10-Q 1 form10-q_2ndqtr08a.htm 2ND QTR 08

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

x

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

For the Quarterly Period Ended:  December 4, 2007  

OR

o 

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

 

 

For the transition period from __________ to _________

Commission file number 1-12454


RUBY TUESDAY, INC.

(Exact name of registrant as specified in charter)

 

 

GEORGIA

 

63-0475239

(State of incorporation or organization)

 

(I.R.S. Employer identification no.)

 

 

150 West Church Avenue, Maryville, Tennessee 37801
(Address of principal executive offices)  (Zip Code)

        Registrant’s telephone number, including area code: (865) 379-5700

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  x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

 

51,712,660

 

(Number of shares of common stock, $0.01 par value, outstanding as of January 7, 2008)

 

 



RUBY TUESDAY, INC.

INDEX

 

Page

PART I - FINANCIAL INFORMATION

 


     ITEM 1. FINANCIAL STATEMENTS

 


                CONDENSED CONSOLIDATED BALANCE SHEETS AS OF

 

DECEMBER 4, 2007 AND JUNE 5, 2007

3 


                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED

 

DECEMBER 4, 2007 AND DECEMBER 5, 2006

4 


                CONDENSED CONSOLIDATED STATEMENTS OF CASH

 

FLOWS FOR THE TWENTY-SIX WEEKS ENDED

 

DECEMBER 4, 2007 AND DECEMBER 5, 2006

5 


                NOTES TO CONDENSED CONSOLIDATED FINANCIAL

 

STATEMENTS

6-18 


     ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

 

OF FINANCIAL CONDITION AND RESULTS

 

OF OPERATIONS

19-33 


     ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT

 

MARKET RISK

33


     ITEM 4. CONTROLS AND PROCEDURES

33-34



PART II - OTHER INFORMATION

 


     ITEM 1. LEGAL PROCEEDINGS

34

ITEM 1A. RISK FACTORS

34-35

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

36

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

36

ITEM 5. OTHER INFORMATION

37

ITEM 6. EXHIBITS

38

SIGNATURES

39

 

 

 

2

 


PART I — FINANCIAL INFORMATION

ITEM 1.

 

RUBY TUESDAY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER-SHARE DATA)

(UNAUDITED)

 

DECEMBER 4,

 

JUNE 5,

 

 

2007

 

2007

 

 

(NOTE A)

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and short-term investments

$

7,886

 

25,892

 

Accounts and notes receivable, net

 

10,384

 

 

14,773

 

Inventories:

 

 

 

 

 

 

Merchandise

 

13,470

 

 

11,825

 

China, silver and supplies

 

9,242

 

 

8,207

 

Income tax receivable

 

888

 

 

 

Deferred income taxes

 

4,772

 

 

4,839

 

Prepaid rent and other expenses

 

14,850

 

 

14,542

 

Assets held for sale

 

36,878

 

 

20,368

 

Total current assets

 

98,370

 

 

100,446

 

 

 

 

 

 

 

 

Property and equipment, net

 

1,091,639

 

 

1,033,336

 

Goodwill

 

18,927

 

 

16,935

 

Notes receivable, net

 

4,956

 

 

9,212

 

Other assets

 

69,162

 

 

69,927

 

 

 

 

 

 

 

 

Total assets

$

1,283,054

 

$

1,229,856

 


Liabilities & shareholders’ equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

$

75,093

 

$

39,435

 

Accrued liabilities:

 

 

 

 

 

 

Taxes, other than income taxes

 

22,247

 

 

19,986

 

Payroll and related costs

 

9,328

 

 

8,740

 

Insurance

 

7,738

 

 

13,525

 

Deferred revenue – gift cards

 

8,209

 

 

8,578

 

Rent and other

 

25,452

 

 

25,985

 

Current maturities of long-term debt, including capital leases

 

548,068

 

 

1,779

 

Income tax payable

 

 

 

5,730

 

Total current liabilities

 

696,135

 

 

123,758

 

 

 

 

 

 

 

 

Long-term debt and capital leases, less current maturities

 

43,673

 

 

512,559

 

Deferred income taxes

 

28,358

 

 

37,107

 

Deferred escalating minimum rent

 

40,991

 

 

39,824

 

Other deferred liabilities

 

78,056

 

 

77,282

 

Total liabilities

 

887,213

 

 

790,530

 

 

 

 

 

 

 

 

Commitments and contingencies (Note L)

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value; (authorized: 100,000 shares;

 

 

 

 

 

 

issued: 51,713 shares at 12/04/07; 53,240 shares at 6/05/07)

 

517

 

 

532

 

Capital in excess of par value

 

4,889

 

 

2,246

 

Retained earnings

 

399,901

 

 

446,584

 

Deferred compensation liability payable in

 

 

 

 

 

 

Company stock

 

3,598

 

 

3,861

 

Company stock held by Deferred Compensation Plan

 

(3,598

)

 

(3,861

)

Accumulated other comprehensive loss

 

(9,466

)

 

(10,036

)

 

 

395,841

 

 

439,326

 

 

 

 

 

 

 

 

Total liabilities & shareholders’ equity

$

1,283,054

 

1,229,856

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

 


RUBY TUESDAY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS EXCEPT PER-SHARE DATA)

(UNAUDITED)

 

 

THIRTEEN WEEKS ENDED

 

TWENTY-SIX WEEKS ENDED

 

 

DECEMBER 4,

 

DECEMBER 5,

 

DECEMBER 4,

 

DECEMBER 5,

 

 

2007

 

2006

 

2007

 

2006

 

 

(NOTE A)

 

(NOTE A)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales and operating revenue

$

317,393

 

$

333,316

 

$

660,387

 

$

668,127

 

Franchise revenue

 

3,530

 

 

3,503

 

 

7,333

 

 

7,351

 

 

 

320,923

 

 

336,819

 

 

667,720

 

 

675,478

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of merchandise

 

89,018

 

 

91,378

 

 

181,711

 

 

181,048

 

Payroll and related costs

 

109,525

 

 

104,314

 

 

219,466

 

 

207,857

 

Other restaurant operating costs

 

69,786

 

 

60,823

 

 

136,673

 

 

121,967

 

Depreciation and amortization

 

25,140

 

 

18,993

 

 

48,733

 

 

37,375

 

(Gain)/loss from Specialty Restaurant

 

 

 

 

 

 

 

 

 

 

 

 

Group, LLC bankruptcy

 

(7)

 

163

 

 

157

 

 

251

 

Selling, general and administrative,

 

 

 

 

 

 

 

 

 

 

 

 

net of support service fee income

 

 

 

 

 

 

 

 

 

 

 

 

for the thirteen and twenty-six week

 

 

 

 

 

 

 

 

 

 

 

 

periods totaling $1,325 and $3,911

 

 

 

 

 

 

 

 

 

 

 

 

in fiscal 2008, and $3,120 and $6,218

 

 

 

 

 

 

 

 

 

 

 

 

in fiscal 2007, respectively

 

32,734

 

 

30,897

 

 

62,487

 

 

60,324

 

Equity in losses of unconsolidated

 

 

 

 

 

 

 

 

 

 

 

 

franchises

 

1,612

 

 

706

 

 

2,458

 

 

638

 

Interest expense, net

 

8,281

 

 

4,589

 

 

15,380

 

 

8,883

 

 

 

336,089

 

 

311,863

 

 

667,065

 

 

618,343

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/income before income taxes

 

(15,166)

 

24,956

 

 

655

 

 

57,135

 

(Benefit)/provision for income taxes

 

(4,815)

 

8,227

 

 

(84)

 

18,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss)/income

$

(10,351)

$

16,729

 

$

739

 

$

38,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.20)

$

0.28

 

$

0.01

 

$

0.65

 

Diluted

$

(0.20)

$

0.28

 

$

0.01

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

51,380

 

 

58,793

 

 

51,763

 

 

58,467

 

Diluted

 

51,380

 

 

59,266

 

 

51,964

 

 

58,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per share

$

 

$

 

$

0.25

 

$

0.25

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

4

 


RUBY TUESDAY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

 

(UNAUDITED)

 

 

TWENTY-SIX WEEKS ENDED

 

 

DECEMBER 4,

 

DECEMBER 5,

 

 

2007

 

2006

 

 

(NOTE A)

 

Operating activities:

 

 

 

 

 

 

Net income

$

739

 

$

38,279

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

48,733

 

 

37,375

 

Amortization of intangibles

 

317

 

 

191

 

Provision for bad debts

 

 

 

(497

)

Deferred income taxes

 

(6,969

)

 

(4,408

Loss/(gain) on impairment or disposal of assets

 

914

 

 

(18

)

Equity in losses of unconsolidated franchises

 

2,458

 

 

638

 

Distributions received from unconsolidated franchises

 

46

 

 

847

 

Share-based compensation expense

 

5,002

 

 

4,569

 

Excess tax benefits from share-based compensation

 

(384

)

 

(2,934

)

Other

 

(1

)

 

12

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables

 

3,144

 

 

4,599

 

Inventories

 

(1,636

)

 

(1,586

)

Income tax receivable

 

(6,234

)

 

(1,389

)

Prepaid and other assets

 

(6,667

)

 

(4,010

)

Accounts payable, accrued and other liabilities

 

38,167

 

 

745

 

Net cash provided by operating activities

 

77,629

 

 

72,413

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

(78,942

)

 

(69,382

)

Acquisition of franchise and other entities

 

(2,464

)

 

(3,002

)

Proceeds from disposal of assets

 

2,701

 

 

6,561

 

Insurance proceeds from property claims

 

511

 

 

2,852

 

Other, net

 

(856

)

 

(5,286

)

Net cash used by investing activities

 

(79,050

)

 

(68,257

)

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

Proceeds from long-term debt

 

46,812

 

 

2,200

 

Principal payments on long-term debt

 

(13,322

)

 

(28,497

)

Proceeds from issuance of stock, including treasury stock

 

2,225

 

 

20,262

 

Excess tax benefits from share-based compensation

 

384

 

 

2,934

 

Stock repurchases

 

(39,491

)

 

(14

)

Dividends paid

 

(13,193

)

 

(14,549

)

Net cash used by financing activities

 

(16,585

)

 

(17,664

)

 

 

 

 

 

 

 

Decrease in cash and short-term investments

 

(18,006

)

 

(13,508

)

Cash and short-term investments:

 

 

 

 

 

 

Beginning of year

 

25,892

 

 

22,365

 

End of quarter

$

7,886

 

$

8,857

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest, net of amount capitalized

$

16,664

 

$

10,370

 

Income taxes, net

$

13,665

 

$

25,152

 

Significant non-cash investing and financing activities:

 

 

 

 

 

 

Assumption of debt and capital leases related to franchise

 

 

 

 

 

 

partnership acquisitions

$

43,914

 

$

8,696

 

Retirement of fully depreciated assets

$

9,738

 

$

513

 

Reclassification of properties to assets held for sale or receivables

$

17,577

 

$

9,448

 

Liability for claim settlements and insurance receivables

$

(4,813

)

$

992

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

5

 


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – BASIS OF PRESENTATION

Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI”, “we” or the “Company”), owns and operates Ruby Tuesday® casual dining restaurants and one Wok-Hay restaurant. We also franchise the Ruby Tuesday concept in select domestic and international markets. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring entries) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the 13 and 26-week periods ended December 4, 2007 are not necessarily indicative of results that may be expected for the year ending June 3, 2008.

The condensed consolidated balance sheet at June 5, 2007 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in RTI’s Annual Report on Form 10-K for the fiscal year ended June 5, 2007.

NOTE B – (LOSS)/EARNINGS PER SHARE

Basic (loss)/earnings per share is computed by dividing net (loss)/income by the weighted average number of common shares outstanding during each period presented. Diluted earnings per share gives effect to restricted stock and options outstanding during the applicable periods. The stock options and restricted shares included in the diluted weighted average shares outstanding totaled 0.5 million for the 13 weeks ended December 5, 2006, and 0.2 million and 0.4 million for the 26 weeks ended December 4, 2007 and December 5, 2006, respectively.

Stock options with an exercise price greater than the average market price of our common stock and certain options with unrecognized compensation expense do not impact the computation of diluted (loss)/earnings per share because the effect would be anti-dilutive. In addition, due to the net loss for the 13 weeks ended December 4, 2007, all then outstanding share-based awards were excluded from the computation of diluted loss per share. For the 13 and 26 weeks ended December 4, 2007, there were 6.8 million and 5.7 million unexercised options, respectively, that were excluded from these calculations. Further, for the 13 weeks ended December 4, 2007, 0.3 million restricted shares were excluded. For the 13 and 26 weeks ended December 5, 2006, there were 3.3 million and 3.4 million unexercised options, respectively, that were excluded from the computation of diluted earnings per share.

