XNAS:JAX Quarterly Report 10-Q Filing - 4/1/2012

Effective Date 4/1/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
 
FORM 10-Q
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For quarterly period ended April 1, 2012
 
or
 
o
 
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
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (615) 269-1900
 
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 þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
 
Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer ¨
 
Smaller reporting company þ
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
As of May 15, 2012, 5,996,453 shares of the registrant’s Common Stock, $.05 par value, were outstanding.



 
 

 
 
 
 
 

 
 
PART I.  FINANCIAL INFORMATION
 
Item 1.  Financial Statements
 
J. Alexander’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited in thousands, except share and per share amounts)
 
   
April 1
   
January 1
 
   
2012
   
2012
 
ASSETS
               
CURRENT ASSETS
               
Cash and cash equivalents
 
$
9,330
   
$
7,917
 
Accounts and notes receivable
   
6,321
     
6,933
 
Inventories
   
1,461
     
1,564
 
Prepaid expenses and other current assets
   
2,015
     
996
 
TOTAL CURRENT ASSETS
   
19,127
     
17,410
 
                 
OTHER ASSETS
   
1,892
     
1,797
 
                 
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation and amortization of $67,507 and $66,272 as of April 1, 2012 and January 1, 2012, respectively
   
71,865
     
71,955
 
                 
DEFERRED INCOME TAXES
   
152
     
152
 
                 
DEFERRED CHARGES, less accumulated amortization of $1,010 and $986 as of April 1, 2012 and January 1, 2012, respectively
   
391
     
416
 
   
$
93,427
   
$
91,730
 
 
 
2

 
 
   
April 1
   
January 1
 
   
2012
   
2012
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES
               
Accounts payable
 
$
3,653
   
$
3,868
 
Accrued expenses and other current liabilities
   
6,201
     
6,133
 
Unearned revenue
   
1,433
     
1,944
 
Current portion of long-term debt and obligations under capital leases
   
1,150
     
1,123
 
TOTAL CURRENT LIABILITIES
   
12,437
     
13,068
 
                 
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES, net of portion classified as current
   
17,055
     
17,356
 
                 
OTHER LONG-TERM LIABILITIES
   
11,645
     
11,521
 
                 
STOCKHOLDERS’ EQUITY
               
Common Stock, par value $.05 per share: Authorized 10,000,000 shares; issued and outstanding 5,994,453 and 5,993,453 shares as of April 1, 2012 and January 1, 2012, respectively
   
300
     
300
 
Preferred Stock, no par value: Authorized 1,000,000 shares; none issued
   
-
     
-
 
Additional paid-in capital
   
34,665
     
34,581
 
Retained earnings
   
17,325
     
14,904
 
TOTAL STOCKHOLDERS’ EQUITY
   
52,290
     
49,785
 
Commitments and Contingencies
               
   
$
93,427
   
$
91,730
 

See notes to condensed consolidated financial statements.

 
3

 
 
J. Alexander’s Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited in thousands, except per share amounts)
                 
   
Quarter Ended
 
   
April 1
   
April 3
 
   
2012
   
2011
 
Net sales
 
$
42,711
   
$
40,749
 
Costs and expenses:
               
Cost of sales
   
13,467
     
13,452
 
Restaurant labor and related costs
   
13,745
     
13,204
 
Depreciation and amortization of restaurant property and equipment
   
1,452
     
1,466
 
Other operating expenses
   
8,224
     
8,407
 
Total restaurant operating expenses
   
36,888
     
36,529
 
General and administrative expenses
   
2,685
     
2,444
 
Operating income
   
3,138
     
1,776
 
Other income (expense):
               
Interest expense
   
(403
)
   
(424
)
Other, net
   
22
     
20
 
Total other expense
   
(381
)
   
(404
)
Income before income taxes
   
2,757
     
1,372
 
Income tax provision
   
336
 
   
310
 
Net income
 
$
2,421
   
$
1,062
 
                 
Basic earnings per share
 
$
.40
   
$
.18
 
Diluted earnings per share
 
$
.39
   
$
.18
 

See notes to condensed consolidated financial statements.

