------------------------------------------------------------------------------------------------------ 1,167,000 1,197,000 PROPERTY AND EQUIPMENT, at cost, less allowances for depreciation and amortization 60,573,000 47,016,000 DEFERRED INCOME TAXES - 1,429,000 DEFERRED CHARGES, less accumulated amortization of $875,000 and $2,326,000 at December 28, 1997, and December 29, 1996, respectively 674,000 1,631,000 - ------------------------------------------------------------------------------------------------------------------ $64,421,000 $66,827,000 ================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $3,573,000 $3,748,000 Accrued expenses and other current liabilities 3,048,000 6,023,000 Current portion of long-term debt and obligations under capital leases 1,922,000 54,000 - ------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 8,543,000 9,825,000 LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES, net of portion classified as current 20,231,000 15,930,000 DEFERRED COMPENSATION AND OTHER DEFERRED CREDITS 652,000 611,000 STOCKHOLDERS' EQUITY Common Stock, par value $.05 per share: Authorized 10,000,000 shares; issued and outstanding 5,421,538 and 5,322,507 shares at December 28, 1997, and December 29, 1996, respectively 272,000 266,000 Preferred Stock, no par value: Authorized 1,000,000 shares; none issued - - Additional paid-in capital 29,909,000 29,475,000 Retained earnings 5,757,000 11,748,000 - ------------------------------------------------------------------------------------------------------------------ 35,938,000 41,489,000 Note receivable - Employee Stock Ownership Plan (943,000) (1,028,000) - ------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 34,995,000 40,461,000 Commitments and Contingencies - ------------------------------------------------------------------------------------------------------------------ $64,421,000 $66,827,000 ==================================================================================================================
See notes to consolidated financial statements. 17 18 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended - ---------------------------------------------------------------------------------------------------------------- DECEMBER 28 December 29 December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(5,991,000) $7,208,000 $5,016,000 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization of property and equipment 3,004,000 3,096,000 3,033,000 Cumulative effect of change in accounting principle 885,000 - - Amortization of deferred charges 134,000 1,578,000 611,000 Employee Stock Ownership Plan expense 85,000 - 172,000 Gain on Wendy's disposition (669,000) (9,400,000) - Deferred income tax provision (benefit) 2,393,000 2,441,000 (1,782,000) Other, net 41,000 195,000 192,000 Changes in assets and liabilities: (Increase) decrease in accounts receivable (58,000) 135,000 (147,000) Increase in inventories (155,000) (78,000) (271,000) (Increase) decrease in prepaid expenses and other current assets (18,000) 115,000 (269,000) Increase in deferred charges (61,000) (1,377,000) (1,111,000) Increase in accounts payable 687,000 4,000 615,000 (Decrease) increase in accrued expenses and other current liabilities (2,468,000) (634,000) 1,432,000 Increase in deferred credits 41,000 110,000 95,000 - ---------------------------------------------------------------------------------------------------------------- Net cash (used) provided by operating activities (2,150,000) 3,393,000 7,586,000 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (17,481,000) (22,132,000) (20,909,000) Proceeds from sale of Wendy's restaurant operations 625,000 28,764,000 - Proceeds from maturities and sales of investments - 505,000 1,005,000 Other, net (17,000) (78,000) (37,000) - ---------------------------------------------------------------------------------------------------------------- Net cash (used) provided by investing activities (16,873,000) 7,059,000 (19,941,000) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds under bank line of credit agreement 11,614,000 12,544,000 - Payments under bank line of credit agreement (5,391,000) (12,544,000) - Payments on long-term debt and obligations under capital leases (55,000) (415,000) (393,000) Sale of stock and exercise of stock options 440,000 278,000 180,000 - ---------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 6,608,000 (137,000) (213,000) - ---------------------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (12,415,000) 10,315,000 (12,568,000) Cash and cash equivalents at beginning of year 12,549,000 2,234,000 14,802,000 - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 134,000 $12,549,000 $2,234,000 ================================================================================================================
See notes to consolidated financial statements. 18 19 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 1, 1995 5,240,481 $262,000 $28,718,000 $(476,000) $(1,200,000) $27,304,000 Exercise of stock options, including tax benefits, and sale of stock under Employee Stock Purchase Plan 36,491 2,000 481,000 - - 483,000 Reduction of note receivable- Employee Stock Ownership Plan - - - - 172,000 172,000 Net income - - - 5,016,000 - 5,016,000 - ------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 31, 1995 5,276,972 264,000 29,199,000 4,540,000 (1,028,000) 32,975,000 Exercise of stock options, including tax benefits, and sale of stock under Employee Stock Purchase Plan 45,535 2,000 276,000 - - 278,000 Net income - - - 7,208,000 - 7,208,000 - ------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 29, 1996 5,322,507 266,000 29,475,000 11,748,000 (1,028,000) 40,461,000 Exercise of stock options, including tax benefits, and sale of stock under Employee Stock Purchase Plan 99,031 6,000 434,000 - - 440,000 Reduction of note receivable- Employee Stock Ownership Plan - - - - 85,000 85,000 Net loss - - - (5,991,000) - (5,991,000) - ------------------------------------------------------------------------------------------------------------------- BALANCES AT DECEMBER 28, 1997 5,421,538 $272,000 $29,909,000 $5,757,000 $(943,000) $34,995,000 ===================================================================================================================
See notes to consolidated financial statements. 19 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made in the prior years' consolidated financial statements to conform to the 1997 presentation. FISCAL YEAR: The Company's fiscal year ends on the Sunday closest to December 31 and each quarter consists of thirteen weeks. CASH EQUIVALENTS: Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. Cash equivalents of $10,066,000 at December 29, 1996 consisted principally of commercial paper, banker's acceptances and federal government agency securities and were carried at cost, which approximates fair value. PROPERTY AND EQUIPMENT: Depreciation and amortization are provided on the straight-line method over the following estimated useful lives: buildings - 20 to 25 years, restaurant and other equipment - three to 10 years, and capital leases and leasehold improvements - lesser of life of assets or terms of leases. DEFERRED CHARGES: Costs in excess of net assets acquired are being amortized over 40 years using the straight-line method. Debt issue costs are amortized principally by the interest method over the life of the related debt. INCOME TAXES: The Company accounts for income taxes under the liability method required by Statement of Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". SFAS No. 109 requires that deferred tax assets and liabilities be established based on the difference between the financial statement and income tax bases of assets and liabilities measured at tax rates that will be in effect when the differences reverse. EARNINGS PER SHARE: In 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings Per Share". SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to the requirements of SFAS No. 128. PRE-OPENING COSTS: Effective December 30, 1996, the Company changed its method of accounting for pre-opening costs to expense these costs as incurred and recorded the cumulative effect of this change in accounting principle resulting in an after tax charge of $885,000 ($.16 per share) in fiscal 1997. The impact in fiscal 1997 in addition to the cumulative effect was to decrease net income by $282,000 ($.05 per share). The pro forma effect of the change in accounting for pre-opening costs would have been to decrease net income by $511,000 ($.09 per share) for the year ended December 29, 1996 and increase net income by $93,000 ($.02 per share) for the year ended December 31, 1995. The Company believes expensing pre-opening costs as incurred is preferable because the future economic benefits resulting from costs of pre-opening activities have indeterminate lives and, therefore, any related amortization periods would be arbitrary. Prior to fiscal 1996, pre-opening costs associated with the start-up of new restaurants were deferred and amortized over the restaurant's first 12 months (Wendy's) or 24 months (J. Alexander's) of operations. During the fourth quarter of 1996, the Company changed its period of amortization from 24 months to 12 months relative to its J. Alexander's restaurants resulting in approximately $450,000 of additional pre-opening amortization during 1996. FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value. 20 21 Long-term debt: The carrying amount of the Company's borrowings with variable interest rates approximates their fair value. The fair value of the Company's convertible subordinated debentures was determined based on quoted market prices (see Note E). Due to the immaterial amounts involved, fair value of other fixed rate long-term debt was estimated to approximate its carrying amount. Contingent liabilities: In connection with the sale of its Mrs. Winner's Chicken & Biscuit restaurant operations and the disposition of its Wendy's restaurant operations, the Company remains secondarily liable for certain real and personal property leases. The Company does not believe it is practicable to estimate the fair value of these contingencies and does not believe any significant loss is likely. DEVELOPMENT COSTS: Certain direct and indirect costs are capitalized in conjunction with acquiring and developing new J. Alexander's restaurant sites and amortized over the life of the related building. Development costs of $307,000, $335,000 and $182,000 were capitalized during 1997, 1996 and 1995, respectively. SELF-INSURANCE: The Company is generally self-insured, subject to stop-loss limitations, for losses and liabilities related to its group medical plan and, for portions of 1995 through 1997, except for the state of Ohio, for workers' compensation claims. Losses are accrued based upon the Company's estimates of the aggregate liability for claims incurred using certain estimation processes applicable to the insurance industry and, where applicable, based on Company experience. ADVERTISING COSTS: The Company charges costs of production and distribution of advertising to expense at the time the costs are incurred. Advertising expense was $255,000, $1,778,000 and $1,980,000 in 1997, 1996 and 1995, respectively. STOCK BASED COMPENSATION: The Company accounts for its stock compensation arrangements in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" and, accordingly, typically recognizes no compensation expense for such arrangements. USE OF ESTIMATES IN FINANCIAL STATEMENTS: Judgment and estimation are utilized by management in certain areas in the preparation of the Company's financial statements. Some of the more significant areas include the valuation allowance relative to the Company's deferred tax assets, reserves for self-insurance of group medical claims and workers' compensation benefits and, for 1996 and 1997, accruals related to the exit of the Wendy's business. Management believes that such estimates have been based on reasonable assumptions and that such reserves are adequate. IMPAIRMENT: SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Accordingly, when indicators of impairment are present, the Company periodically evaluates the carrying value of property and equipment and intangibles. NOTE B - SALE OF WENDY'S RESTAURANT OPERATIONS In 1996, the Company sold 52 of its 58 Wendy's Old Fashioned Hamburgers restaurants to Wendy's International, Inc. for $28.3 million in cash plus the assumption of capitalized lease obligations and long-term debt totaling approximately $2.5 million. This transaction generated a pre-tax gain of $9.4 million in 1996. The six restaurants not sold as part of the November 1996 transaction were sold or closed. In connection with the sale of its Wendy's restaurants, the Company established various accruals for termination benefits and other costs associated with its exit from the Wendy's business, with such accruals totaling $2,029,000 at December 29, 1996. During 1997, the Company made net cash payments of $833,000 related to these accruals. In addition, the Company recognized $669,000 in additional gains related to the Wendy's divestiture during 1997, primarily due to the sale of two properties for amounts greater than their carrying values, a favorable insurance settlement and other adjustments to the accruals established during 1996. At December 28, 1997, the Company continues to maintain accruals related to the exit of the Wendy's business totaling $527,000. 21 22 NOTE C - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
