restaurant operating margin, which represents 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 many other casual dining concepts and that it is necessary for the Company to achieve relatively high sales volumes in its restaurants in order to achieve desired financial returns. 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 attractive financial returns on the Company's investments in new restaurants.
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. The Company opened three new restaurants in the last half of 2008 and two new restaurants in the fourth quarter of 2007. No new restaurants were opened in 2006 and none are planned for 2009.
The following table sets forth, for the fiscal years indicated, (i) the items in the Company's Consolidated Statements of Income expressed as a percentage of net sales, and (ii) other selected operating data:

                                                                              Years Ended
                                                         December 28          December 30          December 31
                                                            2008                 2007                 2006
Net sales                                                       100.0 %              100.0 %              100.0 %
Costs and expenses:
Cost of sales                                                    32.2                 32.5                 32.5
Restaurant labor and related costs                               33.3                 31.9                 31.6
Depreciation and amortization of restaurant
property and equipment                                            4.2                  3.7                  3.8
Other operating expenses                                         21.4                 19.6                 19.5

Total restaurant operating expenses                              91.2                 87.7                 87.4

General and administrative expenses                               7.2                  6.8                  7.0
Pre-opening expense                                               1.2                  0.7                    -

Operating income                                                  0.4                  4.8                  5.6

Other income (expense):
Interest expense                                                 (1.2 )               (1.3 )               (1.4 )
Interest income                                                   0.1                  0.4                  0.3
Other, net                                                          -                  0.1                  0.1

Total other expense                                              (1.1 )               (0.8 )               (1.1 )

Income (loss) before income taxes                                (0.7 )                4.0                  4.5
Income tax benefit (provision)                                    0.7                 (0.8 )               (1.1 )

Net income                                                        0.1 %                3.2 %                3.4 %

Note: Certain percentage totals do not sum due to rounding.

Restaurants open at end of year 33 30 28 Average weekly net sales per restaurant $ 87,800 $ 95,600 $ 94,400