 
4

 
 
J. Alexander’s Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited in thousands)
                 
   
Quarter Ended
 
   
April 1
   
April 3
 
   
2012
   
2011
 
Cash flows from operating activities:
               
Net income
 
$
2,421
   
$
1,062
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of property and equipment
   
1,464
     
1,481
 
Share-based compensation expense
   
80
     
119
 
Other
   
83
     
63
 
Changes in assets and liabilities:
               
Accounts and notes receivable
   
633
     
143
 
Income taxes receivable
   
177
     
297
 
Prepaid expenses and other current assets
   
(1,019
)
   
(652
)
Accounts payable
   
(988
)
   
(1,122
)
Accrued expenses and other current liabilities
   
(131
)
   
(882
)
Other, net
   
(304
)
   
(362
)
Net cash provided by operating activities
   
2,416
     
147
 
                 
Cash flows from investing activities:
               
Purchase of property and equipment
   
(660
)
   
(727
)
Other investing activities
   
(73
)
   
(106
)
Net cash used in investing activities
   
(733
)
   
(833
)
             
Cash flows from financing activities:
               
Payments on debt and obligations under capital leases
   
(274
)
   
(336
)
    Other financing activities
   
4
     
37
 
Net cash used in financing activities
   
(270
)
   
(299
)
             
Increase (decrease) in cash and cash equivalents
   
1,413
     
(985
)
                 
Cash and cash equivalents at beginning of period
   
7,917
     
8,602
 
             
Cash and cash equivalents at end of period
 
$
9,330
   
$
7,617
 
             
                 
Supplemental disclosures of non-cash items:
               
Property and equipment obligations accrued at beginning of period
 
$
226
   
$
549
 
Property and equipment obligations accrued at end of period
 
$
999
   
$
238
 

See notes to condensed consolidated financial statements.
 
 
5

 
 
J. Alexander’s Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
Note A — Basis of Presentation
 
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and rules of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended April 1, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending December 30, 2012. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the J. Alexander’s Corporation (the “Company”) Annual Report on Form 10-K for the fiscal year ended January 1, 2012.
 
Net income and comprehensive income are the same for all periods presented.
 
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)
 
Quarter Ended
 
   
April 1
   
April 3
 
   
2012
   
2011
 
Numerator:
               
Net income (numerator for basic and diluted earnings per share)
 
$
2,421
   
$
1,062
 
Denominator:
               
Weighted average shares (denominator for basic earnings per share)
   
5,994
     
5,978
 
Effect of dilutive securities
   
186
     
80
 
Adjusted weighted average shares (denominator for diluted earnings per share)
   
6,180
     
6,058
 
                 
Basic earnings per share
 
$
.40
   
$
.18
 
Diluted earnings per share
 
$
.39
   
$
.18
 
 
The calculations of diluted earnings per share exclude options for the purchase of 383,000 and 483,500 shares of the Company’s common stock for the quarters ended April 1, 2012 and April 3, 2011, respectively, because the effect of their inclusion would be anti-dilutive.
 
 
6

 
 
Note C – Income Taxes
 
Income tax expense for the first quarter of 2012 has been provided for based on an estimated 12.2% effective tax rate expected to be applicable for the full 2012 fiscal year, which compares to an effective tax rate of 22.6% that was used for the same quarter of the prior year.
 
The Company’s effective annual tax rate has historically been reduced by its ability to utilize FICA tip credits to offset a significant amount of the current portion of its federal tax liability.  The Company will continue to have FICA tip credit carryforwards available to reduce its federal income tax liability in 2012. In addition, because the Company continues to maintain a valuation allowance for substantially all of its net deferred tax assets, its income tax provision consists of income taxes currently payable which include the effect of differences between book and taxable income.  The effect of certain tax deductions the Company expects to receive in 2012 as well as changes in certain state income tax regulations are factors which contribute to the reduction of the Company’s estimated effective tax rate for the current year compared to the rate used in the first quarter of 2011.
 
