FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

(Mark One)

þ	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission file number 1-8766

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 þ No o

     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 o No þ

     Common Stock Outstanding – 6,471,699 shares at May 17, 2005.

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

J. Alexander’s Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited dollars in thousands, except per share amount)

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See notes to condensed consolidated financial statements.

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

See notes to condensed consolidated financial statements.

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

See notes to condensed consolidated financial statements.

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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 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 U.S. generally accepted accounting principles for complete financial statements. Certain reclassifications have been made in the prior year’s condensed consolidated financial statements to conform to the 2005 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 April 3, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending January 1, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the J. Alexander’s Corporation (the “Company’s”) annual report on Form 10-K for the fiscal year ended January 2, 2005.

     Net income and comprehensive income are the same for both periods presented.

NOTE B – EARNINGS PER SHARE

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

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     The calculations of diluted earnings per share exclude stock options for the purchase of 109,000 shares of the Company’s common stock and 86,000 shares of common stock for the quarters ended April 3, 2005 and March 28, 2004, respectively, because the exercise prices of the options were greater than the average market price of the common stock for the applicable periods and the effect of their inclusion would be antidilutive.

NOTE C – INCOME TAXES

     Income tax expense for the first quarter of 2005 has been provided for based on an estimated 24.1% effective tax rate expected to be applicable for the full 2005 fiscal year. The effective income tax rate differs from applying the statutory federal income tax rate of 34% to pre-tax earnings primarily due to employee FICA tip tax credits (a reduction in income tax expense) partially offset by state income taxes.

NOTE D – 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” (APB No. 25) and, accordingly, typically recognizes no compensation expense for such arrangements. One stock option award, issued to the Company’s Chief Executive Officer in 1999 at an initial exercise price equal to the fair market value of the Company’s common stock on the date of the award, included a provision whereby the exercise price increased annually as long as the option remained unexercised and therefore was accounted for as a variable stock option award. The Company’s board of directors fixed the exercise price of this option at $3.94 on May 25, 2004. As a result, no additional compensation expense will be recognized with respect to this option grant subsequent to May 25, 2004. Compensation expense of $77,000 was recognized in connection with this option in the first three months of 2004.

     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” (SFAS No. 123), to stock-based employee compensation:

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     For purposes of pro forma disclosures, the estimated fair value of stock options is amortized to expense primarily over the vesting period.

NOTE E – 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 eleven years. The total estimated amount of lease payments remaining on these 28 leases at April 3, 2005 was approximately $4.3 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 property leases with remaining terms of one to five years. The total estimated amount of lease payments remaining on these 27 leases at April 3, 2005, was approximately $2.9 million. 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 certain real property leases with remaining terms of one to five years. The total estimated amount of lease payments remaining on these 11 leases as of April 3, 2005, was approximately $1.5 million.

     In September of 2004, a lawsuit was filed in the U.S. District Court for the Middle District of Tennessee against the Company by the Equal Employment Opportunity Commission alleging that under Title VII of the Civil Rights Act of 1964 and Title I of the Civil Rights Act of 1991 the Company engaged in unlawful employment practices in two of its restaurants by discriminating against male applicants who were denied employment as bartenders based upon their gender. The lawsuit seeks to compensate those applicants who were allegedly harmed by the Company’s practices, seeks injunctive relief against the Company to prevent it from engaging in such practices, and requests that the Company implement and carry out policies which provide equal employment opportunities for male applicants for employment so that the alleged unlawful employment practices would be eradicated. The Company denies all liability with respect to this claim, believes it is without merit and intends to defend it vigorously. The Company has not provided for any liability with respect to this claim as management believes ultimate loss is not probable. However, the Company could incur expenses relating to this matter which could materially adversely affect its results of operations and there exists the risk that an adverse judgment in this claim, the amount of which cannot be estimated, could have a material adverse effect on the Company’s financial condition or results of operations.

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     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, operating results or liquidity.

