Our pre-tax income for 2005 was about the same as it was in 2004. Simply put, this result is disappointing. I noticed in reading the Coca Cola Company’s recent press release (I am a very small shareholder) that it also had flat earnings and its top five executives received a bonus of $9.66 million. Our senior executive compensation plan is slightly different; our top four executives received total bonuses of zero for our 2005 performance.

The following table includes two captions (in the bold face type) that are non-GAAP financial measures and are not included on our income statements which help explain our performance.

“Restaurant operating income” does not include the following expenses: general and administrative, pre-opening costs, interest and all other items not directly related to the “under roof” performance of our restaurants. In contrast, depreciation, a significant “under roof” expense, is included in restaurant operating expenses.

Our restaurant operating income increased only 4.3 percent in 2005. Our goal was to post an increase of about 12 percent, the same as last year’s increase. Even a 12 percent increase would not have been anything to shout about, but we believed it would have been acceptable because 2004 was a 53-week year. (The extra week represents approximately $2.5 million in net sales and a significant amount of profit.)

Our other important metric is our “running the business profit,” which is operating income before pre-opening expense and any involuntary property conversion gains. This is our principal internal report card.

“Running the business profit” does not include three significant expenses: interest, pre-opening costs and income taxes. Our “running the business profit” increased by only two percent in 2005, compared to a planned improvement of about nine percent. Ordinarily, we would look for improvement of 15 percent or more, but because fiscal 2004 was a 53-week year, we were willing to accept a nine percent goal. To repeat, we believe “running the business profit” is the best measure of the performance of our business and in 2005 we failed to post a meaningful improvement.

A host of factors influenced our performance last year, some within our control and some not. I will attempt a brief summary of what happened and to tell you where we stand in early 2006.

We have four restaurants in Florida, one in Baton Rouge, Louisiana, and one in Houston, Texas. The hurricane seasons of the last two years have been unusually damaging (at least by historical standards) to our business and to the lives of many of our employees. This has been a stressful situation for everyone involved. We are most fortunate to have outstanding employees in Florida and in Baton Rouge and Houston who have done everything they can to mitigate the loss to our business during the hurricane season.

We estimate lost sales from hurricanes of about $465,000 in 2005 and about $300,000 in 2004. We also incurred shut-down and start-up expenses when our restaurants closed. The lost revenue from the hurricanes, on top of the loss of a week in sales because of our fiscal year accounting, really put us behind the eight ball. We needed a large revenue increase to improve financial performance in 2005.

You may recall from last year’s letter that we introduced modified à la carte pricing in all of our restaurants. For the first 13 plus years of J. Alexander’s history, we included a dinner salad with most of our center of the plate entrées. As beef and seafood prices have increased over the years, we have had to increase menu prices correspondingly. We were one of the few upscale restaurant groups that included a salad with the entrée (“bundling” is the term we use). We felt that our upgrade to Certified Angus Beef® in 2005 provided an appropriate opportunity to unbundle, or price our menus modified à la carte (entrée and vegetable, no salad).

We knew this would produce some pain, and we estimated a guest count loss for the first half of the year of around two percent. We thought we would post some improvement in the last half of the year and that our guest counts would be flat when we entered the 2005 holiday season.

Our initial guest count losses were higher than anticipated and averaged over three percent in some months. By the end of the year, guest counts, instead of being flat, were still down, although the trend line was definitely improving. On the other hand, modified à la carte pricing did yield the profit improvement per guest that we wanted. We had a significant improvement in check average and also produced some helpful menu migration from higher food cost items to lower. The end result was that we were able to offer our guests a higher quality beef product and reduce our cost of sales from 33.6 percent of sales to 32.9 percent of sales, a significant reduction.

Our average check for the year, including alcoholic beverages, improved from $20.17 in 2004 to $21.50 in 2005, or 6.6 percent. However, we missed our restaurant sales plan by approximately $1.6 million. This was because (1) our weekly average same store sales growth, while pretty good at 3.9 percent, was still less than our plan growth of 4.3 percent, (2) we lost sales due to hurricanes, and (3) the opening of the Nashville-West End restaurant was slightly delayed.

