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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 June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 1-8766
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J. ALEXANDER'S CORPORATION
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(Exact name of registrant as specified in its charter)
Tennessee 62-0854056
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
(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 - 6,767,197 shares at August 13, 2002.
Page 1 of 18 pages.
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)
JUNE 30 DECEMBER 30
2002 2001
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ......................... $ 693 $ 1,035
Accounts and notes receivable, including current
portion of direct financing leases ............. 155 174
Inventories ....................................... 826 936
Prepaid expenses and other current assets ......... 1,134 835
------- -------
TOTAL CURRENT ASSETS .............................. 2,808 2,980
OTHER ASSETS ......................................... 967 902
PROPERTY AND EQUIPMENT, at cost, less allowances for
depreciation and amortization of $24,389 and
$22,575 at June 30, 2002, and December 30, 2001,
respectively ...................................... 66,175 66,946
DEFERRED CHARGES, less amortization .................. 444 475
------- -------
$70,394 $71,303
======= =======
-2-
JUNE 30 DECEMBER 30
2002 2001
----------- ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................... $ 2,300 $ 2,598
Accrued expenses and other current liabilities ..... 4,421 3,956
Unearned revenue ................................... 1,855 2,415
Current portion of long-term debt and obligations
under capital leases ............................ 7,789 2,746
-------- --------
TOTAL CURRENT LIABILITIES........................ 16,365 11,715
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL
LEASES, net of portion classified as current ....... 12,736 19,532
OTHER LONG-TERM LIABILITIES ........................... 2,174 1,886
STOCKHOLDERS' EQUITY
Common Stock, par value $.05 per share: Authorized
10,000,000 shares; issued and outstanding
6,801,059 and 6,797,618 shares at June 30, 2002,
and December 30, 2001, respectively ............. 340 340
Preferred Stock, no par value: Authorized 1,000,000
shares; none issued ............................. -- --
Additional paid-in capital ......................... 34,756 34,739
Retained earnings .................................. 5,593 4,692
-------- --------
40,689 39,771
Note receivable - Employee Stock Ownership Plan .... (688) (688)
Employee notes receivable - 1999 Loan Program ...... (882) (913)
-------- --------
TOTAL STOCKHOLDERS' EQUITY....................... 39,119 38,170
-------- --------
$ 70,394 $ 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)
SIX MONTHS ENDED QUARTER ENDED
-------------------- --------------------
JUNE 30 JULY 1 JUNE 30 JULY 1
2002 2001 2002 2001
-------- -------- -------- --------
Net sales .................................... $ 49,982 $ 44,888 $ 24,350 $ 21,876
Costs and expenses:
Cost of sales ............................. 15,768 14,612 7,566 7,189
Restaurant labor and related costs ........ 16,571 14,886 8,176 7,415
Depreciation and amortization of
restaurant property and equipment....... 2,196 2,093 1,102 1,044
Other operating expenses .................. 9,198 8,161 4,685 4,080
-------- -------- -------- --------
Total restaurant operating expenses...... 43,733 39,752 21,529 19,728
General and administrative expenses .......... 4,026 3,435 1,944 1,581
Pre-opening expense .......................... -- 105 -- 103
-------- -------- -------- --------
Operating income ............................. 2,223 1,596 877 464
Other income (expense):
Interest expense, net ..................... (582) (675) (285) (314)
Gain on purchase of debentures ............ -- 7 -- --
Other, net ................................ (32) (59) (13) (33)
-------- -------- -------- --------
Total other expense .................... (614) (727) (298) (347)
-------- -------- -------- --------
Income before income taxes ................... 1,609 869 579 117
Income tax provision ......................... (708) (635) (255) (300)
-------- -------- -------- --------
Net income (loss) ............................ $ 901 $ 234 $ 324 $ (183)
======== ======== ======== ========
Basic earnings (loss) per share .............. $ .13 $ .03 $ .05 $ (.03)
======== ======== ======== ========
Diluted earnings (loss) per share ............ $ .13 $ .03 $ .05 $ (.03)
======== ======== ======== ========
See notes to consolidated condensed financial statements.