YEARS ENDED - ------------------------------------------------------------------------------------------------------------------- DECEMBER 28 December 29 December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- NUMERATOR: Income (loss) before cumulative effect of change in accounting principle $(5,106,000) $7,208,000 $5,016,000 Cumulative effect of change in accounting principle (885,000) - - - ------------------------------------------------------------------------------------------------------------------- Net income (loss) (numerator for basic earnings per share) (5,991,000) 7,208,000 5,016,000 Effect of dilutive securities - 799,000 - - ------------------------------------------------------------------------------------------------------------------- Net income (loss) after assumed conversions (numerator for diluted earnings per share) $(5,991,000) $8,007,000 $5,016,000 =================================================================================================================== DENOMINATOR: Weighted average shares (denominator for basic earnings per share) 5,409,000 5,303,000 5,257,000 Effect of dilutive securities: Employee stock options - 167,000 221,000 Convertible debentures - 880,000 - - ------------------------------------------------------------------------------------------------------------------- Dilutive potential common shares - 1,047,000 221,000 - ------------------------------------------------------------------------------------------------------------------- Adjusted weighted average shares and assumed conversions (denominator for diluted earnings per share) 5,409,000 6,350,000 5,478,000 =================================================================================================================== Basic earnings per share: Income (loss) before accounting change $(0.95) $1.36 $0.95 Cumulative effect of change in accounting principle (0.16) - - - ------------------------------------------------------------------------------------------------------------------- Net income (loss) $(1.11) $1.36 $0.95 =================================================================================================================== Diluted earnings per share: Income (loss) before accounting change $(0.95) $1.26 $0.92 Cumulative effect of change in accounting principle (0.16) - - - ------------------------------------------------------------------------------------------------------------------- Net income (loss) $(1.11) $1.26 $0.92 ===================================================================================================================
For additional disclosures regarding the Convertible Subordinated Debentures and the employee stock options, see Notes E and H, respectively. In situations where the exercise price of outstanding options is greater than the average market price of common shares, such options are excluded from the computation of diluted earnings per share because of their antidilutive impact. Due to the net loss in 1997, all 664,650 options outstanding were excluded from the computation of diluted earnings per share. For 1996 and 1995, options to purchase approximately 203,000 and 64,000 shares of common stock, respectively, ranging in price from $7.50 to $13.00, were excluded from the computation of diluted earnings per share due to their antidilutive effect. NOTE D - PROPERTY AND EQUIPMENT Balances of major classes of property and equipment are as follows: 22 23
DECEMBER 28 December 29 1997 1996 - ------------------------------------------------------------------------------------------------------------------- Land $13,033,000 $ 9,696,000 Buildings 30,637,000 21,482,000 Buildings under capital leases 276,000 276,000 Leasehold improvements 8,284,000 5,901,000 Restaurant and other equipment 12,612,000 10,165,000 Construction in progress (estimated additional cost to complete at December 28, 1997, $2,208,000) 3,053,000 4,063,000 - ------------------------------------------------------------------------------------------------------------------- 67,895,000 51,583,000 Less allowances for depreciation and amortization 7,322,000 4,567,000 - ------------------------------------------------------------------------------------------------------------------- $60,573,000 $47,016,000 ===================================================================================================================
NOTE E - LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES Long-term debt and obligations under capital leases at December 28, 1997, and December 29, 1996, are summarized below:
DECEMBER 28, 1997 December 29, 1996 - ------------------------------------------------------------------------------------------------------------------- CURRENT LONG-TERM Current Long-Term - ------------------------------------------------------------------------------------------------------------------- Convertible Subordinated Debentures, 8.25%, due 2003 $1,864,000 $13,750,000 $ - $15,614,000 Bank credit agreement, at variable interest rates ranging from 7.14% to 7.19%, available through 07/01/2000 - 6,223,000 - - Obligations under capital leases, 9.75% to 11.50% interest, payable through 2005 58,000 258,000 54,000 316,000 - ------------------------------------------------------------------------------------------------------------------- $1,922,000 $20,231,000 $54,000 $15,930,000 ===================================================================================================================
Aggregate maturities of long-term debt, including required sinking fund payments, for the five years succeeding December 28, 1997, are as follows: 1998 - - $1,864,000; 1999 - $1,875,000; 2000 - $8,098,000; 2001 - $1,875,000; 2002 - $1,875,000. The Convertible Subordinated Debentures due 2003 are convertible into common stock of the Company at any time prior to maturity at $17.75 per share, subject to adjustment in certain events. At December 28, 1997, 879,662 shares of common stock were reserved for issuance upon conversion of the outstanding debentures. The debentures are redeemable upon not less than 30 days' notice at the option of the Company, in whole or in part, at 100% of the principal amount, together with accrued interest to the redemption date. The effective interest rate on the debentures is 8.68%. The Debenture Indenture provides for annual sinking fund payments commencing June 1, 1993, which will retire at least 75% of the original $25,000,000 principal amount of debentures prior to maturity. The Company has previously purchased a portion of the debentures on the open market which, pursuant to the terms of the Debenture Indenture, were used in satisfaction of sinking fund requirements and were sufficient to satisfy those requirements through 1997. During 1995, the Company entered into an unsecured bank line of credit agreement for up to $30,000,000 of revolving credit for the purpose of financing future capital expenditures. At December 28, 1997, borrowings outstanding under this line of credit totaled $6,223,000. No borrowings were outstanding under the agreement at December 29, 1996. As a result of the reduction in the Company's plans for new restaurant development, the original loan agreement was amended in March of 1998 to reduce the commitment amount from $30 million to $20 million. In addition, because the Company would not have complied with one of the covenants in the credit agreement, that covenant was deleted. In its place, the Company and the bank lender agreed on certain new covenants which 23 24 require the Company to achieve specified results of operations and specified levels of EBITDA (earnings before interest, taxes, depreciation and amortization) to senior debt. The amendment to the credit agreement also contains certain limitations on capital expenditures and restaurant development by the Company (generally limiting the Company to the development of two new restaurants per year) and restricts the Company's ability to incur additional debt outside the bank line of credit. The interest rate on borrowings under the line of credit following the execution of the amendment is LIBOR plus three percent. In addition, a fee of 1/2% on any unused portion of the facility is payable on a quarterly basis. The line of credit was extended through July 1, 2000 and includes an option to convert outstanding borrowings to a term loan at that time. Cash interest payments amounted to $1,483,000, $2,033,000 and $1,732,000, in 1997, 1996 and 1995, respectively. Interest costs of $453,000, $386,000 and $316,000 were capitalized as part of building and leasehold costs in 1997, 1996, and 1995, respectively. The carrying value and estimated fair value of the Company's long-term debt totaled $15,614,000 and $14,053,000, respectively, at December 28, 1997. NOTE F - LEASES At December 28, 1997, the Company was lessee under both ground leases (the Company leases the land and builds its own buildings) and improved leases (lessor owns the land and buildings) for restaurant locations. These leases are generally operating leases. Real estate lease terms are generally for 15 to 25 years and, in many cases, provide for rent escalations and for one or more five-year renewal options. The Company is generally obligated for the cost of property taxes, insurance and maintenance. Certain real property leases provide for contingent rentals based upon 5% of net sales. In addition, the Company is lessee under other noncancellable operating leases, principally for office space. Accumulated amortization of buildings under capital leases totaled $215,000 at December 28, 1997, and $201,000 at December 29, 1996. Amortization of leased assets is included in depreciation and amortization expense. Total rental expense amounted to:
Years Ended - -------------------------------------------------------------------------------------------------------------- DECEMBER 28 December 29 December 31 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- Minimum rentals under operating leases $1,218,000 $1,996,000 $1,800,000 Contingent rentals 63,000 366,000 395,000 Less: Sublease rentals (260,000) (264,000) (313,000) - -------------------------------------------------------------------------------------------------------------- $1,021,000 $2,098,000 $1,882,000 ==============================================================================================================
At December 28, 1997, future minimum lease payments under capital leases and noncancellable operating leases with initial terms of one year or more are as follows:
Capital Operating Leases Leases - -------------------------------------------------------------------------------------------------------------- 1998 $89,000 $1,393,000 1999 69,000 1,399,000 2000 56,000 1,415,000 2001 56,000 1,434,000 2002 55,000 1,353,000 Thereafter 118,000 12,252,000 - -------------------------------------------------------------------------------------------------------------- Total minimum payments 443,000 $19,246,000 - -------------------------------------------------------------------------------------------------------------- Less imputed interest (127,000) - -------------------------------------------------------------------------------------------------------------- Present value of minimum rental payments 316,000 Less current maturities at December 28, 1997 (58,000) - -------------------------------------------------------------------------------------------------------------- Long-term obligations at December 28, 1997 $258,000 ==============================================================================================================
24 25 Minimum future rentals receivable under subleases for operating leases at December 28, 1997, amounted to $1,743,000. In addition to the leases summarized above, the Company previously leased five Wendy's restaurant properties from a corporation principally owned by a Director of the Company and his wife at an aggregate minimum annual rental of approximately $265,000 plus contingent rentals based on sales. Contingent rent payments totaled $43,000 and $49,000 in 1996 and 1995, respectively. These leases were assigned to Wendy's International, Inc. in November 1996. NOTE G - INCOME TAXES At December 28, 1997, the Company had net operating loss carryforwards of $6,226,000 for income tax purposes that expire in the years 2000 through 2012. Tax credit carryforwards (consisting primarily of investment and jobs tax credits which expire in the years 1998 through 2001 and FICA tips credits which expire in the years 2009 through 2012) of $1,982,000 are also available to reduce future federal income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of December 28, 1997, and December 29, 1996, are as follows:
DECEMBER 28 December 29 1997 1996 - -------------------------------------------------------------------------------------------------------------- Deferred tax liabilities: Tax over book depreciation $ 423,000 $ 653,000 Pre-opening costs - 301,000 Other - net 525,000 538,000 - -------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 948,000 1,492,000 - -------------------------------------------------------------------------------------------------------------- Deferred tax assets: Capital/finance leases 7,000 8,000 Deferred compensation accruals 172,000 178,000 Self-insurance accruals 99,000 67,000 Wendy's disposition accruals 60,000 927,000 Net operating loss carryforwards 2,117,000 968,000 Tax credit carryforwards 1,982,000 1,840,000 Other - net 776,000 297,000 - -------------------------------------------------------------------------------------------------------------- Total deferred tax assets 5,213,000 4,285,000 Valuation allowance for deferred tax assets (3,865,000) - - -------------------------------------------------------------------------------------------------------------- 1,348,000 4,285,000 - -------------------------------------------------------------------------------------------------------------- Net deferred tax assets $ 400,000 $2,793,000 ==============================================================================================================
SFAS No. 109 establishes procedures to measure deferred tax assets and liabilities and assess whether a valuation allowance relative to existing deferred tax assets is necessary. Prior to 1993, the Company maintained a valuation allowance at an amount necessary to fully reserve its net deferred tax asset balances, after giving consideration to deferred tax assets that can be realized through offsets to existing taxable temporary differences. In the fourth quarter of 1995, 1994 and 1993, the beginning of the year valuation allowance was reduced in order to reflect a change in circumstances which resulted in a judgment that a corresponding amount of the Company's deferred tax assets would be realized in future years. The 1995 adjustment totaled $2,085,000, of which $303,000 was credited to additional paid-in capital. Management evaluated the need for a valuation allowance for deferred tax assets for 1996 and concluded that all of the deferred tax assets would more likely than not be realized through the future reversal of existing taxable temporary differences within their carryforward period and the future earnings of the Company and, as a result, a valuation allowance was not considered appropriate as of December 29, 1996. 25 26 In the fourth quarter of 1997, management concluded that, based upon results of operations during 1997 and its near-term forecast of future taxable earnings, a valuation allowance was appropriate relative to its deferred tax assets as of December 28, 1997. The beginning of the year valuation allowance was increased by $2,393,000 which, when combined with the impact of 1997's operations, resulted in a valuation allowance of $3,865,000 at December 28, 1997. Net deferred tax assets of $400,000 as of December 28, 1997 represent estimated refunds available through carryback of net operating losses generated in fiscal 1997. Significant components of the income tax provision (benefit) are as follows:
Years Ended - ------------------------------------------------------------------------------------------------------------------- DECEMBER 28 December 29 December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Currently payable: Federal $31,000 $1,100,000 $80,000 State 261,000 702,000 144,000 - ------------------------------------------------------------------------------------------------------------------- Total 292,000 1,802,000 224,000 Deferred 2,393,000 2,441,000 (1,782,000) - ------------------------------------------------------------------------------------------------------------------- Income tax provision (benefit) $2,685,000 $4,243,000 $(1,558,000) ===================================================================================================================
The Company's consolidated effective tax rate differed from the federal statutory rate as set forth in the following table:
Years Ended - ------------------------------------------------------------------------------------------------------------------- DECEMBER 28 December 29 December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Tax expense (benefit) computed at federal statutory rate (34%) $(1,124,000) $3,893,000 $1,176,000 State and local income taxes 172,000 463,000 144,000 Alternative minimum tax - - 80,000 Non-deductible expenses 98,000 121,000 19,000 Benefit of net operating loss carryforwards and tax credits (326,000) (234,000) (1,195,000) Valuation (recognition) of deferred tax assets 3,865,000 - (1,782,000) - ------------------------------------------------------------------------------------------------------------------- Income tax provision (benefit) $ 2,685,000 $4,243,000 $(1,558,000) ===================================================================================================================
Income tax payments were $1,126,000, $1,098,000 and $175,000 in 1997, 1996 and 1995, respectively. NOTE H - STOCK OPTIONS AND BENEFIT PLANS Under the Company's 1994 Employee Stock Incentive Plan, officers and key employees of the Company may be granted options to purchase shares of the Company's common stock. In addition, the 1990 Stock Option Plan for Outside Directors provides for the granting of options to purchase the Company's common stock at the fair market price at the date of the grant to members of the Company's Board of Directors who are not employees. Options to purchase the Company's common stock also remain outstanding under the Company's 1982 Incentive Stock Option Plan and 1985 Stock Option Plan, although the Company no longer has the ability to grant additional options under these plans. A summary of options under the Company's option plans is as follows:
Weighted Average Exercise Options Shares Option Prices Price - ------------------------------------------------------------------------------------------------------------------- Outstanding at January 1, 1995 441,424 $1.38- $13.00 $5.71 Issued 146,700 7.56- 9.75 9.63 Exercised (15,166) 1.38- 7.63 1.95 Expired or canceled (10,250) 7.25- 11.50 9.39 - -------------------------------------------------------------------------------------------------------------------
26 27 Outstanding at December 31, 1995 562,708 1.38- 13.00 6.85 Issued 5,000 9.88 9.88 Exercised (26,521) 1.38- 7.25 4.96 Expired or canceled (11,900) 7.25- 10.38 9.20 - ------------------------------------------------------------------------------------------------------------------- Outstanding at December 29, 1996 529,287 1.38- 13.00 6.83 Issued 326,600 5.69- 8.75 6.79 Exercised (93,419) 1.38- 7.63 4.19 Expired or canceled (97,818) 7.38- 11.69 7.58 - ------------------------------------------------------------------------------------------------------------------- Outstanding at December 28, 1997 664,650 $1.50- $13.00 $6.75 ===================================================================================================================
Options exercisable and shares available for future grant are as follows:
DECEMBER 28 December 29 December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Options exercisable 269,439 380,734 313,393 Shares available for grant 218,384 228,850 226,450 ===================================================================================================================
The following table summarizes information about stock options outstanding at December 28, 1997:
Options Outstanding Options Exercisable - ------------------------------------------------------------------------------ -------------------------------- Number Number Outstanding at Weighted Weighted Exercisable at Weighted Range of December 28 Average Remaining Average Exercise December 28 Average Exercise Prices 1997 Contractual Life Price 1997 Exercise Price - ------------------------------------------------------------------------------ -------------------------------- $1.50- $3.81 111,500 2.2 years $1.69 111,500 $1.69 5.69 204,250 9.9 years 5.69 - - 7.25- 7.88 79,750 6.6 years 7.43 69,756 7.43 8.19- 8.75 117,350 9.2 years 8.64 - - 9.75- 10.50 146,300 6.9 years 10.00 82,683 10.20 11.69- 13.00 5,500 6.3 years 12.05 5,500 12.05 - ------------------------------------------------------------------------------ -------------------------------- $ 1.50- $13.00 664,650 269,439 ============================================================================== ================================
Options exercisable at December 29, 1996 and December 31, 1995 had weighted average exercise prices of $6.02 and $4.94, respectively. In 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock Based Compensation". This standard defines a fair value based method of accounting for an employee stock option or similar equity instrument. This statement gives entities a choice of recognizing related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under Accounting Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to Employees", the former standard. The Company has elected to follow APB No. 25 and related Interpretations in accounting for its stock compensation plans because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 6.04%, 6.85% and 6.43%; no annual dividend yield; volatility factors of .3619, .3812 and .3849 based on monthly closing prices since August, 1990; and an expected option life of 10 years. 27 28 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
Years Ended - ------------------------------------------------------------------------------------------------------------------- DECEMBER 28 December 29 December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Pro forma net income (loss) $(6,503,000) $7,009,000 $4,889,000 Pro forma earnings per share Basic $ (1.20) $ 1.32 $ .93 Diluted $ (1.20) $ 1.23 $ .89
