**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

****FORM 10-K****

x

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

 

For the Fiscal Year Ended:   **June 3, 2008**

 

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 or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

**150 West Church Avenue, Maryville, Tennessee 37801**

(Address of principal executive offices and zip code)

**(865) 379-5700**

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

Name of each exchange on which registered

Common Stock, par value $0.01 per share

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Title of class

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer x   

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the last day of the second fiscal quarter ended December 4, 2007 was $644,856,870 based on the closing stock price of $12.47 on December 4, 2007. 

The number of shares of the registrant's common stock outstanding as of July 31, 2008, the latest practicable date prior to the filing of this Annual Report, was 52,783,684.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the Registrant’s definitive Proxy Statement for the Registrant’s 2008 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, is incorporated by reference into Part III hereof.

 

 

 

**Index**

 

 

 

**PART I**

 

 

 

 

 

Item 1.

Business

4-9

Item 1A.

Risk Factors

9-14

Item 1B.

Unresolved Staff Comments

14

Item 2.

Properties

15-16

Item 3.

Legal Proceedings

16

Item 4.

Submission of Matters to a Vote of Security Holders

16

 

 

 

**PART II**

 

 

 

 

 

Item 5.

Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

17

Item 6.

Selected Financial Data

18

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19-36

Item 7A.

Quantitative and Qualitative Disclosure About Market Risk

36

Item 8.

Financial Statements and Supplementary Data

37-69

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

70

Item 9A.

Controls and Procedures

70

Item 9B.

Other Information

70-71

 

 

 

**PART III**

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

71

Item 11.

Executive Compensation

71

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

71

Item 13.

Certain Relationships and Related Transactions, and Director Independence

71

Item 14.

Principal Accounting Fees and Services

71

 

 

 

**PART IV**

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedule

72

Signatures

 

73

 

 

 

 

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**Special Note Regarding Forward-Looking Information**

This Annual Report on Form 10-K contains various forward-looking statements, which represent our 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.  We caution the reader that a number of important factors and uncertainties could, individually or in the aggregate, cause our 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 our 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; 

 

 

**•**

our 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.

 

 

 

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**PART I**

**Item 1. Business**

**Background**

The first Ruby Tuesday® restaurant was opened in 1972 in Knoxville, Tennessee near the campus of the University of Tennessee. The Ruby Tuesday concept, which at the time consisted of 16 restaurants, was acquired by Morrison Restaurants Inc. (“Morrison”) in 1982. During the following years, Morrison grew the concept to over 300 restaurants with concentrations in the Northeast, Southeast, Mid-Atlantic and Midwest regions of the United States and added other casual dining concepts, including the internally-developed American Cafe® and the acquired Tias, Inc., a chain of Tex-Mex restaurants. In a spin-off transaction that occurred on March 9, 1996, shareholders of Morrison approved the distribution of two separate businesses of Morrison to its shareholders, Morrison Fresh Cooking, Inc. (“MFC”) and Morrison Health Care, Inc. (“MHC”). In conjunction with the spin-off, Morrisonwas reincorporated in the State of Georgia and changed its name to Ruby Tuesday, Inc.  Ruby Tuesday, Inc. and its majority-owned subsidiaries are sometimes referred to herein as “RTI”, the “Company”, “we” and/or “our”.

We began our traditional franchise program in 1997 with the opening of one domestically and two internationally franchised Ruby Tuesday restaurants. The following year, we introduced a program we called our “franchise partnership program”, under which we own 1% or 50% of the equity of each of the entities that own and operate Ruby Tuesday franchised restaurants. We do not own any of the equity of entities that hold franchises under our traditional franchise programs. As of June 3, 2008, we had 48 franchisees, comprised of 13 franchise partnerships, 17 traditional domestic and 18 traditional international franchisees. Of these franchisees, we have signed agreements for the development of new franchised Ruby Tuesday restaurants with 13 franchise partnerships, 13 traditional domestic and 12 traditional international franchisees. In conjunction with the signing of the franchise agreements, between fiscal1997 and 2002, we sold 124 Ruby Tuesday restaurants in our non-core markets to our franchisees.  Seven additional Ruby Tuesday restaurants were sold or leased by the Company to franchise partnerships in fiscal 2007.  In addition, the 12 international franchisees (including Puerto Rico and Guam) hold rights as of June 3, 2008 to develop Ruby Tuesday restaurants in 27 countries.