Note D – Commitments and Contingencies
 
As a result of the disposition of its Wendy’s operations in 1996, the Company remains secondarily liable for certain real property leases with remaining terms of one to four years.  The total estimated maximum amount of lease payments remaining on these nine leases as of April 1, 2012, was approximately $1,100,000.  Also, in connection with the sale of its Mrs. Winner’s Chicken & Biscuit restaurant operations in 1989 and certain previous dispositions, the Company remains secondarily liable for certain real property leases with remaining terms of one to three years.  The total estimated maximum amount of lease payments remaining on these 12 leases as of April 1, 2012, was approximately $600,000.  Additionally, in connection with the previous disposition of certain other Wendy’s restaurant operations, primarily the southern California restaurants in 1982, the Company remains secondarily liable for real property leases with remaining terms of one to four years.  The total estimated maximum amount of lease payments remaining on these five leases as of April 1, 2012, was approximately $600,000.
 
In February 2012, the Company agreed to a settlement of a previously disclosed lawsuit, Dionne Michelle Williams-Green v. J. Alexander’s Restaurants, Inc., pending in the United States District Court for the Northern District of Illinois. The settlement is subject to court approval. The case was filed by a former hourly employee of the Company in Illinois and was later certified as a class action on a claim that the Company’s tip share pool in two restaurants was invalid.  During the fourth quarter of 2011, the Company accrued an estimate of the amount it believes will be necessary to settle this claim.
 
The Company is currently undergoing a federal employment tax audit for 2009 and 2010.  The potential financial impact of this audit is not determinable at this time.
 
In addition to the matters described above, the Company is from time to time subject to routine litigation and claims incidental to its business, including actions with respect to federal and state tax matters, labor-related claims and other matters. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. However, management believes that, based on current knowledge, the final outcome of these other matters will not have a material adverse effect on the Company’s financial condition, operating results or liquidity. Regardless of the outcome, legal proceedings can have an adverse effect on the Company because of defense costs, diversion of management resources and other factors.
 
 
7

 
 
Note E — Fair Value Measurements
 
As of April 1, 2012 and January 1, 2012, the fair value of cash and cash equivalents, accounts receivable, inventory, accounts payable and accrued expenses and other current liabilities approximated their carrying value based on the short maturity of these instruments.  The fair value of long-term mortgage financing is determined using current applicable interest rates for similar instruments and collateral as of the balance sheet date.  The carrying value and estimated fair value of the Company’s mortgage loan were $18,068,000 and $19,337,000, respectively, as of April 1, 2012 compared to $18,332,000 and $19,644,000, respectively, at January 1, 2012.
 
There were no assets and liabilities measured at fair value on a nonrecurring basis during the first quarter of fiscal 2012 or 2011.
 
Note F — Recent Accounting Pronouncements
 
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This pronouncement is effective for reporting periods beginning on or after December 15, 2011. The adoption of ASU 2011-04 did not have a significant impact to the Company’s Condensed Consolidated Financial Statements.
 
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”). The amendments in this ASU require entities to disclose additional information about certain financial instruments and derivatives that are eligible for offset or subject to master netting arrangements. The objective of this ASU is to facilitate comparison between financial statements presented in accordance with GAAP and financial statements presented in accordance with IFRS. The amendments in this ASU are effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within that fiscal year. Other than enhanced disclosures, the adoption of ASU 2011-11 is not expected to have a material impact on the Company’s Consolidated Financial Statements.
 
 
8

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
RESULTS OF OPERATIONS
 
Overview
 
J. Alexander's Corporation (the “Company”) operates upscale casual dining restaurants.  At April 1, 2012, the Company operated 33 J. Alexander’s restaurants in 13 states.  The Company’s net sales are derived primarily from the sale of food and alcoholic beverages in its restaurants.
 
The Company’s strategy is for J. Alexander’s restaurants to compete in the restaurant industry by providing guests with outstanding professional service, high-quality food, and an attractive environment with an upscale, high-energy ambiance.  Quality is emphasized throughout J. Alexander’s operations and substantially all menu items are prepared on the restaurant premises using fresh, high-quality ingredients.  The Company’s goal is for each J. Alexander’s restaurant to be perceived by guests in its market as a market leader in each of the areas above.  J. Alexander’s restaurants offer a contemporary American menu designed to appeal to a wide range of consumer tastes.  The Company believes, however, that its restaurants are most popular with more discriminating guests with higher discretionary incomes.  J. Alexander’s typically does not advertise in the media and relies on each restaurant to increase sales by building its reputation as an outstanding dining establishment.  The Company has generally been successful in achieving sales increases in its restaurants over time using this strategy.  However, the Company’s restaurants which opened in late fiscal 2007 and fiscal 2008 have experienced particular difficulties in building sales and certain of them are having a significant negative impact on the Company’s profitability.
 