The weighted average fair value per share for options granted during 1997, 1996 and 1995 was $4.09, $6.27 and $6.05, respectively. The Company has an Employee Stock Purchase Plan under which 75,547 shares of the Company's common stock are available for issuance. Shares issued under the plan totaled 15,760, 19,014 and 21,355, in 1997, 1996, and 1995, respectively. The Company has a Salary Continuation Plan which provides retirement and death benefits to certain key employees. The expense recognized under this plan was $113,000, $67,000 and $61,000 in 1997, 1996 and 1995, respectively. The Company has a Savings Incentive and Salary Deferral Plan under Section 401(k) of the Internal Revenue Code which allows qualifying employees to defer a portion of their income on a pre-tax basis through contributions to the plan. All Company employees with at least 1,000 hours of service during the twelve month period subsequent to their hire date, or any calendar year thereafter, and who are at least 21 years of age are eligible to participate. For each dollar of participant contributions, up to 3% of each participant's salary, the Company makes a minimum 10% matching contribution to the plan. The Company's matching contribution for 1997 totaled $22,000, or 25% of eligible participant contributions. For 1996 and 1995, the Company made a 20% matching contribution to the plan and recognized expense of $24,000 and $23,000, respectively. NOTE I - EMPLOYEE STOCK OWNERSHIP PLAN In 1992, the Company established an Employee Stock Ownership Plan (ESOP) by purchasing 457,055 shares of Company common stock from the Massey Company, a trust created by the late Jack C. Massey, the Company's former Board Chairman, and the Jack C. Massey Foundation at $3.75 per share for an aggregate purchase price of $1,714,000. The Company funded the ESOP by loaning it an amount equal to the purchase price, with the loan secured by a pledge of the unallocated stock held by the ESOP. The note receivable from the ESOP has been reported as a reduction from the Company's stockholders' equity. Terms of the original ESOP note called for repayment in ten annual principal payments of approximately $172,000 plus interest on the outstanding principal balance at an annual rate of 9%. The Company made a contribution to the ESOP in 1995, allowing the ESOP to make its scheduled loan repayment to the Company and resulting in net compensation expense to the Company of $172,000 with a corresponding reduction in the ESOP note receivable. Due to the sale of its Wendy's restaurant operations, the Company elected not to make a contribution to the ESOP in 1996. As a result, no ESOP expense was reflected for that year. In 1997, the Company modified its loan to the ESOP and made a contribution to the ESOP, allowing the ESOP to make its scheduled loan repayment to the Company. This contribution resulted in net compensation expense to the Company of $85,000, with a corresponding reduction in the ESOP note receivable. The terms of the modified ESOP note call for interest at an annual rate of 10% and for repayment of the ESOP note's remaining principal in annual amounts ranging from $122,000 to $197,000 over the period 1998 through 2003. 28 29 All Company employees with at least 1,000 hours of service during the twelve month period subsequent to their hire date, or any calendar year thereafter, and who are at least 21 years of age are eligible to participate. The ESOP generally requires five years of service with the Company in order for an ESOP participant's account to vest. Allocation of stock is made to participants' accounts as the ESOP's loan is repaid and is in proportion to each participant's compensation for each year. Shares allocated under the ESOP were 229,606 and 182,822 at December 28, 1997 and December 29, 1996, respectively. For purposes of computing earnings per share, the shares originally purchased by the ESOP are included as outstanding shares in the weighted average share calculation. NOTE J - SHAREHOLDER RIGHTS PLAN The Company's Board of Directors has adopted a shareholder rights plan to protect the interests of the Company's shareholders if the Company is confronted with coercive or unfair takeover tactics by encouraging third parties interested in acquiring the Company to negotiate with the Board of Directors. The shareholder rights plan is a plan by which the Company has distributed rights ("Rights") to purchase (at the rate of one Right per share of common stock) one-hundredth of a share of no par value Series A Junior Preferred (a "Unit") at an exercise price of $12.00 per Unit. The Rights are attached to the common stock and may be exercised only if a person or group acquires 20% of the outstanding common stock or initiates a tender or exchange offer that would result in such person or group acquiring 10% or more of the outstanding common stock. Upon such an event, the Rights "flip-in" and each holder of a Right will thereafter have the right to receive, upon exercise, common stock having a value equal to two times the exercise price. All Rights beneficially owned by the acquiring person or group triggering the "flip-in" will be null and void. Additionally, if a third party were to take certain action to acquire the Company, such as a merger or other business combination, the Rights would "flip- over" and entitle the holder to acquire shares of the acquiring person with a value of two times the exercise price. The Rights are redeemable by the Company at any time before they become exercisable for $0.01 per Right and expire in 1999. In order to prevent dilution, the exercise price and number of Rights per share of common stock will be adjusted to reflect splits and combinations of, and common stock dividends on, the common stock. NOTE K - COMMITMENTS AND CONTINGENCIES As a result of the disposition of its Wendy's operations in 1996, the Company remains secondarily liable for certain real property leases with remaining terms of one to eighteen years. The total amount of lease payments remaining on these leases at December 28, 1997 was approximately $5.7 million. In connection with the sale of its Mrs. Winner's Chicken & Biscuit restaurant operations in 1989 and certain previous dispositions, the Company remains secondarily liable for certain real and personal property leases with remaining terms of one to eight years. The total amount of lease payments remaining on these leases at December 28, 1997, was approximately $2.7 million. Additionally, in connection with the previous disposition of certain other Wendy's restaurant operations, primarily the southern California Wendy's restaurants in 1982, the Company remains secondarily liable for certain real property leases with remaining terms of two to nine years. The total amount of lease payments remaining on these leases as of December 28, 1997, was approximately $1.5 million. The Company is a party to legal proceedings incidental to its business. In the opinion of management, the ultimate liability with respect to these actions will not materially affect the operating results or the financial position of the Company. NOTE L - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities included the following:
DECEMBER 28 December 29 1997 1996 - -------------------------------------------------------------------------------------------------- Taxes, other than income taxes $961,000 $ 802,000 Salaries and wages 324,000 322,000 Insurance 905,000 754,000 Interest 120,000 120,000 Wendy's disposition accruals 527,000 2,029,000 Other 211,000 1,996,000 - -------------------------------------------------------------------------------------------------- $3,048,000 $6,023,000 ==================================================================================================
29 30 NOTE M - BUSINESS SEGMENTS For the years ended December 28, 1997, December 29, 1996, and December 31, 1995, retail food operations constituted a dominant segment in accordance with SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise". QUARTERLY RESULTS OF OPERATIONS The following is a summary of the quarterly results of operations for the years ended December 28, 1997, and December 29, 1996 (dollars in thousands, except per share amounts):
1997 QUARTERS ENDED - ------------------------------------------------------------------------------------------------------------------- MARCH 30(1) JUNE 29(1) SEPTEMBER 28(1) DECEMBER 28 - ------------------------------------------------------------------------------------------------------------------- Net sales $14,032 $13,459 $14,143 $15,504 Income from restaurant operations 1,714 1,416 1,094 890 Net income $ (712)(2) $ (45)(3) $ (599)(4) $(4,635)(5) Basic earnings per share: Income (loss) before accounting change $ .03 $ (.01) $ (.11) $ (.85) Cumulative effect of change in accounting principle (.16) - - - - ------------------------------------------------------------------------------------------------------------------- Net loss $ (.13) $ (.01) $ (.11) $ (.85) =================================================================================================================== Diluted earnings per share: Income (loss) before accounting change $ .03 $ (.01) $ (.11) $ (.85) Cumulative effect of change in accounting principle (.16) - - - - ------------------------------------------------------------------------------------------------------------------- Net loss $ (.13) $ (.01) $ (.11) $ (.85) ===================================================================================================================
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(6) 6,007(7) Basic earnings per share $ .06 $ .10 $ .07 $ 1.13 Diluted earnings per share $ .06 $ .10 $ .07 $ .98
(1) Restated to reflect the change in the Company's accounting policy for pre-opening costs to expense them as incurred effective with the beginning of fiscal 1997. (2) Includes an $885 charge to earnings to reflect the cumulative effect of the change in the Company's accounting policy for pre-opening costs to expense them as incurred. (3) Includes pretax gain of $369 related to disposal of Wendy's restaurant operations in 1996. (4) Includes pretax gain of $300 related to disposal of Wendy's restaurant operations in 1996. (5) Includes deferred tax expense of $2,393 related to an adjustment of the Company's beginning of the year valuation allowance for deferred taxes in accordance with Statement of Financial Account Standards (SFAS) No. 109. (6) Includes expenses of $542 related to the disposal of Wendy's restaurant operations. Also includes no depreciation for the Wendy's restaurants, in accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", a reduction in expense of $542. (7) Includes pretax gain of $9,942 related to disposal of Wendy's restaurant operations. Also includes no depreciation for the Wendy's restaurants, a reduction in expense of $316, and an additional $458 in pre-opening expense related to a change in the amortization period for such costs, from 24 months to 12 months, during the fourth quarter of 1996. 30 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required under this item with respect to directors of the Company is incorporated herein by reference to the "Proposal No. 1: Election of Directors" section and the "Compliance with Section 16(a) of the Securities Exchange Act of 1934" section of the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders to be held May 19, 1998. (See also "Executive Officers of the Company" under Part I of this Form 10-K.) ITEM 11. EXECUTIVE COMPENSATION The information required under this item is incorporated herein by reference to the "Executive Compensation" section of the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders to be held May 19, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this item is incorporated herein by reference to the "Security Ownership of Certain Beneficial Owners and Management" section of the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders to be held May 19, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this item is incorporated herein by reference to the "Certain Relationships and Related Transactions" section of the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders to be held May 19, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) See Item 8. (a)(2) The information required under Item 14, subsection (a)(2) is set forth in a supplement filed as part of this report beginning on page F-1. (a)(3) Exhibits: (3)(a)(1) Charter (Exhibit 3(a) of the Registrant's Report on Form 10-K for the year ended December 30, 1990, is incorporated herein by reference). (3)(a)(2) Amendment to Charter dated February 7, 1997 (Exhibit (3)(a)(2) of the Registrant's Report on Form 10-K for the year ended December 29, 1996 is incorporated herein by reference). (3)(b) Bylaws as currently in effect (Exhibit 3(b) of the Registrant's Report on Form 10-K for the year ended December 30, 1990, is incorporated herein by reference). (4)(a) Form of Indenture dated as of May 19, 1983, between the Registrant and First American National Bank of Nashville, Trustee (Exhibit 4 of the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 1983, is incorporated herein by reference). 