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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For quarterly period ended September 29, 2002
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 No.)
3401 West End Avenue, Suite 260, P.O. Box 24300, Nashville, Tennessee 37202
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(Address of principal executive offices)
(Zip Code)
(615) 269-1900
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Common Stock Outstanding - 6,684,735 shares at November 12, 2002.
-1-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
SEPTEMBER 29 December 30
2002 2001
------------ -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................................... $ 782 $ 1,035
Accounts and notes receivable, including current portion of
direct financing leases .................................... 115 174
Inventories ................................................... 737 936
Prepaid expenses and other current assets ..................... 633 835
------- -------
TOTAL CURRENT ASSETS .......................................... 2,267 2,980
OTHER ASSETS ..................................................... 964 902
PROPERTY AND EQUIPMENT, at cost, less allowances for
depreciation and amortization of $25,413 and $22,575 at
September 29, 2002, and December 30, 2001, respectively ....... 67,896 66,946
DEFERRED CHARGES, less amortization .............................. 550 475
------- -------
$71,677 $71,303
======= =======
-2-
SEPTEMBER 29 December 30
2002 2001
------------ -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ....................................................... $ 2,393 $ 2,598
Accrued expenses and other current liabilities ......................... 4,773 3,956
Unearned revenue ....................................................... 1,771 2,415
Current portion of long-term debt and obligations under
capital leases ...................................................... 8,078 2,746
-------- --------
TOTAL CURRENT LIABILITIES ........................................... 17,015 11,715
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL
LEASES, net of portion classified as current ........................... 13,438 19,532
OTHER LONG-TERM LIABILITIES ............................................... 2,206 1,886
STOCKHOLDERS' EQUITY
Common Stock, par value $.05 per share: Authorized 10,000,000
shares; issued and outstanding 6,705,535 and 6,797,618 shares at
September 29, 2002, and December 30, 2001, respectively ............. 335 340
Preferred Stock, no par value: Authorized 1,000,000 shares; none
issued .............................................................. -- --
Additional paid-in capital ............................................. 34,464 34,739
Retained earnings ...................................................... 5,637 4,692
-------- --------
40,436 39,771
Note receivable - Employee Stock Ownership Plan ........................ (688) (688)
Employee notes receivable - 1999 Loan Program .......................... (730) (913)
-------- --------
TOTAL STOCKHOLDERS' EQUITY .......................................... 39,018 38,170
-------- --------
$ 71,677 $ 71,303
======== ========
See notes to consolidated condensed financial statements.
-3-
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine Months Ended Quarter Ended
----------------------------- -----------------------------
SEPT. 29 Sept. 30 SEPT. 29 Sept. 30
2002 2001 2002 2001
-------- -------- -------- --------
Net sales .................................. $ 73,680 $ 67,076 $ 23,698 $ 22,188
Costs and expenses:
Cost of sales ........................... 23,338 21,922 7,570 7,310
Restaurant labor and related costs ...... 24,644 22,493 8,073 7,607
Depreciation and amortization of
restaurant property and equipment .... 3,295 3,148 1,099 1,055
Other operating expenses ................ 13,849 12,370 4,651 4,209
-------- -------- -------- --------
Total restaurant operating expenses .. 65,126 59,933 21,393 20,181
General and administrative expenses ........ 5,936 5,380 1,910 1,945
Pre-opening expense ........................ 42 558 42 453
-------- -------- -------- --------
Operating income (loss) .................... 2,576 1,205 353 (391)
Other income (expense):
Interest expense, net ................... (829) (975) (247) (300)
Gain on purchase of debentures .......... -- 7 -- --
Other, net .............................. (60) (35) (28) 24
-------- -------- -------- --------
Total other expense .................. (889) (1,003) (275) (276)
-------- -------- -------- --------
Income (loss) before income taxes .......... 1,687 202 78 (667)
Income tax (provision) benefit ............. (742) (242) (34) 393
-------- -------- -------- --------
Net income (loss) .......................... $ 945 $ (40) $ 44 $ (274)
======== ======== ======== ========
Basic earnings (loss) per share ............ $ .14 $ (.01) $ .01 $ (.04)
======== ======== ======== ========
Diluted earnings (loss) per share .......... $ .14 $ (.01) $ .01 $ (.04)
======== ======== ======== ========
See notes to consolidated condensed financial statements.