The restaurant industry is highly competitive and is often affected by changes in consumer tastes and discretionary spending patterns; changes in general economic conditions; public safety conditions or concerns; demographic trends; weather conditions; the cost of food products, labor, energy and other operating costs; and governmental regulations.  Because of these factors, the Company’s management believes it is of critical importance to the Company’s success to effectively execute the Company’s operating strategy and to constantly develop and refine the critical conceptual elements of J. Alexander’s restaurants in order to distinguish them from other casual dining competitors and maintain the Company’s competitive position.
 
The restaurant industry is also characterized by high capital investments for new restaurants and relatively high fixed or semi-variable restaurant operating expenses.  Because of the high fixed and semi-variable expenses, changes in sales in existing restaurants are generally expected to significantly affect restaurant profitability because many restaurant costs and expenses are not expected to change at the same rate as sales.  Restaurant profitability can also be negatively affected by inflationary and regulatory increases in operating costs and other factors.  Management continues to believe that excellence in restaurant operations, and particularly providing exceptional guest service, will increase net sales in the Company’s restaurants over time.
 
Changes in sales for existing restaurants, or same store sales, are generally measured in the restaurant industry by computing the change in sales for the same group of restaurants from the same period in the prior year.  Same store sales changes can be the result of changes in guest counts, which the Company estimates based on a count of entrée items sold, and changes in the average check per guest.  The average check per guest can be affected by menu price changes and the mix of menu items sold.  Management regularly analyzes guest count, average check and product mix trends for each restaurant in order to improve menu pricing and product offering strategies.  Management believes it is important to maintain or increase guest counts and average guest checks over time in order to improve the Company’s profitability.
 
 
9

 
 
Other key indicators which can be used to evaluate and understand the Company’s restaurant operations include cost of sales, restaurant labor and related costs and other operating expenses, with a focus on these expenses as a percentage of net sales. Since the Company uses primarily fresh ingredients for food preparation, the cost of food commodities can vary significantly from time to time due to a number of factors.  The Company generally expects to increase menu prices in order to offset the increase in the cost of food products as well as increases in labor and related costs and other operating expenses, but attempts to balance these increases with the goals of providing reasonable value to the Company’s guests.  Management believes that restaurant operating margin, which is net sales less total restaurant operating expenses expressed as a percentage of net sales, is an important indicator of the Company’s success in managing its restaurant operations because it is affected by the level of sales achieved, menu offering and pricing strategies, and the management and control of restaurant operating expenses in relation to net sales.
 
Because large capital investments are required for J. Alexander’s restaurants and because a significant portion of labor costs and other operating expenses are fixed or semi-variable in nature, management believes the sales required for a J. Alexander’s restaurant to break even are relatively high compared to break-even sales volumes of many other casual dining concepts.  As a result, it is necessary for the Company to achieve relatively high sales volumes in its restaurants compared to the average sales volumes of other casual dining concepts in order to achieve desired financial returns.
 
The opening of new restaurants by the Company can have a significant impact on the Company’s financial performance because pre-opening expense for new restaurants is significant and most new restaurants incur operating losses during their early months of operation.  Some of the Company’s restaurants, including the two restaurants opened in fiscal 2007 and the three restaurants opened in fiscal 2008, have experienced losses for considerably longer periods.  No new restaurants have been opened since fiscal 2008 and none are planned for fiscal 2012.
 
 
10

 
 
The following table sets forth, for the periods indicated, (i) the items in the Company’s Condensed Consolidated Statements of Income expressed as a percentage of net sales, and (ii) other selected operating data:
 
   
Quarter Ended
   
April 1
 
April 3
   
2012
 
2011
Net sales
 
100.0
%
 
100.0
%
Costs and expenses:
           
Cost of sales
 
31.5
   
33.0
 
Restaurant labor and related costs
 
32.2
   
32.4
 
Depreciation and amortization of restaurant property and equipment
 
3.4
   
3.6
 
Other operating expenses
 
19.3
   
20.6
 
Total restaurant operating expenses
 
86.4
   
89.6
 
General and administrative expenses
 
6.3
   
6.0
 
Operating income
 
7.3
   
4.4
 
Other income (expense):
           
Interest expense
 
(0.9
)
 
(1.0
)
Other, net
 
0.1
   
 
Total other expense
 
(0.9
)
 
(1.0
)
Income before income taxes
 
6.5
   
3.4
 
Income tax provision
 
0.8
   
0.8
 
Net income
 
5.7
%
 
2.6
%
             
Note: Certain percentage totals do not sum due to rounding.
             