Even with the sales shortfall, we still could have hit our profit goals had it not been for substantial increases in some of our other restaurant operating expenses. Our same store utility costs increased by 14 percent. Our same store restaurant supply accounts (paper, operating supplies, china, smallwares, etc.) also absorbed increases of over eight percent, mostly rate or price increase driven. Consequently, other restaurant operating expenses increased to 19.5 percent of sales in 2005 from 19.0 percent in 2004, offsetting much of the improvement in lower cost of sales. At various times during the year we considered taking an aggressive menu price increase to offset the increases in operating expenses, but because our guest count losses were higher than anticipated we decided not to do so.

Missing our sales goals and higher than expected operating expenses were the principal culprits that caused us to miss our income goal in our 2005 Business Plan. This was especially disappointing because many of our restaurants posted truly outstanding performances, but a handful performed poorly and held back consolidated operating performance.

Most of our trouble spots last year were in our small and mid-market restaurants where resistance to our modified à la carte pricing was strong enough that we ultimately rebundled menu pricing in six restaurants. In all of those markets, a combination of price sensitivity and economic conditions had a negative impact on our business. Additionally, some upscale competition entered some of the smaller and mid-size markets and took a bite out of an already small pie. We have for the most part weathered these intrusions, and have very few small market and mid-market restaurants which are significantly below our expectations. One of our 2006 goals is to put those still under-performing restaurants on a positive sales growth track by the end of this year.

Our outlook for 2006 is bright. Under our new beef contract, which was effective in March, the total effect of price increases for prime rib and tenderloins is expected to be about $400,000 annually. We expect, however, to offset a substantial portion of this increase by improving our strip steak cutting yields. I won’t bore you with a technical explanation, but we have changed the strip loin product to one that is slightly more expensive to us per pound but that should substantially improve our steak cutting efficiency and reduce our effective cost of this product.

The outlook for other food commodities is relatively stable for 2006. We do expect another year of significant increases in utility costs along with continued increases in wage rates and benefit costs. We have taken a modest menu price increase, in the one percent to two percent range, that should offset most of the cost increases and allow us to improve our margins.

We plan to build sales this year by continuing to expand and enhance our wine-merchandising program. Wine consumption is increasing nationally, and an important component of a good upscale restaurant is a good wine program. Our growth in wine sales has outstripped all other alcoholic beverage categories and has exceeded our growth in food sales.

We are also installing French rotisseries in all of our restaurants and will serve rotisserie chicken in all markets. Markets that have served roasted chicken will convert to rotisserie. Our new rotisserie chicken is not only an outstanding quality product; it also has a high degree of health perception associated with it. (This assumes we do not have a Bird Flu scare.) We are also working to enhance several components of our fresh seafood program. About two years ago, we started featuring many of our fresh seafood selections with sauces and various upscale presentations. This program has been successful and we will continue to expand on it.

We have also developed new printed menu and feature products. We have a new pecan-encrusted trout that was added to the menu for the opening of our new Nashville-West End restaurant. We expect to place this item on several other menus. We are also adding jumbo lump crab cakes to our major markets and have added an ahi tuna sandwich with a ginger-mustard glaze to our line-up. For several years our goal has been to become more chef-driven and have more local options in each restaurant. We have more than 100 different menu items that can be used as daily lunch and dinner features by our 28 restaurants. We have added more sautéed products to our feature menu line-up, which allows us to do more sauced and interesting plate presentations. As part of our seafood program this year, we will do more pan-seared fish.

In summary, we are excited about our business prospects in 2006.

In the remainder of the letter, I will update several topics that we have discussed in the past which I think will continue to be of interest.

Competitive Strategy
We compete in the upscale end of the casual dining industry. Casual dining is generally defined to include full table service but no reservations accepted. The upscale tag means that we market to higher income consumers and also reflects very high guest expectations for the quality of food, service and ambiance. These certainly are characteristics of our concept. As is true of most high-volume casual dining restaurants, we market to a broad demographic. Our check average, with alcohol, is approaching $25 per person in many of our restaurants. Our lunch average is around $16, so our dinner averages can exceed $25 by a large amount. Two of our most expensive items are usually our filet and 16-ounce prime rib. Both of these entrées are served with a vegetable and are generally priced between $24 and $27 in our unbundled markets. We feature fresh seafood and other daily selections that are sometimes priced at even higher price points. Those three key competitive factors, food quality, intense professional service and ambiance are the key sales drivers. Guests expect the highest quality food possible at each price point backed up by flawless professional service in an upscale dining environment.

