RESULTS OF OPERATIONS

Overview

J. Alexander's Corporation (the "Company") operates upscale casual dining restaurants. At September 27, 2009, 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, because of recessionary conditions for the past two years, the Company has experienced decreases in same store sales as is further discussed under Net Sales, and these decreases are having a significant negative impact on the Company's profitability. Management believes it will be difficult to increase, or even maintain, same store sales levels until consumers regain their confidence and consumer spending improves. In addition, the Company's restaurants which opened in late 2007 and 2008 have yet to achieve satisfactory sales levels and are experiencing particular difficulties in building sales in the current economic environment.

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 and energy; 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 investment 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 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 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, one new restaurant in the third quarter of 2008 and two new restaurants in the fourth quarter of 2008. No new restaurants are currently planned for 2009 or 2010.

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               Nine Months Ended
                                             Sept. 27       Sept. 28       Sept. 27        Sept. 28
                                               2009           2008           2009            2008
Net sales                                      100.0 %        100.0 %         100.0 %         100.0 %
Costs and expenses:
Cost of sales                                   31.7           33.0            31.4            32.1
Restaurant labor and related costs              37.6           35.4            35.4            32.9
Depreciation and amortization of
restaurant property and equipment                5.0            4.6             4.7             4.2
Other operating expenses                        24.5           22.9            23.3            21.1
Total restaurant operating expenses             98.9           96.0            94.9            90.3
General and administrative expenses              7.6            7.6             7.2             7.1
Pre-opening expense                                -            2.7               -             1.2
Operating income (loss)                         (6.6 )         (6.4 )          (2.1 )           1.5
Other income (expense):
Interest expense                                (1.5 )         (1.2 )          (1.4 )          (1.2 )
Interest income                                    -            0.1               -             0.1
Other, net                                         -            0.1               -               -
Total other expense                             (1.5 )         (1.1 )          (1.3 )          (1.1 )
Income (loss) before income taxes               (8.0 )         (7.5 )          (3.4 )           0.4
Income tax benefit                               4.0            1.3             1.8             0.3
Net income (loss)                               (4.1 )%        (6.2 )%         (1.6 )%          0.8 %

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

Restaurants open at end of period                33            31
Average weekly sales per restaurant (1):
All restaurants                            $ 75,500      $ 81,600     $ 81,700      $ 89,100
Percent change                                 -7.5  %                    -8.3  %
Same store restaurants (2)                 $ 77,900      $ 82,200     $ 84,200      $ 89,700
Percent change                                 -5.2  %                    -6.1  %

(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 increased by $62,000 in the third quarter of 2009 compared to the third quarter of 2008 as the additional net sales generated by the new restaurants opened in the third and fourth quarters of 2008 generally offset the decline in same store sales for the quarter. Net sales increased by $584,000 in the first nine months of 2009 compared to the same period of 2008 primarily because additional 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 0.6% to $24.27 in the third quarter of 2009 from $24.12 in the third quarter of 2008 and by 0.8% to $24.60 for the first nine months of 2009 compared to $24.41 for the first nine months of 2008. Management believes these increases were due primarily to the effect of higher menu prices which it estimates averaged approximately 1.4% and 1.3% higher in the third quarter and first nine 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 4.8% and 5.9% in the third quarter and first nine months of 2009, respectively, compared to the same periods of 2008.

The Company's same store sales have decreased for eight 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 98.9% of net sales in the third quarter of 2009 from 96.0% in the third period of the previous year and to 94.9% of net sales in the first nine months of 2009 from 90.3% in the first nine months 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 during the periods. Restaurant operating margins decreased to 1.1% in the third quarter of 2009 from 4.0% in the third quarter of 2008 and to 5.1% in the first nine months of 2009 compared to 9.7% in the same period of 2008.

Cost of sales, which includes the cost of food and beverages, decreased as a percentage of net sales for the third quarter and for the first nine months of 2009 compared to the same periods of 2008 primarily due to lower prices for beef and dairy products and certain other commodities.

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 and third quarters of 2009 were lower than market prices paid during the same periods 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 0.9% and 1.1% of net sales in the third quarter and first nine 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 continually monitors the beef market and if there are significant changes in market conditions or attractive opportunities to contract arise, will consider entering into a fixed price purchasing agreement.

Restaurant labor and related costs increased to 37.6% of net sales in the third quarter of 2009 from 35.4% in the third quarter of 2008 and to 35.4% for the first nine months of 2009 from 32.9% for the first nine months 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 $144,000 in the third quarter of 2009 and $579,000 in the first nine 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 24.5% of net sales in the third quarter of 2009 from 22.9% of net sales in the third quarter of 2008 and to 23.3% of net sales for the first nine months of 2009 compared to 21.1% 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, remained at approximately the same level in the third quarter of 2009 as in the third quarter of 2008 and increased by $160,000 in the first nine months of 2009 compared to the same period of 2008. The increase for the first nine months of 2009 included a charge to earnings during the second quarter of 2009 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. This charge 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 third quarter and first nine months 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 third quarter and first nine months 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 third quarter and first nine months 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 benefit of $1,929,000 for the first nine months of 2009 was based on an estimated effective annual income tax rate of 53.7%. This rate differs from the statutory federal income tax 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.

The Company recorded an income tax benefit of $343,000 for the first nine months of 2008. This benefit was primarily related to the effect of FICA tip tax credits earned by the Company which exceeded the tax liability computed at statutory rates and was based on the actual effective income tax rate for the year-to-date period. Management did not believe a reasonable estimate of the year-to-date income tax provision could be made using the estimated annual effective income tax rate because the Company's estimated pre-tax results for the year were expected to be close to break-even, and a relatively small change in the Company's estimated operating results for the year could result in a large change in the estimated annual effective income tax rate.

Outlook

The Company's weekly average same store sales per restaurant for the first six weeks of the fourth quarter of 2009 were down less than 1% compared to the same weeks of the prior year. While this represents an improvement from comparative same store sales trends experienced earlier in the year, management remains concerned about the continuing impact of economic conditions, 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, and there can be no assurance that the Company's sales trends for the first six weeks of the current quarter will continue.

Because, as previously discussed, a significant portion of the Company's labor and other operating expenses are fixed or semi-variable in nature, decreases in the Company's same store sales over the past two years as well as the effect of the Company's five newest restaurants (which have not built sales in line with management's expectations and which have experienced operating losses) have had a significant negative impact on the Company's restaurant operating margins and profitability. While the effects of these factors have been mitigated somewhat in 2009 by the effect of lower commodity prices paid for certain food products and other cost reduction programs implemented by the Company, management does not expect significant improvement in its operating results until there are meaningful increases in same store sales. The Company does expect the inclusion of a 14th week in its fourth fiscal quarter of 2009, compared to 13 weeks in the fourth quarter of 2008 and in the first three quarters of 2009, to have a favorable impact on performance, especially since the final week includes New Year's Eve when the Company typically experiences higher than normal net sales.

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 September 27, 2009 totaled $1,590,000. The Company's net cash provided by operating activities totaled $4,570,000 and $5,029,000 for the first nine 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 $1,436,000 at September 27, 2009, down 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 $2.8 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 currently plan to open any new restaurants in 2009 or 2010 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 previous secured bank line of credit agreement and entered into a new bank loan agreement 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 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 equal 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 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 minus certain capital expenditures, to (b) the sum of interest expense during such period plus scheduled monthly rent payments made . . .