Restaurants open at end of period                                                                                        
 
33
   
33
 
             
Average weekly net sales per restaurant (1):
 
$
99,600
   
$
95,300
 
Percent increase
   
4.5
%
       
 
                   
(1) The Company computes average weekly net sales per restaurant by dividing total restaurant sales for the period by the total number of days all restaurants were open for the period to obtain a daily sales average, with the daily sales average then multiplied by seven to arrive at the average weekly net sales per restaurant.  Days on which restaurants are closed for business for any reason other than the scheduled closure of all J. Alexander’s restaurants on Thanksgiving day and Christmas day are excluded from this calculation.  Revenue associated with reductions in liabilities for gift cards which are considered to be only remotely likely to be redeemed is not included in the calculation of average weekly net sales per restaurant.
 
 
11

 
 
Net Sales
 
Net sales increased by $1,962,000, or 4.8%, in the first quarter of 2012 compared to the first quarter of 2011.  For the first quarter of 2012, the Company recorded average weekly net sales per restaurant of $99,600, up from $95,300 in the corresponding quarter a year earlier. The Company’s average weekly net same store sales per restaurant for the first quarter of 2012 were the same as the average weekly net sales per restaurant because same store sales calculations are based on restaurants open for more than 18 months and no new restaurants have opened since 2008. The 4.5% increase in average weekly net sales per restaurant for the first quarter of 2012 compared to the first quarter of 2011 was less than the 4.8% increase in total net sales because of the exclusion from the weekly average calculation of a total of ten restaurant days that certain restaurants were closed due to inclement weather in the first quarter of 2011 as compared to only one restaurant day that was excluded from the calculation for the same quarter in 2012.
 
Management estimates the average check per guest, including alcoholic beverage sales, increased by 5.3% to $28.13 during the first quarter of 2012 compared to $26.72 during the first quarter of 2011 and that the effect of menu price increases was approximately 4.2% in the first quarter of 2012 compared to the same period of 2011.  Management estimates that weekly average guest counts decreased by approximately 0.9% in the first quarter of 2012 compared to the first quarter of 2011.  
 
The Company has experienced positive same store sales for the last ten consecutive quarters. Management is encouraged by recent same store sales trends which it believes are due to improved economic conditions and consumer spending patterns as well as the Company’s continued emphasis on maintaining excellent operations.  However, there can be no assurance that favorable trends will continue or that consumer spending patterns have not been altered on a long-term basis, which would make it difficult to sustain the current sales momentum.
 
Restaurant Costs and Expenses
 
Total restaurant operating expenses decreased to 86.4% of net sales in the first quarter of 2012 from 89.6% in the first quarter of 2011 due primarily to the favorable impact of increased sales.  Restaurant operating margins (net sales minus total restaurant operating expenses divided by net sales) increased to 13.6% in the first quarter of 2012 from 10.4% in the comparable period of 2011.
 
Cost of sales, which includes the cost of food and beverages, for the first quarter of 2012 totaled 31.5% of net sales, down from 33.0% of net sales in the corresponding period of 2011.  Although beef prices paid by the Company increased by almost 20% in the first quarter of 2012 compared to the first quarter of 2011, the Company was able to more than offset this increase with the effect of a combination of menu prices increases, lower prices paid for certain other food commodities and other actions taken to lower food costs.  Approximately 25% to 30% of cost of sales is comprised of beef purchases which are made at weekly market prices.  Management estimates that the effect of higher beef prices was approximately 1.5% of net sales in the first quarter of 2012.  The Company’s beef purchases remain subject to variable market conditions and management anticipates that prices for beef in 2012 will exceed those paid in 2011.
 