-4-
J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED IN THOUSANDS)
SIX MONTHS ENDED
-------------------
JUNE 30 JULY 1
2002 2001
-------- --------
Net cash provided by operating activities .............. $ 3,162 $ 2,189
Net cash used by investing activities:
Purchase of property and equipment .................. (1,736) (3,635)
Other investing activities .......................... (63) (61)
-------- --------
(1,799) (3,696)
Net cash (used) provided by financing activities:
Payments on debt and obligations under capital leases (1,721) (1,324)
Proceeds under bank line of credit agreement ........ 19,621 20,758
Payments under bank line of credit agreement ........ (19,653) (18,204)
Other ............................................... 48 11
-------- --------
(1,705) 1,241
Decrease in cash and cash equivalents .................. (342) (266)
Cash and cash equivalents at beginning of period ....... 1,035 1,057
-------- --------
Cash and cash equivalents at end of period ............. $ 693 $ 791
======== ========
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 six months ended June 30,
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:
SIX MONTHS ENDED QUARTER ENDED
----------------- -----------------
JUNE 30 JULY 1 JUNE 30 JULY 1
(In thousands, except per share amounts) 2002 2001 2002 2001
------- ------- ------- -------
NUMERATOR:
Net income (loss) (numerator for basic earnings
per share) .................................. $ 901 $ 234 $ 324 $ (183)
Effect of dilutive securities .................. -- -- -- --
------- ------- ------- -------
Net income (loss) after assumed conversions
(numerator for diluted earnings per share) .. $ 901 $ 234 $ 324 $ (183)
======= ======= ======= =======
DENOMINATOR:
Weighted average shares (denominator for basic
earnings per share) ......................... 6,788 6,857 6,790 6,857
Effect of dilutive securities:
Employee stock options ...................... 59 3 87 --
------- ------- ------- -------
Adjusted weighted average shares and assumed
conversions (denominator for diluted earnings
per share) .................................. 6,847 6,860 6,877 6,857
======= ======= ======= =======
Basic earnings (loss) per share ................ $ .13 $ .03 $ .05 $ (.03)
======= ======= ======= =======
Diluted earnings (loss) per share .............. $ .13 $ .03 $ .05 $ (.03)
======= ======= ======= =======
-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
antidilutive impact. For the quarter ended June 30, 2002, options to purchase
244,000 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
antidilutive effect. Due to the net loss during the second quarter of 2001, all
outstanding options were excluded from the computation of diluted earnings per
share.
For the six months ended June 30, 2002 and July 1, 2001, respectively,
options to purchase 486,000 and 704,000 shares of common stock were excluded
from the diluted earnings per share calculation, at prices ranging from $2.75 to
$11.69 (2002) and $2.25 to $11.69 (2001).
NOTE C - LONG-TERM DEBT
The Company maintains an unsecured bank line of credit for up to $20
million of revolving credit for the purpose of financing capital expenditures.
Borrowings outstanding under this line of credit totaled $14,239,000 at June 30,
2002. The Company and its bank lender recently agreed to extend the maturity of
the line of credit, as well as the Company's option to convert borrowings
outstanding under the line of credit to a term loan, to October 1, 2002 on the
same terms that existed prior to the extension. In the event of conversion to a
term loan, the principal would be repaid in 84 equal monthly installments.
Because the line of credit is scheduled to mature within three months of June
30, 2002, $1,526,000, representing nine months' principal payments if the total
credit line balance were converted to a term loan, has been reflected as a
current liability in the June 30, 2002 balance sheet.
The Company also has $6,250,000 of Convertible Subordinated Debentures that
mature on June 1, 2003 and are reflected as a current liability in the June 30,
2002 balance sheet.
While the Company believes its existing credit facility will be adequate to
meet its financing needs during 2002, it is in the final stages of evaluating
proposals for long-term real estate financing and believes that such financing
will be available on acceptable terms in an amount sufficient to reduce or fully
repay the current line of credit as well as provide for payment related to the
remaining balance of its convertible debentures. The Company presently intends
to obtain such financing, but there can be no assurance that it will be
successful in doing so. Interest rates on financing of this nature are expected
to be significantly higher than those currently being paid on balances
outstanding under the Company's line of credit. If the Company is unsuccessful
in obtaining long-term real estate financing, then it can exercise the option to
convert its credit facility to a term loan, as described above, and would
pursue alternate financing sources.
-7-
NOTE D - INCOME TAXES
The Company's provisions for income taxes for the first six months and
second 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 certain other tax
carryforwards that it has accumulated.
'
NOTE E - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 141 "Business
Combinations" ("SFAS 141") and SFAS No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001, and that
the use of the pooling-of-interest method is no longer allowed. 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. 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
-8-
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.
