Changes in sales for existing restaurants are generally measured in the restaurant industry by computing the change in same store sales, which represents 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.
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 which the Company experiences 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 and also that 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, and some have experienced losses for considerably longer periods. The Company opened two new restaurants in the fourth quarter of 2007 and three new restaurants in the last half of 2008. No new restaurants are planned for 2009.

The following table sets forth, for the periods indicated, (i) the items in the Company's Condensed Consolidated Statements of Operations expressed as a percentage of net sales, and (ii) other selected operating data:

                                                       Quarter Ended                      Six Months Ended
                                                 June 28           June 29           June 28           June 29
                                                   2009              2008              2009              2008
Net sales                                          100.0 %           100.0 %           100.0 %           100.0 %
Costs and expenses:
Cost of sales                                       31.2              31.1              31.3              31.6
Restaurant labor and related costs                  35.5              32.4              34.4              31.8
Depreciation and amortization of
restaurant property and equipment                    4.8               4.2               4.6               4.0
Other operating expenses                            23.5              20.9              22.8              20.3

Total restaurant operating expenses                 94.9              88.5              93.1              87.7
General and administrative expenses                  7.8               6.9               7.0               6.8
Pre-opening expense                                    -               0.8                 -               0.5

Operating income (loss)                             (2.8 )             3.8              (0.1 )             5.0
Other income (expense):
Interest expense                                    (1.4 )            (1.2 )            (1.3 )            (1.2 )
Interest income                                        -               0.1                 -               0.1
Other, net                                             -                 -                 -                 -

Total other expense                                 (1.3 )            (1.1 )            (1.3 )            (1.0 )

Income (loss) before income taxes                   (4.1 )             2.7              (1.4 )             4.0
Income tax benefit (provision)                       1.8               0.8               0.9              (0.1 )

Net income (loss)                                   (2.3 )%            3.5 %            (0.5 )%            3.9 %

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

Restaurants open at end of period                     33                30
Average weekly sales per restaurant (1):
All restaurants                                 $ 80,900          $ 89,300          $ 84,800          $ 92,900
Percent change                                      -9.4 %                              -8.7 %
Same store restaurants (2)                      $ 83,400          $ 89,700          $ 87,500          $ 93,600
Percent change                                      -7.0 %                              -6.5 %

(1) 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 closure 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.

(2) Includes the thirty restaurants open for more than eighteen months.

