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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

J. ALEXANDER’S CORPORATION

3401 West End Avenue, Suite 260, P.O. Box 24300, Nashville, Tennessee 37202

(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  [X]   No  [ ]

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Yes  [ ]   No  [X]

Common Stock Outstanding — 6,508,373 shares at May 13, 2003.

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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)

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See notes to consolidated condensed financial statements.

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J. Alexander’s Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited in thousands, except per share amounts)

See notes to consolidated condensed financial statements.

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J. Alexander’s Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Unaudited in thousands)

See notes to consolidated condensed financial statements.

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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 2003 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 three months ended March 30, 2003, are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the J. Alexander’s Corporation’s (the “Company’s”) annual report on Form 10-K for the fiscal year ended December 29, 2002.

NOTE B — EARNINGS PER SHARE

      The following table sets forth the computation of basic and diluted earnings per share:

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      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 March 30, 2003, options to purchase 423,000 shares of common stock, at prices ranging from $3.42 to $11.69, were excluded from the computation of diluted earnings per share due to their antidilutive effect. During the corresponding period of 2002, options to purchase 736,000 shares of common stock, at prices ranging from $2.75 to $11.69, were similarly excluded from the computation of diluted earnings per share.

NOTE C – INCOME TAXES

      The Company’s provisions for income taxes for the first quarters of both 2003 and 2002 result from estimated federal alternative minimum tax (AMT) and state income taxes payable.

      The effective tax rates result from the AMT rate being applied to the Company’s pre-tax accounting income after adding back certain tax preference items as well as permanent differences and timing differences in book and tax income. The Company maintains a significant valuation allowance on its deferred tax assets, and 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.

NOTE D – LONG-TERM DEBT

      In October 2002, the Company obtained $25,000,000 of long-term financing through completion of a mortgage loan transaction. The mortgage loan has an effective annual interest rate of 8.2% and is payable in equal monthly installments of principal and interest of approximately $212,000 through November 2022. At March 30, 2003, the mortgage loan had an outstanding balance of $24,823,000. A portion of these funds was used to pay off the outstanding balance of $15,470,000 on the Company’s bank line of credit, terminating that facility. Remaining funds were invested in short-term money market funds and will be used primarily for retiring the Company’s Convertible Subordinated Debentures. During the quarter ended March 30, 2003, the Company redeemed $4,000,000 of the Convertible Subordinated Debentures and the remaining $2,250,000 of obligations mature on June 1, 2003.

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NOTE E – STOCK BASED COMPENSATION

      The Company accounts for its stock compensation arrangements using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25 “Accounting for Stock Issued to Employees” and, accordingly, typically recognizes no compensation expense for such arrangements.

      The following table represents the effect on net income and earnings per share if the Company had applied the fair value based Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:

      As required, the pro forma disclosures above include options granted since January 1, 1995. Consequently, the effects of applying SFAS No. 123 for providing pro forma disclosures may not be representative of the effects on reported net income for future years until all options outstanding are included in the pro forma disclosures. For purposes of pro forma disclosures, the estimated fair value of stock-based compensation plans and other options is amortized to expense primarily over the vesting period.

Note F – GOODWILL AND OTHER INTANGIBLE ASSETS

      In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which eliminated the systematic amortization of goodwill. The Company adopted SFAS No. 142, effective December 31, 2001, and ceased amortization of its goodwill balance. However, intangible assets with finite lives continue to be amortized over their estimated useful lives.

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      SFAS No. 142 also required the Company to complete an impairment review of its goodwill. During the fourth quarter of 2002, the Company completed its transitional impairment test and determined that the goodwill associated with the acquisition of its original restaurant was impaired. Accordingly, effective as of the first quarter of fiscal 2002, the Company recorded as a cumulative effect of change in accounting principle a write-off of its goodwill balance in the amount of $171,000 on which the Company recognized no tax benefit.

Note J – COMMITMENTS AND CONTINGENCIES

      As a result of the disposition of its Wendy’s operations in 1996, the Company remains secondarily liable for certain real property leases with remaining terms of one to thirteen years. The total estimated amount of lease payments remaining on these 27 individual leases at March 30, 2003 was approximately $5.5 million. In connection with the sale of its Mrs. Winner’s Chicken & Biscuit restaurant operations in 1989 and certain previous dispositions, the Company also remains secondarily liable for certain real and personal property leases with remaining terms of one to five years. The total estimated amount of lease payments remaining on these 33 individual leases at March 30, 2003, was approximately $2.1 million. Additionally, in connection with the previous disposition of certain other Wendy’s restaurant operations, primarily the southern California Wendy’s restaurants in 1982, the Company remains secondarily liable for certain real property leases with remaining terms of one to five years. The total estimated amount of lease payments remaining on these 11 individual leases as of March 30, 2003, was approximately $1.3 million.