A marketing consultant once told me that everyone who sells food, including grocery stores, is a restaurant’s competitor. While this is true to a certain extent, we believe our real competitors are either (1) similar to us in menu, price point, service and ambiance or (2) upscale restaurants with different menu formats but with a heavy marketing emphasis to upscale, casual dining guests. In most markets our major direct competitors are privately-owned restaurant groups and not publicly-owned companies.

We believe high food quality is our first cornerstone and we do a lot of things to compete successfully on the food quality front. For example, last year we made a major commitment to Certified Angus Beef® brand as part of our long-term commitment to quality, and we continue to use the best branded choice beef available in most of our markets. Another example is our fresh ahi tuna. It is caught in the Pacific, not in the Gulf of Mexico. We are one of the few restaurant groups that use the real thing. All the tuna we sell at J. Alexander’s is shipped in fresh from Hawaii. We believe our Hawaiian ahi tuna is far superior to that offered by most other restaurants. Most of our competitors use Gulf of Mexico tuna and dub it “Ahi.” Crab cakes are another high-end product in some restaurants. These are made using only jumbo lump crabmeat, which is some of the highest quality and most expensive fresh crabmeat on the market. These are just three small examples of some of the quality aspects of our restaurants.

However, a restaurant can provide the greatest food quality in the world, but if not supported by an appropriate level of service, it is guaranteed to fail. We must support our food quality with outstanding levels of consistent, seamless, professional service. We consider that to be our business franchise. Historically, we have put strong emphasis on meeting our service standards, and we plan to intensify our efforts in the future.

Finally, the dining environment is extremely important to guests. At higher price points guests select restaurants based on a host of factors which together provide the correct, attractive ambiance. In addition to our building designs, we put a considerable amount of effort into very small – and some might think trivial – details of our restaurants: for example, the length of the stem on our wine glasses and the Austrian crystal of which they are constructed. We are concerned about the weight of our silverware, and the size, weight and color of our china. Every detail is important. These are the factors that make us competitive in our marketplace. There are numerous upscale casual dining concepts in operation today, and new entrants arrive every year. We believe that providing a better dining experience is the key to our long-term success.

Real Estate Development Strategy
I give us good marks in most aspects of our business execution. The real estate function is an exception. When we began J. Alexander’s in the early nineties, we thought we could gradually ramp up to five or six openings per year. After a few years of operations and after opening as many as five locations in a single year, we discovered this business is far too complex to open a large number of restaurants off a small base. The Company’s overall situation was exacerbated after we sold our quick-service restaurant business in 1996. At that time we had a number of J. Alexander’s restaurants in various development stages and the Company’s revenue base was simply too small for us to be profitable. We have gradually and diligently added restaurants over the last several years and have grown and matured to a profitable position.

However, we have stumbled several times along the way. We have too many restaurants in small and mid-sized markets for an upscale concept with the characteristics of J. Alexander’s. Many of these restaurants are quite successful and have matured into profitable restaurants. However, some of them incurred painful losses before they became profitable ventures. We also have a few restaurants that are in locations I today would describe as unsatisfactory. In one we have overcome most of the site negatives, so that the restaurant is now successful, and its prospects are very encouraging. Another has ranged from moderately successful to disappointing. We really struggle in this location when other upscale competitors enter the market with more visible and convenient locations. Our most disappointing restaurant is a newer location opened in 2003. We made numerous judgments about the market that proved incorrect. The biggest mistake was mine, because I am ultimately responsible for all of our capital investments. My name is at the bottom of the list of those who approve our capital expenditures.

Because of some of these historical issues we have had in the real estate area, we have put a lot of thought into the real estate function. Last year we brought in Rick Carson, a seasoned veteran with a great deal of technical real estate expertise to head up our (one-man) real estate department. We believe Rick will significantly enhance our results in this area. We have asked him to improve our deal-flow and to position us to develop three, solid upscale major market locations every year. We will not be able to meet this objective until 2008. However, we believe we will be able to add two restaurants in 2007.

As I shared with you in last year’s letter, we try to limit site risk as much as possible. In the three locations I described as unsatisfactory, we thought we could overcome known obstacles in each market and be successful. While we are experiencing some success in overcoming these obstacles, the disadvantages have far outweighed the advantages. The old adage, “location, location, location,” is still true.