-4-
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED IN THOUSANDS)
Nine Months Ended
-----------------------------
SEPT. 29 Sept. 30
2002 2001
-------- --------
Net cash provided by operating activities .................. $ 5,098 $ 3,794
Net cash used by investing activities:
Purchase of property and equipment ...................... (4,437) (6,107)
Other investing activities .............................. (55) (55)
-------- --------
(4,492) (6,162)
Net cash (used) provided by financing activities:
Payments on debt and obligations under capital leases ... (1,723) (1,327)
Proceeds under bank line of credit agreement ............ 29,586 30,345
Payments under bank line of credit agreement ............ (28,625) (26,829)
Other ................................................... (97) (45)
-------- --------
(859) 2,144
Decrease in cash and cash equivalents ...................... (253) (224)
Cash and cash equivalents at beginning of period ........... 1,035 1,057
-------- --------
Cash and cash equivalents at end of period ................. $ 782 $ 833
======== ========
See notes to consolidated condensed financial statements.
-5-
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Certain reclassifications have been made in
the prior year's consolidated condensed financial statements to conform to the
2002 presentation. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the quarter and nine months ended September
29, 2002, are not necessarily indicative of the results that may be expected for
the fiscal year ending December 29, 2002. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended December 30,
2001.
NOTE B - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
(In thousands, except per share amounts) Nine Months Ended Quarter Ended
-------------------------- --------------------------
SEPT. 29 Sept. 30 SEPT. 29 Sept. 30
2002 2001 2002 2001
-------- -------- -------- --------
NUMERATOR:
Net income (loss) (numerator for basic earnings
per share) ...................................... $ 945 $ (40) $ 44 $ (274)
Effect of dilutive securities ......................... -- -- -- --
------ ------- ------ -------
Net income (loss) after assumed conversions
(numerator for diluted earnings per share) ...... $ 945 $ (40) $ 44 $ (274)
====== ======= ====== =======
DENOMINATOR:
Weighted average shares (denominator for basic
earnings per share) ............................. 6,780 6,853 6,764 6,844
Effect of dilutive securities:
Employee stock options .......................... 59 -- 61 --
------ ------- ------ -------
Adjusted weighted average shares and assumed
conversions (denominator for diluted earnings
per share) ...................................... 6,839 6,853 6,825 6,844
====== ======= ====== =======
Basic earnings (loss) per share ....................... $ .14 $ (.01) $ .01 $ (.04)
====== ======= ====== =======
Diluted earnings (loss) per share ..................... $ .14 $ (.01) $ .01 $ (.04)
====== ======= ====== =======
-6-
In situations where the exercise price of outstanding employee stock
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
anti-dilutive impact. For the quarter ended September 29, 2002, options to
purchase 247,000 shares of common stock at prices ranging from $3.44 to $11.69
were excluded from the computation of diluted earnings per share due to their
anti-dilutive effect. For the nine months ended September 29, 2002, options to
purchase 417,000 shares of common stock at prices ranging from $2.75 to $11.69
were excluded from the diluted earnings per share calculation.
Due to the net losses incurred during both the second quarter and nine
months ended September 30, 2001, all outstanding options were excluded from the
computation of diluted earnings per share for these periods.
NOTE C - SUBSEQUENT EVENT
On October 29, 2002, the Company completed, through an indirect
wholly-owned subsidiary, a mortgage loan transaction in the amount of
$25,000,000. The mortgage loan has an effective interest rate of approximately
8.2% per annum and is payable in equal monthly installments of principal and
interest of approximately $212,000 over a period of 20 years through November
2022. Net proceeds from the mortgage loan, after deducting fees and expenses
associated with the transaction, were approximately $24,275,000. These funds
were used to pay off the outstanding balance of $15,470,000 on the Company's
bank line of credit as of October 29, 2002. Remaining funds were invested in
short term money market funds and are expected to be used primarily for retiring
the Company's $6,250,000 of convertible subordinated debentures which are due in
June 2003.
Provisions of the mortgage loan and related agreements require that a
minimum fixed charge coverage ratio be maintained for the restaurants securing
the loan and that the Company's leverage ratio not exceed a specified level. The
loan is pre-payable without penalty after five years, with a yield maintenance
penalty, if applicable, in effect prior to that time.
The mortgage loan is secured by the real estate, equipment and other
personal property of nine of the Company's restaurant locations with an
aggregate book value of $26,988,000 at September 29, 2002. The real property at
these locations is owned by JAX Real Estate, LLC, a newly formed entity which is
the borrower under the loan agreement and which leases the properties to a
wholly-owned subsidiary of the Company as lessee. The Company has guaranteed the
obligations of the lessee subsidiary to pay rents under the lease.