31 32 (4)(b) Rights Agreement dated May 16, 1989, by and between Registrant and NationsBank (formerly Sovran Bank/Central South) including Form of Rights Certificate and Summary of Rights (Exhibit 3 to the Report on Form 8-K dated May 16, 1989, is incorporated herein by reference). (10)(a) Employee Stock Ownership Plan (Exhibit 1 to the Registrant's Report on Form 8-K dated June 25, 1992, is incorporated herein by reference). (10)(b) Employee Stock Ownership Trust Agreement dated June 25, 1992 between Registrant and Third National Bank in Nashville. (Exhibit 2 to the Registrant's Report on Form 8-K dated June 25, 1992, is incorporated herein by reference). (10)(c) Secured Promissory Note dated June 25, 1992 from the Volunteer Capital Corporation Employee Stock Ownership Trust to Registrant (Exhibit 4 to the Registrant's Report on Form 8-K dated June 25, 1992, is incorporated herein by reference). (10)(d) Pledge and Security Agreement dated June 25, 1992, by and between Registrant and Third National Bank in Nashville as the Trustee for the Volunteer Capital Corporation Employee Stock Ownership Trust (Exhibit 5 to the Registrant's Report on Form 8-K dated June 25, 1992, is incorporated herein by reference). (10)(e) $30,000,000 Loan Agreement dated August 29, 1995 by and between Volunteer Capital Corporation, VCE Restaurants, Inc., Total Quality Management, Inc. and NationsBank of Tennessee, N.A. (Exhibit 10.1 of the Registrant's quarterly report on Form 10-Q for the quarter ended October 1, 1995 is incorporated herein by reference). (10)(f) Asset Purchase Agreement dated October 25, 1996 by and between VCE Restaurants, Inc., Volunteer Capital Corporation and Wendy's International, Inc. (Exhibit 10.1 of the Registrant's quarterly report on Form 10-Q for the quarter ended September 29, 1996 is incorporated herein by reference). (10)(g) Amended and restated secured promissory note dated November 21, 1997 from the J. Alexander's Corporation Employee Stock Ownership Trust to Registrant. (10)(h) Amendment to Loan Agreement dated March 27, 1998, by and between J. Alexander's Corporation, J. Alexander's Restaurants, Inc. and NationsBank of Tennessee, N.A. (10)(i) Line of Credit note dated March 27, 1998, by and between J. Alexander's Corporation, J. Alexander's Restaurants, Inc. and NationsBank of Tennessee, N.A. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS (10)(j) Written description of Salary Continuation Plan (description of Salary Continuation Plan included in the Registrant's Proxy Statement for Annual Meeting of Shareholders, May 10, 1994, is incorporated herein by reference). (10)(k) Form of Severance Benefits Agreement between the Registrant and Messrs. Stout and Lewis (Exhibit (10)(j) of the Registrant's Report on Form 10-K for the year ended December 31, 1989, is incorporated herein by reference). 32 33 (10)(l) 1982 Incentive Stock Option Plan (incorporated by reference to pages B-1 through B-6 of Registration Statement No 2-78140). (10)(m) Amended and restated 1982 Employee Stock Purchase Plan (incorporated by reference from the Registrant's Current Report on Form 8-K filed March 29, 1996). (10)(n) 1985 Stock Option Plan (incorporated by reference to pages 15 through 20 of the Registrant's Proxy Statement for Annual Meeting of Shareholders, May 8, 1985, and Exhibit A to the Registrant's Proxy Statement for Annual Meeting of Shareholders, May 11, 1993.) (10)(o) 1990 Stock Option Plan for Outside Directors (Exhibit A of the Registrant's Proxy Statement for Annual Meeting of Shareholders, May 8, 1990, is incorporated herein by reference). (10)(p) 1994 Employee Stock Incentive Plan (incorporated by reference to Exhibit 4(c) of Registration Statement No. 33-77476). (10)(q) Amendment to 1994 Employee Stock Incentive Plan (Appendix A of the Registrant's Proxy Statement for Annual Meeting of Shareholders, May 20, 1997, is incorporated herein by reference). (18) Letter from Independent Auditors addressing the Company's change of accounting principle related to pre-opening costs. (21) List of subsidiaries of Registrant. (23) Consent of Independent Auditors. (b) Reports on Form 8-K: During the quarter ended December 28, 1997, the Company filed no reports on Form 8-K. (c) Exhibits - The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules - The response to this portion of Item 14 is submitted as a separate section of this report. 33 34 SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. J. ALEXANDER'S CORPORATION Date 3/27/98 --------------- By: /s/Lonnie J. Stout II --------------------------------- Lonnie J. Stout II Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Capacity Date ---- -------- ---- /s/Lonnie J. Stout II Chairman, President, Chief Executive Officer 3/27/98 - --------------------------------- and Director Lonnie J. Stout II /s/R. Gregory Lewis Vice President and Chief Financial Officer 3/27/98 - --------------------------------- (Principal Financial Officer) R. Gregory Lewis /s/Mark A. Parkey Controller - --------------------------------- (Principal Accounting Officer) 3/27/98 Mark A. Parkey /s/Earl Beasley, Jr. Director 3/27/98 - --------------------------------- Earl Beasley, Jr. /s/E. Townes Duncan Director 3/27/98 - --------------------------------- E. Townes Duncan Director - --------------------------------- Garland G. Fritts /s/John L.M. Tobias Director 3/27/98 - --------------------------------- John L.M. Tobias
34 35 ANNUAL REPORT ON FORM 10-K ITEM 14(A)(2), (C) AND (D) FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FISCAL YEAR ENDED DECEMBER 28, 1997 J. ALEXANDER'S CORPORATION AND SUBSIDIARIES NASHVILLE, TENNESSEE 35 36 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 28, 1997: Valuation allowance for deferred tax assets $0 $3,865,000(1) $0 $0 $3,865,000 Year ended December 29, 1996: Valuation allowance for deferred tax assets $0 $0 $0 $0 $0 Year ended December 31, 1995: Valuation allowance for deferred tax assets $3,071,000 $0 $0 $3,071,000(2) $0
(1) Includes a $2,393,000 increase to the beginning of the year valuation allowance reflecting a change in circumstances which resulted in a judgement that a 100% valuation allowance, after making allowance for $400,000 in estimated refunds available through carryback of net operating losses generated in 1997, was appropriate as of December 28, 1997. (2) Includes a $2,085,000 reduction in the beginning of the year valuation allowance reflecting a change in circumstances which resulted in a judgement that a corresponding amount of the Company's deferred tax assets will be realized in future years. The remainder of the reduction results primarily from changes in the deferred tax items. 36 37 J. ALEXANDER'S CORPORATION EXHIBIT INDEX
Reference Number per Item 601 of Regulation S-K Description - -------------- ----------- (10)(g) Amended and restated secured promissory note dated November 21, 1997 from the J. Alexander's Corporation Employee Stock Ownership Trust to Registrant (10)(h) Amendment to Loan Agreement dated March 27, 1998, by and between J. Alexander's Corporation, J. Alexander's Restaurants, Inc. and NationsBank of Tennessee, N.A. (10)(i) Line of Credit note dated March 27, 1998, by and between J. Alexander's Corporation, J. Alexander's Restaurants, Inc. and NationsBank of Tennessee, N.A. (18) Letter from Ernst & Young LLP, independent auditors, addressing the Company's change of accounting principle related to pre-opening costs. (21) List of subsidiaries of Registrant. (23) Consent of Ernst & Young LLP, independent auditors (27) Financial Data Schedule (FOR SEC USE ONLY)
37 EX-10.G 2 AMENDED & RESTATED PROMISSORY NOTE 1 Exhibit (10)(g) Exhibit(10)(g) Amended and restated secured promissory note dated November 21, 1997 from the J. Alexander's Corporation Employee Stock Ownership Trust to Registrant. AMENDED AND RESTATED SECURED PROMISSORY NOTE Original Principal Amount: Date of Restatement: $1,713,956.25 Nashville, Tennessee November 21, 1997 RECITALS On June 25, 1992, Volunteer Capital Corporation loaned the sum of $1,713,956.25 to the Volunteer Capital Corporation Employee Stock Ownership Trust as evidenced by a promissory note dated June 25, 1992 (the "Original Note"). The name of Volunteer Capital Corporation has subsequently been changed to J. Alexander's Corporation. The parties desire to extend the maturity date of the note to November 30, 2003, increase the interest rate from 9% to 10% and change the payment schedule to level payments of principal and interest commencing on November 30, 1998. In consideration of the foregoing, effective as of November 21, 1997, the parties amend and restate the Original Note as follows: AMENDED AND RESTATED NOTE FOR VALUE RECEIVED, the undersigned J. ALEXANDER'S CORPORATION EMPLOYEE STOCK OWNERSHIP TRUST, a Tennessee trust established for the benefit of the J. Alexander's Corporation Employee Stock Ownership Plan ("Maker"), promises to pay to the order of J. Alexander's Corporation ("Payee"; Payee and any subsequent holder[s] hereof are hereinafter referred to collectively as "Holder"), without grace, at the office of Payee at 3401 West End Avenue, Nashville, Tennessee 37203, or at such other place as Holder may designate to Maker in writing from time to time, the original principal sum of One Million Seven Hundred Thirteen Thousand Nine Hundred Fifty-six and 25/100 Dollars ($1,713,956.25), or so much thereof as may be advanced here against, together with interest on the outstanding principal balance hereof from June 25, 1992, at an annual rate equal to nine percent (9%) until November 21, 1997, and ten percent (10%) thereafter. As of November 21, 1997, the effective date of this amendment and restatement of the Original Note, the outstanding principal balance is $1,028,373.73 and the accrued but unpaid interest is $183,078.70. Interest on the outstanding principal balance hereof was due and payable annually, in arrears, with the first installment being payable on November 30, 1992, and subsequent installments being payable on each November 30 thereafter until November 30, 1996. Principal was due and payable in equal annual installments of One Hundred Seventy One Thousand Three Hundred Ninety-five and 63/100 Dollars ($171,395.63) each, with the first installment being payable on November 30, 1992, and subsequent installments on each November 30 thereafter until and including November 30, 1995. No principal payment was due on November 30, 1996. 