NOTE F – RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS No. 123 and supercedes APB No. 25. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. On April 14, 2005, the Securities and Exchange Commission adopted a rule that amended the compliance dates for SFAS 123R, which the Company will now be required to adopt in the first quarter of fiscal 2006. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The Company is assessing SFAS No. 123R and has not determined the impact that adoption of this statement will have on its results of operations.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Overview

     J. Alexander’s Corporation (the “Company”) owns and operates high volume, upscale casual dining restaurants which offer a contemporary American menu designed to appeal to a wide variety of tastes. J. Alexander’s restaurants compete in the restaurant industry by placing special emphasis on high food quality and high levels of professional service offered in an attractive environment. J. Alexander’s typically does no advertising and relies on each restaurant to increase sales through building its reputation as an outstanding dining establishment. The Company has generally been successful in achieving same store sales increases over time using this strategy. At April 3, 2005, the Company owned and operated 27 J. Alexander’s restaurants in 12 states.

     For the first quarter of 2005, the Company’s operating income decreased by $217,000 and income before income taxes decreased by $157,000 compared to the first quarter of 2004. These decreases included the effects of higher food costs and other restaurant operating expenses compared to the same quarter of the previous year. Further, because the first fiscal quarter of 2005 began on January 3, 2005 and did not include the favorable effects on sales and profits of the 2005 New Year’s holiday period, comparisons of operating results to the first quarter of 2004, which did include the New Year’s holidays for that year, were negatively effected. The effect of a lower estimated effective income tax rate for 2005 offset the decrease in income before income taxes, and net income for the quarter was approximately the same as reported for the first quarter of 2004.

     Same store sales comparisons, which exclude the effect of newer restaurants and compare the results of the same base of restaurants for comparable periods, are commonly used to measure sales performance in the restaurant industry and the Company’s management believes that same store sales performance is an important factor in assessing the performance of the Company’s restaurant operations. For the first quarter of 2005, the Company’s average weekly same store sales per restaurant increased 4.1% compared to the first quarter of 2004. Management estimates the increase would have been 4.8% if the favorable effect on sales of the New Year’s holiday were excluded from the prior year quarter. Management attributes this increase to continued emphasis on providing high quality food and professional service, a generally favorable restaurant industry environment and the effect of menu price increases. However, management believes that because of increases in menu prices, guest counts declined by approximately 2% for the most recent quarter compared to the first quarter of 2004.

     In order to reduce cost of sales as a percentage of net sales and improve operating margins, and in connection with an upgrade of the Company’s beef program, in April of 2005 the Company increased prices for selected menu items and changed its menu pricing format to modified a la carte pricing for beef and seafood entrees. Under the modified a la carte format, menu prices of beef and seafood entrees which previously included a dinner salad decreased by $1.00 to $2.00 in many locations (although increasing in certain major market locations), but no longer include a salad. If desired, a salad can now be added for an additional charge of $4.00. Management is pleased with the initial results of these changes and believes the changes are generally having the desired effect. Management expects same store sales to continue to

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increase in 2005 as a result of the effect of menu price increases and continued excellence in restaurant operations. However, some additional guest count losses are expected in 2005 and there can be no assurance that same store sales will not be negatively affected.

     The Company currently plans to open one new restaurant in 2005. While no pre-opening expense was incurred in the first quarters of 2005 or 2004, the Company will incur pre-opening costs during 2005 in connection with the opening of this new restaurant. Also most of the Company’s new restaurants incur operating losses during their early months of operation which can have a significant impact on the Company’s operating results.

     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:

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

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Net Sales

     Net sales increased by $1,365,000, or 4.4%, to $32,154,000 for the first quarter of 2005 from $30,789,000 for the same period of 2004. Same store sales averaged $93,600 per week on a base of 25 restaurants during the quarter ended April 3, 2005, an increase of 4.1% compared to $89,900 per week during the comparable period of 2004.

     The Company’s weighted average weekly sales per restaurant are computed 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 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. Weighted 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.

     Management estimates the average check per guest, excluding alcoholic beverage sales, was $17.36 for the first quarter of 2005, representing an increase of 6.2% compared to $16.35 for the first quarter of 2004. Menu prices for the first quarter of 2005 increased by an estimated 4.8% compared to the same period in 2004. The Company estimates that customer traffic (guest counts) on a same store basis decreased by approximately 2% in the first quarter of 2005 compared to the corresponding period of 2004.