NOTE C – SHARE-BASED EMPLOYEE COMPENSATION

The Company compensates its employees and Directors using share-based compensation through the following plans:

 

The Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan for Directors

Under the Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan for Directors (the “Directors’ Plan”), non-employee directors are eligible to be awarded stock-based incentives. Restricted shares granted under the Directors’ Plan vest in equal amounts after one, two and three years provided the Director continually serves on the Board. Options issued under the Directors’ Plan become vested after thirty months and are exercisable until five years after the grant date. Stock option exercises are settled with the issuance of new shares.

 

All options awarded under the Directors’ Plan have been at the fair market value at the time of grant. A Committee, appointed by the Board, administers the Directors’ Plan. At December 4, 2007, we had

 

6

 


reserved 509,000 shares of common stock under this Directors’ Plan, 262,000 of which were subject to options outstanding.

The Ruby Tuesday, Inc. 2003 Stock Incentive Plan

A Committee, appointed by the Board, administers the Ruby Tuesday, Inc. 2003 Stock Incentive Plan (“2003 SIP”), and has full authority in its discretion to determine the key employees and officers to whom stock incentives are granted and the terms and provisions of stock incentives. Option grants under the 2003 SIP can have varying vesting provisions and exercise periods as determined by such Committee. Options granted under the 2003 SIP vest in periods ranging from immediate to fiscal 2011, with the majority vesting 24 or 30 months following the date of grant, and the majority expiring five, but some up to ten, years after grant. The 2003 SIP permits the Committee to make awards of shares of common stock, awards of stock options or other derivative securities related to the value of the common stock, and certain cash awards to eligible persons. These discretionary awards may be made on an individual basis or for the benefit of a group of eligible persons. All options awarded under the 2003 SIP have a strike price equal to the fair market value of the Company’s stock at the time of grant.

At December 4, 2007, we had reserved a total of 8,295,000 shares of common stock for the 2003 SIP, 6,494,000 of which were subject to options outstanding. Stock option exercises are settled with the issuance of new shares.

Stock Options

The following table summarizes the activity in options for the 26 weeks ended December 4, 2007 under these stock option plans (in thousands, except per-share data):

 

 

 

 

Weighted-

 

 

 

 

Average

 

 

Options

 

Exercise Price

 

Balance at June 5, 2007

6,928 

 

$ 26.56

 

Granted

– 

 

 

Exercised

 (124)

 

17.96

 

Forfeited

 (48)

 

24.55

 

Balance at December 4, 2007

6,756 

 

$ 26.73

 

 

 

 

 

 

Exercisable at December 4, 2007

4,324 

 

$ 25.80

 

At December 4, 2007, there was approximately $6.3 million of unrecognized pre-tax compensation expense related to non-vested stock options. This cost is expected to be recognized over a weighted-average period of 1.3 years.

No stock options were awarded during the 26 weeks ended December 4, 2007.

 

Restricted Stock

The following table summarizes the status of our restricted-stock activity for the 26 weeks ended December 4, 2007 (in thousands, except per-share data):

 

 

 

 

Weighted-Average

 

 

Restricted

 

Grant-Date

 

 

Stock

 

Fair Value

 

Non-vested at June 5, 2007

317

 

$ 27.08

 

Granted

14

 

19.05

 

Vested

 

 

Forfeited

 

 

Non-vested at December 4, 2007

331

 

$ 26.74

 

The fair value of the restricted share awards was based on the Company’s fair market value at the time of grant. At December 4, 2007, unrecognized compensation expense related to restricted stock grants expected to vest totaled approximately $0.7 million and will be recognized over a weighted average vesting period of approximately 2.0 years.

 

7

 


During the fourth quarter of fiscal 2007, RTI granted approximately 267,000 restricted shares to certain employees under the terms of the 2003 SIP. A performance condition, to be measured in June 2008, will determine the maximum number of restricted shares that can vest. At December 4, 2007, there was no unrecognized compensation expense related to this award as the performance condition is not expected to be achieved.

During the second quarter of fiscal 2008, RTI granted approximately 14,000 restricted shares to non-employee directors.

Other Share-Based Compensation

During the first quarter of fiscal 2007, RTI granted 60,000 stock appreciation rights (“SARs”) to a strategic partner. The award was to vest on July 5, 2008 provided that the strategic partner would still be providing services to RTI.

During the third quarter of fiscal 2007, RTI granted 180,000 SARs to its branding and marketing agency of record in connection with a strategic partnership agreement which were to vest, in whole or in part, on January 6, 2009 provided that the agency would still be providing services to RTI. A performance condition, to be measured in January 2008, will determine the maximum number of SARs that vest.

As of December 4, 2007, none of the above SARs will vest. For the 26 weeks ended December 4, 2007, we recognized $0.2 million of income relating to the reversal of share-based expense related to the SARs.

NOTE D – ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable – current consist of the following (in thousands):

 

December 4, 2007

 

June 5, 2007

 

 

 

 

 

 

Rebates receivable

$

809

 

$

938

Amounts due from franchisees

 

3,279

 

 

4,163

Other receivables

 

1,834

 

 

7,066

Current portion of notes receivable, net of allowance for

 

 

 

 

 

doubtful accounts and equity method losses totaling

 

 

 

 

 

$435 in 2008 and $157 in 2007

 

4,462

 

 

2,606

 

$

10,384

 

$

14,773

The Company negotiates purchase arrangements, including price terms, with designated and approved suppliers on behalf of RTI and the franchise system. We receive various volume discounts and rebates based on purchases for our Company-owned restaurants from certain suppliers.

Amounts due from franchisees consist of royalties, license and other miscellaneous fees, almost all of which represent the prior month's billings. Also included in this amount is the current portion of the straight-lined rent receivable from franchise sublessees and the amount to be collected in exchange for RTI’s guarantees of certain franchise partnership debt.

As of December 4, 2007, other receivables consisted primarily of amounts due for third party gift card sales and amounts due from various landlords. Other receivables at June 5, 2007 primarily consisted of insurance proceeds associated with a dram shop liability case settled before, but not paid until after, year-end. The offsetting liability was included in insurance within the accrued liabilities section of the Condensed Consolidated Balance Sheet.

 

Included in the current portion of notes receivable are payments due within one year on acquisition-related loans and amounts due under line of credit arrangements.

 

 

 

8

 


Notes receivable consist of the following (in thousands):

 

 

December 4, 2007

 

June 5, 2007

 

 

 

 

 

 

Notes receivable from domestic franchisees

$

12,118

 

$

17,413

Other

 

221

 

 

992

 

 

12,339

 

 

18,405

 

 

 

 

 

 

Less current maturities, net (included in accounts

 

 

 

 

 

and notes receivable)

 

4,462

 

 

2,606

 

 

7,877

 

 

15,799

Less allowances for doubtful notes and equity

 

 

 

 

 

method losses

 

2,921

 

 

6,587

Total notes receivable, net -- noncurrent 

$

4,956

 

$

9,212

 

Notes receivable from franchise partnerships generally arise when Company-owned restaurants are sold to franchise partnerships (“refranchised”). Historically, these notes generally allowed for deferral of interest during the first one to three years and required only the payment of interest for up to six years from the inception of the note. Twelve current franchisees received acquisition financing from RTI as part of the refranchising transactions. The amounts financed by RTI approximated 36% of the original purchase prices.

As of December 4, 2007, all the franchise partnerships were making interest and/or principal payments on a monthly basis in accordance with the terms of these notes. All of the refranchising notes accrue interest at 10.0% per annum.

The allowance for doubtful notes represents our best estimate of losses inherent in the notes receivable at the balance sheet date. At December 4, 2007 the allowance for doubtful notes was $2.9 million. Included in the allowance for doubtful notes is $2.2 million allocated to the $5.4 million of debt due from five franchisees that, for the most recent reporting period, have either reported coverage ratios below the required levels with certain of their third party debt, or reported ratios above the required levels but for an insufficient amount of time.

Also included in the allowance for doubtful notes at December 4, 2007 is $0.7 million, which represents RTI’s portion of the equity method losses of three of our 50%-owned franchise partnerships which was in excess of our recorded investment in those partnerships.

NOTE E – FRANCHISE PROGRAMS

As of December 4, 2007, we held a 50% equity interest in each of six franchise partnerships which collectively operate 72 Ruby Tuesday restaurants. We apply the equity method of accounting to all 50%-owned franchise partnerships. Also, as of December 4, 2007, we held a 1% equity interest in each of seven franchise partnerships which collectively operate 50 restaurants and no equity interest in various traditional domestic and international franchises which collectively operate 101 restaurants.

Beginning in May 2005, under the terms of the franchise operating agreements, we required all domestic franchisees to contribute a percentage, currently 2.4%, of monthly gross sales to a national advertising fund formed to cover their pro rata portion of the costs associated with our national advertising campaign. Under the terms of those agreements, we can charge up to 3.0% of monthly gross sales for this national advertising fund.

Advertising amounts received from domestic franchisees are considered by RTI to be reimbursements, recorded on an accrual basis as earned, and have been netted against selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

See Note L to the Condensed Consolidated Financial Statements for a discussion of our franchise partnership working capital credit facility and our related guarantees.

 

9

 


NOTE F – BUSINESS ACQUISITIONS

In June 2007, in conjunction with a previously announced strategy to acquire certain franchisees in the Eastern United States, RTI, through its subsidiaries, acquired the remaining 50% of the partnership interests of RT West Palm Beach Franchise, LP (“RT West Palm Beach”), thereby increasing its ownership to 100% of this partnership. RT West Palm Beach, previously a franchise partnership with 11 restaurants in Florida, was acquired for $1.7 million plus assumed debt.  Our Condensed Consolidated Financial Statements reflect the results of operations of these acquired restaurants subsequent to the date of acquisition. 

In October 2007, in part for the same reasons noted above, RTI, through its subsidiaries, acquired the remaining 99% and 50% of the membership interests of RT Michigan Franchise, LLC (“RT Michigan”) and RT Detroit Franchise, LLC (“RT Detroit”), respectively, thereby increasing its ownership to 100% of these companies.  RT Michigan, previously a franchise partnership with 14 Ruby Tuesday restaurants, was acquired for assumption of debt. RT Detroit, previously a franchise partnership with 11 Ruby Tuesday restaurants, was also acquired for assumption of debt. As further consideration for the transactions, RTI surrendered collection of its notes receivable from RT Michigan and RT Detroit. These notes, net of allowances for doubtful accounts and unearned revenue, totaled $1.5 million and $0.8 million, respectively, at the time of the transactions. Our Condensed Consolidated Financial Statements reflect the results of operations of these acquired restaurants subsequent to the dates of acquisition. 

These transactions were accounted for as step acquisitions using the purchase method as defined in SFAS No. 141, “Business Combinations.”  For RT West Palm Beach, the purchase price was allocated to the fair value of property and equipment of $3.7 million, goodwill of $1.4 million, reacquired franchise rights of $0.9 million, long-term debt and capital leases of $3.9 million, and other net liabilities of $0.4 million.  RT West Palm Beach had total debt and capital leases of $7.9 million at the time of acquisition, none of which was payable to RTI.

For RT Michigan, the purchase price was allocated to the fair value of property and equipment of $19.7 million, reacquired franchise rights of $1.2 million, long-term debt of $19.2 million, and other net liabilities of $0.2 million. The amount shown for other net liabilities was reduced by $0.2 million, which represented the cash RT Michigan had on hand at the time of acquisition.  RT Michigan had total debt of $25.1 million at the time of acquisition, $5.9 million of which was payable to RTI.

For RT Detroit, the purchase price was allocated to the fair value of property and equipment of $8.9 million, reacquired franchise rights of $0.6 million, long-term debt of $8.4 million, and other net liabilities of $0.3 million.  RT Detroit had total debt of $18.9 million at the time of acquisition, $2.1 million of which was payable to RTI. In addition to recording the amounts discussed above, RTI reclassified its investments in RT West Palm Beach, RT Michigan, and RT Detroit to account for the remainder of the assets and liabilities, which are now fully recorded within the Condensed Consolidated Balance Sheet of RTI.

On June 27, 2007, we purchased certain assets from Wok Hay, LLC for $1.0 million. The purchase price was allocated to the fair value of property and equipment of $0.3 million, goodwill of $0.6 million, and other net assets of $0.1 million. At the time of acquisition, Wok Hay, LLC operated a fast casual Asian restaurant located in Knoxville, Tennessee. One of the sellers was granted, for no cash consideration, a 10% minority interest in the subsidiary we formed to acquire the Knoxville restaurant. The Company has since converted the acquired restaurant to a full-service Asian restaurant.