2 After November 21, 1997, the effective date of this amendment and restatement, principal shall be due and payable as follows: November 30, 1997 $82,464.28 November 30, 1998 122,629.37 November 30, 1999 134,892.31 November 30, 2000 148,192.94 November 30, 2001 163,200.84 November 30, 2002 179,520.92 November 30, 2003 197,473.01 It is intended that the total payment of principal and interest due on November 30, 1997, shall be equal to $268,078.70, and that the total payment of principal and interest due on each November 30 thereafter until November 30, 2003 shall be equal to $217,220.32. On November 30, 2003 (the "Maturity Date"), the entire outstanding principal balance, together with all accrued and unpaid interest, shall be immediately due and payable in full. Time is of the essence of this Note. In the event this Note is placed in the hands of an attorney for collection or for enforcement or protection of the security, or if Holder incurs any costs incident to the collection of the indebtedness evidenced hereby or the enforcement or protection of the security, Maker and any endorsers hereof agree to pay a reasonable attorney's fee, all court and other costs, and the reasonable costs of any other collection efforts. Presentment for payment, demand, protest and notice of demand, protest and nonpayment are hereby waived by Maker and all other parties hereto. No acceptance of a past-due installment or other indulgences granted from time to time shall be construed as a novation of this Note or as a waiver of the right of Holder thereafter to insist upon strict compliance with the terms of this Note or to prevent the exercise of any right granted hereunder or by applicable laws. Unless otherwise specifically agreed by Holder in writing, the liability of Maker and all other persons now or hereafter liable for payment of the indebtedness evidenced hereby, or any portion thereof, shall not be affected by (a) any renewal hereof or other extension of the time for payment of the indebtedness evidenced hereby or any amount due in respect thereof, (b) the release of all or any part of any collateral now or hereafter securing the payment of the indebtedness evidenced hereby or any portion thereof, or (c) the release of or resort to any evidenced hereby or any portion thereof. This Note may not be changed orally, but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. 2 3 Any renewal or extension hereof in whole or in part may provide for a rate of interest not exceeding the greater of (a) the maximum rate of interest from time to time allowed by applicable law (the "Maximum Rate") in effect as of the date of this Note, or (b) the Maximum Rate in effect at the time of such extension or renewal. As security for the indebtedness and other obligations evidenced by this Amended and Restated Note, the Holder shall continue to possess a security interest in pledged common stock of the Holder pursuant to a Pledge and Security Agreement between the parties dated June 25, 1992, with respect to the Original Note, and such security interest shall continue until released in accordance with such Pledge and Security Agreement. Reference to the foregoing document is made for a statement of the additional rights and obligations of the parties hereto as set forth in said document. All agreements herein made are expressly limited so that in no event whatsoever, whether by reason of advancement of proceeds hereof, or otherwise, shall the interest and loan charges agreed to be paid to Holder for the use of the money advanced or to be advanced hereunder exceed the maximum amounts collectible under applicable laws in effect from time to time. If for any reason whatsoever the interest or loan charges paid or contracted to be paid in respect of the indebtedness evidenced hereby shall exceed the maximum amounts collectible under applicable laws in effect from time to time, then, ipso facto, the obligation to pay such interest and/or loan charges shall be reduced to the maximum amounts collectible under applicable laws in effect time to time, and any amounts collected by Holder that exceed such maximum amounts shall be applied to the reduction of the principal balance remaining unpaid hereunder and/or refunded to Maker so that at no time shall the interest or loan charges paid or payable in respect of the indebtedness evidenced hereby exceed the maximum amounts permitted from time to time by applicable law. This provision shall control every other provision in any and all other agreements and instruments now existing or hereafter arising between Maker and Holder with respect to the indebtedness evidenced hereby. Notwithstanding any provision herein to the contrary, Holder shall have no right to assets of Maker other than the collateral described in the Pledge Agreement, contributions (other than contributions of securities of the Payee) that are made to Maker to meet its obligations under this Note and earnings attributable to such collateral and the investment of such contributions. This Note has been negotiated, executed and delivered in the State of Tennessee, and is intended as a contract under and shall be construed and enforceable in accordance with the laws of said state, except to the extent that Federal law may be applicable to the determination of the Maximum Rate. This Note may be prepaid at any time prior to the Maturity Date in whole or in part without any penalty. 3 4 As used herein, the terms "Maker" and "Holder" shall be deemed to include their respective successors, legal representatives and assigns, whether by voluntary action of the parties or by operation of law. In the event that more than one person, firm or entity is a maker hereunder, then all references to "Maker" shall be deemed to refer equally to each of said persons, firms and/or entities, all of whom shall be jointly and severally liable for all of the obligations of Maker hereunder. MAKER: SUNTRUST BANK, NASHVILLE, N.A. as trustee of the J. Alexander's Corporation Employee Stock Ownership Trust By: /s/ Robert G. Mayer ------------------------------------------ Title: Vice President --------------------------------------- 4 EX-10.H 3 AMENDMENT TO LOAN AGREEMENT 1 Exhibit 10(h) Exhibit 10(h) Amendment to Loan Agreement dated March 27, 1998 by and between J. Alexander's Corporation, J. Alexander's Restaurants, Inc. and NationsBank of Tennessee, N.A. AMENDMENT TO LOAN AGREEMENT THIS AMENDMENT TO LOAN AGREEMENT entered into this 27th day of March, 1998, by and among J. ALEXANDER'S CORPORATION (f/k/a VOLUNTEER CAPITAL CORPORATION), J. ALEXANDER'S RESTAURANTS, INC. (f/k/a TOTAL QUALITY MANAGEMENT, INC.), Tennessee corporations (collectively referred to as the "Borrower"), and NATIONSBANK OF TENNESSEE, N.A., a national banking association ("Lender"). W I T N E S S E T H WHEREAS, Borrower and Lender entered into that Loan Agreement dated August 29, 1995 ("Loan Agreement") and that Line of Credit Note dated August 29, 1995 in the maximum principal amount of Thirty Million and 00/100 Dollars ($30,000,000.00) ("$30,000,000 Note"); and WHEREAS, Volunteer Capital Corporation has changed its name to J. Alexander's Corporation and Total Quality Management, Inc. has changed its name to J. Alexander's Restaurants, Inc.; and WHEREAS, Borrower and Lender desire to amend the Loan Agreement as provided herein; and WHEREAS, in connection therewith, Borrower has executed that Line of Credit Note of even date herewith in the maximum principal amount of $20,000,000 payable to the order of Lender ("Line of Credit Note"); NOW, THEREFORE, for the mutual promises contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Sections l.a., b. & c. of the Loan Agreement shall be deleted in their entirety and in their place the following shall be inserted: a. Amount. The principal indebtedness of Borrower to Lender under the Line of Credit shall not exceed Twenty Million and No/100 Dollars ($20,000,000). b. Interest Rate. From the date hereof until December 31, 1998, interest shall accrue at the LIBOR Rate plus a spread of 3.0%. Beginning on January 1, 1999 until the stated maturity of the Note, interest shall accrue at, for any given period of 30 days (a "LIBOR Period") the LIBOR Rate plus a spread of 2.0%, 2.25%, 2.5% or 3.0% depending on the Senior Debt Coverage Ratio ("SDCR") as further provided herein. If the SDCR is less than or equal to 2.75 but greater than 2.5, the LIBOR spread will be 3.0%; if the SDCR is less than or equal to 2.5 but 2 greater than 2.25, the LIBOR spread will be 2.5%; if the SDCR is less than or equal to 2.25 but greater than 2.0, the LIBOR spread will be 2.25%; if the SDCR is less than or equal to 2.0, the LIBOR spread will be 2.0%: i. As used in this Agreement, Lender's "Prime Rate" is the fluctuating rate of interest established by Lender from time to time as its "Prime Rate", whether or not such rate shall be otherwise published. Such Prime Rate is established by Lender as an index or base rate and may or may not at any time be the best or lowest rate charged by Lender on any loan. If at any time or from time to time the Prime Rate increases or decreases, then the rate of interest hereunder shall be correspondingly increased or decreased effective on the day on which any such increase or decrease of the Prime Rate changes, unless otherwise herein provided. In the event that Lender, during the term hereof, shall abolish or abandon the practice of establishing a Prime Rate, or should the same become unascertainable, Lender shall designate a reasonably comparable reference rate which shall be deemed to be the Prime Rate. ii. For purposes hereof, the Senior Debt Coverage Ratio, ("SDCR") is defined as Senior Funded Debt (as defined herein) divided by EBITDA, all measured on a trailing four-quarter basis. Senior Funded Debt means all long-term debt, the current portion of long-term debt, obligations under Leases (both long-term and current), any notes payable or other borrowed money, but Senior Funded Debt does not include any subordinated or convertible debt. iii. For purposes hereof, the "LIBOR Rate" shall mean the rate per annum announced by Lender as its LIBOR Rate for a period equal to the length of such LIBOR Period as adjusted, without duplication, to reflect Lender's reserve requirements, all as calculated and announced from time to time by Lender, whose announcement shall be binding absent manifest error. To elect the LIBOR Rate for a LIBOR Period, Borrower shall deliver a written election to Lender at least two (2) business days in advance of the effective date of such election, which notice shall specify which LIBOR Period is selected and the amount of the Line of Credit that is to bear interest based upon the LIBOR Rate. Interest hereunder shall be calculated based upon a 360-day year and actual days elapsed. If the adoption of or change in any applicable legal requirement or any change in the interpretation or administration thereof by any governmental authority or compliance by the Lender with any request or directive (whether or not having the force of law) from any central bank or other governmental authority, shall at any time as a result of any portion of the principal balance of this Note being maintained on the LIBOR Rate: A. Subject the Lender to any tax (including without limitation any United States Interest Equalization Tax), levy, impost, duty, charge, fee (collectively "Taxes"), other than income and franchise taxes of the United States and its political subdivisions; or 2 3 B. Change the basis of taxation on payments due from the Borrower to the Lender under any LIBOR Rate Borrowing (otherwise than by a change in the rate of taxation of the overall net income of the Lender); or C. Impose, modify, increase or make applicable any reserve requirement, special deposit requirement or similar requirement (including, but not limited to, state law requirements and Regulation D) against assets held by the Lender, or against deposits or accounts in or for the account of the Lender, or against any loans made by the Lender, or against any other funds, obligations or other property owned or held by Lender; or D. Impose on the Lender any other condition regarding any LIBOR Rate Borrowing; and the result of any of the foregoing is to increase the cost to the Lender of agreeing to make or of making, renewing or maintaining such borrowing on the basis of the LIBOR Rate, or reduce the amount of principal or interest received by the Lender, then, upon demand by the Lender, the Borrower shall pay to the Lender, from time to time as specified by the Lender, additional amounts which shall reasonably compensate the Lender for such increased cost or reduced amount relating to LIBOR Rate Borrowings outstanding after Lender's demand. The Lender's reasonable determination of the amount of any such increased cost, increased reserve requirement or reduced amount shall be conclusive and binding, absent manifest error. iv. In no event shall the interest rate charged on the Line of Credit exceed the maximum rate allowed under applicable law. Any amounts paid in excess of the maximum lawful rate shall be applied to reduce the principal amount of Borrower's obligations to Lender or shall be refunded to Borrower, at Lender's election. After maturity (by acceleration or otherwise), the principal amount under the Line of Credit shall bear interest at the rate of interest in effect immediately before maturity plus three percent (3%). c. Payments. Payment of all obligations arising under the Line of Credit shall be made as follows: (1) Interest. Interest on the outstanding principal balance under the Line of Credit shall be paid in arrears on the first (1st) day of each month beginning on April 1, 1998. (2) Voluntary Prepayment. Voluntary prepayments of principal or accrued interest may be made, in whole or in part, at any time without penalty. 