Net Sales
Net sales decreased by $1.5 million, or 1.1%, in fiscal 2008 compared to fiscal 2007. This decrease was due to a decrease in net sales in the same store restaurant base which more than offset net sales generated by new restaurants opened in 2007 and 2008. The decrease included estimated sales of $425,000 lost due to fires in two of the Company's restaurants. Net sales increased by $3.6 million, or 2.6%, in fiscal 2007 compared to 2006 due to an increase in net sales for restaurants in the same store base and sales from the two new restaurants which opened in the last quarter of 2007.
Average weekly same store sales per restaurant decreased by 5.7% to $90,300 in 2008 from $95,800 in 2007 on a base of 28 restaurants. Same store sales averaged $95,600 per restaurant per week in 2007, an increase of 1.6% over 2006 on a base of 28 restaurants.
The Company computes average weekly 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 weekly average sales per restaurant. Days on which restaurants are closed for business for any reason other than the scheduled closing of all J. Alexander's restaurants on Thanksgiving day and Christmas day are excluded from this calculation. Average weekly same store sales per restaurant are computed in the same manner as described above except that sales and sales days used in the calculation include only those for restaurants open for more than 18 months. 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 sales per restaurant or average weekly same store sales per restaurant.
Management estimates the average check per guest, including alcoholic beverage sales, increased by less than 1.0% to $24.48 in 2008. The average guest check in 2007 increased by approximately 6.4% over the average check in 2006. Management believes the increase in 2007 was the result of a combination of factors including higher menu prices, increased wine sales, which management believes were due to additional emphasis placed on the Company's wine feature program, and emphasis on the Company's special menu features which generally are priced higher than many of the Company's other menu offerings. Management estimates that average menu prices increased by less than 1.0% in 2008 over 2007 and by approximately 3.3% in 2007 over 2006. These price increase estimates reflect nominal amounts of menu price changes, prior to any change in product mix because of price increases, and may not reflect amounts effectively paid by customers. Management estimates that weekly average guest counts decreased on a same store basis, as adjusted for days restaurants were closed, by approximately 6.1% in 2008 compared to 2007 and by approximately 4.8% in 2007 compared to 2006.
The Company's same store sales have decreased for five consecutive quarters, with the downturn first noted in mid-September of 2007 and all restaurants in the same store restaurant base experiencing decreases in sales in 2008 compared to 2007. Management believes these decreases are due to a significant slowdown in discretionary consumer spending caused by recessionary economic conditions, the tightening of consumer credit, and general concerns about unemployment, lower home values and turmoil in the financial markets.
The Company recognizes revenue from reductions in liabilities for gift cards which, although they do not expire, are considered to be only remotely likely to be redeemed. These revenues are included in net sales in the amounts of $273,000, $300,000 and $266,000 for 2008, 2007 and 2006, respectively. Restaurant Costs and Expenses
Total restaurant operating expenses were 91.2% of net sales in 2008, up from 87.7% in 2007 and 87.4% in 2006. The increase in 2008 was due primarily to the adverse effects of lower same store sales and the effect of five new restaurants opened since the third quarter of 2007, with the effects of these factors being partially offset by lower cost of sales for 2008. The increase in 2007 was primarily due to an increase in labor and related costs. Restaurant operating margins were 8.8% in 2008, 12.3% in 2007 and 12.6% in 2006.
Cost of sales, which includes the cost of food and beverages, was 32.2% of net sales in 2008, down slightly from 32.5% of net sales in both 2007 and 2006. During 2008, the effect of lower prices paid for beef more than offset increases in input costs for a number of food products. Also, cost of sales for 2008 included the settlement of a claim against a prospective vendor which decreased cost of sales for the year by 0.1% of net sales. There was no change in cost of sales as a percentage of net sales in 2007 compared to 2006 as lower alcoholic beverage costs and the effect of menu price increases more than offset higher input costs for beef, poultry, dairy products, salmon and other food products.