Restaurant labor and related costs decreased to 32.2% of net sales in the first quarter of 2012 from 32.4% in the same period of 2011 due primarily to the effect of higher average weekly net sales per restaurant.  Depreciation and amortization of restaurant property and equipment decreased by $14,000 in the first quarter of 2012 compared to the first quarter of 2011 primarily due to certain equipment becoming fully depreciated subsequent to the first quarter of 2011.
 
 
12

 
 
Other operating expenses, which include restaurant level expenses such as china and supplies, laundry and linen costs, repairs and maintenance, utilities, credit card fees, rent, property taxes and insurance, decreased to 19.3% of net sales in the first quarter of 2012 from 20.6% of net sales in the first quarter of 2011 due to the effect of both higher average weekly net sales per restaurant and reductions in certain operating expenses achieved by the Company.
 
General and Administrative Expenses
 
Total general and administrative expenses, which include all supervisory costs and expenses, management training and relocation costs, and other costs incurred above the restaurant level, increased by $241,000, or 9.9%, in the first quarter of 2012 compared to the first quarter of 2011.   This increase is attributed primarily to the addition of certain staff positions subsequent to the first quarter of 2011, a marketing research project which was completed during the first quarter of 2012, increased legal and other professional advisory fees and increased incentive compensation accruals, which more than offset a reduction in restaurant management training costs.
 
Income Taxes
 
Income tax expense for the first quarter of 2012 has been provided for based on an estimated 12.2% effective tax rate expected to be applicable for the full 2012 fiscal year, which compares to an effective tax rate of 22.6% that was used for the same quarter of the prior year.
 
The Company’s effective annual tax rate has historically been reduced by its ability to utilize FICA tip credits to offset a significant amount of the current portion of its federal tax liability.  The Company will continue to have FICA tip credit carryforwards available to reduce its federal income tax liability in 2012. In addition, because the Company continues to maintain a valuation allowance for substantially all of its net deferred tax assets, its income tax provision consists of income taxes currently payable which include the effect of differences between book and taxable income.  The effect of certain tax deductions the Company expects to receive in 2012 as well as changes in certain state income tax regulations are factors which contribute to the reduction of the Company’s estimated effective tax rate for the current year compared to the rate used in the first quarter of 2011.
 
 
13

 

Outlook
 
Management is pleased with the Company’s sales and operating performance improvements in recent quarters and, subject to the comments below regarding the possibility of a contested election of directors, expects continued improvement for the balance of fiscal 2012. While same store sales for the second quarter of 2012 to date have increased generally in line with the increase experienced during the first quarter of 2012, management remains concerned that the effects of high gasoline prices and uncertain economic conditions could affect consumer discretionary spending and have a negative impact on the Company’s sales performance at some point during the year.  Management is also quite concerned about the possible impact of increases in food commodity costs, particularly with regard to beef market prices, which the Company is currently experiencing and which are expected to continue during 2012.  While additional increases in food input costs are expected over the course of 2012, management expects that based on current trends and its outlook for the remainder of the year, cost of sales as a percentage of sales will decrease in 2012 compared to 2011, although there can be no assurance that these results will be achieved.   Depending on the magnitude of additional input cost increases, management may consider increasing menu prices or making other menu revisions in order to offset some portion of the impact of cost increases.  However, there can be no assurance that any such changes will offset the full effect of these or other cost increases or that they will not negatively affect guest counts or profitability.
 
A shareholder has filed a preliminary proxy statement with the SEC indicating its intent to nominate two director candidates for election to the Company’s Board of Directors at the Company’s 2012 Annual Meeting of Shareholders.  If a contested election ensues, costs associated with such an event are expected to be significant.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The Company’s capital needs are currently primarily for maintenance of and improvements to its existing restaurants, and for meeting debt service requirements and operating lease obligations.  The Company has met its cash requirements and maintained liquidity in recent years primarily through use of cash and cash equivalents on hand, cash flow from operations and the availability of a bank line of credit.
 
Cash and cash equivalents as of April 1, 2012 totaled $9,330,000 compared to $7,917,000 at the end of 2011.  Substantially all of the Company’s cash and cash equivalents are maintained in bank accounts which are fully insured by the FDIC or in money market funds which invest primarily in short term U.S. Treasury securities.  The Company had a working capital surplus of $6,690,000 at April 1, 2012 compared to a surplus of $4,342,000 at January 1, 2012.  Management expects that future cash flows from operating activities will vary primarily as a result of future operating results.
 