3 4 (3) Mandatory Prepayment. Borrower must immediately prepay, any amount by which the principal balance of the Line of Credit exceeds $20,000,000. (4) All Amounts Due. All remaining principal, interest and expenses outstanding under the Line of Credit shall become due July 1, 2000, unless the borrower exercises its option to extend for a seven (7) year term, in which case all remaining principle, interest and expenses outstanding under the Line of Credit shall become due July 1, 2007. (5) Conversion to Term Loan. Subject to the provisions contained herein, Borrower has the option to convert this Line of Credit Note to a Term Note. Providing that Borrower is not then in default hereunder, Borrower may make a written election to convert the Line of Credit Note to a Term Note any time prior to July 1, 2000. The written election must be delivered to Payee at least thirty (30) days prior to the conversion date. After receipt of the election, Payee has sole discretion to determine what collateral will be required of Maker to provide security for the term loan. Payee will notify Maker whether or in what manner the term loan shall be securitized within fifteen (15) days after receiving the election. Upon conversion, there will be a conversion fee equal to one-quarter (1/4) of one percent (1%) of the then outstanding principal balance. The unpaid principal balance will then be repayable in eighty-four (84) equal monthly installments of principal with the first principal payment due thirty (30) days following the conversion date. Interest will continue to be paid monthly at the same time as the principal payment is due. Interest shall accrue on the Term Note at the NationsBank Prime Rate, as it may change from time to time or the LIBOR Rate discussed above (subject to the restriction on the number of LIBOR borrowings discussed above) or at a fixed rate to be determined by Payee at the time of receiving the written election. Maker shall specify the interest rate option (Prime Rate, LIBOR Rate or fixed) to be used in the conversion election. 2. The first sentence of Section 1.e. of the Loan Agreement shall be deleted and in its place the following shall be inserted: During the term of this Agreement, Borrower may from time to time request, repay and reborrow advances under the Line of Credit, provided that the total principal amount outstanding under the Line of Credit shall not at any time exceed $20,000,000 and that no event of default or any event which with the giving of notice, the passage of time, or both, would constitute an event of default, then exists hereunder. 3. The term Loan Documents (defined in Section 2 of the Loan Agreement) shall include the Line of Credit Note. 4 5 4. Section 30.a(4) is hereby deleted. 5. Section 30.g. shall be deleted in its entirety and in its place the following shall be inserted: g. Store Openings. Without the prior written approval of Lender, open more than two (2) J. Alexander stores in any one calendar year. 6. The following shall be added as Section 30.1.: 1. Capital Expenditures. Make capital expenditures (including capitalized leases) during fiscal year 1998 exceeding in the aggregate $6,500,000.00, during fiscal year 1999 exceeding in the aggregate $8,500,000 and during fiscal year 2000 exceeding in the aggregate $8,500,000. 7 The following shall be added as Section 31.e.: e. Profit/Loss. For the first quarter of fiscal year 1998, Borrower's pretax loss shall not exceed $1,500,000; for the second quarter of fiscal year 1998, Borrower's pretax loss shall not exceed $400,000 and Borrower's cumulative pretax loss for the first two quarters of fiscal year 1998 shall not exceed $1,700,000; for the third quarter of fiscal year 1998, Borrower's pretax loss shall not exceed $400,000 and Borrower's cumulative pretax loss for the first three quarters of fiscal year 1998 shall not exceed $2,000,000; for the fourth quarter of fiscal year 1998, Borrower's pretax profit shall exceed $200,000 and Borrower's cumulative pretax loss for fiscal year 1998 shall not exceed $1,500,000. 8. Section 31.c. shall be deleted in its entirety effective December 31, 1997 and in its place the following shall be inserted: c. Senior Funded Debt to EBITDA Ratio. For the quarter ending December 31, 1998 and each quarter thereafter, Borrower's SDCR shall be less than or equal to 2.75 to 1.0, calculated on a trailing four quarter basis. 9. Except as amended herein, the provisions contained in the Loan Agreement shall remain in full force and effect. 5 6 IN WITNESS WHEREOF, the parties have executed this document through authorized agents on the day and date first above written. NATIONSBANK OF TENNESSEE, N.A. By: /s/ William H. Diehl --------------------------------- Title: Senior Vice President ------------------------------ J. ALEXANDER'S CORPORATION (f/k/a VOLUNTEER CAPITAL CORPORATION) By: /s/ R. Gregory Lewis --------------------------------- Title: Vice President and Chief Financial Officer ------------------------------ J. ALEXANDER'S RESTAURANTS, INC. (f/k/a TOTAL QUALITY MANAGEMENT, INC.) By: /s/ R. Gregory Lewis --------------------------------- Title: Vice President -- Finance ------------------------------ 6 EX-10.I 4 LINE OF CREDIT 1 Exhibit 10(i) Exhibit 10(i) Line of Credit Note dated March 27, 1998 by and between J. Alexander's Corporation, J. Alexander's Restaurants, Inc. and NationsBank of Tennessee, N.A. LINE OF CREDIT NOTE $20,000,000.00 Nashville, Tennessee March 27, 1998 FOR VALUE RECEIVED, J. ALEXANDER'S CORPORATION (f/k/a VOLUNTEER CAPITAL CORPORATION) and J. ALEXANDER'S RESTAURANTS, INC. (f/k/a TOTAL QUALITY MANAGEMENT, INC.), Tennessee corporations (the "Maker"), jointly and severally promise to pay to the order of NATIONSBANK OF TENNESSEE, N.A. ("Payee" or "NationsBank"), the sum of Twenty Million and No/100 Dollars ($20,000,000.00), or as much thereof as may be outstanding from time to time, together with interest thereon as set forth below. Advances under this Note shall be governed by that certain Loan Agreement dated August 29, 1995, as amended by that Amendment to Loan Agreement of even date herewith ("Loan Agreement"). Subject to the provisions of the Loan Agreement, Maker may borrow, repay and reborrow and there is no limit on the number of advances against this Note as long as the total unpaid principal balance at any time outstanding does not exceed Twenty Million and No/100 Dollars ($20,000,000.00). From the date hereof until December 31, 1998, interest shall accrue at the LIBOR Rate plus a spread of 3.0%. Beginning on January 1, 1999 until the stated maturity of this Note, interest shall accrue at, for any given period of 30 days (a "LIBOR Period") the LIBOR Rate plus a spread of 2.0%, 2.25%, 2.5% or 3.0% depending on the Senior Debt Coverage Ratio ("SDCR") as further provided in the Loan Agreement. From the date hereof until December 31, 1998, a non-usage fee of .50% will be paid quarterly in arrears. Beginning on January 1, 1999 until the stated maturity of this Note, a non-usage fee of either .25%, .35% or .50% based upon the daily average unused amount and based on the SDCR will be paid quarterly in arrears. If the SDCR is less than or equal to 2.75 but greater than 2.5, the fee will be .50%; if the SDCR is less than or equal to 2.5 but greater than 2.25, the fee will be .35%; if the SDCR is less than or equal to 2.25, the fee will be .25%. Interest in arrears shall be due and payable on the first (1st) day of each month beginning on April 1, 1998. All remaining principal and interest shall become due on July 1, 2000 under the three year revolver, or July 1, 2007 if the option to convert to an additional seven (7) year term loan is exercised. Subject to the provisions contained herein, Maker has the option to convert this Line of Credit Note to a Term Note. Providing that Borrower is not then in default hereunder, Borrower may make a written election to convert the Line of Credit Note to a Term Note any time prior to July 1, 2000. The written election must be delivered to Payee at least thirty (30) days prior to the conversion date. After receipt of the election, Payee has sole discretion to determine what collateral will be required of Maker to provide security for the term loan. Payee will notify Maker whether or in what manner the term loan shall be securitized within fifteen (15) days after receiving the election. Upon conversion, there will be a conversion fee equal to one-quarter (1/4) of one percent (1%) of the then outstanding principal balance. The unpaid principal balance will then be repayable in eighty-four (84) equal monthly installments of principal with the first principal payment due thirty (30) days following the conversion date. Interest will continue to be paid monthly at the same time as the principal payment is due. Interest shall accrue on the Term Note at the NationsBank Prime Rate, as it may change from time to time or the LIBOR Rate discussed above (subject to the 2 restriction on the number of LIBOR borrowings discussed above) or at a fixed rate to be determined by Payee at the time of receiving the written election. Maker shall specify the interest rate option (Prime Rate, LIBOR Rate or fixed) to be used in the conversion election. As used herein, the term "NationsBank Prime Rate" shall mean the fluctuating rate of interest established by NationsBank from time to time as its "Prime Rate", whether or not such rate shall be otherwise published. Such Prime Rate is established by NationsBank as an index or base rate and may or may not at any time be the best or lowest rate charged by NationsBank on any loan. If at any time or from time to time the Prime Rate increases or decreases, then the rate of interest hereunder shall be correspondingly increased or decreased effective on the day on which any such increase or decrease of the Prime Rate changes, unless otherwise herein provided. In the event that NationsBank, during the term hereof, shall abolish or abandon the practice of establishing a Prime Rate, or should the same become unascertainable, NationsBank shall designate a comparable reference rate which shall be deemed to be the Prime Rate for purposes hereof. For purposes hereof, the "LIBOR Rate" shall mean the rate per annum announced by NationsBank as its LIBOR Rate for a period equal to the length of such LIBOR Period and in an amount comparable to the then aggregate unpaid principal balance hereunder (or will be outstanding by the commencement of the LIBOR Period requested by Maker) as adjusted to reflect NationsBank's reserve requirements, all as calculated and announced from time to time by Payee, whose announcement shall be binding absent manifest error. Interest hereunder shall be calculated based upon a 360 day year and actual days elapsed. The interest rate required hereby shall not exceed the maximum rate permissible under applicable law, and any amounts paid in excess of such rate shall be applied to reduce the principal amount hereof or shall be refunded to Maker, at the