Due to difficulties in staffing the real estate department last year and some opportunities that did not work out, we will not meet our objective of opening two restaurants in 2006. In fact, we will have no openings this year (unless a conversion opportunity comes our way). Our development goal, as stated in last year’s letter, is to develop locations in mature upscale markets with all the components needed to drive sales. We are working in large metropolitan areas (generally markets with populations of over two million people in the standard metropolitan statistical area). We are focusing on upscale trade areas with dense high-income populations and high levels of upscale retail activity. Obviously, other upscale restaurant groups are looking for the same kind of sites. Competition for good locations is intense. We have every intention of meeting our development goal of two units in 2007 and three starting in 2008; however, I will pass on a transaction rather than doing a bad one because of pressure to meet our opening goals.

We have several outstanding locations in some dynamic growth markets. However, we have made the real estate and development function far too difficult. I look forward to reporting much better news about this area in the future.

Unit Economics
We do not use a prototype building. We have from time to time re-used or modified only slightly some of our building designs. However, when we have multiple locations in a market we try to make each unique. Because construction costs have escalated significantly just in the last year, we plan to reduce the size of our restaurants as much as possible. We will do this by redesigning our kitchen and storage areas, but not our dining and guest-occupied spaces. We are confident we will be able to utilize a footprint of 7,200 square feet or less; most of our current restaurants have been close to 8,000 square feet. Our targeted development cost is between $2.5 and $3 million for a leased site. Our equipment package, which includes kitchen equipment, seating and signage packages and point of sale systems, is expected to run approximately $900,000. Our goal is to keep total development costs per unit to under $4.0 million (excluding soft costs, pre-opening costs, legal and architectural fees). However, depending on specific site costs and other considerations, we could exceed this amount significantly in some locations. We would, of course, also have commensurately higher revenue expectations for such locations.

In the past, we have purchased land where feasible, but it is unlikely we will buy any going forward. The kinds of sites we are looking for today in densely populated upscale urban areas are generally not available for purchase.

We use a discounted cash flow analysis to determine whether a proposed project meets our internal rate of return objectives. We also use restaurant “cash-on-cash return” analysis as a “shorthand” method of determining if a project meets our cash flow return objectives. Because our restaurants are sometimes slow to ramp up, we take a very hard look at third year cash-on-cash returns, with a minimum expectation of about 25 percent. If we can earn a 25 percent cash-on-cash return in the third year of operation (excluding pre-opening costs) we believe a restaurant will provide excellent financial rewards. We use a 14 percent internal rate of return as the hurdle rate in our discounted cash flow model, which includes a substantial investment for remodeling every seven years. To make a long story short, we currently expect about $6 million in revenue at the end of year three before we will give a transaction serious consideration. At this volume level, we exceed all of our minimum hurdles by a wide margin. Our new West End restaurant in Nashville is already tracking toward these kinds of returns. If we meet our minimum return target, our return on capital will continue to post improvement. Our long-term goal is to improve our return on average equity capital to 14 percent.

Unit Growth Outlook
We are aggressively looking for opportunities in our existing large markets: Chicago, Detroit, Houston, South Florida, and Atlanta. We also are targeting other large metropolitan areas that have solid upscale demographics. We consider any statistical metropolitan area with a population in excess of two million people to be a target market. There are a few smaller markets under consideration only because they are exclusive, upscale, high-income markets (think Naples, Florida). We are actively looking for opportunities in Orlando, St. Louis, Washington D.C. Metroplex, Long Island, New Jersey, and Dallas to name a few markets that have solid entry points for us. We have worked in the Phoenix/Scottsdale market for several years and are studying the Southern California market.

In summary, we are focusing on a national development program. We are laying the groundwork to generate a predictable deal flow over the next five to seven years that should allow us to develop three new restaurants a year starting in 2008.

Capital Allocations
A goal we set several years ago was to develop restaurants with internally generated capital. We do not have any current plans to increase the equity capital base in the Company by selling more common stock. We believe we have the ability to generate enough cash flow to meet our development objective without incurring a substantial amount of additional debt. However, we do our best to be an opportunistic company. I have learned to never say “never.” Our business has the ability to generate large cash flows, but it also has high fixed costs. Although only 30 percent of our capitalization is technically debt, we have many ground leases classified as operating leases and therefore not included on the balance sheet. As described in Note G to the financial statements, we have approximately $31 million in operating lease commitments. Some restaurant analysts like to compute lease adjusted leverage by using a capitalization factor of eight times lease expense to convert operating leases to debt. Under this analysis our approximately $2.9 million in annual operating lease expense would equate to another $23 million of long-term debt, which would then be almost 50 percent of our total capital.