In addition to JAX Real Estate, LLC, other wholly-owned subsidiaries of
the Company, JAX RE Holdings, LLC and JAX Real Estate Management, Inc., were
formed in connection with the transaction to act as a holding company and a
member of the board of managers of JAX Real Estate, LLC, respectively. While all
of these subsidiaries will be included in the Company's consolidated financial
statements, each of them was established as a special purpose, bankruptcy remote
entity and maintains its own legal existence, ownership of its assets and
responsibility for its liabilities separate from the Company and its other
affiliates.
-7-
The September 29, 2002, balance sheet presents long-term debt and
obligations under capital leases as to its current or long term portions based
on the scheduled maturities of the debt at that time. Borrowings outstanding
under the Company's unsecured bank line of credit totaled $15,232,000 at
September 29, 2002. Because the credit line, which was scheduled to mature on
December 1, 2002, contained a provision allowing the Company to convert
borrowings outstanding under the line to a term loan payable in 84 equal monthly
installments of principal plus interest, $1,813,000, representing ten months'
principal payments if the total credit line balance were converted to a term
loan, was reflected as a current liability in the September 29, 2002 balance
sheet. The $6,250,000 of convertible subordinated debentures maturing in June
2003 was also reflected as a current liability in the September 29, 2002 balance
sheet.
The following presentation reflects the classification of long-term
debt and obligations under capital leases on a pro forma basis as of September
29, 2002, as if the $25,000,000 mortgage loan had been completed and the
outstanding balance of $15,232,000 under the Company's bank line of credit as
well as the $6,250,000 of convertible subordinated debentures had been retired
at that date:
As Presented Pro Forma
------------ -----------
Current portion of long-term debt and
obligations under capital leases $ 8,078,000 $ 530,000
Long-term debt and obligations under
capital leases, net of portion
classified as current $13,438,000 $24,504,000
This pro forma presentation includes approximately $3,518,000 of debt
obligations which were not actually outstanding at September 29, 2002. In
addition, on the basis of this presentation, $2,793,000 of additional cash which
is not reflected above would have been available to the Company.
NOTE D - INCOME TAXES
The Company's provisions for income taxes for the first nine months and
third quarters of both 2002 and 2001 include the effect of estimated federal
alternative minimum tax (AMT) and state income taxes payable.
The effective tax rates used in all periods are higher than the federal
statutory rate because the AMT rate is applied to the Company's pre-tax
accounting income after adding back certain tax preference items as well as
certain permanent differences and timing differences in book and tax income.
Because the Company maintains a 100% valuation allowance on its deferred tax
assets, no benefit is recognized in the current year's income tax provision with
respect to the
-8-
AMT credit carryforward or other tax assets generated for the year. Further,
because of the application of AMT, the Company at its current taxable income
level is unable to take advantage of certain other tax carryforwards that it has
accumulated.
NOTE E - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142") in July 2001. SFAS 142 requires that
upon adoption, goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be evaluated for impairment on an annual
basis. Identifiable intangible assets will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS 142 is effective for fiscal years beginning after December 15, 2001.
The Company has applied the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. As of the date
of adoption, the Company had unamortized goodwill of $171,000, which is subject
to the transition provisions of SFAS 142. The Company is in the process of
completing its assessment of SFAS 142 and until such assessment is finalized, it
is not practicable to reasonably estimate the impact of SFAS 142's adoption on
the Company's financial statements. Any charge related to the adoption of SFAS
142 would have no effect on the Company's cash position and would be reported as
a cumulative effect of change in accounting principle effective as of the
beginning of fiscal 2002.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations" for a disposal of a segment of a business.
SFAS 144 provides a single framework for evaluating long-lived assets that are
to be disposed of by sale and addresses the principal implementation issues.