     Management believes that continuing to increase sales volumes in the Company’s restaurants is a significant factor in improving the Company’s profitability. Management intends to maintain a conservative new restaurant development rate of generally one or 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.

Costs and Expenses

     Total restaurant operating expenses increased to 87.6% of sales in the first quarter of 2005 from 86.7% in the corresponding period of 2004 due to higher cost of sales and other operating expenses.

     Cost of sales increased to 33.5% of net sales in the first quarter of 2005 from 33.1% in the corresponding period of 2004, as menu price increases and reductions in poultry prices did not offset, as a percentage of net sales, higher input costs for beef.

     Beef purchases represent the largest component of the Company’s cost of sales and comprise approximately 28% to 30% of this category. The Company typically enters into an annual pricing agreement covering most of its beef purchases. Due to higher prices in the beef market during 2003 and early 2004, prices under the Company’s beef pricing agreement which was effective in March of 2004 increased by an estimated 13% to 14%. Beef prices under the Company’s most recent beef pricing agreement which was effective in March of 2005 increased by an estimated additional 7% to 8% over those under the previous agreement. A portion of the increase under the new pricing agreement is due to the Company upgrading its beef program to serve only Certified Angus Beef® in all of its restaurants.

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     Restaurant labor and related costs decreased to 31.1% of net sales in the first quarter of 2005 from 31.4% of net sales for the same period of 2004. Because of the nature of J. Alexander’s operations and the Company’s emphasis on providing high quality food and outstanding levels of service, much of the labor scheduled for overseeing restaurant operations, for preparing food, and for staffing the service areas of the restaurants is relatively fixed in nature within broad ranges of sales for each restaurant. As a result, increases in net sales in the first quarter of 2005 did not result in proportionate increases in labor costs and labor costs as a percentage of sales decreased. Reductions in certain benefit costs also contributed to the decrease.

     Other operating expenses increased to 19.3% of net sales during the first quarter of 2005 from 18.4% of net sales during the same period of 2004. This increase was due primarily to increases in credit card processing fees, repairs and maintenance costs, paper supplies, china and smallwares costs, laundry and linen expense, general liability insurance expense and certain other operating expense categories.

General and Administrative Expenses

     General and administrative expenses, which include supervisory costs and expenses, management training and relocation costs, and other costs above the restaurant level, increased by approximately $100,000 for the first quarter of 2005 over the corresponding period of 2004. This represented an increase of 4.6% which was generally in line with the Company’s rate of sales growth. General and administrative expenses were 7.1% of net sales for the first quarters of both 2005 and 2004.

Other Income (Expense)

     Net interest expense decreased by $67,000 in the first quarter of 2005 compared to the first quarter of 2004 due to more investment income earned on higher levels of invested funds and to lower interest expense due to reductions in debt balances.

Income Taxes

     The Company’s estimated effective income tax rate of 24.1% for 2005 is lower than the statutory federal income tax rate of 34% due primarily to the effect of FICA tip tax credits expected to be earned and recognized by the Company for the year partially offset by state income taxes . The estimated effective income tax rate for 2005 is also lower than the rate used for the first quarter of 2004 primarily because of the nature of the valuation allowance maintained for FICA tip credits and certain other deferred tax assets during 2004.

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 its existing restaurants, and for meeting debt service obligations. The Company has met these needs and maintained liquidity in recent years primarily by use of cash flow from operations, use of bank lines of credit, and through proceeds received from a mortgage loan in 2002.

     The Company had cash flow from operations totaling $808,000 and $1,759,000 during the first quarters of 2005 and 2004, respectively. The 2004 amount included the receipt of a landlord tenant improvement allowance of approximately $500,000 related to a restaurant

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opened in the fourth quarter of 2003. Cash and cash equivalents on hand at April 3, 2005 were $7,089,000. The Company currently plans to open one new restaurant in 2005 and management estimates that capital expenditures for the year will be approximately $7 million. Capital expenditures in 2005 for the development of any new restaurants in addition to the restaurant currently planned are dependent upon the timing and success of management’s efforts to locate acceptable sites and would be in addition to the estimate above. Management believes cash and cash equivalents on hand combined with cash flow from operations for the year will be adequate to meet the Company’s financing needs for 2005.