While not over-leveraged, we have utilized a considerable amount of leverage in our business. There is an old saying that, “what goes around, comes around,” which, for investment and commercial banking, could be summarized as “nothing is new under the sun.” I remember several years ago something called a “leveraged re-capitalization” which was in vogue in the restaurant industry. Companies with little debt on their balance sheets would leverage themselves to the maximum and (after paying big fees to their Helpers) use the proceeds to buy back common stock or pay a one-time dividend. A lot of managers learned that running a business with this kind of leverage turned their Helpers’ rosy assumptions another color. It is hard for a company with high levels of fixed assets to maintain those assets in competitive condition when all the cash flow is needed to repay debt. Many of these companies either went bankrupt or were sold at a huge discount to the value accorded them by the market immediately after the leveraged re-capitalization. It appears that some restaurant companies are again considering this kind of leverage, and we can only hope that they are our competitors. We have done our best to be prudent in using leverage. If we add any debt to the balance sheet in the future it will be done very carefully.

Federal tax laws have changed in the last few years and corporate dividends are now treated somewhat more reasonably by the Internal Revenue Service. With that view and in association with extending the Solidus standstill agreement, we paid our first cash dividend this year. Management recommended and our Board of Directors approved the dividend after concluding that it would not have an adverse effect on our growth plans. I expect that in the future the same analysis, including any opportunities that come our way, will be utilized. In any event, we intend to be entrepreneurial.

Marketing
We believe that everything about our concept is marketing, from employee appearance, to how we plate our food, to the design of our buildings. We are not, however, advertisers. We spend virtually nothing on advertising. As I review our same store sales performance and compare it to some of our competitors, I believe our same store sales growth is as good, if not better, than most of the concepts that aggressively spend money on advertising. We are not opposed to advertising, but simply do not believe it is cost effective in our segment of the industry. For example, the amount of advertising dollars that would be required to build and maintain top-of-mind awareness for our restaurant in the Denver market would probably exceed our annual sales. We believe word of mouth is the most impressive of all advertising. We believe that the greatest advertisement we can get is a friend or neighbor’s recommendation that you dine at J. Alexander’s because of the outstanding service experience and quality food they experienced.

We do, from time to time, conduct marketing research to test our theories. We have not done any extensive research in the last four years, so this year we plan a major update. Our past research projects showed that guests use upscale casual dining restaurants because of the perceived quality of the food and level of service. Ambiance, as well as some of the other standard restaurant attributes, such as cleanliness, also plays a big role. We expect to learn from marketing research and to adjust our business plans accordingly.

Pre-Opening Costs
Restaurants are required to expense all pre-opening costs as incurred. Our pre-opening costs include the salaries and benefits for our on-site restaurant management team and hourly employee trainers, travel and lodging costs of the training team, all food used during the training cycle, wages and benefits for the newly hired employees being trained, employee recruiting costs, and any other costs incidental to the opening except construction period rent expense, which is discussed below. We estimate that our out-of-pocket pre-opening costs will be around $350,000 per restaurant depending on the variance associated with travel and lodging. Management relocation costs can also be a big component of pre-opening costs and can cause these costs to run as high as $400,000. In our financial model we charge pre-opening costs against a restaurant’s first year of revenue.

An accounting change that will influence the future impact of restaurant openings is the treatment of construction period rents. Since the beginning of time most landlords have given a “rent holiday” during the construction period to virtually any kind of business utilizing a ground lease. Most landlords understand that a business must match its revenue stream to its costs. In the typical 15 or 20-year restaurant lease, rents usually do not commence until the restaurant opens for business. The free rent period usually has a fixed length, and in most cases there is a maximum “rent holiday” in the lease, but in most cases this was sufficient to allow the owner to have the business open prior to or in conjunction with the beginning of the rent period. Many companies, including ours, have historically not expensed any rents until payments began under the terms of the lease.

Last year the Financial Accounting Standards Board staff decided that when a tenant has control of the leased property, it is required to record rent during the construction period as an expense before any rent is in fact due and payable. We plan to treat construction period rent as a pre-opening cost. It may end up being a very significant expense on the income statement even though it requires no cash to fund the expense until later in the business cycle. A lease of 15 years (180 months) after a restaurant opens, with total rent payments of, say, $5 million will result in about $200,000 of construction period rent expense (the lease will now be amortized over, say, 188 months) even though no rent is actually paid for the first eight (construction period) months. Thus if out-of-pocket pre-opening costs are $400,000, the financial statement expense in the example would be around $600,000 because of including construction period rent. Operators and investors will need to pay close attention to the effect of this accounting treatment, because in the later years of the lease, the restaurant tenant will be reporting lower rent expense than the cash rents actually paid, because of this type of amortization. It will be possible that 15 years from now, for instance, a one-restaurant operator may get a big surprise: reported profits and negative cash flow.