SFAS 144 is effective for fiscal years beginning after December 15, 2001. The
Company adopted SFAS 144 as of December 31, 2001 and adoption of the Statement
did not have a significant impact on the Company's financial position or results
of operations.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, (i) the
percentages which the items in the Company's Consolidated Statements of
Operations bear to total net sales, and (ii) other selected operating data:
Nine Months Ended Quarter Ended
---------------------------- ----------------------------
SEPT. 29 Sept. 30 SEPT. 29 Sept. 30
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales ........................................ 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales .............................. 31.7 32.7 31.9 32.9
Restaurant labor and related costs ......... 33.4 33.5 34.1 34.3
Depreciation and amortization of
restaurant property and equipment .... 4.5 4.7 4.6 4.8
Other operating expenses ................... 18.8 18.4 19.6 19.0
--------- --------- --------- ---------
Total restaurant operating expenses .. 88.4 89.4 90.3 91.0
General and administrative expenses .............. 8.1 8.0 8.1 8.8
Pre-opening expense .............................. 0.1 0.8 0.2 2.0
--------- --------- --------- ---------
Operating income (loss) .......................... 3.5 1.8 1.5 (1.8)
Other income (expense):
Interest expense, net ...................... (1.1) (1.5) (1.0) (1.4)
Other, net ................................. (0.1) (0.1) (0.1) 0.1
--------- --------- --------- ---------
Total other expense .................. (1.2) (1.5) (1.2) (1.2)
--------- --------- --------- ---------
Income (loss) before income taxes ................ 2.3 0.3 0.3 (3.0)
Income tax (provision) benefit ................... (1.0) (0.4) (0.1) 1.8
--------- --------- --------- ---------
Net income (loss) ................................ 1.3% (0.1)% 0.2% (1.2)%
========= ========= ========= =========
Restaurants open at end of period ................ 24 23
Weighted average weekly sales per restaurant:
All restaurants ............................ $ 78,800 $ 77,800 $ 76,000 $ 76,500
Same store restaurants ..................... $ 78,900 $ 77,800 $ 76,400 $ 76,500
NET SALES
Net sales increased by $6,604,000, or 9.8%, and $1,510,000, or 6.8%,
for the first nine months and third quarter of 2002, respectively, as compared
to the same periods of 2001. These increases were attributable to new
restaurants opened during September and December of 2001 and, for the nine month
period ended September 29, 2002, to sales increases within the
-10-
Company's same store restaurant base. Same store sales, which include comparable
results for all restaurants open for more than 18 months, averaged $78,900 and
$76,400 per week on a base of 22 restaurants during the nine months and third
quarter ended September 29, 2002 compared to averages of $77,800 and $76,500
during the corresponding periods of 2001.
Management estimates the average check per guest, excluding alcoholic
beverage sales, was $15.82 and $15.74 for the first nine months and third
quarter of 2002, representing increases of 3.7% and 2.1% compared to $15.25 and
$15.42 for the same periods of 2001. Menu prices for the first nine months and
third quarter of 2002 increased by an estimated 2.2% and 0.8%, respectively,
compared to the same periods in 2001. The Company estimates that customer
traffic (guest counts) on a same store basis decreased by approximately 2.4% and
2.1% during the first nine months and third quarter of 2002, respectively,
compared to the corresponding periods of 2001.
The menu price increases referenced above are primarily attributed to
modest price increases implemented by management during August and October of
2001 on selected menu items in order to positively impact both sales performance
and profitability. While customer traffic decreased during the first nine months
and third quarter of 2002 compared to the corresponding periods of 2001,
management anticipates that the effect of menu management and continued emphasis
on providing professional service will reverse this trend over time. However,
management anticipates that growth in customer traffic may continue to be
constrained for the remainder of 2002 as the nation's economy has not recovered
as quickly as hoped.
COSTS AND EXPENSES
Total restaurant operating expenses decreased to 88.4% and 90.3% of
sales in the first nine months and third quarter of 2002 compared to 89.4% and
91.0% in the corresponding periods of 2001. These decreases were due primarily
to lower cost of sales which decreased to 31.7% and 31.9% of sales in the first
nine months and third quarter of 2002 from 32.7% and 32.9% in the corresponding
periods of 2001. The decreases in cost of sales were due to the impact of
increased menu prices and favorable costs associated with pork, poultry and
effective March 1, 2002, beef, which more than offset increased produce costs
incurred during the first quarter of 2002 as a result of inclement weather in
the western United States and during August and September of 2002 upon
expiration of the Company's favorably priced potato contract.
Restaurant labor and related costs decreased from 34.3% of sales during
the third quarter of 2001 to 34.1% of sales during the same period of 2002. This
decrease is attributed to the favorable effect of an increase during January of
2002 in the tip share percentage which servers are required to contribute to
each restaurant's tip pool which, in turn, reduced the hourly wage paid by the
Company to other employees receiving distributions from the tip pool program.