Beef purchases represent the largest component of the Company's cost of sales and comprise approximately 25% to 30% of this expense category. In 2007 and 2006, the Company entered into fixed price beef purchase agreements for most of its beef in an effort to minimize the impact of significant increases in the market price of beef. Because of uncertainty in the beef market and the high prices at which beef was quoted to the Company on a forward fixed price basis relative to market prices, the Company did not enter into a fixed price beef purchase agreement to replace the fixed price agreement which expired in March of 2008. Since that time, the Company has purchased beef based on weekly market prices which have generally been lower than the contract prices paid by the Company for beef for most of 2007. The effect of this change reduced cost of sales by an estimated 0.8% of net sales for 2008 compared to the contract prices paid in 2007. Higher prices paid for beef in 2007 compared to 2006 increased the Company's cost of beef by an estimated $1,100,000, or 0.8% of net sales.
While management believes that purchasing beef at weekly market prices has been beneficial to the Company, this strategy exposes the Company to variable market conditions and there can be no assurance that the price of beef will not increase significantly in the future. Management will continue to monitor the beef market in 2009 and if there are significant changes in market conditions or attractive opportunities to contract later in the year, will consider entering into a fixed price purchasing agreement.
While prices of some food commodities have increased significantly over the past two years, management believes that most food commodity prices will be more stable, and in some cases favorable, in 2009 compared to 2008.
Restaurant labor and related costs increased to 33.3% of net sales in 2008 from 31.9% in 2007 due primarily to the effects of lower same store sales and higher labor costs incurred in the five new restaurants opened since the third quarter of 2007, with the effects of these factors being partially offset by lower incentive compensation and other employee benefits expense. Restaurant labor and related costs increased to 31.9% of net sales in 2007 from 31.6% in 2006 due primarily to the effect of higher labor costs incurred in the two new restaurants opened in the fourth quarter of 2007. In existing restaurants in 2007, higher wage rates, including those resulting from increases in minimum wage rates, and management salaries were generally offset by more efficient labor management, the effects of higher menu prices and lower incentive compensation.
The Company estimates that the impact of increases in minimum wage rates was approximately $150,000 in 2008 and $560,000 in 2007, and that the impact will be approximately $300,000 in 2009. Most of these increases relate to increases in minimum cash rates required by certain states to be paid to tipped employees. The increases in the federal minimum wage rate for non-tipped employees in 2008 and 2007 did not have a significant impact on the Company because most of the Company's non-tipped employees were already paid more than the federal minimum wage. The required federal minimum cash wage paid to tipped employees was not increased in 2007 or 2008.
Depreciation and amortization of restaurant property and equipment increased by $644,000 in 2008 compared to 2007 because of the additional expense for the five new restaurants opened since the third quarter of 2007. The effect of the new restaurants as well as the effect of lower same store sales resulted in an increase in this expense category as a percentage of net sales in 2008. Depreciation and amortization of restaurant property and equipment increased by $88,000 in 2007 compared to 2006 because of new restaurants opened during 2007.
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, increased to 21.4% of net sales in 2008, from 19.6% of net sales in 2007 and 19.5% of net sales in 2006. The increase in 2008 was due to the effects of the five new restaurants opened since the third quarter of 2007 and lower sales in the same store restaurant base. The increase in 2007 was primarily due to higher utility costs, credit card fees and contracted maintenance and service costs which were largely offset by lower costs for operating supplies and certain other operating expenses. General and Administrative Expenses
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 $436,000 in 2008 compared to 2007 due primarily to expenses related to modifications made in the fourth quarter of 2008 to executive salary continuation agreements, higher share-based compensation expense and the cost of marketing research. These increases were partially offset by lower travel expenses and lower franchise taxes which resulted from the classification of certain state taxes as income taxes rather than franchise taxes in 2008. General and administrative expenses decreased slightly in 2007 compared to 2006. Significant factors favorably affecting the comparison of