 

 

 

 

10

 


NOTE G – PROPERTY, EQUIPMENT AND OPERATING LEASES

Property and equipment, net, is comprised of the following (in thousands):

 

 

December 4, 2007

 

June 5, 2007

Land

$

221,597

 

$

205,647

Buildings

 

460,514

 

 

429,721

Improvements

 

449,852

 

 

425,498

Restaurant equipment

 

304,721

 

 

294,810

Other equipment

 

99,972

 

 

99,911

Construction in progress

 

49,481

 

 

55,968

 

 

1,586,137

 

 

1,511,555

Less accumulated depreciation and amortization

 

494,498

 

 

478,219

 

$

1,091,639

 

$

1,033,336

Approximately 54% of our 722 restaurants are located on leased properties. Of these, approximately 57% are land leases only; the other 43% are for both land and building. The initial terms of these leases expire at various dates over the next 20 years. These leases may also contain required increases in minimum rent at varying times during the lease term and have options to extend the terms of the leases at a rate that is included in the original lease agreement. Most of our leases require the payment of additional (contingent) rent that is based upon a percentage of restaurant sales above agreed upon sales levels for the year. These sales levels vary for each restaurant and are established in the lease agreements. We recognize contingent rental expense (in annual as well as interim periods) prior to the achievement of the specified target that triggers the contingent rental expense, provided that achievement of that target is considered probable.

In June 2007, RTI, through its subsidiaries, acquired the remaining partnership interests of RT West Palm Beach, in which we had previously owned a 50% interest. In October 2007, RTI, through its subsidiaries, acquired the remaining partnership interests of RT Michigan and RT Detroit, in which we had previously owned a 1% and 50% interest, respectively. At the time of acquisition, RT West Palm Beach, RT Michigan, and RT Detroit operated 11, 14, and 11 Ruby Tuesday restaurants, respectively, and were scheduled to make future sub-lease payments totaling $3.1 million, $1.1 million, and $1.4 million, respectively, to various lessors as part of the sub-lease agreements with RTI. See Note F to the Condensed Consolidated Financial Statements for more information regarding these transactions.

 

Amounts included in assets held for sale at December 4, 2007 primarily consist of parcels of land upon which the Company has no intention to build restaurants.

NOTE H – LONG-TERM DEBT AND CAPITAL LEASES

Long-term debt and capital lease obligations consist of the following (in thousands):

 

December 4, 2007

 

June 5, 2007

 

 

 

 

 

 

Revolving credit facility

$

393,800

 

$

347,000

Unsecured senior notes:

 

 

 

 

 

Series A, due April 2010

 

85,000

 

 

85,000

Series B, due April 2013

 

65,000

 

 

65,000

Mortgage loan obligations

 

47,771

 

 

17,073

Capital lease obligations

 

170

 

 

265

 

 

591,741

 

 

514,338

Less current maturities

 

548,068

 

 

1,779

 

$

43,673

 

$

512,559

 

 

11

 


On April 3, 2003, RTI issued non-collateralized senior notes totaling $150.0 million through a private placement of debt (the “Private Placement”). The Private Placement consists of $85.0 million in notes with a fixed interest rate of 4.69% (the “Series A Notes”) and $65.0 million in notes with a fixed interest rate of 5.42% (the “Series B Notes”). The Series A Notes and Series B Notes mature on April 1, 2010 and April 1, 2013, respectively.

 

On February 28, 2007, RTI entered into an amendment and restatement of its previous five-year revolving credit agreement (the “Credit Facility”) such that the aggregate amount we may borrow increased to $500.0 million. This amount includes a $50.0 million subcommitment for the issuance of standby letters of credit and a $50.0 million subcommitment for swingline loans. The Credit Facility contains an additional provision permitting RTI to increase the aggregate amount of the Credit Facility by an additional amount up to $100.0 million. Proceeds from the additional capacity can be used for general corporate purposes, including additional capital expenditures and share repurchases. The Credit Facility will mature on February 23, 2012.

 

Under the Credit Facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize. Our options for the rate are the Base Rate or an adjusted LIBO Rate plus an applicable margin. The Base Rate is defined to be the higher of the issuing bank’s prime lending rate or the Federal Funds rate plus 0.5%. The applicable margin is zero percent for the Base Rate loans and a percentage ranging from 0.5% to 1.25% for the LIBO Rate-based option. We pay commitment fees quarterly ranging from 0.1% to 0.25% on the unused portion of the Credit Facility.

Under the terms of the Credit Facility, we had borrowings of $393.8 million with an associated floating rate of interest of 5.48% at December 4, 2007. As of June 5, 2007, we had $347.0 million outstanding with an associated floating rate of interest of 5.95%. After consideration of letters of credit outstanding, the Company had $89.1 million available under the Credit Facility as of December 4, 2007.

Both the Credit Facility and the notes issued in the Private Placement contain various restrictions, including limitations on additional debt, the payment of dividends and limitations regarding maximum funded debt, minimum net worth, and minimum fixed charge coverage ratios. On November 30, 2007, RTI entered into amendments of both the Credit Facility and the notes issued in the Private Placement to amend the minimum fixed charge coverage and maximum funded debt ratios through the fiscal quarter ending June 2, 2009 and thereafter. The amendment to the Private Placement provided for a 1% increase in interest rates upon the occurrence of credit ratios outside those previously allowed. As of December 4, 2007, our maximum funded debt ratio exceeded that which was previously allowed by the lenders. As a result, the interest rates of our Series A and Series B Private Placement notes for the third fiscal quarter of 2008 will be 5.69% and 6.42%, respectively, and are anticipated to remain at this rate for the remainder of the fiscal year.

As a result of these amendments, the Company is currently in compliance with its debt covenants. Under current Company and industry conditions, however, absent further modifications, the Company anticipates that, at some point during the next twelve months, it will be in violation of its maximum funded debt and minimum fixed charge coverage ratios, which between December 4, 2007 and December 2, 2008 are 3.75:1 and 1.85:1, respectively. Accordingly, RTI has reclassified the Credit Facility and the notes issued in its Private Placement from long-term to current as of December 4, 2007 in accordance with Emerging Issues Task Force (“EITF”) Issue No. 86-30, “Classification of Obligations When a Violation is Waived by a Creditor.” In the event of default, there is no assurance that our lenders will waive any future covenant violations or agree to any future amendments of our Credit Facility and Private Placement.

NOTE I – INCOME TAXES

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with Statement 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48 on June 6, 2007.

 

12

 


As a result of the adoption of FIN 48, the Company recognized a negligible increase in its liability for unrecognized tax benefits, which was accounted for as a reduction to our opening balance of retained earnings on June 6, 2007. The Company had a liability for unrecognized tax benefits of $5.1 million and $5.6 million as of December 4, 2007 and June 6, 2007, respectively. As of December 4, 2007 and June 6, 2007, the total amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate was $3.3 million and $3.6 million, respectively. We do not expect that the amounts of unrecognized tax benefits will change significantly within the next twelve months.

 

Interest and penalties related to unrecognized tax benefits are recognized as components of income tax expense. As of December 4, 2007 and June 6, 2007, the Company had accrued $2.3 million and $2.2 million, respectively, for the payment of interest and penalties.

 

The effective tax rate for the 26-week period ended December 4, 2007 was (12.8)% compared to 33.0% for the corresponding period of the prior year. The effective tax rate decreased as compared to the prior year primarily as a result of favorable developments on certain tax exposure items and the impact of tax credits coupled with the decrease in net income.

 

At December 4, 2007, the Company is no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2006, and with few exceptions, state and local examinations by tax authorities prior to fiscal year 2004.

NOTE J – COMPREHENSIVE (LOSS)/INCOME

SFAS No. 130, “Reporting Comprehensive Income” (“SFAS 130”) requires the disclosure of certain revenue, expenses, gains and losses that are excluded from net (loss)/income in accordance with U.S. generally accepted accounting principles. Items that currently impact the Company’s other comprehensive income are the minimum pension liability adjustments and payments received in partial settlement of the Piccadilly divestiture guarantee. See Note L to the Condensed Consolidated Financial Statement for further information on the Piccadilly settlement. Amounts shown in the table below are in thousands.

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

December 4,

 

December 5,

 

December 4,

 

December 5,

 

 

2007

 

2006

 

2007

 

2006

 

Net (loss)/income

$

(10,351)

$

16,729

 

$

739

 

$

38,279

 

Pension liability reclassification, net of tax

 

419  

 

 

 

 

419

 

 

 

Piccadilly settlement, net of tax

 

151  

 

 

 

 

151

 

 

 

Comprehensive (loss)/income

$

(9,781)

$

16,729

 

$

1,309

 

$

38,279

 

 

 

 

 

 

NOTE K – PENSION AND POSTRETIREMENT MEDICAL AND LIFE BENEFIT PLANS

We sponsor three defined benefit pension plans for active employees and offer certain postretirement benefits for retirees. A summary of each of these is presented below.

Retirement Plan

RTI, along with Morrison Fresh Cooking, Inc. (which was subsequently purchased by Piccadilly Cafeterias, Inc., “Piccadilly”) and Morrison Health Care, Inc. (which was subsequently purchased by Compass Group, PLC, “Compass”), have sponsored the Morrison Restaurants Inc. Retirement Plan (the “Retirement Plan”). Effective December 31, 1987, the Retirement Plan was amended so that no additional benefits would accrue and no new participants may enter the Retirement Plan after that date. Participants receive benefits based upon salary and length of service.

On October 29, 2003, Piccadilly announced that it had filed for Chapter 11 protection in the United States Bankruptcy Court. Piccadilly withdrew as a sponsor of the Retirement Plan, with court approval, on March 4, 2004. Because RTI and Morrison Health Care, Inc. (“MHC”) were, at the time, the remaining sponsors of the Retirement Plan, they are jointly and severally required to make contributions to the Retirement Plan,

 

13

 


or any successor plan, in such amounts as are necessary to satisfy all benefit obligations under the Retirement Plan. Participants formerly with Morrison Fresh Cooking, Inc. (“MFC”) were allocated between RTI and Compass in fiscal 2007.

Assets and obligations attributable to MHC participants, as well as participants, formerly with MFC, who were allocated to Compass following the bankruptcy, were spun out of the Retirement Plan effective June 30, 2006. Following Compass’s withdrawal, RTI remained the sole sponsor of the Retirement Plan.

Executive Supplemental Pension Plan and Management Retirement Plan

Under these unfunded defined benefit pension plans, eligible employees earn supplemental retirement income based upon salary and length of service, reduced by social security benefits and amounts otherwise receivable under other specified Company retirement plans. Effective June 1, 2001, the Management Retirement Plan was amended so that no additional benefits would accrue and no new participants may enter the plan after that date.

 

Included in the amounts shown below are costs and obligations associated with pension benefits for certain Piccadilly employees which were absorbed by RTI following Piccadilly's bankruptcy. See Note L to the Condensed Consolidated Financial Statements for more information.

 

Postretirement Medical and Life Benefits

Our Postretirement Medical and Life Benefits plans provide medical benefits to substantially all retired employees and life insurance benefits to certain retirees. The medical plan requires retiree cost sharing provisions that are more substantial for employees who retire after January 1, 1990.

The following tables detail the components of net periodic benefit costs and the amounts recognized in our Condensed Consolidated Financial Statements for the Retirement Plan, Management Retirement Plan, the Executive Supplemental Pension Plan (collectively, the “Pension Benefits”) and the Postretirement Medical and Life Benefits plans (in thousands):

 

 

Pension Benefits

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

December 4,

 

December 5,

 

December 4,

 

December 5,

 

 

2007

 

2006

 

2007

 

2006

 

Service cost

$

91

 

$

75

 

$

182

 

$

150

 

Interest cost

 

566

 

 

532

 

 

1,132

 

 

1,064

 

Expected return on plan assets

 

(186

)

 

(158

)

 

(372

)

 

(316

)

Amortization of prior service cost

 

81

 

 

82

 

 

162

 

 

164

 

Recognized actuarial loss

 

244

 

 

223

 

 

488

 

 

445

 

Net periodic benefit cost

$

796

 

$

754

 

$

1,592

 

$

1,507

 

 

 

 

 

 

 

 

 

 

Postretirement Medical and Life Benefits

 

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

 

December 4,

 

December 5,

 

December 4,

 

December 5,

 

 

2007

 

2006

 

2007

 

2006

 

Service cost

$

2

 

$

4

 

$

4

 

$

8

 

Interest cost

 

26

 

 

29

 

 

52

 

 

58

 

Amortization of prior service cost

 

(2

)

 

(4

)

 

(4

)

 

(8

)

Recognized actuarial loss

 

24

 

 

29

 

 

48

 

 

58

 

Net periodic benefit cost

$

50

 

$

58

 

$

100

 

$

116

 

 

 

14

 


As disclosed in our Form 10-K for fiscal 2007, we are required to make contributions to the Retirement Plan in fiscal 2008. No contribution was required and we did not make any contributions to the Retirement Plan during the 26 weeks ended December 4, 2007. We expect to make contributions of $0.4 million for the remainder of fiscal 2008.

We also sponsor two defined contribution retirement savings plans. Information regarding these plans is included in RTI’s Annual Report on Form 10-K for the fiscal year ended June 5, 2007.

NOTE L – COMMITMENTS AND CONTINGENCIES

Guarantees

At December 4, 2007, we had certain third party guarantees, which primarily arose in connection with our franchising and divestiture activities. The majority of these guarantees expire at various dates ending in fiscal 2013. Generally, we are required to perform under these guarantees in the event that a third party fails to make contractual payments or, in the case of franchise partnership debt guarantees, achieve certain performance measures.