The out-of-pocket cash portion of pre-opening costs is real, and we pay close attention to budgeting and managing these costs. However, the worst short-term decision a restaurateur, or any other retailer for that matter, could make would be to limit front-end training because of cost concerns, especially if providing service is an essential component of your business franchise. We believe all of our work over the last several years came together in the West End Nashville opening. It was our most efficient opening, from a training point-of-view, since we started the Company. We believe our guests, from day one, were provided with outstanding professional service. I often share with our management team the thought that our guests deserve and expect perfection the minute we open our doors for business and receive the first sales dollar. I have occasionally been given a note or a card in a new restaurant saying, “Please forgive our poor service. We are new.” I don’t. (Nor do they offer me a discount on my meal.)

General and Administrative Expenses
Several years ago, when our general and administrative expenses were ten percent of sales, I told you that our goal was to reduce them every year. We have been fairly successful in reducing this percentage in most years. Our regional management and office support staff head count at the end of 2005 was 35, compared to 34 five years ago. As we grow the business, we see very little need to add a significant number of staff. We will, from time to time, add people to clerical positions in the finance and accounting group. Our culinary and operational support group, including human resources, will need to also add staff, but not at an accelerated rate. The biggest variable in our general and administrative expenses is our training and recruiting cost, which varies from year to year. We are one of the few restaurant companies that focuses on college-level recruiting. The majority of our new management candidates are recent graduates of university hospitality programs. We have an extensive training program. Before a new management employee is given any restaurant level responsibility, he or she must train for an average of about five months. During this period the new manager (we call them Coach In Training) learns every function in our restaurant, especially culinary functions. Training continues for several years before one can take command of a restaurant.

Turnover is an enemy of all retailers, especially restaurants. It is very hard to compare turnover statistics, because very few companies publish them. If they do, the methodology varies from company to company, making comparisons difficult. In a company our size, we can go for several months with almost no turnover, and then have a period we experience what seems to be an excessive amount of turnover. Since we are an entry-level trainer and developer of people, some of our younger managers decide to leave the restaurant industry after a year or two in the business. Because we have a national reputation as a superior service provider, and are known to have an excellent training program, our management is constantly being recruited by other hospitality groups. Some of the larger national companies (we call them the “big chains”; you know who we are talking about) are simply not capable of training management to work in a service-intense environment. When new service-intense concepts start up with aggressive development schedules, they come knocking on our door for talent. It is flattering that other restaurant groups continually try to hire away our management team, but it is costly to us. We believe our salaries and benefits are among the most competitive in our segment of the industry.

The other issue that increases turnover is that our business is so performance driven. Our culture demands a goal of continuous improvement. Unfortunately, the pressure of this kind of environment causes some people to leave the industry. We do everything we can to be a great place to work, and we believe our culture and human resource systems help to create an extremely positive work environment. Nevertheless, this is a pressure-filled business. In summary, our turnover will always be too high, but we think it’s competitive and probably not as high as our direct competitors.

Incentive Compensation – Senior Management
We have an incentive compensation system that allows everyone on the senior leadership team, including the Chief Executive Officer, to receive an annual cash bonus based on meeting certain pre-determined financial targets. We use stretch budgeting, and by that I mean we set aggressive goals to improve the business every year. Bonuses to the senior management team are paid if we meet these objectives. It is a hurdle system, meaning that our minimum objective must be met for a bonus to be paid. If our performance significantly exceeds our business plan objectives, the system provides for bonus payout levels above the minimum. Because our system is based on stretch goals, management has not historically received a bonus every year and probably never will. However, the system does keep the senior leadership team focused on improving operating results, and that is ultimately where the focus should be.