option of the holder of this Note. All amounts due under this Note are payable at par in lawful money of the United States of America, at the principal place of business of Payee in Nashville, Tennessee, or at such other address as the Payee or other holder hereof (herein "Holder") may direct. Any payment not made within fifteen (15) days of its due date will be subject to assessment of a late charge equal to five percent (5%) of such payment. Holder's right to impose a late charge does not evidence a grace period for the making of payments hereunder. The occurrence of any of the following shall constitute an event of default under this Note: (a) the failure of Maker to timely pay any amount due Holder under this Note or any other obligation to Holder if such failure continues for ten (10) days after notice of nonpayment from Holder to Maker provided, however, that should Holder give Maker a notice of nonpayment, then for the twelve month period following such notice of nonpayment, Holder shall not be required to give Maker notice of nonpayment and Maker will be in default if it fails to make a monetary payment within ten (10) days of the due date; (b) the institution of proceedings by Maker under any state insolvency law or under any federal bankruptcy law; (c) the institution of proceedings against Maker under any state insolvency law or under any federal bankruptcy law, if such proceedings are not dismissed within sixty (60) days; (d) Maker's becoming insolvent or generally failing to pay its debts as they become due; (e) the discovery by Holder that Maker has made a material misrepresentation of financial condition in any written statement made to any present or previous Holder which remains uncured for thirty (30) days; (f) the instigation of legal proceedings against Maker for the violation of a material criminal statute; (g) the issuance of an attachment against property of Maker unless removed, by bond or otherwise, within ten (10) days; (h) the entry of a 2 3 judgment against Maker that remains unsatisfied for thirty (30) days after execution may first issue; (i) Maker's liquidation or cessation of business; (j) the occurrence of a default under the terms of any loan agreement, security agreement, deed of trust, or similar document to which Maker is a party or to which any property securing this Note is subject which results in the acceleration of an indebtedness of One Hundred Thousand and 00/100 Dollars ($100,000.00) or more; or (k) the occurrence of any of the foregoing with regard to any surety, guarantor, endorser, or other person or entity primarily or secondarily liable for the payment of the indebtedness evidenced by this Note. Upon the occurrence of an event of default, as defined above, Holder may, at its option and without notice, terminate any obligation to advance funds under this Note, declare all principal and interest provided for under this Note, and any other obligations of Maker to Holder; to be presently due and payable, and Holder may enforce any remedies available to Holder under any documents securing or evidencing debts of Maker to Holder. Holder may waive any default before or after it occurs and may restore this Note in full effect without impairing the right to declare it due for a subsequent default, this right being a continuing one. Upon default, at Holder's election, the remaining unpaid principal balance of the indebtedness evidenced hereby and all expenses due Holder shall bear interest at the interest rate in effect immediately before the default plus three percent (3%). All amounts received for payment of this Note shall be first applied to any expenses due Holder under this Note or under any other documents evidencing or securing obligations of Maker to Holder, then to accrued interest, and finally to the reduction of principal. Prepayment of principal or accrued interest may be made, in whole or in part, at any time without penalty. Any prepayment(s) shall reduce the final payment(s) and shall not reduce or defer installments next due. This Note may be freely transferred by Holder. Maker and all sureties, guarantors, endorsers and other parties to this instrument hereby consent to any and all renewals, waivers, modifications, or extensions of time (of any duration) that may be granted by Holder with respect to this Note and severally waive demand, presentment, protest, notice of dishonor, and all other notices that might otherwise be required by law. All parties hereto waive the defense of impairment of collateral and all other defenses of suretyship. Maker's performance under this Note is unsecured. There will be a negative pledge on existing unencumbered assets, as further described in the Loan Agreement. Maker and all sureties, guarantors, endorsers and other parties hereto agree to pay reasonable attorneys' fees and all court and other costs that Holder may incur in the course of efforts to collect the debt evidenced hereby or to protect Holder's interest in any collateral securing the same. The validity and construction of this Note shall be determined according to the laws of Tennessee applicable to contracts executed and performed within that state. If any provision of this Note should for any reason be invalid or unenforceable, the remaining provisions hereof shall remain in full effect. The provisions of this Note may be amended or waived only by instrument in writing signed by the Holder and Maker and attached to this Note. 3 4 Any controversy or claim between or among the parties to this Note or any related loan or collateral agreements or instruments (collectively, "Loan Documents"), including any claim based on or arising from an alleged tort, shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state law), the Rules of Practice and Procedure for the arbitration of commercial disputes of Judicial Arbitration and Mediation Services, Inc. (J.A.M.S.), and the "special rules" set forth below. In the event of any inconsistency, the special rules shall control. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to the Loan Documents may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this agreement applies in any court having jurisdiction over such action. The following "Special Rules" shall apply. The arbitration shall be conducted in Nashville, Tennessee and administered by J.A.M.S. who will appoint an arbitrator; if J.A.M.S. is unable or legally precluded from administering the arbitration, then the American Arbitration Association will serve. All arbitration hearings will be commenced within 90 days of the demand for arbitration; further, the arbitrator shall only, upon a showing of cause, be permitted to extend the commencement of such hearing for up to an additional 60 days. Nothing in foregoing arbitration shall be deemed to (i) limit the applicability of any otherwise applicable statutes of limitation or repose and any waivers contained in the Loan Documents; or (ii) be a waiver by NationsBank of the protection afforded to it by 12 U.S.C. Sec. 91 or any substantially equivalent state law; or (iii) limit the rights of NationsBank under the Loan Documents (a) to exercise self help remedies such as (but not limited to) set-off, or (b) to foreclose against any real or personal property collateral, or (c) to obtain from a court provisional or ancillary remedies such as (but not limited to) injunctive relief, possession of collateral or the appointment of a receiver. NationsBank may exercise such self help rights, foreclose upon such property, or obtain such provisional or ancillary remedies before, during or after the pendency of any arbitration proceeding brought pursuant to the Loan Documents. At NationsBank's option, foreclosure under a deed of trust or mortgage may be accomplished by any of the following: the exercise of a power of sale under the deed of trust or mortgage, or by judicial sale under the deed of trust or mortgage, or by judicial foreclosure. Neither this exercise or self help remedies nor the institution or maintenance of an action for foreclosure or provisional or ancillary remedies shall constitute a waiver of the right of any party, including the claimant in any such action, to arbitrate the merits of the controversy or claim occasioning resort to such remedies. 4 5 Words used herein indicating gender or number shall be read as context may require. J. ALEXANDER'S CORPORATION (f/k/a VOLUNTEER CAPITAL CORPORATION) By: /s/ R. Gregory Lewis --------------------------------- Title: Vice President and Chief Financial Officer ------------------------------ J. ALEXANDER'S RESTAURANTS, INC. (f/k/a TOTAL QUALITY MANAGEMENT, INC.) By: /s/ R. Gregory Lewis --------------------------------- Title: Vice President -- Finance ------------------------------ 5 EX-18 5 LETTER FROM ERNST & YOUNG LLP 1 Exhibit 18 Exhibit 18 -- Letter from Independent Auditors addressing the Company's change of accounting principle related to pre-opening costs. March 27, 1998 Mr. R. Gregoary Lewis Vice President and Chief Financial Officer J. Alexander's Corporation 3401 West End Avenue, Suite 260 Nashville, TN 37203 Dear Mr. Lewis: The Summary of Significant Accounting Policies Note of Notes to the Consolidated Financial Statements of J. Alexander's Corporation and Subsidiaries included in its Form 10-K for the year ended December 28, 1997 describes a change in the method of accounting for pre-opening costs from the deferral and amortization of such costs over twelve months to expensing such costs as incurred. You have advised us that you believe that the change is to a preferable method in your circumstances because the future economic benefits resulting from costs of pre-opening activities have indeterminate lives and, therefore, any related amortization periods would be arbitrary. There are no authoritative criteria for determining a "preferable" method of accounting for pre-opening costs based on the particular circumstances, however, we conclude that the change in the method of accounting for pre-opening costs is to an acceptable alternative method which, based on your business judgment to make this change for the reasons cited above, is preferable in your circumstances. Very truly yours, Ernst & Young LLP EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21--SUBSIDIARIES OF J. ALEXANDER'S CORPORATION
STATE OF NAME UNDER WHICH SUBSIDIARY INCORPORATION BUSINESS IS DONE - ---------- ------------- ---------------- J. Alexander's Restaurants, Inc. Tennessee J. Alexander's Restaurant J. Alexander's Restaurants of Kansas, Inc. Kansas J. Alexander's Restaurant J. Alexander's Restaurants of Texas, Inc. Texas J. Alexander's Restaurant
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 the following J. Alexander's Corporation Registration Statements: a. Form S-8 Registration Statement (No. 33-77478) pertaining to the 1985 Stock Option Plan, filed on May 25, 1994; b. Form S-8 Registration Statement (No. 33-77476) pertaining to the 1994 Employee Stock Incentive Plan, filed on April 6, 1994; c. Form S-8 Registration Statement (No. 33-39870) pertaining to the 1990 Stock Option Plan for Outside Directors, filed April 9, 1991; d. Form S-8 Registration Statement (No. 33-4483) pertaining to the 1985 Stock Option Plan, filed on April 1, 1986; e. Form S-8 Registration Statement (No. 2-78140) pertaining to the 1982 Incentive Stock Option Plan, filed on June 25, 1982; and f. Form S-8 Registration Statement (No. 2-78139) pertaining to the 1982 Employee Stock Purchase Plan, filed on June 25, 1982; of our report dated March 27, 1998, with respect to the consolidated financial statements and schedule of J. Alexander's Corporation included in the Annual Report (Form 10-K) for the year ended December 28, 1997. Ernst & Young LLP Nashville, Tennessee March 27, 1998 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 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-28-1997 DEC-30-1996 DEC-28-1997 134 0 241 0 689 2,007 67,895 7,322 64,421 8,543 20,231 0 0 272 34,723 64,421 57,138 57,138 19,480 38,351 13,673 0 1,030 (2,421) 2,685 (5,106) 0 0 (885) (5,991) (1.11) (1.11)
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