Management currently estimates that capital expenditures for 2012 will be approximately $5,000,000. This amount includes expenditures for improvements and asset replacements related to the Company’s restaurants of approximately $4,500,000, of which $700,000 is designated for certain ADA compliance upgrades and the remodel of one location.  Management does not plan to open any new restaurants in 2012 and remains cautious about future development.  New restaurant development could also be constrained in the future due to lack of capital resources depending on the amount of cash flow generated by future operations of the Company or the availability to the Company of additional financing on terms acceptable to the Company, if at all.
 
 
14

 
 
The Company maintains a $5,000,000 revolving line of credit which is set to expire on May 22, 2012, and which the Company currently intends to renew on the same or similar terms.  The line of credit is secured by liens on certain personal property of the Company and its subsidiaries, subsidiary guaranties and a negative pledge on certain real property.  No amounts were outstanding under the revolving line of credit at April 1, 2012, or subsequent to that time through May 15, 2012.
 
A mortgage loan obtained in 2002 represents the most significant portion of the Company’s outstanding long-term debt.  The loan, which was originally for $25,000,000, had an outstanding balance of $18,068,000 at April 1, 2012.  The loan is secured by the real estate, equipment and other personal property of nine of the Company’s restaurant locations with an aggregate net book value of $21,967,000 at April 1, 2012.
 
The Company believes that cash and cash equivalents on hand as of April 1, 2012 and cash flow generated by future operations will be adequate to meet the Company’s operating and capital needs for 2012.  The Company was in compliance with the financial covenants of its debt agreements as of April 1, 2012.  Should the Company fail to comply with these covenants, management would likely request waivers of the covenants, attempt to renegotiate them or seek other sources of financing. However, if these efforts were not successful, the unused portion of the Company’s bank line of credit would not be available for borrowing and amounts outstanding under the Company’s debt agreements could become immediately due and payable, and there could be a material adverse effect on the Company’s financial condition and operations.
 
OFF BALANCE SHEET ARRANGEMENTS
 
As of May 15, 2012, the Company had no financing transactions, arrangements or other relationships with any unconsolidated affiliated entities. Additionally, the Company is not a party to any financing arrangements involving synthetic leases or trading activities involving commodity contracts.

CONTINGENT OBLIGATIONS
 
From 1975 through 1996, the Company operated restaurants in the quick-service restaurant industry.  The discontinuation of these quick-service restaurant operations included disposals of restaurants that were subject to lease agreements which typically contained initial lease terms of 20 years plus two additional option periods of five years each.  In connection with certain of these dispositions, the Company remains secondarily liable for ensuring financial performance as set forth in the original lease agreements.  The Company can only estimate its contingent liability relative to these leases, as any changes to the contractual arrangements between the current tenant and the landlord subsequent to the assignment are not required to be disclosed to the Company.  A summary of the Company’s estimated contingent liability as of April 1, 2012, is as follows:
         
Wendy’s restaurants (14 leases)
 
$
1,700,000
 
Mrs. Winner’s Chicken & Biscuits restaurants (12 leases)
   
600,000
 
Total contingent liability related to assigned leases
 
$
2,300,000
 
 
There have been no payments by the Company of such contingent liabilities in the history of the Company.
 
 
15

 
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Critical accounting policies are those that management believes to be the most significant judgments and estimates used in the preparation of the Company’s Condensed Consolidated Financial Statements.  Judgments or uncertainties regarding the application of these policies could potentially result in materially different amounts being reported under different assumptions and conditions.  There have been no material changes to the critical accounting policies previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2012.
 