Franchise Partnership Guarantees

As part of the franchise partnership program, we have negotiated with various lenders a $48 million credit facility to assist the franchise partnerships with working capital needs (the “Franchise Facility”). As sponsor of the Franchise Facility, we serve as partial guarantor of the draws made by the franchise partnerships on the Franchise Facility. Although the Franchise Facility allows for individual franchise partnership loan commitments to the end of the Franchise Facility term, all current commitments are for 12 months. If desired, RTI can increase the amount of the Franchise Facility by up to $25 million (to a total of $73 million) or reduce the amount of the Franchise Facility. The Franchise Facility expires on October 5, 2011.

The Franchise Facility contains various restrictions, including limitations on RTI additional debt, the payment of dividends and limitations regarding maximum funded debt, minimum net worth, and minimum fixed charge coverage ratios. On November 30, 2007, RTI entered into an amendment of the Franchise Facility to amend the minimum fixed charge coverage and maximum funded debt ratios through the fiscal quarter ending June 2, 2009 and thereafter. As discussed in Note H to the Condensed Consolidated Financial Statements, the Company is currently in compliance with its debt covenants. However, absent further modifications, violation of certain of these covenants is anticipated at some point during the next twelve months. Should this occur, amounts due under the Franchise Facility could be called by the lenders and the Company could be liable as guarantor of the debt.

Prior to July 1, 2004, RTI also had an arrangement with a third party lender whereby we could choose, in our sole discretion, to partially guarantee specific loans for new franchisee restaurant development (the “Cancelled Facility”). Should payments be required under the Cancelled Facility, RTI has certain rights to acquire the operating restaurants after the third party debt is paid. On July 1, 2004, RTI terminated the Cancelled Facility and notified this third party lender that it would no longer enter into additional guarantee arrangements. RTI will honor the partial guarantees of the remaining two loans to franchise partnerships that were in existence as of the termination of the Cancelled Facility.

Also in July 2004, RTI entered into a new program, similar to the Cancelled Facility, with a different third party lender (the “Franchise Development Facility”). Under the Franchise Development Facility, the Company’s potential guarantee liability was reduced, and the program included better terms and lower rates for the franchise partnerships as compared to the Cancelled Facility.  Under the Franchise Development Facility, qualifying franchise partnerships could collectively borrow up to $20 million for new restaurant development. The Company partially guarantees amounts borrowed under the Franchise Development Facility. The Franchise Development Facility had a three-year term that expired on July 1, 2007, although the guarantees outstanding at that time survived the expiration of the arrangement. Should payments be required under the Franchise Development Facility, RTI has rights to acquire the operating restaurants at fair market value after the third party debt is paid.

As of December 4, 2007, the amounts guaranteed under the Franchise Facility, the Cancelled Facility and the Franchise Development Facility were $30.8 million, $0.9 million and $4.2 million, respectively. The

 

15

 


guarantees associated with the Franchise Development Facility are collateralized by a $4.2 million letter of credit. As of June 5, 2007, the amounts guaranteed under the Franchise Facility, the Cancelled Facility and the Franchise Development Facility were $30.4 million, $0.9 million and $6.8 million, respectively. Unless extended, guarantees under these programs will expire at various dates from January 2008 through February 2013. To our knowledge, all of the franchise partnerships are current in the payment of their obligations due under these credit facilities. We have recorded liabilities totaling $0.6 million and $1.2 million as of December 4, 2007 and June 5, 2007, respectively, related to these guarantees. This amount was determined based on amounts to be received from the franchise partnerships as consideration for the guarantees. We believe these amounts approximate the fair value of the guarantees.

Divestiture Guarantees

On November 20, 2000, the Company completed the sale of all 69 of its American Cafe (including L&N Seafood) and Tia’s Tex-Mex (“Tia’s”) restaurants to Specialty Restaurant Group, LLC (“SRG”), a limited liability company. A number of these restaurants were located on leased properties. RTI remains primarily liable on certain American Cafe and Tia’s leases that were subleased to SRG and contingently liable on others. SRG, on December 10, 2003, sold its 28 Tia’s restaurants to an unrelated entity and, as part of the transaction, further subleased certain Tia’s properties.

 

During the second quarter of fiscal 2007, the third party owner to whom SRG had sold the Tia’s restaurants declared Chapter 7 bankruptcy. As of December 4, 2007, RTI remains primarily liable for two Tia’s leases and contingently liable for four other Tia’s leases. RTI has recorded an estimated liability of $1.0 million based on the unsettled claims made to date. Included in this amount is $0.8 million for two leases settled after quarter end.

 

On January 2, 2007, SRG closed 20 of its restaurants, 14 of which were located on properties sub-leased from RTI. Four other SRG restaurants were closed in calendar 2006. SRG filed for Chapter 11 bankruptcy on February 14, 2007.

 

Following the closing of the 20 SRG restaurants in January 2007, RTI performed an analysis of the now-closed properties in order to estimate the lease liability to be incurred from the closings. Based upon the analysis performed, a charge of $5.8 million was recorded during fiscal 2007. An additional charge of $0.2 million was recorded during the first two quarters of fiscal 2008.

 

As of December 4, 2007, RTI had $0.1 million recorded within our liability for deferred escalating minimum rents for three SRG leases for which we remain primarily liable. These three SRG leases represent restaurants scheduled by SRG to remain open at the current time. RTI remains primarily liable for seven other SRG leases which cover restaurants now closed. Scheduled cash payments for rent remaining on these seven and three leases at December 4, 2007 totaled $3.3 million and $0.3 million, respectively. Because many of these restaurants were located in malls, RTI may be liable for other charges such as common area maintenance and property taxes. In addition to the scheduled remaining payments, we believe an additional $0.6 million for previously scheduled rent and related payments on these leases had not been paid as of December 4, 2007.

 

Two leases, which, at June 5, 2007, comprised $0.6 million of the lease liability reserve, were settled in the first quarter of fiscal 2008 at a total cost of $0.6 million. Deferred escalating minimum rent balances for these leases were negligible at the time of settlement. An additional $0.6 million was paid on currently unresolved leases during the two quarters of fiscal 2008.

 

As of December 4, 2007, RTI has recorded an estimated liability of $3.0 million based on seven SRG unsettled claims to date.

We will continue to review the situation relative to these, as well as the Tia’s, leases during the remainder of fiscal 2008 and adjust reserves as deemed appropriate.

During fiscal 1996, our shareholders approved the distribution (the “Distribution”) of our family dining restaurant business, then called Morrison Fresh Cooking, Inc., and our health care food and nutrition services business, then called Morrison Health Care, Inc. Subsequently, Piccadilly acquired MFC and Compass acquired MHC. Prior to the Distribution, we entered into various guarantee agreements with both MFC and MHC, most of which have expired. We do remain contingently liable for (1) payments to MFC and MHC employees retiring under (a) MFC’s and MHC’s versions of the Management Retirement Plan and the Executive Supplemental Pension Plan (the two non-qualified defined benefit plans) for the accrued

 

16

 


benefits earned by those participants as of March 1996, and (b) funding obligations under the Retirement Plan maintained by MFC and MHC following the Distribution (the qualified plan), and (2) payments due on certain workers’ compensation claims. As payments are required under these guarantees, RTI is to divide the amounts due equally with the other remaining entity.

On October 29, 2003, Piccadilly filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court in Fort Lauderdale, Florida. In addition, on March 4, 2004, Piccadilly withdrew as a sponsor of the Retirement Plan with the approval of the bankruptcy court. Because RTI and MHC were, at the time, the remaining sponsors of the Retirement Plan, they are jointly and severally required to make contributions to the Retirement Plan, or any successor plan, in such amounts as are necessary to satisfy all benefit obligations under the Retirement Plan.

The Company entered into a settlement agreement under which we agreed to accept a $5.0 million unsecured claim in exchange for the creditors’ committee agreement to allow such a claim. This settlement agreement was approved by the bankruptcy court on October 21, 2004.

As of December 4, 2007, we have received partial settlements of the Piccadilly bankruptcy totaling $2.0 million to date. The Company hopes to recover further amounts upon final settlement of the bankruptcy. The actual amount we may be ultimately required to pay towards the divestiture guarantees could be lower if there is any further recovery in the bankruptcy proceeding, or could be higher if more valid participants are identified or if actuarial assumptions are proven inaccurate.

We estimated our divestiture guarantees related to MHC at December 4, 2007 to be $3.3 million for employee benefit plans and $0.1 million for workers’ compensation claims. In addition, we remain contingently liable for MHC’s portion (estimated to be $2.7 million) of the MFC employee benefit plan and workers’ compensation claims for which MHC is currently responsible under the divestiture guarantee agreements. We believe the likelihood of being required to make payments for MHC’s portion to be remote due to the size and financial strength of MHC and Compass.

Litigation

We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business. We provide reserves for such claims when payment is probable and estimable in accordance with FASB Statement No. 5, “Accounting for Contingencies”. At this time, in the opinion of management, the ultimate resolution of pending legal proceedings will not have a material adverse effect on our condensed consolidated results of operations, financial position or liquidity.

NOTE M – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 for financial assets and liabilities, as well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements are effective for financial statements issued for fiscal years beginning after November 15, 2007 (fiscal year 2009 for RTI), and interim periods within those fiscal years. The provisions for nonfinancial assets and liabilities are expected to be effective for financial statements issued for fiscal years beginning after November 15, 2008 (fiscal year 2010 for RTI), and interim periods within those fiscal years. We are currently evaluating the impact of SFAS 157 on our Condensed Consolidated Financial Statements.

 

In September 2006, the FASB issued Statement No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132R” (“SFAS 158”). SFAS 158 requires an entity to recognize in its statement of financial condition the funded status of its defined benefit pension and postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation. We adopted this requirement of SFAS 158 as of June 5, 2007. SFAS 158 also requires companies to measure the funded status of pension and postretirement plans as of the date of a company’s fiscal year ending after December 31, 2008 (fiscal 2009 for RTI). Our plans currently have a measurement date that does not coincide with our fiscal year end. Accordingly, we will be required to change their measurement date in fiscal 2009. The impact of the transition, including the net periodic benefit cost computed for the period between our previous measurement date and our fiscal year

 

17

 


end, as well as changes in the fair value of plan assets and benefit obligations during the same period, will be recorded directly to Shareholders’ Equity. We do not anticipate the adoption of this requirement to materially impact our financial position.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (fiscal 2009 for RTI). We are currently evaluating the impact of SFAS 159 on our Condensed Consolidated Financial Statements.

 

In March 2007, the FASB ratified the consensus reached by the EITF on Issue No. 06-10 (“EITF 06-10”), “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements”. EITF 06-10 provides guidance on an employers’ recognition of a liability and related compensation costs for collateral assignment split-dollar life insurance arrangements that provide a benefit to an employee that extends into postretirement periods and the asset in collateral assignment split-dollar life insurance arrangements. The effective date of EITF 06-10 is for fiscal years beginning after December 15, 2007 (fiscal 2009 for RTI). As of December 4, 2007 we have recorded a $2.8 million asset within our Condensed Consolidated Balance Sheet for our collateral assignment in eight split-dollar life insurance arrangements. We are currently evaluating the impact of EITF 06-10 on our Condensed Consolidated Financial Statements.

 

In June 2007, the FASB ratified the consensus reached by the EITF on Issue No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires that the tax benefit related to dividends or dividend equivalents paid on equity-classified awards, which are expected to vest, be recorded as an increase to additional paid-in capital. EITF 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007, and we expect to adopt the provisions of EITF 06-11 beginning in the first quarter of fiscal 2009. We are currently evaluating the impact of EITF 06-11 on our Condensed Consolidated Financial Statements.

 

In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes the principles and requirements for how an acquirer: 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008 (fiscal 2010 for RTI). We are currently evaluating the impact SFAS 141R will have on any future business combinations we enter into.

 

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS 160 is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008 (fiscal 2010 for RTI). We are currently evaluating the impact of SFAS 160 on our Condensed Consolidated Financial Statements.

 

 

 

18

 


ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

General:

Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI”, the “Company”, “we” and/or “our”), owns and operates Ruby Tuesday® casual dining restaurants. We also franchise the Ruby Tuesday concept in selected domestic and international markets. In June 2007, we acquired one Wok Hay restaurant, an Asian concept located in Knoxville, Tennessee. As of December 4, 2007 we owned and operated 721, and franchised 223, Ruby Tuesday restaurants and owned and operated one Wok Hay restaurant. Ruby Tuesday restaurants can now be found in 45 states, the District of Columbia, 12 foreign countries, and Puerto Rico.

Casual dining, the segment of the restaurant industry in which RTI operates, is intensely competitive with respect to prices, services, convenience, locations and the types and quality of food. We compete with other food service operations, including locally-owned restaurants, and other national and regional restaurant chains that offer the same or similar types of services and products as we do. Our industry is often affected by changes in consumer tastes, national, regional or local conditions, demographic trends, traffic patterns, and the types, numbers and locations of competing restaurants as well as overall marketing efforts. There also is significant competition in the restaurant industry for management personnel and for attractive commercial real estate sites suitable for restaurants.