     The Company maintains a secured bank line of credit agreement which provides up to $5,000,000 for financing capital expenditures related to the development of new restaurants and for general operating purposes. Credit available under the line, which restricts additional borrowing outside of the line, is currently approximately $4.6 million and is based on a percentage of the appraised value of the collateral securing the line. The credit line expires on April 30, 2006, unless converted to a term loan prior to March 30, 2006 under the provisions of the agreement. There were no borrowings under the line as of April 3, 2005.

     Management’s long-term growth plans call for opening one or two restaurants per year for the next several years and management does not believe that these growth plans will be constrained due to lack of capital resources. However, to supplement its other sources of capital and provide additional funds for future growth, the Company completed $750,000 of five-year equipment financing in January 2004. Management believes that, if needed, additional financing would be available for future growth through an increase in bank credit, additional mortgage or equipment financing, or the sale and leaseback of some or all of the Company’s unencumbered restaurant properties. There can be no assurance, however, that, if needed, such financing could be obtained or that it would be on terms satisfactory to the Company.

     The Company has periodically made purchases of its common stock under a repurchase program authorized by the Company’s Board of Directors. The total authorized purchases under this program are $2,000,000. From June 2001 through May 14, 2003, the Company repurchased approximately 535,000 shares at a cost of approximately $1,555,000, an average cost of $2.91 per share. The Company generally does not repurchase shares following the end of a fiscal quarter until after results for the quarter have been publicly announced.

     While the Company at times operates with a working capital deficit, management does not believe such deficits impair 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 cash equivalents at the time of 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 was in compliance with the financial covenants of its debt agreements as of April 3, 2005. 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, amounts outstanding under these credit facilities could become immediately due and payable, and there could be a material adverse effect on the Company’s financial condition and operations.

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     As of May 17, 2005, the Company had no financing transactions, arrangements or other relationships with any unconsolidated affiliated entities or related parties. Additionally, the Company is not a party to any financing arrangements involving synthetic leases or trading activities involving commodity contracts. Contingent lease commitments are discussed in Note E “Commitments and Contingencies” to the Condensed Consolidated Financial Statements.

CONTRACTUAL OBLIGATIONS

     In the ordinary course of business, the Company routinely executes contractual agreements for cleaning services, linen usage, trash removal and similar type services. Whenever possible, these agreements are limited to a term of one year or less and often contain a provision allowing the Company to terminate the agreement upon providing a 30 day written notice. Subsequent to January 2, 2005, there have been a number of agreements of the nature described above executed by the Company. None of them, individually or collectively, would be considered material to the Company’s financial position or results of operations in the event of termination prior to the scheduled term.

     The only contractual obligation entered into during the first quarter of 2005 considered significant to the Company was the Company’s annual beef pricing agreement, which was renewed effective March 7, 2005. Under terms of the agreement, if the Company’s supplier has contracted for specific products, the Company is obligated to purchase such products. As of March 7, 2005, the Company’s supplier was under contract to purchase approximately $14.4 million of beef related to the Company’s annual pricing agreement which expires March 6, 2006.

     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 3, 2005, is as follows:

     There have been no payments by the Company of such contingent liabilities in the history of the Company.

CRITICAL ACCOUNTING POLICIES

     The preparation of the Company’s condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial

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statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to its accounting for income taxes, property and equipment, impairment of long-lived assets, lease accounting, self-insurance accrual, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Management believes the following critical accounting policies are those which involve the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Income Taxes: The Company had $7,086,000 of gross deferred tax assets at January 2, 2005, consisting principally of $4,676,000 of tax credit carryforwards. Generally accepted accounting principles require that the Company record a valuation allowance against its deferred tax assets unless it is “more likely than not” that such assets will ultimately be realized.

Due to losses incurred by the Company from 1997 through 1999 and because a significant portion of the Company’s costs are fixed or semi-fixed in nature, management was unable to conclude from 1997 through 2001 that it was more likely than not that its existing deferred tax assets would be realized; therefore, the Company maintained a valuation allowance for 100% of its deferred tax assets, net of deferred tax liabilities, for those years.