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.  Other risks, uncertainties and factors which could affect actual results include the Company’s ability to maintain satisfactory guest count levels and  maintain or increase  sales and operating margins in its restaurants under varying economic conditions, which could worsen, potentially resulting in additional asset impairment charges and/or restaurant closures and charges associated therewith; the effect of  higher gasoline prices or commodity prices, unemployment and other economic factors on consumer demand; increases in food input costs or product shortages and the Company’s response to them; changes in consumer spending, consumer tastes, and consumer attitudes toward nutrition and health; the potential impact of mandated food content labeling and disclosure legislation; costs that may be incurred in connection with the contested election of directors; expenses incurred if the Company is the subject of claims or litigation, including matters resulting from complaints or allegations from current, former or prospective employees, or increased governmental regulation; the impact associated with recently passed federal health care reform legislation, including the operating costs necessary to comply with applicable health care benefit requirements; the impact of tax audits conducted by the Internal Revenue Service and various state tax authorities; increases in the minimum wage the Company is required to pay; availability of qualified employees; increased cost of utilities, insurance and other restaurant operating expenses; potential fluctuations of quarterly operating results due to seasonality and other factors; the effect of hurricanes and other weather disturbances which are beyond the control of the Company; the number and timing of new restaurant openings and the Company’s ability to operate them profitably; competition within the casual dining industry, which is very intense; competition by the Company’s new restaurants with its existing restaurants in the same vicinity; fluctuations in the Company’s operating results which could affect compliance with its debt covenants and ability to borrow funds; conditions in the U.S. credit markets and the availability of bank financing on acceptable terms; changes in accounting standards, which may affect the Company’s reported results of operations; and expenses the Company may incur in order to comply with changing corporate governance and public disclosure requirements of the Securities and Exchange Commission and The NASDAQ Stock Market. See “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2012 for a description of a number of risks and uncertainties which could affect actual results.
 
 
16

 
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
The Company is a smaller reporting company as defined in Item 10 of Regulation S-K and thus is not required to report the quantitative and qualitative measures of market risk specified in Item 305 of Regulation S-K.
 
Item 4.  Controls and Procedures
 
(a)  
Evaluation of disclosure controls and procedures.  The Company’s principal executive officer and principal financial officer have conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report.  Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures were effective.
 
(b)  
Changes in internal controls.  There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
17

 
 
PART II.  OTHER INFORMATION
 
Item 6. Exhibits

The Exhibit Index on page 20 of this Quarterly Report on Form 10-Q lists the exhibits that are filed or furnished, as applicable, as part of this Quarterly Report on Form 10-Q.

 
18

 
 
 
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: May 16, 2012
/s/ Lonnie J. Stout II  
 
Lonnie J. Stout II 
 
Chairman, President and Chief Executive Officer
(Principal Executive Officer) 
 
   
   
Date: May 16, 2012
/s/ R. Gregory Lewis  
 
R. Gregory Lewis 
 
Vice President and Chief Financial Officer
(Principal Financial Officer) 
 
 
19

 
 
J. ALEXANDER’S CORPORATION AND SUBSIDIARIES
 
Exhibit No.

     
Exhibit (3)(a)
 
Charter, as amended (Restated for SEC filing purposes only).
     
Exhibit (4)(a)
 
Rights Agreement, dated as of March 5, 2012, between J. Alexander’s Corporation and Computershare Trust Company, N.A. (Exhibit 4.1 of the Registrant’s Report on Form 8-K filed March 6, 2012 (File No. 1-8766), is incorporated herein by reference).
     
Exhibit (4)(b)
 
Amendment to Rights Agreement, dated as of March 5, 2012, between J. Alexander’s Corporation and Computershare Trust Company, N.A. (Exhibit 4.2 of the Registrant’s Report on Form 8-K filed March 6, 2012 (File No. 1-8766), is incorporated herein by reference).
     
Exhibit (10)(a)
 
Severance Benefits Agreement between J. Alexander’s Corporation and Lonnie J. Stout, II, as amended (Restated for SEC filing purposes only).
     
Exhibit (10)(b)
 
Severance Benefits Agreement between J. Alexander’s Corporation and R. Gregory Lewis, as amended (Restated for SEC filing purposes only).
     
Exhibit (31.1)
 
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
Exhibit (31.2)
 
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
Exhibit (32.1)
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
Exhibit (101)
  
The following financial statements from the Company’s 10-Q for the fiscal quarter ended April 1, 2012, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Cash Flows and (iv) Notes to Condensed Consolidated Financial Statements.
 

 
20

XNAS:JAX Quarterly Report 10-Q Filling

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XNAS:JAX Quarterly Report 10-Q Filing - 4/1/2012
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