      The Company is from time to time subject to routine litigation incidental to its business. The Company believes that the results of such legal proceedings will not have a materially adverse effect on the Company’s financial condition.

NOTE G – LINE OF CREDIT

      On May 12, 2003, the Company entered into a $5 million secured bank line of credit agreement which is available for financing capital expenditures related to the development of new restaurants and for general operating purposes. Provisions of the line of credit agreement require that a minimum fixed charge coverage ratio be maintained and that the Company’s leverage ratio not exceed a specified level. The Company’s ability to incur additional debt outside of the line of credit is also restricted. The line of credit is secured by the real estate of two of the Company’s restaurant locations with an aggregate book value of $7,701,000 at March 30, 2003 and bears interest at the rate of LIBOR plus a spread of two to four percent, depending on the leverage ratio. The credit line expires on April 30, 2006, unless converted to a term loan under the provisions of the agreement prior to March 30, 2006.

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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 Income bear to total net sales, and (ii) other selected operating data:

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Net Sales

      Net sales increased by $818,000, or 3.2%, to $26,450,000 during the first quarter of 2003 from $25,632,000 during the same period of 2002. This increase was attributable to sales increases within the Company’s same store restaurant base and a new restaurant which opened in March, 2003.

      Same store sales, which include comparable results for all restaurants open for more than 18 months, totaled $83,600 per week on a base of 22 restaurants during the quarter ended March 30, 2003, an increase of 2.1% compared to $81,900 per week during the same period of 2002. Management estimates the average check per guest, excluding alcoholic beverage sales, was $15.81 for the first quarter of 2003 representing a decrease of 0.8% compared to $15.93 for the first quarter of 2002. Menu prices for the first quarter of 2003 decreased by an estimated 0.4% compared to the same period in 2002. The Company estimates that customer traffic (guest counts) on a same store basis increased by 2.2% in the first quarter of 2003 compared to the corresponding period of 2002.

      Management believes that continued emphasis on providing professional service combined with effective menu management will continue to build sales and increase customer traffic over time. However, the results of these efforts may be dependent on improvement in the nation’s economy and consumer confidence levels.

Costs and Expenses

      Total restaurant operating expenses decreased to 86.2% of sales in the first quarter of 2003 from 86.6% in the corresponding period of 2002, with restaurant operating margins increasing to 13.8% from 13.4% for the respective periods. Cost of sales decreased to 31.8% in the first quarter of 2003 compared to 32.0% in the corresponding period of 2002, as favorable costs associated with pork and produce more than offset increased costs associated with seafood and poultry products.

      Restaurant labor and related costs decreased from 32.8% of sales during the first quarter of 2002 to 32.4% of sales during the first quarter of 2003. This decrease is due largely to the effect of higher tip share contributions by restaurant servers to each restaurant’s tip pool, which resulted in reductions in the hourly wage rates paid by the Company to the employees receiving distributions under the tip pool program. The favorable effects of the higher tip share contributions more than offset the impact of increased wages associated with kitchen staff and increases in workers’ compensation insurance premiums and other benefit related items.

      Depreciation and amortization of restaurant property and equipment decreased to 4.0% of sales during the first quarter of 2003, compared to 4.3% of sales during the corresponding period of the prior year, primarily due to assets which became fully depreciated subsequent to March 31, 2002.

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      Other operating expenses increased to 18.0% of sales during the first quarter of 2003 compared to 17.6% of sales during the same period of 2002. This increase is primarily related to higher repair and maintenance expenditures and increased utilities expense, primarily related to natural gas, during the first quarter of 2003.

      While management expects the Company to continue to make progress in the performance of its restaurants during the remainder of 2003, much of the financial improvement achieved in this area will likely be offset by large increases expected in pre-opening expense and interest expense as discussed below.

      Management believes that continuing to increase sales volumes in the Company’s restaurants is a significant factor in improving the Company’s profitability and it intends to maintain a low new restaurant development rate of one to 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, decreased from $2,082,000 during the first quarter of 2002 to $1,886,000 during the corresponding period of 2003. Reduced management training and relocation costs, which typically comprise 15-20% of the Company’s total general and administrative expenses, were primarily responsible for the decrease noted above. As a percentage of sales, general and administrative expenses decreased from 8.1% during the first quarter of 2002 to 7.1% during the comparable period in 2003.

Pre-Opening Expense

      Pre-opening costs, which are expensed as incurred, totaled $271,000 during the first quarter of 2003 and were incurred in connection with the Northbrook, Illinois restaurant opened in March of 2003. There were no new restaurants opened during 2002. In addition to the Northbrook restaurant, the Company plans to open one additional new restaurant in 2003 and, as a result, expects pre-opening expenses to increase by approximately $600,000 in 2003 compared to 2002.

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