Incentive Compensation – Restaurant Management
Our restaurant management teams and our regional operations management earn bonuses based on their individual performance. Restaurant management must meet pre-determined bonus criteria, based on improvements in restaurant level sales and profitability and meeting business plan objectives. This system employs fairly high hurdles similar to the system for senior management but is tailored to individual restaurant performance. Our head coaches (general managers) can earn about 25 percent of their total compensation by meeting their business plan objectives and flowing through a significant portion of their year-to-year sales improvement to store level profitability. Our more experienced head coaches can earn as much as $130,000 to $140,000 per year. We increase this earnings potential every year. Our goal is to move it closer to $200,000 as our business matures. Our executive chefs and coaches in charge of service also participate in the restaurant level incentive compensation system. As our restaurants become more successful, the opportunity for our restaurant level leadership team to increase their own financial rewards also goes up, as it should.

Our regional manager compensation system is slightly different but uses similar objectives and is based on how the particular regional director’s restaurants perform. There is a huge penalty to the regional director’s incentive compensation if one of his or her restaurants has poor performance. Two or more poor performing units can have an exponentially negative (or terminal) impact on the regional director’s bonus.

Long-Term Incentive Compensation
The Company has used stock options as a form of long-term incentive compensation for corporate management as well as restaurant level management. These options have been an important component of compensation especially since we have not offered qualified, defined benefit retirement plans, or really any other significant benefits except health insurance for most members of management. However, with changes in the accounting rules, we are unsure to what degree, if any, we will use equity-based compensation in the future as part of our long-term incentive compensation program. We are presently evaluating several programs for future use, but in all probability they will include at most a very modest stock option component.

Miscellaneous

• We are a small publicly-owned company with four corporate officers. That means we all wear many hats. I am the President and Chief Executive Officer and also serve the role of Chief Operating Officer. I travel and work our restaurants. When I say I work our restaurants, I mean that when I visit our restaurants, I work. I evaluate service and food quality, review operational standards, participate in our daily taste plate (quality check) and generally inject myself in the operation enough to develop a feel for how we are doing. We are restaurateurs, first and foremost.
  
  Occasionally I am asked why we do not do more to “promote” our Company. We are a small company and put all of our energy into food quality and service standards, leaving little time for other types of activities. We work hard on improving our business with the idea of improving our earnings. I believe that in today’s electronic information age, if we make substantial improvement in our earnings, the word will get out. We also believe our disclosures should be as transparent as possible. With the exception of data we believe necessary to maintain our competitive advantages, we are quite willing to share anything. However, we will not publish any earnings guidance. With 28 restaurants in a highly volatile industry, we do not know our results from one week to the next until we see our weekly profit and loss statement each Monday. Some weeks we beat expected results by a wide margin, and other weeks we miss by the same margin. Our reluctance to give earnings guidance has nothing to do with wanting to keep information secret. It is just that we believe to play by the rules we would have to provide it every week. We also have strong feelings that all shareholders should be treated the same. We believe the 100-share shareholder and the 100,000-share shareholder should have equal access to information.
  
  
• From time to time we are asked who is Solidus. They are an investment partnership managed by E. Townes Duncan, one of our directors. Solidus is our largest shareholder.
  
  
• We try to run our business as efficiently as possible. We are a public company, but we try to think like a miserly-managed private company. We do not own an airplane. We do most of our traveling on Southwest Airlines. I personally stay in hotels where I can get my AAA or senior citizen’s discount. All of our management team shares the same philosophy: Be efficient and keep expenses as low as possible. We try to spend and invest wisely, just like you would with your own money.
  
  
• None of our management team, including your CEO, is involved in any active business ventures other than J. Alexander’s. We do not invest in other restaurants or operate restaurants on the side. We give the Company 100 percent of our loyalty.
  
  
• Occasionally, I am asked if I have an exit strategy. The answer is yes. The Columbarium at the First Presbyterian Church in Nashville.
  
  
• We do a complete business review at our annual meeting of shareholders. Our entire management team, including the operations staff, is in attendance. We are there to meet with our owners and answer any questions you might have about our business. We are hopeful many of you will attend.
  

In closing, we are confident we have a great team of restaurant operators and support staff in place to meet our business objectives of improving performance every year with continued revenue and earnings growth. We are highly focused on meeting the needs of our guests by providing an outstanding service experience so they can enjoy our quality food products. We are also highly focused on providing improved financial performance to our shareholders. We are excited about what we have learned from our newest restaurant in Nashville. We believe we have the appropriate systems and the commitment of our entire team to improve the consistency of our restaurant development process and meet our objective of continuing improvement in our business every day. I look forward to reporting to you next year that we have met all of our 2006 objectives.

Sincerely,

Lonnie J. Stout II
Chairman, President and
Chief Executive Officer
March 31, 2006

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