On November 20, 2000, the American Cafe (including L&N Seafood) and Tia’s Tex-Mex concepts, with 69 operating restaurants, were sold to Specialty Restaurant Group, LLC (“SRG”), a limited liability company owned by the former President of our American Cafe and Tia’s Tex-Mex concepts and certain members of his management team.  During fiscal 2007, both SRG, and the company to whom it sold the Tia’s Tex-Mex concept in fiscal 2004, filed for bankruptcy protection.   

In fiscal 2008, we acquired certain assets of Wok Hay, LLC.  Wok Hay, LLC operated a fast casual Asian restaurant in Knoxville, Tennessee.  One of the sellers was granted a 10% minority interest in the subsidiary we formed to acquire the restaurant.  We have since converted the acquired restaurant to a full-service Asian restaurant.  

**Operations**

We own and operate the Ruby Tuesday concept in the higher end of the bar and grill segment of casual dining. We also offer franchises for the Ruby Tuesday concept in domestic and international markets.  As of June 3, 2008, we owned and operated 721 casual dining restaurants, located in 28 states and the District of Columbia. Also, as of June 3, 2008, the franchise partnerships operated 122 restaurants and traditional franchisees operated 48 domestic and 54 international restaurants.  A listing of the states and countries in which our franchisees operate is set forth below in Item 2 entitled “Properties.” 

Ruby Tuesday restaurants offer simple, fresh American dining with a wide variety of appetizers, handcrafted burgers, a garden bar which offers up to 46 items, fresh chicken, steaks, crab cakes, salmon, tilapia, fork-tender ribs, and more.  Burger choices include such items as beef, bison, turkey, chicken, and crab.  Entree selections typically range in price from $6.99 to $18.99.  We also offer our RubyTueGo curbside service at both Company-owned and franchised restaurants.  This program provides a quick, convenient alternative for active guests who are on the go and a delivered-meals catering program for businesses, organizations, and group events.     

In our effort to continue moving our brand towards higher-quality casual dining and to differentiate ourselves from the traditional bar and grill category, we have changed the look and feel of our restaurants.  As of June 3, 2008, we have completed the re-imaging of 655 Company-owned restaurants which resulted in a more contemporary-looking exterior 

 

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and dining rooms that are less cluttered, more comfortable, and more in touch with what we believe to be the tastes and expectations of today’s consumers.     

In addition to the completion of the re-imaging of a majority of our Company-owned restaurants, we achieved certain other operational successes in fiscal 2008, including the following:

 

**•**

The implementation of a new guest service system that, although it increased labor costs, contributed to improved guest service ratings during the year;

 

**•**

A reduction in hourly turnover that partially offset the increased cost of our new guest service system; and

 

**•**

Enhancements to our menu through offering higher quality food and beverage items.

At June 3, 2008, the Company owned and operated restaurants concentrated primarily in the Southeast, Northeast, Mid-Atlantic and Midwest of the United States. We consider these regions to be our core markets.  We believe our business sector is overbuilt and demand has declined.  Because of this, we have suspended our new restaurant openings.  We plan to open approximately four Company-owned Ruby Tuesday restaurants during fiscal 2009, all of which were already in progress at the end of fiscal 2008. These new restaurants will primarily be located in existing markets.  Existing prototypes range in size from 4,600 to 5,400 square feet with seating for 162 to 230 guests. Because these restaurants provide for substantial seating in proportion to the square footage of the buildings, we believe these restaurants offer an opportunity for improved restaurant-level returns on invested capital.  The availability ofseveral different restaurant prototypes enables us to develop restaurants in a variety of different markets, including rural America, locations adjacent to interstate highways, retail locations, as well as our more traditional sites. Other than population and traffic volume, our site selection requirements for these new restaurants include annual household incomes ranging from $50,000 to $80,000, good accessibility to our restaurants, and visibility of the location. Our restaurants are operated by general managers who are rewarded for their ability to grow guest counts, achieve high standards and control certain costs. 