A key performance goal for us is to get more out of existing assets. To measure our progress towards that goal, we focus on measurements we believe are critical to our growth and progress including, but not limited to, the following:

 

Same-restaurant sales: a year-over-year comparison of sales volumes for restaurants that, in the current year, have been open 18 months or longer in order to remove the impact of new openings in comparing the operations of existing restaurants; and

 

Average restaurant volumes: a per-restaurant calculated annual average sales amount, which helps us gauge the continued development of our brand. Generally speaking, growth in average restaurant volumes in excess of same-restaurant sales is an indication that newer restaurants are operating with sales levels in excess of the Company system average and conversely, when the growth in average restaurant volumes is less than that of same-restaurant sales, a general conclusion can be reached that newer restaurants are recording sales less than those of the existing Company system.

Our goal is to stabilize and ultimately increase same-restaurant sales 2% or greater per year and to increase average restaurant volumes by $100,000 per year towards our long-term goal of $2.5 million in sales per restaurant per year. We also have strategies to invest wisely in new restaurants (which means generating both higher sales as well as higher returns) and to maintain the right capital structure to create value for our shareholders. To that end, we have begun a re-imaging initiative intended to move our brand towards a higher quality casual dining restaurant and away from the traditional bar and grill category.

Our historical performance in these areas as well as further details regarding our re-imaging are discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) section.

RTI generates revenue from the sale of food and beverages at our restaurants and from contractual arrangements with our franchisees. Franchise development and license fees are recognized when we have substantially performed all material services and the franchise-owned restaurant has opened for business. Franchise royalties and support service fees (each generally 4.0% of monthly sales) are recognized on the accrual basis.

 

19

 


Results of Operations:

The following is an overview of our results of operations for the 13- and 26-week periods ended December 4, 2007:

Net income decreased to a $10.4 million loss for the 13 weeks ended December 4, 2007 compared to $16.7 million of income for the same quarter of the previous year. Diluted earnings per share for the fiscal quarter ended December 4, 2007 decreased to a loss of $0.20 per share from the corresponding period of the prior year as a result of a decrease in net income as discussed below, partially offset by fewer outstanding shares.

During the 13 weeks ended December 4, 2007:

 

30 Company-owned Ruby Tuesday restaurants were opened or acquired, including 25 purchased from our Michigan and Detroit franchisees;

 

No Company-owned Ruby Tuesday restaurants were closed;

 

Aside from the restaurants sold to the Company, four franchise restaurants were opened and none were closed; and

 

Same-restaurant sales at Company-owned restaurants decreased 10.8%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 8.7%.

Net income decreased to $0.7 million for the 26 weeks ended December 4, 2007 compared to $38.3 million for the same period of the previous year. Diluted earnings per share for the 26-week period ended December 4, 2007 decreased to $0.01 from the corresponding period of the prior year as a result of a decrease in net income as discussed below, partially offset by fewer outstanding shares.

During the 26 weeks ended December 4, 2007:

 

45 Company-owned Ruby Tuesday restaurants were opened or acquired, including 36 purchased from our West Palm Beach, Michigan, and Detroit franchisees;

 

Four Company-owned Ruby Tuesday restaurants were closed;

 

Aside from the restaurants sold to the Company, seven franchise restaurants were opened and one was closed;

 

Same-restaurant sales at Company-owned restaurants decreased 7.8%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 5.6%; and

 

One Wok Hay Asian restaurant was acquired.

 

 

 

20

 


The following table sets forth selected restaurant operating data as a percentage of total revenue, except where otherwise noted, for the periods indicated. All information is derived from our Condensed Consolidated Financial Statements included in this Form 10-Q.

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

December 4,

 

December 5,

 

December 4,

 

December 5,

 

2007

 

2006

 

2007

 

2006

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales and operating revenue

98

.9%

 

99

.0%

 

98

.9%

 

98

.9%

Franchise revenue

1

.1

 

1

.0    

 

1

.1

 

1

.1    

Total revenue

100

.0

 

100

.0

 

100

.0

 

100

.0

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of merchandise (1)

28

.0

 

27

.4

 

27

.5

 

27

.1

Payroll and related costs (1)

34

.5

 

31

.3

 

33

.2

 

31

.1

Other restaurant operating costs (1)

22

.0

 

18

.2

 

20

.7

 

18

.3

Depreciation and amortization (1)

7

.9

 

5

.7

 

7

.4

 

5

.6

Selling, general and administrative, net

10

.2

 

9

.2

 

9

.4

 

8

.9

Equity in losses of

 

 

 

 

 

 

 

 

 

 

 

unconsolidated franchises

0

.5

 

0

.2

 

0

.4

 

0

.1

Interest expense, net

2

.6

 

1

.4      

 

2

.3

 

1

.3      

(Loss)/income before income taxes

(4

.7)

 

7

.4

 

0

.1

 

8

.5

(Benefit)/provision for income taxes

(1

.5)

 

2

.4     

 

0

.0

 

2

.8      

Net (loss)/income

(3

.2)%

 

5

.0%

 

0

.1%

 

5

.7%

 

(1)  

As a percentage of restaurant sales and operating revenue.

The following table shows Company-owned and franchised Ruby Tuesday concept restaurant openings and closings, and total Ruby Tuesday concept restaurants for the 13 and 26 week periods ended December 4, 2007 and December 5, 2006.

 

Thirteen weeks ended

 

Twenty-six weeks ended

 

December 4, 2007

 

December 5, 2006

 

December 4, 2007

 

December 5, 2006

Company–owned:

 

 

 

 

 

 

 

Beginning number

691

 

658

 

680

 

629

Opened

5

 

15

 

9

 

32

Acquired from franchisees

25

 

 

36

 

17

Sold or leased to franchisees

 

 

 

(3)

Closed

 

 

(4)

 

(2)

Ending number

721

 

673

 

721

 

673

 

 

 

 

 

 

 

 

Franchise:

 

 

 

 

 

 

 

Beginning number

244

 

246

 

253

 

251

Opened

4

 

7

 

7

 

17

Acquired or leased from RTI

 

 

 

3

Sold to RTI

(25)

 

 

(36)

 

(17)

Closed

 

 

(1)

 

(1)

Ending number

223

 

253

 

223

 

253

* Excludes one Wok Hay restaurant which was acquired in June 2007.

We estimate that approximately 11 additional Company-owned Ruby Tuesday restaurants will be opened during the remainder of fiscal 2008.

We expect our domestic and international franchisees to open approximately 8 to 13 additional Ruby Tuesday restaurants during the remainder of fiscal 2008.

 

 

21

 


Revenue

RTI’s restaurant sales and operating revenue for the 13 weeks ended December 4, 2007 decreased 4.8% to $317.4 million compared to the same period of the prior year. This decrease primarily resulted from a 10.8% decrease in same-restaurant sales, offset by a net addition of 48 restaurants over the prior year. The decrease in same-restaurant sales results from reductions in both customer counts and average check, as RTI utilized value-oriented pricing and promotions and direct mail and freestanding insert coupons.

Franchise revenue for the 13 weeks ended December 4, 2007 increased 0.8% to $3.5 million compared to the same period of the prior year. Franchise revenue is predominately comprised of domestic and international royalties, which totaled $3.1 million and $3.3 million for the 13-week periods ended December 4, 2007 and December 5, 2006, respectively. The increase in franchise revenue is a result of additional international development fees, which offset the decrease in royalties which resulted from the acquisitions of RT West Palm Beach Franchise, LP (“RT West Palm Beach”) in June 2007 and RT Michigan Franchise, LLC (“RT Michigan”) in October 2007 and lower same-restaurant sales. Same-restaurant sales for domestic franchise Ruby Tuesday restaurants decreased 8.7% in the second quarter of fiscal 2008.

For the 26 weeks ended December 4, 2007, sales at Company-owned restaurants decreased 1.2% to $660.4 million compared to the same period of the prior year. This decrease primarily resulted from a 7.8% decrease in same-restaurant sales for the 26-week period ended December 4, 2007, offset by a net addition of 48 restaurants.

For the 26-week period ended December 4, 2007, franchise revenues decreased 0.2% to $7.3 million compared to $7.4 million for the same period in the prior year. Domestic and international royalties totaled $6.8 million for each of the 26-week periods ending December 4, 2007 and December 5, 2006 as increased royalties from traditional domestic and international franchisees were offset, in part, by the acquisition of RT West Palm Beach and RT Michigan and lower same-restaurant sales, as previously discussed.

Average restaurant volumes at Company-owned restaurants, calculated on a rolling 12 period basis, decreased 2.7% to $2.05 million as of December 4, 2007.

Pre-tax (Loss)/Income

Pre-tax income decreased to a $15.2 million loss for the 13 weeks ended December 4, 2007, from the corresponding period of the prior year. This decrease is primarily due to a decrease of 10.8% in same-restaurant sales at Company owned restaurants combined with increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of merchandise, payroll and related costs, other restaurant operating costs, depreciation and amortization, selling, general, and administrative expense, and interest expense.

For the 26-week period ended December 4, 2007, pre-tax income was $0.7 million. This decrease is primarily due to a decrease of 7.8% in same-restaurant sales at Company owned restaurants combined with increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of merchandise, payroll and related costs, other restaurant operating costs, depreciation and amortization, selling, general, and administrative expense, and interest expense.

In the paragraphs which follow, we discuss in more detail the components of the decrease in pre-tax income for the 13 and 26-week periods ended December 4, 2007, as compared to the comparable periods in the prior year.

Cost of Merchandise

Cost of merchandise decreased 2.6% to $89.0 million for the 13 weeks ended December 4, 2007, over the corresponding period of the prior year. As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 27.4% to 28.0% for the 13 weeks ended December 4, 2007.

 

22

 


For the 26-week period ended December 4, 2007, cost of merchandise increased 0.4% to $181.7 million over the corresponding period of the prior year. As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 27.1% to 27.5% for the 26 weeks ended December 4, 2007.

The increase for both the 13 and 26-week periods as a percentage of restaurant sales and operating revenue is primarily due to increased food and beverage costs as a result of offering higher quality menu items. Additionally, several promotions were offered during the current quarter which increased cost of merchandise as a percentage of restaurant sales and operating revenue, such as a free garden bar with the purchase of certain entrees and lunch fresh combinations.

Payroll and Related Costs

Payroll and related costs increased 5.0% to $109.5 million for the 13 weeks ended December 4, 2007, as compared to the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 31.3% to 34.5%.

For the 26-week period ended December 4, 2007, payroll and related costs increased 5.6% to $219.5 million, as compared to the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 31.1% to 33.2%.

The increase as a percentage of restaurant sales and operating revenue for both the 13 and 26-week periods is primarily due to higher hourly labor relating to the rollout of the quality service specialist program in the current quarter, minimum wage increases in several states since the end of the same quarters in the prior year, and higher management labor due to loss of leveraging with lower sales volumes.

Other Restaurant Operating Costs

Other restaurant operating costs increased 14.7% to $69.8 million for the 13-week period ended December 4, 2007, as compared to the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, other restaurant operating costs increased from 18.2% to 22.0%. Increases for the 13-week period were primarily due to higher repairs expense to maintain our 5-star facilities standard, increased rent and leasing costs due to the acquisition of certain franchise partnerships since the same quarter of the prior year and a loss of leverage from lower sales, higher insurance due to proceeds from a Hurricane Katrina claim received in the same quarter of the prior year, higher utilities due to higher average temperatures in the current year, and higher supplies expense due to upgrading napkins to high-quality linen-like dinner napkins and rollout of new tablecloths and glassware due to our reimaging initiative.

For the 26-week period ended December 4, 2007, other restaurant operating costs increased 12.1% to $136.7 million as compared to the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, these costs increased from 18.3% to 20.7%. The increase is due to the increased expenses mentioned above, coupled with an increase in asset impairment charges.

Depreciation and Amortization

Depreciation and amortization expense increased 32.4% to $25.1 million for the 13-week period ended December 4, 2007, as compared to the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, this expense increased from 5.7% to 7.9%.

For the 26-week period ended December 4, 2007, depreciation and amortization expense increased 30.4% to $48.7 million as compared to the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, this expense increased from 5.6% to 7.4%.

The increase for both the 13 and 26-week periods as a percentage of restaurant sales and operating revenue is primarily due to accelerated depreciation ($5.1 million and $9.0 million, respectively) for restaurants reimaged as part of our reimaging initiative which had begun in the latter part of fiscal 2007 and loss of leveraging with lower sales volumes.

 

23

 


Selling, General and Administrative Expenses, Net

Selling, general and administrative expenses, net of support service fee income totaling $1.3 million, increased 5.9% to $32.7 million for the 13-week period ended December 4, 2007, as compared to the corresponding period in the prior year. As a percentage of total operating revenue, these expenses increased from 9.2% to 10.2%.