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:
SIX MONTHS ENDED QUARTER ENDED
--------------------- --------------------
JUNE 30 JULY 1 JUNE 30 JULY 1
2002 2001 2002 2001
-------- -------- -------- --------
Net sales ................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales ............................ 31.5 32.6 31.1 32.9
Restaurant labor and related costs ....... 33.2 33.2 33.6 33.9
Depreciation and amortization of
restaurant property and equipment ..... 4.4 4.7 4.5 4.8
Other operating expenses ................. 18.4 18.2 19.2 18.7
-------- -------- -------- --------
Total restaurant operating expenses ... 87.5 88.6 88.4 90.2
General and administrative expenses ......... 8.1 7.7 8.0 7.2
Pre-opening expense ......................... -- 0.2 -- 0.5
-------- -------- -------- --------
Operating income ............................ 4.4 3.6 3.6 2.1
Other income (expense):
Interest expense, net .................... (1.2) (1.5) (1.2) (1.4)
Other, net ............................... (0.1) (0.1) (0.1) (0.2)
-------- -------- -------- --------
Total other expense ................... (1.2) (1.6) (1.2) (1.6)
-------- -------- -------- --------
Income before income taxes .................. 3.2 1.9 2.4 0.5
Income tax provision ........................ (1.4) (1.4) (1.0) (1.4)
-------- -------- -------- --------
Net income (loss) ........................... 1.8% 0.5% 1.3% (0.8)%
======== ======== ======== ========
Restaurants open at end of period ........... 24 22
Weighted average weekly sales per restaurant:
All restaurants .......................... $ 80,300 $ 78,500 $ 78,300 $ 76,500
Same store restaurants ................... $ 80,100 $ 78,500 $ 78,400 $ 76,500
-9-
NET SALES
Net sales increased by $5,094,000, or 11.3%, and $2,474,000, also 11.3%,
for the first six months and second 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 to sales increases
within the Company's same store restaurant base. Same store sales, which include
comparable results for all restaurants open for more than 18 months, averaged
$80,100 and $78,400 per week on a base of 22 restaurants during the six months
and second quarter ended June 30, 2002, representing increases of 2.0% and 2.5%
compared to the same periods of 2001.
Management estimates the average check per guest, excluding alcoholic
beverage sales, was $15.86 and $15.79 for the first six months and second
quarter of 2002 representing increases of 4.6% and 4.8% compared to $15.16 and
$15.06 for the same periods of 2001. Menu prices for the first six months and
second quarter of 2002 increased by an estimated 2.9% compared to the same
periods in 2001. The Company estimates that customer traffic (guest counts) on a
same store basis decreased by approximately 2.5% during the first six months and
second quarter of 2002 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. These changes positively impacted both sales
performance and profitability during the last half of 2001 and the first half of
2002. While customer traffic decreased during the first six months and second
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 due to an apparent slowing of the nation's
economic recovery.
COSTS AND EXPENSES
Total restaurant operating expenses decreased to 87.5% and 88.4% of sales
in the first six months and second quarter of 2002 compared to 88.6% and 90.2%
in the corresponding periods of 2001. Cost of sales decreased to 31.5% and 31.1%
of sales in the first six months and second quarter of 2002 compared to 32.6%
and 32.9% in the corresponding periods of 2001, as the impact of increased menu
prices and favorable costs associated with poultry, salmon and effective March
1, 2002, beef, more than offset increased produce costs incurred during the
first several months of 2002 as a result of inclement weather in the western
United States.
Restaurant labor and related costs decreased from 33.9% of sales during the
second quarter of 2001 to 33.6% 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 that servers are required to contribute to each
restaurant's tip pool which, in turn, reduced the hourly wage paid by the
Company to employees participating in the tip pool program. This change, when
-10-
coupled with lower management labor and efficiencies achieved at higher sales
levels, more than offset increased payouts related to the Company's restaurant
level bonus program, higher premiums related to the Company's workers'
compensation insurance program and increased wages associated with kitchen
staff. These same factors resulted in restaurant labor and related costs
totaling 33.2% of sales for the first six months of both 2002 and 2001.
Depreciation and amortization of restaurant property and equipment
decreased to 4.4% and 4.5% of sales during the first six months and second
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 July 1, 2001. Other operating expenses increased to
18.4% and 19.2% of sales during the first six months and second quarter of 2002
compared to 18.2% and 18.7% 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.
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
insurance brokers have indicated, however, that the Company's insurance premiums
are likely to increase significantly at the time of the Company's annual policy
renewal date of October 1 due to substantial hardening of insurance markets over
the past year. For the first six weeks of the third quarter, the Company's same
store sales have been slightly below prior year levels and management
anticipates that same store sales for the third quarter may be even with, or
slightly below, the levels achieved during the third quarter of 2001. However,
management believes that, based on current sales trends and cost estimates, the
Company will post improved operating results for the third quarter as well as
the full year of 2002 as compared to the corresponding periods of 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% and 8.0% of sales for the first six months and second
quarter of 2002 compared to 7.7% and 7.2% of sales for the corresponding periods
of 2001. These increases as a percent of sales are primarily related to the
impact of providing for bonus accruals in the 2002 periods which were not
present during the 2001 periods. Management anticipates general and
administrative expenses will increase as a percentage of sales for fiscal 2002
when compared to fiscal 2001.