This change more than offset the impact of increased wages associated with
kitchen staff, increased payouts related to the Company's restaurant level bonus
program, and increases in workers' compensation insurance premiums and other
benefit related items. These same factors resulted in restaurant labor and
related costs decreasing to 33.4% of sales for the first nine months of 2002
compared to 33.5% of sales during the same period of 2001.
-11-
Depreciation and amortization of restaurant property and equipment
decreased to 4.5% and 4.6% of sales during the first nine months and third
quarter of 2002, compared to 4.7% and 4.8% of sales during the corresponding
periods of the prior year, primarily due to assets which became fully
depreciated subsequent to September 30, 2001.
Other operating expenses increased to 18.8% and 19.6% of sales during
the first nine months and third quarter of 2002 compared to 18.4% and 19.0% of
sales in the corresponding periods of 2001. These increases are primarily
related to higher premiums associated with the Company's property and casualty
insurance program effective October 1, 2001, additional rent expense, and higher
repair and maintenance expenditures.
Management expects a generally favorable cost environment for the
remainder of 2002 as a result of lower beef prices and other factors. The
Company's property and casualty insurance program was renewed effective October
1, 2002 at rates comparable to those for the policy year ended September 30,
2002. Management believes that, based on current sales trends and cost
estimates, the Company will post operating results for the fourth quarter
generally comparable to those realized during the same period of 2001 and that
the full year of 2002 will reflect improved operating results compared to those
realized during 2001.
Management believes that continuing to increase sales volumes in the
Company's restaurants is a significant factor in improving the Company's
profitability and intends to maintain a low new restaurant development rate of
no more than two new restaurants per year to allow management to focus intently
on improving sales and profits in its existing restaurants while maintaining its
pursuit of operational excellence. Further, the Company's criteria for new
restaurant development target locations with high population densities and high
household incomes which management believes provide the best prospects for
achieving outstanding financial returns on the Company's investments in new
restaurants.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, which include supervisory costs as
well as management training costs and all other costs above the restaurant
level, totaled 8.1% of sales for both the first nine months and third quarter of
2002 compared to 8.0% and 8.8% of sales for the corresponding periods of 2001.
For the nine months ended September 29, 2002, general and administrative
expenses increased $556,000 compared to the same period in 2001, as the
inclusion of bonus accruals, increases in other employee benefit obligations,
and higher management trainee salaries more than offset decreases in travel
costs and employee procurement and relocation expense. For the third quarter of
2002, general and administrative expenses decreased $35,000 compared to the same
period of 2001 as decreases in travel costs and employee procurement and
relocation expenses more than offset the impact of increased expenses in other
areas. Management anticipates that general and administrative expenses will
increase only slightly, if at all, as a percentage of sales for fiscal 2002 when
compared to fiscal 2001.
-12-
OTHER INCOME (EXPENSE)
Net interest expense decreased from $975,000 to $829,000 during the
first nine months of 2002 compared to the same period of 2001. For the third
quarter, net interest expense decreased from $300,000 in 2001 to $247,000 during
the corresponding quarter of 2002. These decreases reflect reduced balances
associated with the Company's convertible subordinated debentures and lower
interest rates on the Company's line of credit, which more than offset increases
in the average principal balance outstanding under the line during the 2002
periods.
INCOME TAXES
The Company's provisions for income taxes for the first nine months and
third quarters of both 2002 and 2001 include the effect of estimated federal
alternative minimum tax (AMT) and state income taxes payable.
The effective tax rates used in all periods are higher than the federal
statutory rate because the AMT rate is applied to the Company's pre-tax
accounting income after adding back certain tax preference items as well as
certain permanent differences and timing differences in book and tax income.
Because the Company maintains a 100% valuation allowance on its deferred tax
assets, no benefit is recognized in the current year's income tax provision with
respect to the AMT credit carryforward or other tax assets generated for the
year. Further, because of the application of AMT, the Company at its current
taxable income level is unable to take advantage of other tax carryforwards that
it has accumulated.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary needs for capital in recent years have been for
the development and maintenance of its J.Alexander's restaurants and for meeting
required debt service obligations. The Company has met these needs and
maintained liquidity primarily by use of cash flow from operations and use of a
bank line of credit. The Company had cash flow from operations totaling
$5,098,000 and $3,794,000 during the first nine months of 2002 and 2001,
respectively. Cash and cash equivalents decreased from $1,035,000 at year end
2001 to $782,000 at September 29, 2002.