2007 to 2006 included the elimination of incentive compensation accruals for the corporate management staff for 2007, as Company incentive performance targets were not attained, lower management training expenses, and the absence in 2007 of marketing research costs which were incurred in 2006. The impact of these factors was largely offset by increases in certain other expenses including accounting and auditing fees, travel expenses, corporate staff salary expense and share-based compensation expense.
Pre-Opening Expense
Pre-opening expense consists of expenses incurred prior to opening a new restaurant and includes principally manager salaries and relocation costs, payroll and related costs for training new employees, travel and lodging expenses for employees who assist with training new employees, and the cost of food and other expenses associated with practice of food preparation and service activities. Pre-opening expense also includes rent expense for leased properties for the period of time between the Company taking control of the property and the opening of the restaurant.
The Company incurred pre-opening expense of $1,626,000 in 2008 when three new restaurants were opened compared to $939,000 in 2007 when two new restaurants opened. No pre-opening expense was incurred in 2006 because no new restaurants were opened or under development during that time. Because the Company does not expect to open any new J. Alexander's restaurants in 2009, no pre-opening expense is expected to be incurred for the year. Other Income (Expense)
Interest expense decreased in 2008 compared to 2007 and in 2007 compared to 2006 due to reductions in outstanding debt and capitalization of interest costs in connection with new restaurant development.
Interest income decreased in 2008 compared to 2007 due to lower average balances of surplus funds invested in money market funds and lower interest rates earned on those funds. Interest income increased in 2007 compared to 2006 due to higher average balances of surplus funds invested in money market funds. Interest income is expected to decrease further in 2009 due to the use in 2008 of a significant portion of the Company's surplus funds for restaurant development and lower expected yields on invested funds. Income Taxes
The Company recorded an income tax benefit of $1,017,000 for 2008. This benefit exceeds the benefit computed at statutory rates primarily due to the effect of FICA tip tax credits earned by the Company. The Company's effective income tax rates were 20.0% and 23.7% for 2007 and 2006, respectively. These rates are lower than the statutory federal rate of 34% due primarily to the effect of FICA tip tax credits, with the effect of those credits being partially offset by the effect of state income taxes. Outlook
Management expects that 2009 will continue to be a very challenging year. Because, as previously discussed, a significant portion of the Company's labor and other operating expenses are fixed or semi-variable in nature, management expects that continued decreases in same store sales, which management expects will persist for several more months or more and which could worsen, and the effect of three new restaurants opened in the last half of 2008 will have a significant negative effect on the Company's restaurant operating margins and profitability in 2009. Management further believes, however, that the effects of these factors will be mitigated somewhat by the effect of a recent increase in menu prices of approximately 2.0%, lower commodity prices paid for certain food products, and other cost reduction programs being implemented by the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital needs are primarily for the development and construction of new J. Alexander's restaurants, for maintenance of and improvements to its existing restaurants, and for meeting debt service requirements and operating lease obligations. The Company has met its needs 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 on hand at December 28, 2008 was approximately $2.5 million, down significantly from $11.3 million at the end of 2007 due to the use of a portion of these funds for restaurant development during 2008. Primarily because of the decrease in cash and cash equivalents, the Company had a working capital deficit of $2,576,000 at December 28, 2008 compared to working capital surplus of $4,412,000 at December 30, 2007. Management does not believe its working capital deficit impairs the overall financial condition of the Company. Many companies in the restaurant industry operate with a working capital deficit because guests pay for their purchases with cash or by credit card at the time of the sale while trade payables for food and beverage purchases and other obligations related to restaurant operations are not typically due for some time after the sale takes place. Since requirements for funding accounts receivable and inventories are relatively insignificant, virtually all cash generated by operations is available to meet current obligations.
The Company's net cash provided by operating activities totaled $6,680,000, $9,198,000 and $10,862,000 for 2008, 2007 and 2006, respectively. The amount for 2008 included federal income tax refunds related to prior years of approximately $1.4 million. Management expects that future cash flows from operating activities will vary primarily as a result of future operating results. The Company also expects to receive in the first half of 2009, a landlord contribution of approximately $1.1 million for improvements made by the Company for a new restaurant developed on leased property in 2008.
The Company's capital expenditures can vary significantly from year to year depending primarily on the number, timing and form of ownership of new restaurants under development. Cash expenditures for capital assets totaled $14,248,000, $11,876,000 and $3,632,000 for 2008, 2007 and 2006, respectively. The Company places a high priority on maintaining the image and condition of its restaurants and of the amounts above, $1,523,000, $2,914,000 and $2,932,000 represented expenditures for remodels, enhancements and asset replacements related to existing restaurants for 2008, 2007 and 2006, respectively. Cash provided by operating activities exceeded capital expenditures for 2006. In 2008 and 2007, the Company's capital expenditures were funded by cash flow from operations and use of a portion of the Company's surplus funds.
Other financing activities included proceeds of $230,000, $427,000 and $141,000 from the exercise of employee stock options for 2008, 2007 and 2006, respectively. In 2006, the Company also received payments of $376,000 representing the remaining outstanding balance of employee notes receivable under a stock loan program initiated in 1999.
Management currently does not plan to open any new restaurants in 2009 and is opting to be cautious and conserve the Company's capital until there is a clearer picture of the future of the economy before making any additional commitments for new restaurants. Additionally, new restaurant development could be constrained 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, especially considering recent tightening in the credit markets.
The Company paid cash dividends to shareholders aggregating $666,000, $657,000 and $653,000 in January of 2008, 2007 and 2006, respectively. The Company's Board of Directors determined not to pay a dividend in January of 2009 in order to conserve capital and maintain financial flexibility in the current economic environment. . . .