Selling, general and administrative expenses, net of support service fee income totaling $3.9 million, increased 3.6% to $62.5 million for the 26-week period ended December 4, 2007 as compared to the corresponding period in the prior year. As a percentage of total operating revenue, these expenses increased from 8.9% to 9.4%.

The increase for both the 13 and 26-week periods is primarily due to an increase in advertising due to utilizing a direct mail program in conjunction with the completion of reimaged restaurants, higher television expense due to the addition of late night and prime network purchases, and higher newspaper expense due to two freestanding newspaper inserts. Additionally, for the 13-week period ended December 4, 2007, general and administrative expenses were higher, as a percentage of operating revenue, due primarily to increased management labor due to additional catering managers since the same period of the prior year and rollout of the Regional Service Manager program and loss of leveraging with lower sales volumes, offset by a reduction in bonus expense based on current expectations, a decrease in share-based compensation and a decrease in training payroll due to only five new restaurant openings during the current quarter compared to fifteen openings in the same quarter of the prior year.

Equity in Losses of Unconsolidated Franchises

Our equity in the losses of unconsolidated franchises was $1.6 million for the 13 weeks ended December 4, 2007, which is $0.9 million more than the corresponding period of the prior year.

Our equity in losses of unconsolidated franchises was $2.5 million for the 26-week period ended December 4, 2007, which is $1.8 million more than the corresponding period of the prior year.

The increase in loss for both the 13 and 26-week periods is primarily due to a reduction in earnings from investments in certain franchise partnerships, offset by the acquisition of four franchise partnerships since the first quarter of the prior year. As of December 4, 2007, we held 50% equity investments in each of six franchise partnerships which collectively operate 72 Ruby Tuesday restaurants. As of December 5, 2006, we held 50% equity investments in each of ten franchise partnerships which then collectively operated 110 Ruby Tuesday restaurants.

Interest Expense, Net

Net interest expense increased $3.7 million for the 13 weeks ended December 4, 2007, as compared to the corresponding period in the prior year, primarily due to higher average debt outstanding resulting from the Company acquiring 8.8 million shares of its common stock subsequent to December 5, 2006 under our ongoing share repurchase program and the acquisitions of four franchise partnerships since the second quarter of the prior year. Net interest expense increased $6.5 million for the 26-week period ended December 4, 2007, as compared to the corresponding period in the prior year, primarily for the same reasons mentioned above. See “Borrowings and Credit Facilities” for more information.

(Benefit)/Provision for Income Taxes

The effective tax rate for the current quarter was 31.7% compared to 33.0% for the same period of the prior year. The effective tax rate was (12.8)% for the 26-week period ended December 4, 2007 compared to 33.0% for the corresponding period of the prior year. The effective income tax rate for both the 13- and 26-week periods decreased primarily as a result of the impact of tax credits, which remained consistent or increased, while net income decreased. Based upon projected pre-tax income levels for the remainder of the fiscal year and given the expiration of certain statutes of limitations and expected settlements of audits, we anticipate our effective tax rate for the fiscal year to be in the range of 7.0% to 9.0%, which excludes any discrete items.

 

24

 


Critical Accounting Policies:

Our MD&A is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make subjective or complex judgments that may affect the reported financial condition and results of operations. We base our estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about 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. We continually evaluate the information used to make these estimates as our business and the economic environment changes.

We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity.

Share-based Employee Compensation

We account for share-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123(R)”). As required by SFAS 123(R), share-based compensation expense is estimated for equity awards at fair value at the grant date. We determine the fair value of equity awards using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires various highly judgmental assumptions including the expected dividend yield, stock price volatility and life of the award. If any of the assumptions used in the model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. See Note C to the Condensed Consolidated Financial Statements for further discussion of share-based employee compensation.

Impairment of Long-Lived Assets

Each quarter we evaluate the carrying value of any individual restaurant when the cash flows of such restaurant have deteriorated and we believe the probability of continued operating and cash flow losses indicate that the net book value of the restaurant may not be recoverable. In performing the review for recoverability, we consider the future cash flows expected to result from the use of the restaurant and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the restaurant, an impairment loss is recognized for the amount by which the net book value of the asset exceeds its fair value. Otherwise, an impairment loss is not recognized. Fair value is based upon estimated discounted future cash flows expected to be generated from continuing use through the expected disposal date and the expected salvage value. In the instance of a potential sale of a restaurant in a refranchising transaction, the expected purchase price is used as the estimate of fair value.

If a restaurant that has been open for at least one quarter shows negative cash flow results, we prepare a plan to reverse the negative performance. Under our policies, recurring or projected annual negative cash flow signals a potential impairment. Both qualitative and quantitative information are considered when evaluating for potential impairments.

At December 4, 2007, we had 26 restaurants that had been open more than one year with rolling 12 month negative cash flows. Of these 26 restaurants, one had previously been impaired to salvage value and three were impaired to salvage value during the current quarter. We reviewed the plans to improve cash flows at each of the other 22 restaurants and concluded that impairments existed at four of these restaurants. Impairment charges of $1.0 million were recorded during the quarter for these seven restaurants. Should sales at these restaurants not improve within a reasonable period of time, further impairment charges are possible. In addition to the above, impairments totaling $0.3 million were recorded during the quarter ended December 4, 2007 on assets classified as held for sale in our Condensed Consolidated Balance Sheet.

Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs, salvage value, and sublease income. Accordingly, actual results could vary significantly from our estimates.

 

25

 


Allowance for Doubtful Notes and Interest Income

We follow a systematic methodology each quarter in our analysis of franchise and other notes receivable in order to estimate losses inherent at the balance sheet date. A detailed analysis of our loan portfolio involves reviewing the following for each significant borrower:

 

terms (including interest rate, original note date, payoff date, and principal and interest start dates);

 

note amounts (including the original balance, current balance, associated debt guarantees, and total exposure); and

 

other relevant information including whether the borrower is making timely interest, principal, royalty and support payments, the borrower’s debt coverage ratios, the borrower’s current financial condition and sales trends, the borrower’s additional borrowing capacity, and, as appropriate, management’s judgment on the quality of the borrower’s operations.

Based on the results of this analysis, the allowance for doubtful notes is adjusted as appropriate. No portion of the allowance for doubtful notes is allocated to guarantees. In the event that collection is deemed to be an issue, a number of actions to resolve the issue are possible, including modification of the terms of payment of franchise fees or note obligations or a restructuring of the borrower’s debt to better position the borrower to fulfill its obligations.

At December 4, 2007, the allowance for doubtful notes was $2.9 million. Included in the allowance for doubtful notes is $2.2 million allocated to the $5.4 million of debt due from five franchisees that, for the most recent reporting period, have either reported coverage ratios below the required levels with certain of their third party debt, or reported ratios above the required levels, but for an insufficient amount of time. With the exception of amounts borrowed under one current and two former credit facilities for franchise partnerships (see Note L to the Condensed Consolidated Financial Statements for more information), the third party debt referred to above is not guaranteed by RTI. The Company believes that payments are being made by these franchisees in accordance with the terms of these debts.

We recognize interest income on notes receivable when earned, which sometimes precedes collection. A number of our franchise notes have, since the inception of these notes, allowed for the deferral of interest during the first one to three years. All franchisees that issued outstanding notes to us are currently paying interest on these notes. It is our policy to cease accruing interest income and recognize interest on a cash basis when we determine that the collection of interest is doubtful. The same analysis noted above for doubtful notes is utilized in determining whether to cease recognizing interest income and thereafter record interest payments on the cash basis.

Lease Obligations

The Company leases a significant number of its restaurant properties. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty.

Our lease term used for straight-line rent expense is calculated from the date we take possession of the leased premises through the lease termination date. There is potential for variability in our “rent holiday” period which begins on the possession date and ends on the earlier of the restaurant open date or the commencement of rent payments. Factors that may affect the length of the rent holiday period generally relate to construction-related delays. Extension of the rent holiday period due to delays in restaurant opening will result in greater preopening rent expense recognized during the rent holiday period.

For leases that contain rent escalations, we record the total rent payable during the lease term, as determined above, on the straight-line basis over the term of the lease (including the “rent holiday” period beginning upon possession of the premises), and we record the difference between the minimum rents paid and the straight-line rent as deferred escalating minimum rent.

Certain leases contain provisions that require additional rental payments, called "contingent rents", when the associated restaurants' sales volumes exceed agreed upon levels. We recognize contingent rental

 

26

 


expense (in annual as well as interim periods) prior to the achievement of the specified target that triggers the contingent rental expense, provided that achievement of that target is considered probable.

Estimated Liability for Self-insurance

We self-insure a portion of our current and past losses from workers’ compensation and general liability claims. We have stop loss insurance for individual claims for workers’ compensation and general liability in excess of stated loss amounts. Insurance liabilities are recorded based on third party actuarial estimates of the ultimate incurred losses, net of payments made. The estimates themselves are based on standard actuarial techniques that incorporate both the historical loss experience of the Company and supplemental information as appropriate.

 

The analysis performed in calculating the estimated liability is subject to various assumptions including, but not limited to, (a) the quality of historical loss and exposure information, (b) the reliability of historical loss experience to serve as a predictor of future experience, (c) the reasonableness of insurance trend factors and governmental indices as applied to the Company, and (d) projected payrolls and revenue. As claims develop, the actual ultimate losses may differ from actuarial estimates. Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.

 

Income Tax Valuation Allowances and Tax Accruals

We record deferred tax assets for various items. As of December 4, 2007, we have concluded that it is more likely than not that the future tax deductions attributable to our deferred tax assets will be realized and therefore no valuation allowance has been recorded.

As a matter of course, we are regularly audited by federal and state tax authorities. We record appropriate accruals for potential exposures in accordance with Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). We evaluate these accruals, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events that may impact our ultimate tax liability.

Liquidity and Capital Resources:

We require capital principally for new restaurant construction, investments in technology, equipment, remodeling of existing restaurants, and on occasion for acquisition of franchisees or other restaurant concepts. We also require capital to pay dividends to our common stockholders and to repurchase shares of our common stock. Historically our primary sources of cash have been operating activities, proceeds from refranchising transactions, and the issuance of indebtedness. We have used and expect to continue to use our borrowing and credit facilities to meet our capital needs, if necessary.

Due in significant part to the reclassification of certain long-term debt totaling $543.8 million to current as a result of our projection of possible debt covenant violations at some point during the next twelve months, our working capital deficiency and current ratio as of December 4, 2007 were $597.8 million and 0.1:1, respectively. See the Borrowings and Credit Facilities section of this MD&A for further discussion regarding our possible debt covenant violations. Our working capital deficiency was also impacted by the $35.7 million increase in accounts payable which primarily resulted from certain invoices due to a significant vendor, by agreement, not being payable until subsequent to the end of the quarter. As is common in the restaurant industry, we carry current liabilities in excess of current assets because cash (a current asset) generated from operating activities is reinvested in capital expenditures (a long-term asset) and receivable and inventory levels are generally not significant.

 

 

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Capital Expenditures

Property and equipment expenditures for the 26 weeks ended December 4, 2007 were $78.9 million which was $1.3 million more than cash provided by operating activities for the same period. As of December 4, 2007, we have completed the reimaging of 408 Company-owned restaurants. Capital expenditures attributable to reimaging during fiscal 2008 to date were $38.0 million. Capital expenditures for the remainder of fiscal 2008, primarily relating to new restaurant development, the ongoing reimaging of our restaurants, refurbishment and capital replacement for existing restaurants, and the enhancement of information systems are projected to be approximately $36.0 to $51.0 million. Of this amount, approximately $12.0 to $17.0 million is projected to reimage our existing restaurants. To the extent capital expenditures have exceeded cash flow from operating activities, we have historically relied on cash provided by financing activities to fund our capital expenditures. See “Special Note Regarding Forward-Looking Information.”

Pension Plan Funded Status

RTI is a sponsor of the Morrison Restaurants Inc. Retirement Plan (the “Retirement Plan”), formerly along with the two companies that were “spun-off” as a result of the fiscal 1996 “spin-off” transaction: Morrison Fresh Cooking, Inc. (“MFC”) (subsequently acquired by Piccadilly Cafeterias, Inc., or “Piccadilly”) and Morrison Health Care, Inc. (“MHC”) (subsequently acquired by Compass Group, PLC, or “Compass”). The Retirement Plan was established to provide retirement benefits to qualifying employees of Morrison Restaurants Inc. Under the Retirement Plan, participants are entitled to receive benefits based upon salary and length of service. The Retirement Plan was amended as of December 31, 1987, so that no additional benefits will accrue and no new participants will enter the Retirement Plan after that date.

As discussed in more detail in Note L to the Condensed Consolidated Financial Statements, Piccadilly announced on October 29, 2003 that it had filed for Chapter 11 protection under the United States Bankruptcy Code. On March 4, 2004, with bankruptcy court approval, Piccadilly withdrew as a sponsor of the Retirement Plan. On March 16, 2004, Piccadilly’s assets and ongoing business operations were sold to a third party for $80 million.