On October 29, 2002, the Company obtained $25,000,000 of long term
financing through completion of a mortgage loan transaction. The mortgage loan
has an effective interest rate of approximately 8.2% per annum and is payable in
equal monthly installments of principal and interest of approximately $212,000
over a period of 20 years through November 2022. Net proceeds from the mortgage
loan, after deducting fees and expenses associated with the transaction, were
approximately $24,275,000. These funds were used to pay off the outstanding
balance of $15,470,000 on the Company's bank line of credit as of October 29,
2002, terminating that facility. Remaining funds were invested in short term
money market funds and are expected to be used primarily for retiring the
Company's $6,250,000 of convertible subordinated debentures which are due in
June 2003.
-13-
Provisions of the mortgage loan and related agreements require that a
minimum fixed charge coverage ratio be maintained for the restaurants securing
the loan and that the Company's leverage ratio not exceed a specified level. The
loan is pre-payable without penalty after five years, with a yield maintenance
penalty, if applicable, in effect prior to that time.
The mortgage loan is secured by the real estate, equipment and other
personal property of nine of the Company's restaurant locations with an
aggregate book value of $26,988,000 at September 29, 2002. The real property at
these locations is owned by JAX Real Estate, LLC, the borrower under the loan
agreement, which leases them to a wholly-owned subsidiary of the Company as
lessee. The Company has guaranteed the obligations of the lessee subsidiary to
pay rents under the lease. JAX Real Estate, LLC, while an indirect wholly owned
subsidiary of the Company which will be included in the Company's consolidated
financial statements, was established as a special purpose, bankruptcy remote
entity and maintains its own legal existence, ownership of its assets and
responsibility for its liabilities separate from the Company and its other
affiliates.
The September 29, 2002, balance sheet presents long-term debt and
obligations under capital leases as to its current or long term portions based
on the scheduled maturities of the debt at that time. Borrowings outstanding
under the Company's unsecured bank line of credit totaled $15,232,000 at
September 29, 2002. Because the credit line, which was scheduled to mature on
December 1, 2002, contained a provision allowing the Company to convert
borrowings outstanding under the line to a term loan payable in 84 equal monthly
installments of principal plus interest, $1,813,000, representing ten months'
principal payments if the total credit line balance were converted to a term
loan, was reflected as a current liability in the September 29, 2002 balance
sheet. The $6,250,000 of convertible subordinated debentures maturing in June
2003 was also reflected as a current liability in the September 29, 2002 balance
sheet.
The following presentation reflects the classification of long-term
debt and obligations under capital leases on a pro forma basis as of September
29, 2002, as if the $25,000,000 mortgage loan had been completed and the
outstanding balance of $15,232,000 under the Company's bank line of credit as
well as the $6,250,000 of convertible subordinated debentures had been retired
at that date:
As Presented Pro Forma
------------ -----------
Current portion of long-term debt and
obligations under capital leases $ 8,078,000 $ 530,000
Long-term debt and obligations under
capital leases, net of portion
classified as current $13,438,000 $24,504,000
This pro forma presentation includes approximately $3,518,000 of debt
obligations which were not actually outstanding at September 29, 2002. In
addition, on the basis of this presentation, $2,793,000 of additional cash which
is not reflected above would have been available to the Company.
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The Company's primary need for capital is expected to continue to be
for the development and maintenance of its J. Alexander's restaurants, the cost
of which management estimates to be approximately $6.7 million for 2002. This
amount includes expenditures for improvements to the Company's existing
restaurants as well as for a significant portion of the costs of a new
restaurant to be opened in early 2003. The Company may also make purchases of up
to $1,000,000 of its common stock under a repurchase program authorized by the
Company's Board of Directors. From June 2001 through November 7, 2002, the
Company has repurchased approximately 233,000 shares at a cost of approximately
$636,000. The Company generally does not repurchase shares following the end of
its fiscal quarter until after results for the quarter have been publicly
announced.
While a working capital deficit of $14,748,000 existed as of September
29, 2002, the Company does not believe this deficit impairs the overall
financial condition of the Company. A significant portion of the current
liabilities reflected in the September 29, 2002 balance sheet relates to debt
which was refinanced subsequent to September 29, 2002, as discussed above.
Further, certain of the Company's expenses, particularly depreciation and
amortization, do not require current outlays of cash, and requirements for
funding accounts receivable and inventories are relatively insignificant; thus
virtually all cash generated by operations is available to meet current
obligations, which include rental expense and other restaurant operating
expenses.