In 2002, the Company completed its third consecutive profitable year, with pre-tax income increasing significantly over the previous year. In addition the Company had recorded significant increases in operating income in four of the five years from 1998 through 2002 and had reached a size and experience level which management believed made it less likely that an unsuccessful new restaurant would have a significant effect on consolidated operating results. Because of these factors, management further assessed the likelihood of realization of its deferred tax assets, using as its principal basis its forecast of future taxable income for the following two years adjusted by applying varying probability factors to the achievement of this forecast. As the result of this assessment, the beginning of the year valuation allowance was reduced by $1,200,000 in the fourth quarter of 2002, with a corresponding credit to deferred income tax expense. In 2003, after achieving pretax income in excess of $2,000,000 for two consecutive years, management performed a similar analysis but extended its outlook for the following three years and determined that an additional $1,475,000 of deferred tax assets were more likely than not going to be realized. As a result of this analysis, the beginning of the year valuation allowance was reduced by $1,475,000 in the fourth quarter of 2003, with a corresponding credit to deferred income tax expense.

In performing its evaluation of the need for a valuation allowance with respect to deferred tax assets in 2004, management gave consideration to the higher level of pre-tax income achieved in 2004 as compared to recent years and to the fact that the Company was

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profitable for the five fiscal years 2000 through 2004. Based on these historical results and on its assessment of the Company’s expected future profitability adjusted by varying probability factors, management concluded that a valuation allowance was needed only for federal alternative minimum tax (AMT) credit carryforwards of $1,657,000 and for $262,000 of tax assets related to state net operating loss carryforwards, the use of which involves considerable uncertainty. Even though the AMT credit carryforwards do not expire, their use is not presently considered more likely than not because significant increases in earnings levels are expected to be necessary to utilize them since they must be used only after certain other carryforwards currently available, as well as additional tax credits which are expected to be generated in future years, are realized. As a result of this assessment, the Company reduced the beginning of the year tax valuation allowance by $1,531,000 in the fourth quarter of 2004, with a corresponding credit to deferred income tax expense.

Failure to achieve projected taxable income could affect the ultimate realization of the net deferred tax assets. Because of the uncertainties discussed above, there can be no assurance that management’s estimates of future taxable income will be achieved and that there could not be a subsequent increase in the valuation allowance. It is also possible that the Company could generate taxable income levels in the future which would cause management to conclude that it is more likely than not that the Company will realize all, or an additional portion of, its deferred tax assets.

The Company will continue to evaluate the likelihood of realization of its deferred tax assets and upon reaching any different conclusion as to the appropriate carrying value of these assets, management will adjust them to their estimated net realizable value. Any such revisions to the estimated realizable value of the deferred tax assets could cause the Company’s provision for income taxes to vary significantly from period to period, although its cash tax payments would remain unaffected until the benefits of the various carryforwards were fully utilized. However, because the remaining valuation allowance is related to specific deferred tax assets noted above, management does not anticipate further adjustments to the valuation allowance until the Company’s projections of future taxable income increase significantly.

In addition, certain other components of the Company’s provision for income taxes must be estimated. These items include, but are not limited to, effective state tax rates, allowable tax credits for items such as FICA taxes paid on reported tip income, and estimates related to depreciation expense allowable for tax purposes. These estimates are made based on the best available information at the time the tax provision is prepared. Income tax returns are generally not filed, however, until several months after year-end. All tax returns are subject to audit by federal and state governments, usually years after the returns are filed, and could be subject to differing interpretations of the tax laws.

Property and Equipment: Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the asset’s estimated useful life or the expected lease term, generally including renewal options. Improvements are capitalized while repairs and maintenance costs are expensed as incurred. Because significant judgments are required in estimating useful lives, which are not ultimately known until the passage of time and may be dependent on proper asset maintenance, and in the

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determination of what constitutes a capitalized cost versus a repair or maintenance expense, changes in circumstances or use of different assumptions could result in materially different results from those determined based on the Company’s estimates.