The Company entered into a settlement agreement under which RTI agreed to accept a $5.0 million unsecured claim in exchange for the creditors’ committee agreement to allow such claims. The settlement was approved by the court on October 21, 2004.

In partial settlement of the Piccadilly bankruptcy, RTI has received $2.0 million to date. The Company hopes to recover a further amount upon final settlement of the bankruptcy. No further recovery has been recorded in our Condensed Consolidated Financial Statements.

Assets and obligations attributable to Morrison Health Care, Inc. participants, as well as participants, formerly with Morrison Fresh Cooking, Inc. who were allocated to Compass following Piccadilly’s bankruptcy, were spun out of the Retirement Plan effective June 30, 2006. Following Compass’s withdrawal, RTI remained the sole sponsor of the Retirement Plan.

For the 26 weeks ended December 4, 2007, no contribution was required and we did not make any contributions to the Retirement Plan. We expect to make contributions for the remainder of fiscal 2008 totaling $0.4 million.

 

 

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Significant Contractual Obligations and Commercial Commitments

Long-term financial obligations were as follows as of December 4, 2007 (in thousands):

 

Payments Due By Period

 

 

 

Less than

 

1-3

 

3-5

 

More than 5

 

Total

 

1 year

 

years

 

years

 

years

Notes payable and other

long-term debt, including

 

 

 

 

 

 

 

 

 

 

 

 

 

 

current maturities (a)

$

47,941

 

$

4,268

 

$

9,071

 

$

10,040

 

$

24,562

Revolving credit facility (a)

 

393,800

 

 

393,800

 

 

 

 

 

 

Unsecured senior notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Series A and B) (a)

 

150,000

 

 

150,000

 

 

 

 

      

 

 

Interest (b)

 

34,300

 

 

12,866

 

 

6,706

 

 

5,223

 

 

9,505

Operating leases (c)

 

436,276

 

 

45,482

 

 

80,946

 

 

69,164

 

 

240,684

Purchase obligations (d)

 

202,626

 

 

98,450

 

 

67,178

 

 

29,487

 

 

7,511

Pension obligations (e)

 

29,780

 

 

2,187

 

 

4,756

 

 

5,822

 

 

17,015

Total (f)

$

1,294,723

 

$

707,053

 

$

168,657

 

$

119,736

 

$

299,277

 

(a)

See Note H to the Condensed Consolidated Financial Statements and the Borrowings and Credit Facilities section of this MD&A for more information regarding the classification as current of the revolving credit facility and the unsecured senior notes.

(b)

Amounts represent contractual interest payments on our fixed-rate debt instruments. Interest payments on our variable-rate revolving credit facility and variable-rate notes payable with balances of $393.8 million and $3.8 million, respectively, as of December 4, 2007 have been excluded from the amounts shown above, primarily because the balance outstanding under our revolving credit facility fluctuates daily. Twelve months of interest payments on our non-collateralized senior notes (the “Private Placement”) with balances of $150.0 million as of December 4, 2007 have been included in the amounts shown above because the debt is classified as current at December 4, 2007 in our Condensed Consolidated Balance Sheet. See Note H of the Condensed Consolidated Financial Statements for more information.

(c)

This amount includes operating leases totaling $22.2 million for which sublease income of $22.2 million from franchisees or others is expected. See Note G to the Condensed Consolidated Financial Statements for more information.

(d)

The amounts for purchase obligations include commitments for food items and supplies, construction projects, and other miscellaneous commitments.

(e)

See Note K to the Condensed Consolidated Financial Statements for more information.

(f)

This amount excludes $5.1 million of unrecognized tax benefits under FIN 48 due to the uncertainty regarding the timing of future cash outflows associated with such obligations.

Commercial Commitments (in thousands):

 

Payments Due By Period

 

 

Less than

1-3

3-5

More than 5

 

Total

1 year

years

years

years

Letters of credit (a)

 

$ 17,111

 

$ 17,111

 

$         

 

$         

 

$         

 

Franchisee loan guarantees (a)

 

31,641

 

30,259

 

680

 

702

 

 

Divestiture guarantees

 

6,930

 

192

 

404

 

420

 

5,914

 

Total

 

$ 55,682

 

$ 47,562

 

$   1,084

 

$   1,122

 

$   5,914

 

(a)

Includes a $4.2 million letter of credit which secures franchisees’ borrowings for construction of restaurants being financed under a franchise loan facility. The franchise loan guarantee of $31.6 million also shown in the table excludes the guarantee of $4.2 million for construction to date on the restaurants being financed under the facility.

See Note L to the Condensed Consolidated Financial Statements for more information.

 

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Borrowings and Credit Facilities

On November 19, 2004, RTI entered into a $200.0 million five-year revolving credit agreement (the “Credit Facility”), which, after the most recent amendment discussed below, includes a $50.0 million swingline subcommitment and a $50.0 million subcommitment for letters of credit. The Credit Facility, which was increased by $100.0 million on November 7, 2005 and $200.0 million on February 28, 2007 to $500.0 million, is scheduled to mature on February 23, 2012.

At December 4, 2007, we had borrowings of $393.8 million outstanding under the Credit Facility with an associated floating rate of 5.48%. After consideration of letters of credit outstanding, the Company had $89.1 million available under the Credit Facility as of December 4, 2007. At June 5, 2007, we had borrowings of $347.0 million outstanding under the Credit Facility with an associated floating rate of 5.95%.

During fiscal 2003, we concluded the private sale of $150.0 million of non-collateralized senior notes. The Private Placement consisted of $85.0 million with a fixed interest rate of 4.69% (the “Series A Notes”) and $65.0 million with a fixed interest rate of 5.42% (the “Series B Notes”). The Series A Notes and Series B Notes mature on April 1, 2010 and April 1, 2013, respectively. On November 30, 2007, RTI entered into amendments of both the Credit Facility and the notes issued in the Private Placement to amend the minimum fixed charge coverage and maximum funded debt ratios through the fiscal quarter ending June 2, 2009 and thereafter. The amendment to the Private Placement provided for a 1% increase in interest rates upon the occurrence of credit ratios outside those previously allowed. As of December 4, 2007, our maximum funded debt ratio exceeded that which was previously allowed by the lenders. As a result, the interest rates of our Series A and Series B Private Placement notes for the third fiscal quarter of 2008 will be 5.69% and 6.42%, respectively, and are anticipated to remain at this rate for the remainder of the fiscal year.

As a result of these amendments, the Company is currently in compliance with its debt covenants. Under current Company and industry conditions, however, absent further modifications, the Company anticipates that it will be in violation of certain of its covenants at some point during the next twelve months. Accordingly, RTI has reclassified the Credit Facility and the notes issued in its Private Placement from long-term to current as of December 4, 2007 in accordance with Emerging Issues Task Force (“EITF”) Issue No. 86-30, “Classification of Obligations When a Violation is Waived by a Creditor.” In the event of default, there is no assurance that our lenders will waive any future covenant violations or agree to any future amendments of our Credit Facility and Private Placement. We are working with our creditors to obtain waivers and/or additional modifications to our covenants prior to any event of default and we may incur fees and transaction costs during this process. We hope that further modifications will allow for covenants at levels better aligned with our expected future results. If we were to violate any of our covenants and either agreements cannot be reached with our creditors or agreements are reached but we do not meet the revised covenants, our creditors could exercise their rights under the indebtedness. At that point, we may be required to obtain new financing from alternative financial sources. If new financing is made available to us, it may be at terms less favorable than existing terms. Accordingly, our liquidity, financial condition, and results of operations would likely be adversely affected.

During the remainder of fiscal 2008, we expect to fund operations, capital expansion, any repurchase of common stock or franchise partnership equity, and the payment of dividends from operating cash flows, our Credit Facility, and operating leases. See “Special Note Regarding Forward-Looking Information” below.

Off-Balance Sheet Arrangements

See Note L to the Condensed Consolidated Financial Statements for information regarding our franchise partnership and divestiture guarantees.

As discussed in Note L to the Condensed Consolidated Financial Statements, the Franchise Facility contains various restrictions, including limitations on RTI additional debt, the payment of dividends and limitations regarding maximum funded debt, minimum net worth, and minimum fixed charge coverage

 

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ratios. On November 30, 2007, RTI entered into an amendment of the Franchise Facility to amend the minimum fixed charge coverage and maximum funded debt ratios through the fiscal quarter ending June 2, 2009 and thereafter. As discussed in Note H to the Condensed Consolidated Financial Statements, the Company is currently in compliance with its debt covenants. However, absent further modifications, violation of certain of these covenants is anticipated at some point during the next twelve months. Should this occur, amounts due under the Franchise Facility could be called by the lenders and the Company could be liable as guarantor of the debt for all outstanding borrowings, not just the amounts which would be owed should individual franchises default. At December 4, 2007, the total amount outstanding under the Franchise Facility was $38.3 million.

Recently Issued Accounting Pronouncements Not Yet Adopted

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 for financial assets and liabilities, as well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements are effective for financial statements issued for fiscal years beginning after November 15, 2007 (fiscal year 2009 for RTI), and interim periods within those fiscal years. The provisions for nonfinancial assets and liabilities are expected to be effective for financial statements issued for fiscal years beginning after November 15, 2008 (fiscal year 2010 for RTI), and interim periods within those fiscal years. We are currently evaluating the impact of SFAS 157 on our Condensed Consolidated Financial Statements.

 

In September 2006, the FASB issued Statement No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132R” (“SFAS 158”). SFAS 158 requires an entity to recognize in its statement of financial condition the funded status of its defined benefit pension and postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation. We adopted this requirement of SFAS 158 as of June 5, 2007. SFAS 158 also requires companies to measure the funded status of pension and postretirement plans as of the date of a company’s fiscal year ending after December 31, 2008 (fiscal 2009 for RTI). Our plans currently have a measurement date that does not coincide with our fiscal year end. Accordingly, we will be required to change their measurement date in fiscal 2009. The impact of the transition, including the net periodic benefit cost computed for the period between our previous measurement date and our fiscal year end, as well as changes in the fair value of plan assets and benefit obligations during the same period, will be recorded directly to Shareholders’ Equity. We do not anticipate the adoption of this requirement to materially impact our financial position.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007 (fiscal 2009 for RTI). We are currently evaluating the impact of SFAS 159 on our Condensed Consolidated Financial Statements.

 

In March 2007, the FASB ratified the consensus reached by the EITF on Issue No. 06-10 (“EITF 06-10”), “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements”. EITF 06-10 provides guidance on an employers’ recognition of a liability and related compensation costs for collateral assignment split-dollar life insurance arrangements that provide a benefit to an employee that extends into postretirement periods and the asset in collateral assignment split-dollar life insurance arrangements. The effective date of EITF 06-10 is for fiscal years beginning after December 15, 2007 (fiscal 2009 for RTI). As of December 4, 2007 we have recorded a $2.8 million asset within our Condensed Consolidated Balance Sheet for our collateral assignment in eight split-dollar life insurance arrangements. We are currently evaluating the impact of EITF 06-10 on our Condensed Consolidated Financial Statements.

 

In June 2007, the FASB ratified the consensus reached by the EITF on Issue No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires that the tax benefit related to dividends or dividend equivalents paid on equity-classified awards, which are expected to vest, be recorded as an increase to additional paid-in capital. EITF 06-11 is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007, and we expect to adopt the provisions of EITF 06-11 beginning in the first quarter of fiscal 2009.

 

 

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We are currently evaluating the impact of EITF 06-11 on our Condensed Consolidated Financial Statements.

 

In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes the principles and requirements for how an acquirer: 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008 (fiscal 2010 for RTI). We are currently evaluating the impact SFAS 141R will have on any future business combinations we enter into.

 

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS 160 is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008 (fiscal 2010 for RTI). We are currently evaluating the impact of SFAS 160 on our Condensed Consolidated Financial Statements.

Known Events, Uncertainties and Trends:

Financial Strategy and Stock Repurchase Plan

Our financial strategy is to utilize a prudent amount of debt, including operating leases, letters of credit, and any guarantees, to minimize the weighted average cost of capital while allowing financial flexibility and maintaining the equivalent of an investment-grade bond rating. This strategy periodically allows us to repurchase RTI common stock. During the 26 weeks ended December 4, 2007, we repurchased 1.7 million shares of RTI common stock for a total purchase price of $39.5 million. The total number of remaining shares authorized to be repurchased, as of December 4, 2007, is approximately 7.9 million. To the extent not funded with cash from operating activities and proceeds from stock option exercises, additional repurchases, if any, may be funded by borrowings on the Credit Facility.

Reimage Progress

As discussed in previous filings, in an effort to continue moving our brand towards a high quality casual dining restaurant and away from the traditional bar and grill category, we are changing our look and feel, differentiating ourselves with a more contemporary and fresher look. As of December 4, 2007, we have completed the reimaging of 408 Company-owned restaurants. Capital expenditures to date, excluding the costs to accelerate depreciation or write-off existing assets, totaled $42.5 million, of which $38.0 million was spent in fiscal 2008. We plan to complete the reimaging of an additional 259 Company-owned restaurants by the end of 2008’s third fiscal quarter.