Management believes that cash and short term investments on hand
following the financing transaction described above combined with cash flow from
operations will be adequate to meet its financing needs through the upcoming
year. However, it also plans to negotiate a new bank line of credit which would
provide additional liquidity if needed to meet the Company's development or
working capital needs. While management believes that such financing will be
available on acceptable terms, there can be no assurance that a satisfactory
credit line can be obtained.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated condensed financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. On an ongoing basis, management evaluates its estimates and
judgments, including those related to its accounting for income taxes,
impairment of long-lived assets, contingencies and litigation. Management bases
its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
-15-
Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. Management
believes the following critical accounting policies are those which involve the
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
- - Income Taxes - the Company had $5,056,000 of gross deferred tax assets
at December 30, 2001, consisting principally of $4,013,000 of tax
credit carryforwards and $552,000 of net operating loss carryforwards.
Generally accepted accounting principles require that the Company
record a valuation allowance against its deferred tax assets unless it
is "more likely than not" that such assets will ultimately be realized.
Due to losses incurred from 1997 through 1999 and because the Company
operates with a high degree of financial and operating leverage, with a
significant portion of its costs being fixed or semi-fixed in nature,
management has been unable to conclude that it is more likely than not
that its existing deferred tax assets will be realized and has
maintained a valuation allowance for 100% of its net deferred tax
assets, net of deferred tax liabilities, since 1997. As a result, the
Company currently provides for income taxes only to the extent that it
expects to pay cash taxes (primarily state taxes and the federal
alternative minimum tax) on current taxable income. It is possible,
however, that the Company could generate profits in the future at
levels which would cause management to conclude that it is more likely
than not that the Company will realize all or a portion of its various
net deferred tax assets. Upon reaching such a conclusion, management
would record the estimated net realizable value of the deferred tax
assets. Subsequent revisions to the estimated net realizable value of
the deferred tax assets could cause the Company's provision for income
taxes to vary significantly from period to period, although its cash
tax payments would remain unaffected until the benefit of the various
carryforwards was fully utilized.
- - Impairments of Long-Lived Assets - when events and circumstances
indicate that long-lived assets - most typically assets associated with
a specific restaurant - might be impaired, management compares the
carrying value of such assets to the undiscounted cash flows it expects
that restaurant to generate over its remaining useful life. In
calculating its estimate of such undiscounted cash flows, management is
required to make assumptions relative to the restaurant's future sales
performance, cost of sales, labor, operating expenses and occupancy
costs, which include property taxes, property and casualty insurance
premiums and other similar costs associated with the restaurant's
operation. The resulting forecast of undiscounted cash flows represents
management's best estimate based on both historical results and
management's expectation of future operations for that particular
restaurant. To date, all of the Company's long-lived assets have been
determined to be recoverable based on management's estimates of future
cash flows.
The above listing is not intended to be a comprehensive listing of all
of the Company's accounting policies. In many cases, the accounting treatment of
a particular transaction is
-16-
specifically dictated by generally accepted accounting principles, with no need
for management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended December 30, 2001, which contain
accounting policies and other disclosures required by generally accepted
accounting principles.
FORWARD-LOOKING STATEMENTS
In connection with the safe harbor established under the Private
Securities Litigation Reform Act of 1995, the Company cautions investors that
certain information contained in this Form 10-Q, particularly information
regarding future economic performance and finances, development plans, and
objectives of management is forward-looking information that involves risks,
uncertainties and other factors that could cause actual results to differ
materially from those expressed or implied by forward-looking statements. The
Company disclaims any intent or obligation to update these forward-looking
statements. Factors which could affect actual results include, but are not
limited to, the Company's ability to increase sales in certain of its
restaurants; the Company's ability to recruit and train qualified restaurant
management personnel; competition within the casual dining industry, which is
very intense; changes in business and economic conditions; the terms of
financing arrangements; changes in consumer tastes; and government regulations.
See "Risk Factors" included in the Company's Annual Report on Form 10-K for the
year ended December 30, 2001 and incorporated herein by reference for a
description of a number of risks and uncertainties which could affect actual
results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On October 29, 2002, the Company completed a mortgage loan transaction
in the amount of $25,000,000 with net proceeds, after deducting fees and
expenses associated with the transaction, totaling approximately $24,275,000.