-11-
OTHER INCOME (EXPENSE)
Net interest expense decreased from $675,000 to $582,000 during the first
six months of 2002 compared to the same period of 2001. For the second quarter,
net interest expense decreased from $314,000 in 2001 to $285,000 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 six months and
second 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 selected tax carryforwards
that it has accumulated.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash flow from operations totaling $3,162,000 and
$2,189,000 during the first six months of 2002 and 2001, respectively. Cash and
cash equivalents decreased from $1,035,000 at year end 2001 to $693,000 at June
30, 2002.
The Company's primary need for capital is expected to continue to be for
the development and maintenance of its J. Alexander's restaurants. In addition,
the Company has $6,250,000 of outstanding Convertible Subordinated Debentures
which mature on June 1, 2003 and which have been classified as a current
liability as of June 30, 2002. 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 August 13, 2002, the
Company has repurchased approximately 112,000 shares at a cost of approximately
$280,000. The Company expects to meet its capital needs and maintain liquidity
primarily by use of cash flow from operations and use of its bank line of credit
or other long-term real estate financing as discussed below.
While management anticipates that the next J. Alexander's restaurant will
not open until early 2003, a significant portion of the costs associated with
the development of this property will be incurred during fiscal 2002. Management
estimates that the cost to purchase property for, and build and equip this
restaurant and for capital maintenance for existing restaurants will be
-12-
approximately $6.7 million for 2002. In addition, the Company may incur capital
expenditures for the purchase of property and/or construction of restaurants for
additional locations to be opened in 2003. Any such expenditures are dependent
upon the timing and success of management's efforts to locate acceptable sites.
While a working capital deficit of $13,557,000 existed as of June 30, 2002,
the Company does not believe this deficit impairs the overall financial
condition of the Company. 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. Finally, a significant portion of the current
liabilities reflected in the June 30, 2002 balance sheet relate to debt which
management anticipates will be refinanced prior to the end of fiscal 2002.
The Company maintains a bank line of credit for up to $20 million of
revolving credit for the purpose of funding capital expenditures and to provide
liquidity for meeting working capital or other needs. At June 30, 2002,
borrowings outstanding under this line of credit were $14,239,000. The line of
credit agreement contains covenants which require the Company to achieve
specified levels of senior debt to EBITDA (earnings before interest, taxes,
depreciation and amortization) and to maintain certain other financial ratios.
The Company was in compliance with these covenants at June 30, 2002 and, based
on a current assessment of its business, believes it will continue to comply
with these covenants during the remainder of 2002. 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 is currently based
on LIBOR plus a spread of two to three percent, depending on the ratio of senior
debt to EBITDA. This agreement was recently amended to extend the expiration
date to October 1, 2002. The agreement also includes an option to convert
outstanding borrowings to a term loan prior to that time. In the event of
conversion, the principal would be repaid in 84 equal monthly installments.
Because the line of credit is scheduled to mature within three months of June
30, 2002, $1,526,000, representing nine months' principal payments if the total
credit line balance were converted to a term loan, has been reflected as a
current liability in the June 30, 2002 balance sheet.
While management believes its existing credit facility will be adequate to
meet its financing needs during 2002, it is in the final stages of evaluating
proposals for long-term real estate financing and believes that such financing
will be available on acceptable terms in an amount sufficient to reduce or fully
repay the current line of credit as well as provide for payment related to the
remaining balance of its convertible debentures. The Company presently intends
to obtain such financing, but there can be no assurance that it will be
successful in doing so. Interest rates on financing of this nature are expected
to be significantly higher than those currently being paid on balances
outstanding under the Company's line of credit. If the Company
-13-
is unsuccessful in obtaining long-term real estate financing, then it can
exercise the option to convert its credit facility to a term loan, as described
above, and would pursue alternate financing sources.
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.
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.
o 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.
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o 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 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
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.
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PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit(10)(a) Correspondence dated June 18, 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.
(b) None.
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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: 8/14/02 /s/ Lonnie J. Stout II
---------------------------------- ------------------------------------
Lonnie J. Stout II
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: 8/14/02 /s/ R. Gregory Lewis
---------------------------------- ------------------------------------
R. Gregory Lewis
Vice-President and
Chief Financial Officer
(Principal Financial Officer)
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J. ALEXANDER'S CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit No. Page No.
- ----------- --------
(10)(a) Correspondence dated June 18, 2002, 20
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.
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