Dividends

During fiscal 1997, our Board of Directors approved a dividend policy as an additional means of returning capital to RTI’s shareholders. A $0.25 per share dividend, which totaled $13.2 million, was paid on August 7, 2007, to shareholders of record on July 23, 2007. On January 9, 2008, the Board of Directors announced a plan of moving our semi-annual dividend to an annual payment, which the Board will review for payment in August 2008. The payment of a dividend in any particular future period and the actual amount thereof remain, however, at the discretion of the Board of Directors and no assurance can be given that dividends will be paid in the future. Additionally, our Credit Facility and Private Placements contain certain limitations on the payment of dividends. See “Special Note Regarding Forward-Looking Information.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This quarterly report on Form 10-Q contains various forward-looking statements which represent the Company’s expectations or beliefs concerning future events, including one or more of the following:  future financial performance and restaurant growth (both Company-owned and franchised), future capital expenditures, future borrowings and repayment of debt, availability of debt financing on terms attractive to the Company, payment of dividends, stock repurchases, and restaurant and franchise acquisitions and re-franchises. The Company cautions the reader that a number of important factors and uncertainties could, individually or in the aggregate, cause actual results to differ materially from those included in the forward-looking statements, including, without limitation, the following: changes in promotional, couponing and advertising strategies; guests’ acceptance of changes in menu items; changes in our guests’ disposable income; consumer spending trends and habits; mall-traffic trends; increased competition in the restaurant market; weather conditions in the regions in which Company-owned and franchised restaurants are operated; guests’ acceptance of the Company’s development prototypes and remodeled restaurants; laws and regulations affecting labor and employee benefit costs, including further potential increases in federally mandated minimum wage; costs and availability of food and beverage inventory; the Company’s ability to attract qualified managers, franchisees and team members; changes in the availability and cost of capital; impact of adoption of new accounting standards; impact of food-borne illnesses resulting from an outbreak at either Ruby Tuesday or other restaurant concepts; effects of actual or threatened future terrorist attacks in the United States; significant fluctuations in energy prices; and general economic conditions.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosures about Market Risk

We are exposed to market risk from fluctuations in interest rates and changes in commodity prices. The interest rate charged on our Credit Facility can vary based on the interest rate option we choose to utilize. Our options for the rate are the Base Rate or LIBO Rate plus an applicable margin. The Base Rate is defined to be the higher of the issuing bank’s prime lending rate or the Federal Funds rate plus 0.5%. The applicable margin is zero percent for the Base Rate loans and a percentage ranging from 0.5% to 1.25% for the LIBO Rate-based option. As of December 4, 2007, the total amount of outstanding debt subject to interest rate fluctuations was $397.6 million. A hypothetical 100 basis point change in short-term interest rates would result in an increase or decrease in interest expense of $4.0 million per year.

As previously discussed, on November 30, 2007 we amended both the notes issued in the Private Placement and the Credit Facility to adjust minimum fixed charge coverage and maximum funded debt ratios through the fiscal quarter ending June 2, 2009 and thereafter. The amendment to the Private Placement provided for a 1% increase in interest rates upon the occurrence of credit ratios outside those previously allowed. At any time when RTI reports ratios within those newly-allowed outer ranges, the additional interest expense to be incurred on the $150.0 million Private Placement debt will be up to $1.5 million per year.

Many of the ingredients used in the products we sell in our restaurants are commodities that are subject to unpredictable price volatility. This volatility may be due to factors outside our control such as weather and seasonality. We attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients. Historically, and subject to competitive market conditions, we have been able to mitigate the negative impact of price volatility through adjustments to average check or menu mix.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation and under the supervision of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the

 

33

 


Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of December 4, 2007.

Changes in Internal Controls

During the fiscal quarter ended December 4, 2007, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a – 15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

 

We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business. We provide reserves for such claims when payment is probable and estimable in accordance with Financial Accounting Standards Board Statement No. 5, “Accounting for Contingencies.” In the opinion of management, the ultimate resolution of these pending legal proceedings will not have a material adverse effect on our condensed consolidated results of operations, financial position, or liquidity.

 

ITEM 1A.

RISK FACTORS

 

 

While we attempt to identify, manage, and mitigate risks and uncertainties associated with our business, some level of risk and uncertainty will always be present. Our Form 10-K for the fiscal year ended June 5, 2007, in the section entitled Item 1A. Risk Factors, describes the most significant risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results, and future prospects. The following supplements the risk factors previously disclosed in our 2007 Annual Report on Form 10-K. Additional risks and uncertainties not currently known to us or that we have deemed to be immaterial also may materially affect our business, financial condition, or results of operations.

Our potential inability to meet a financial covenant contained in our indebtedness or guarantee may adversely affect our liquidity, financial condition, or results of operations.

The amount of debt we carry, which we believe is prudent based upon our financial strategy, is significant. At December 4, 2007, we had a total of $591.7 million in debt and capital lease obligations and guaranteed a further $35.9 million in debt. The indebtedness requires us to dedicate a portion of our cash flows from

 

34

 


operating activities to principal and interest payments on our indebtedness, which could prevent or limit our ability to implement growth plans, proceed with operational improvement initiatives, or pay dividends.

We have recently modified the covenants contained in the Credit Facility, the notes issued in the Private Placement, and the Franchise Facility. In connection with the amendment to the notes issued in the Private Placement, we also agreed to pay higher quarterly interest rates for so long as we do not meet the original covenants, which could be required for an indefinite period of time.

We project that, absent further modifications to the financial covenants contained therein or improvements to our operations, at some point during the next twelve months we will violate two covenants, the fixed charge coverage ratio and our maximum funded debt ratio.

We are currently working with our creditors to obtain waivers and/or additional modifications to our covenants prior to any event of default, and we may incur significant fees and transaction costs during this process. We anticipate that further modifications will allow for covenants at levels better aligned with our expected future results.

If we were to violate any of our covenants and either agreements cannot be reached with our creditors or agreements are reached but we do not meet the revised covenants, our creditors could exercise their rights under the indebtedness and guarantee. Under the guarantee, if the Franchise Facility were to be unwound, we could be required to repay the creditors for all then-outstanding borrowings, not just the amounts which would be owed should individual franchises default. At December 4, 2007, the total amount outstanding under the Franchise Facility was $38.3 million.

Should our creditors choose to exercise their rights under the indebtedness and guarantee, we may be required to obtain new financing from alternative financial sources. However, we may have difficulty in borrowing sufficient funds to refinance the accelerated indebtedness or to satisfy the guarantee. If new financing is made available to us, it may not be available on acceptable terms. Accordingly, our liquidity, financial condition, and results of operations would likely be adversely affected.

 

 

 

 

35

 


ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table includes information regarding purchases of our common stock made by us during the second quarter ended December 4, 2007:

 

 

(a)

 

(b)

 

(c)

 

(d)

 

 

 

Total number

 

Average

 

Total number of shares

 

Maximum number of shares

 

 

 

of shares

 

price paid

 

purchased as part of publicly

 

that may yet be purchased

 

Period

 

purchased (1)

 

per share

 

announced plans or programs (1)

 

under the plans or programs (2)

 

 

 

 

 

 

 

 

 

 

 

Month #1

 

 

 

 

 

 

 

 

 

(September 5 to October 9)

 

 

 

 

7,919,227

 

Month #2

 

 

 

 

 

 

 

 

 

(October 10 to November 6)

 

1,286

 

 

 

7,919,227

 

Month #3

 

 

 

 

 

 

 

 

 

(November 7 to December 4)

 

 

 

 

7,919,227

 

Total

 

1,286

 

 

 

 

7,919,227

 

(1) In October 2007, RTI repurchased 1,286 shares in conjunction with the acquisition of RT Detroit Franchise, LLC. These shares were cancelled subsequent to the acquisition.

(2) On January 9, 2007, the Company’s Board of Directors authorized the repurchase of an additional 5.0 million shares of Company stock under the Company’s ongoing share repurchase program. As of December 4, 2007, 3.6 million shares of the January 2007 authorization have been repurchased at a cost of approximately $93.7 million. On July 11, 2007, the Board of Directors authorized the repurchase of an additional 6.5 million shares of Company stock.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

The Annual Meeting of Shareholders was held on October 10, 2007. The Shareholders voted on the following matters:

Proposal 1: To elect two Class III directors for a term of three years to the Board of Directors.

 

Authority

Nominees

For

Withheld

Samuel E. Beall, III

46,928,702

1,096,897

Bernard Lanigan, Jr.

47,065,464

960,135

 

Proposal 2: To ratify the selection of KPMG LLP to serve as the Company’s independent registered public accounting firm for the fiscal year ending June 3, 2008.

 

For

47,773,228

Against

86,620

Abstain

165,751

 

The Directors continuing in office are: Claire L. Arnold, Kevin T. Clayton, James A. Haslam, III, Dr. Donald Ratajczak, and Stephen I. Sadove.

 

36

 


ITEM 5.

OTHER INFORMATION

On January 9, 2008, the Compensation and Stock Option Committee of the Board of Directors (the "Committee") clarified certain aspects of the compensation arrangement for Samuel E. Beall, III, Chairman of the Board, President and Chief Executive Officer.  Namely, with regard to long-term incentive compensation provided for in Section 3.2(b) of Mr. Beall's employment agreement with the Company (the "Agreement"), the Committee clarified its intent that the target value of future equity incentive awards for each fiscal year shall be the sum of (a) plus (b) where:

(a) is the grant day value of equity incentive award(s) granted at target level for the immediately preceding fiscal year, and (b) is the greater of (i) 4% multiplied by (a), or (ii) the increase as may be recommended by the Company's independent compensation consultants based on peer group competitive market data. 

The Committee clarified this provision as the schedule for stock option awards attached as Schedule 3.2(b) to the Agreement ended in Fiscal Year 2006 and, but for an administrative oversight, would have been extended in January, 2003, when the Company and Mr. Beall entered into Amendment No. 1 to Employment Agreement (the "Amendment") which, among other things, extended the Agreement from June 18, 2006 to June 18, 2010. 

The Committee also determined the amount of the lump sum payment which Mr. Beall will receive in the event he chooses a lump sum payment option upon his retirement under the Company's Executive Supplemental Pension Plan (the "Plan").  The Plan currently provides for a lump sum payment option.  However, the Committee and Mr. Beall felt that it was in the best interest of both parties to fix the assumptions comprising any lump sum payout amount.  Accordingly, should Mr. Beall timely elect a lump sum form of payment under the Plan, the lump sum amount payable shall be as follows:

 

Effective Date of Retirement

Lump Sum Amount

Prior to June 3, 2008

$7,423,453

On or after June 3, 2008 but prior to June 2, 2009

$7,584,587

On or after June 2, 2009 but prior to June 1, 2010

$7,740,709

 

The actions of the Committee were ratified by the vote of the full Board of Directors with Mr. Beall abstaining from the vote.

 

 

 

 

 

 

37

 


ITEM 6.

EXHIBITS

 

 

  Exhibit No.  

 

 

 

3

.1

Bylaws, as amended, of Ruby Tuesday, Inc. (1)

 

 

 

 

 

10

.1

First Amendment to Amended and Restated Revolving Credit Agreement, dated as of November 30,

 

 

 

2007, by and among Ruby Tuesday, Inc., the Lenders, and Bank of America, N.A., as Administrative

 

 

 

Agent, Issuing Bank and Swingline Lender. +

 

 

 

 

 

10

.2

Third Amendment to Amended and Restated Loan Facility Agreement and Guaranty, dated as of

 

 

 

November 30, 2007, by and among Ruby Tuesday, Inc., the Participants, and Bank of America, N.A.,

 

 

 

as Servicer and Agent for the Participants. +

 

 

 

 

 

10

.3

Second Amendment, dated as of November 30, 2007, to Note Purchase Agreement, dated as of April 1,

 

 

 

2003, by and among Ruby Tuesday, Inc. and the Purchasers. +

 

 

 

 

 

10

.4

Form of Director Restricted Stock Award. +

 

 

 

 

 

31

.1

Certification of Samuel E. Beall, III, Chairman of the Board, President, and Chief Executive Officer. +

 

 

 

 

 

31

.2

Certification of Marguerite N. Duffy, Senior Vice President, Chief Financial Officer. +

 

 

 

 

 

32

.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the

 

 

 

Sarbanes-Oxley Act of 2002. +

 

 

 

 

 

32

.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the

 

 

 

Sarbanes-Oxley Act of 2002. +

 

  Footnote

 

 

+

 

Filed herewith.

 

 

 

(1

)

Incorporated by reference to Exhibit 99.B to Form 8-K filed with the Securities and Exchange Commission

 

 

on October 12, 2007 (File No. 1-12454).

 

 

38

 


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

RUBY TUESDAY, INC.

(Registrant)

Date: January 9, 2008

 

BY: /s/ MARGUERITE N. DUFFY
——————————————
Marguerite N. Duffy
Senior Vice President and
Chief Financial Officer

 

 

 

39