Net Sales
Net sales decreased by $57,000 in the second quarter of 2009 compared to the second quarter of 2008 as declines in same store sales for the quarter generally offset the net sales generated by the three new restaurants opened in the last half of 2008. Net sales increased by $522,000 in the first half of 2009 compared to the first half of 2008 primarily because sales from the new restaurants opened in 2008 more than offset the decline in same store sales.
Management estimates the average check per guest, including alcoholic beverage sales, increased by 1.0% to $24.47 in the second quarter of 2009 from $24.23 in the second quarter of 2008 and by 0.9% to $24.75 for the first half of 2009 compared to $24.53 for the first half of 2008. Management believes these increases were due primarily to the effect of higher menu prices which it estimates averaged approximately 1.6% and 1.3% higher in the second quarter and first six months of 2009, respectively, than in the corresponding periods of 2008. These price increase estimates reflect menu price changes, without regard to any change in product mix because of price increases, and may not reflect amounts effectively paid by the customer. Management estimates that weekly average guest counts decreased on a same store basis by approximately 7.0% and 6.4% in the second quarter and first six months of 2009, respectively, compared to the same periods of 2008.
The Company's same store sales have decreased for seven consecutive quarters, with a downturn first noted in mid-September of 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.
Restaurant Costs and Expenses
Total restaurant operating expenses increased to 94.9% of net sales in the second quarter of 2009 from 88.5% in the second period of the previous year and to 93.1% of net sales in the first half of 2009 from 87.7% in the first half of 2008 due primarily to the adverse effects of lower same store sales and the effect of the three new restaurants opened in the last half of 2008, with the effects of these factors being partially offset by lower cost of sales for the first half of 2009. Restaurant operating margins decreased to 5.1% in the second quarter of 2009 from 11.5% in the second quarter of 2008 and to 6.9% in the first half of 2009 compared to 12.3% in the same period of 2008.
Cost of sales, which includes the cost of food and beverages, increased slightly as a percentage of net sales for the second quarter and decreased for the first six months of 2009 compared to the same periods of 2008. Prices for beef and some other commodities were lower in the 2009 periods than in the comparable 2008 periods. However, the second quarter of 2008 included the settlement of a claim against a prospective vendor which decreased cost of sales by 0.5% of net sales for the quarter and 0.2% for the first six months of the year, more than offsetting the effect of lower commodity prices and higher menu prices in the second quarter of 2009.
Beef purchases represent the largest component of the Company's cost of sales and comprise approximately 25% to 30% of this expense category. In recent years, 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 prices paid by the Company for beef under the previous contract. Also, market prices paid in the second quarter of 2009 were lower than market prices paid during the second quarter of 2008. The effect of lower prices paid for beef in 2009 compared to the prices paid in 2008 reduced cost of sales by an estimated 0.4% and 1.1% of net sales in the second quarter and first six months of 2009, respectively, compared to the same periods of 2008.
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 beef prices will not increase significantly. 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.
Restaurant labor and related costs increased to 35.5% of net sales in the second quarter of 2009 from 32.4% in the second quarter of 2008 and to 34.4% for the first half of 2009 from 31.8% for the first half of 2008. These increases were due primarily to the effects of lower same store sales and higher labor costs incurred in the three new restaurants opened in the last half of 2008.
The Company estimates that the impact of increases in minimum wage rates will be approximately $300,000 in 2009. Most of these increases relate to increases in minimum cash wage 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 has not had, nor is the 2009 increase expected to have, a significant impact on the Company because most of the Company's non-tipped employees are already paid more than the federal minimum wage.
Depreciation and amortization of restaurant property and equipment increased by $212,000 in the second quarter of 2009 and $435,000 in the first six months of 2009 compared to the same periods in 2008 primarily because of the effect of the new restaurants opened during the last half of 2008. The effect of the new restaurants as well as the effect of lower same store sales resulted in increases in this expense category as a percentage of net sales in the 2009 periods.
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 23.5% of net sales in the second quarter of 2009 from 20.9% of net sales in the second quarter of 2008 and to 22.8% of net sales for the first half of 2009 compared to 20.3% in the comparable period of 2008. These increases were also due primarily to the effects of the new restaurants opened in the last half of 2008 and lower sales in the same store restaurant base. 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 $338,000 in the second quarter of 2009 versus the second quarter of 2008 due primarily to a charge to earnings during the quarter related to the expected settlement of litigation in connection with alleged improper administration of the "tip share" pool in the Company's Overland Park, Kansas restaurant. General and administrative expenses increased by $153,000 in the first half of 2009 compared to the first half of 2008 primarily due to the litigation

charge noted above which more than offset decreases in certain other expenses, including particularly management training costs during the 2009 period. The reduction in management training costs was due to lower restaurant management turnover and because no additional staffing is required for new restaurants since none are planned for 2009.
Pre-Opening Expense
Pre-opening expense consists of expenses incurred prior to opening a new restaurant and include 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.
Pre-opening expense was incurred in the second quarter and first half of 2008 in connection with restaurants under development during that time. The Company does not expect to incur any pre-opening expense during 2009 because no new restaurant development is planned for the year. Other Income (Expense)
Interest expense increased in the second quarter and first half of 2009 compared to the same periods in 2008 due primarily to the effect of the capitalization of interest costs in connection with new restaurant development in 2008, whereas no interest costs were capitalized in 2009. Interest income decreased in the second quarter and first half of 2009 compared to the corresponding periods of 2008 due to lower average balances of surplus funds invested in money market funds and lower interest rates earned on those funds. Income Taxes
The Company's income tax provisions for the first six months of 2009 and 2008 were based on estimated effective annual income tax rates of 65.0% and 2.9%, respectively. These rates differ from the statutory federal rate of 34% due primarily to the effect of FICA tip tax credits, with the benefit 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 believes that the effects of these factors will be mitigated somewhat by the effect of menu price increases implemented in the first quarter of 2009, lower commodity prices paid for certain food products, and other cost reduction programs being implemented by the Company. However, management is unable to project the future impact of the recession and remains concerned about its depth, what its duration may ultimately be, that an economic recovery may take place relatively slowly, and that consumer spending in upscale restaurants may continue to be negatively affected for some time.