The mortgage loan has an effective interest rate of 8.2% per annum and is
payable in equal monthly installments of principal and interest over a period of
20 years. Proceeds from this loan were used to pay off the outstanding balance
of $15,470,000 on the Company's bank line of credit as of October 29, 2002,
terminating this facility. Remaining funds were invested in short term money
market funds and are expected to be used primarily for retiring the Company's
$6,250,000 of convertible subordinated debentures which are due in June 2003.
The interest rate on borrowings outstanding under the bank line of credit was
based on LIBOR plus two to three percent, depending on certain financial ratios
achieved by the Company. Thus, while the Company is no longer subject to market
risk from exposure to changes in interest rates relative to its bank line of
credit facility, market risk does exist with respect to exposure to changes in
interest rates affecting the loan proceeds referenced above which have been
invested in money market funds. However, the Company does not consider its
current exposure to changes in such rates to be material.
Aside from the factors noted above, there have been no material changes
in the disclosures set forth in Item 7a of the Company's Annual Report on Form
10-K for the year ended December 30, 2001.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The
Company's principal executive officer and its principal
financial officer, after completing the evaluation of the
effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)) on November 11, 2002, have concluded that, as of
such date, the Company's disclosure controls and procedures
were adequate and effective to ensure that material
information relating to the Company and its consolidated
subsidiaries is communicated to the Company's management,
including its principal executive officer and principal
financial officer, to allow timely decisions regarding
required disclosures.
(b) Changes in internal controls. There were no significant
changes in the Company's internal controls or in other factors
that could significantly affect these controls
-17-
subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the
Company's internal controls. As a result, no corrective
actions were required or undertaken.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit (10)(a) Correspondence dated August 29, 2002, extending maturity date of loan from Bank of America, NA
("Bank"), to J. Alexander's Corporation & J. Alexander's Restaurants, Inc. ("Borrower"), in the original
principal amount of $20,000,000.
Exhibit (10)(b) Loan Agreement dated October 29, 2002 by and between GE Capital Franchise Finance Corporation and JAX
Real Estate, LLC.
Exhibit (10)(c) Master Lease dated October 29, 2002 by and between JAX Real Estate, LLC and J. Alexander's
Restaurants, Inc.
Exhibit (10)(d) Unconditional Guaranty of Payment and Performance dated October 29, 2002 by and between J. Alexander's
Corporation and JAX Real Estate, LLC.
Exhibit (10)(e) Form of Promissory Note for each premises subject to the Loan Agreement dated October 29, 2002 by and
between JAX Real Estate, LLC and GE Capital Franchise Finance Corporation.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) On August 14, 2002, the Company filed a Form 8-K containing
Item 9, Regulation FD Disclosure. Certifications of Lonnie J.
Stout II and R. Gregory Lewis, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, were attached as exhibits pursuant to Item 7 of
Form 8-K.
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
J. ALEXANDER'S CORPORATION
Date: 11/13/02 /s/ Lonnie J. Stout II
------------------ -------------------------------------------
Lonnie J. Stout II
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: 11/13/02 /s/ R. Gregory Lewis
------------------ -------------------------------------------
R. Gregory Lewis
Vice-President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATIONS:
I, Lonnie J. Stout II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. Alexander's
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
-19-
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ Lonnie J. Stout II
------------------------------------------
Lonnie J. Stout II
Chairman of the Board,
Chief Executive Officer
and President
-20-
I, R. Gregory Lewis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of J. Alexander's
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ R. Gregory Lewis
---------------------------------------
R. Gregory Lewis
Vice President, Chief Financial Officer
and Secretary
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J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No. Page No.
- ----------- --------
(10)(a) Correspondence dated August 29, 2002, extending
maturity date of loan from Bank of America, NA
("Bank"), to J. Alexander's Corporation & J.
Alexander's Restaurants, Inc. ("Borrower"), in the
original principal amount of $20,000,000.
(10)(b) Loan Agreement dated October 29, 2002 by and
between GE Capital Franchise Finance Corporation
and JAX Real Estate, LLC.
(10)(c) Master Lease dated October 29, 2002 by and
between JAX Real Estate, LLC and J. Alexander's
Restaurants, Inc.
(10)(d) Unconditional Guaranty of Payment and
Performance dated October 29, 2002 by and
between J. Alexander's Corporation and JAX
Real Estate, LLC.
(10)(e) Form of Promissory Note Agreement dated
October 29, 2002 by and between JAX Real
Estate, LLC and GE Capital Franchise Finance
Corporation.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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