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 at June 28, 2009 totaled $4,086,000. The Company's net cash provided by operating activities totaled $3,057,000 and $4,142,000 for the first six months of 2009 and 2008, respectively. Cash provided by operating activities in 2009 included the collection of a $1,145,000 contribution receivable from a landlord for improvements made by the Company for a new restaurant developed on leased property in 2008. Management expects that future cash flows from operating activities will vary primarily as a result of future operating results.
The Company had a working capital deficit of $1,371,000 at June 28, 2009, reduced from $2,576,000 at December 28, 2008. Management does not believe this 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 small, virtually all cash generated by operations is available to meet current obligations.
Management estimates that cash expenditures for capital assets in 2009 will be approximately $2.9 million. Most of these funds will be used for improvements and asset replacements in the Company's restaurants, although approximately $600,000 of the total amount represents the final payments for new restaurants opened in the last quarter of 2008. Management 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 that credit markets remain relatively tight.
On May 22, 2009, the Company terminated its secured bank line of credit agreement and entered into a loan agreement with Pinnacle National Bank that provides two new credit facilities. The new credit facilities consist of a three-year $5,000,000 revolving line of credit, which may be used for general corporate purposes, and a $3,000,000 term loan which funded the purchase of 808,000 shares of the Company's common stock for a total purchase price of $2,909,000 from Solidus Company, L.P., which was the Company's largest shareholder prior to the purchase, and E. Townes Duncan, a director of the Company. See Note E "Purchase of Stock from Related Party" to the Company's Condensed Consolidated Financial Statements for additional description of the transaction. The credit facilities are secured by liens on certain personal property of the Company and its subsidiaries, subsidiary guaranties and a negative pledge on certain real property.
Amounts borrowed under the loan agreement will bear interest at an annual rate of 30-day LIBOR plus an initial margin of 450 basis points, with a minimum interest rate of 4.6%. The loans can be prepaid at any time without penalty. Scheduled term loan payments are interest only for six months and monthly payments of principal plus interest over the remainder of the

five-year term. The agreement, among other things, limits capital expenditures, asset sales and liens and encumbrances, prohibits dividends, and contains certain other provisions customarily included in such agreements.
The loan agreement also includes certain financial covenants. The Company must maintain a fixed charge coverage ratio of at least 1.05 to 1.00 as of the end of any fiscal quarter. The fixed charge coverage ratio will be measured for the two fiscal quarters ending June 28, 2009, for the three fiscal quarters ending September 27, 2009 and for the four fiscal quarters ending each quarter thereafter. The fixed charge coverage ratio is defined in the loan agreement as the ratio of (a) the sum of net income for the applicable period (excluding the effect on such period of any extraordinary or non-recurring gains or losses including any asset impairment charges, deferred income tax benefits and expenses and up to $500,000 (in the aggregate during the term of loan) in uninsured losses) plus depreciation and amortization plus interest expense plus scheduled monthly rent payments plus non-cash stock based compensation expense recorded under Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), minus certain capital expenditures, to (b) the sum of interest expense during such period plus scheduled monthly rent payments made during such period plus scheduled payments of long term debt and capital lease obligations made during such period, all determined in accordance with U.S. generally accepted accounting principles ("GAAP").
In addition, the Company's adjusted debt to EBITDAR ratio must not exceed 6 to 1 for the four quarters ending June 28, 2009 and September 27, 2009, 5 to 1 . . .