**Franchising**

As previously noted, as of June 3, 2008, we had franchise arrangements with 48 franchise groups which operate Ruby Tuesday restaurants in 23 states, Puerto Rico, Guam, and in 13 foreign countries.

 

As of June 3, 2008, there were 224 franchise restaurants, including 122 operated by franchise partnerships.  We acquired 36 restaurants from franchise partnerships in fiscal 2008 and 28 restaurants in fiscal 2007.  Franchisees opened, or acquired from RTI, 14 restaurants in fiscal 2008, 35 restaurants in fiscal 2007, and 32 restaurants in fiscal 2006.  We anticipate that our franchisees will open approximately 20 restaurants in fiscal 2009.

 

Generally, franchise arrangements consist of a development agreement and a separate franchise agreement for each restaurant.  Under a development agreement, a franchisee is granted the exclusive right, and undertakes the obligation, to develop multiple restaurants within a specifically described geographic territory.  The term of a domestic franchise agreement is generally 15 years, with two five-year renewal options.

 

For each restaurant developed under a domestic development agreement, a franchisee is currently obligated to pay a development fee of $10,000 per restaurant (at the time of signing a development agreement), an initial franchise fee (which typically is $35,000 in the aggregate for domestic franchisees), and a royalty fee equal to 4.0% of the restaurant’s monthly gross sales, as defined in the franchise agreement.  Development and operating fees for international franchise restaurants vary.  

Additionally, we offer support service agreements for domestic franchisees.  Under the support services agreements, we have one level of support, which is required for franchise partnerships and optional for traditional franchisees, in which we provide specified services to assist the franchisees with various aspects of the business including, but not limited to, processing of payroll, basic bookkeeping and cash management.  Fees for these services are typically 2.5% of monthly gross sales for franchise partnerships and about 1.5% for traditional franchisees, as defined in the franchise agreement.  There is also an optional level of support services, available only to traditional franchisees, in which we charge a fee to cover certain information technology related support that we provide.  All domestic franchisees also are required to pay a marketing and purchasing fee of 1.5% of monthly gross sales.  Underthe terms of the franchise agreements, we also require all domestic franchisees to contribute a percentage of monthly gross sales, currently 1.0%, to a national advertising fund formed to cover their pro rata portion of the production and airing costs associated with our national cable advertising campaign.  Under these terms, we can charge up to 3.0% of monthly gross sales for this national advertising fund.

 

-5-

 

 

While financing is the responsibility of the franchisee, we make available to the domestic franchisees information about financial institutions that may be interested in financing the costs of restaurant development for qualified franchisees.  Additionally, in limited instances, and only with regard to the franchise partnerships, we provide partial guarantees to certain of these lenders.

 

We provide ongoing training and assistance to all of our franchisees in connection with the operation and management of each restaurant through the Ruby Tuesday Center for Leadership Excellence, our training facility, meetings, on-premises visits, and by written or other material.

**Training**

The Ruby Tuesday Center for Leadership Excellence, located in our WOW-U® training facility in the Maryville, Tennessee Restaurant Support Services Center, serves as the centralized training center for all of our and the franchisees’ managers, multi-restaurant operators and other team members.  Facilities include classrooms, a test kitchen, and the Ruby Tuesday Culinary Arts Center, which opened in fiscal 2007.  The Ruby Tuesday Center for Leadership Excellence provides managers with the opportunity to assemble for intensive, ongoing instruction and hands on interaction. Programs include classroom instruction and various team competitions, which are designed to contribute to the skill and enhance the dedication of the Company and franchise teams and to strengthen our corporate culture.  Starting with fiscal 2008, we also offered all team member training materials in a computer-based training(“CBT”) format.  CBT enables us to leverage technology to provide an even higher quality training experience and allows for testing at every level to calibrate our team members’ skill levels.  

Further contributing to the training experience is the Ruby Tuesday LodgeSM, which is located on a wooded campus just minutes from the Restaurant Support Services Center. Ruby Tuesday Lodge serves as the lodging quarters and dining facility for those attending the Ruby Tuesday Center for Leadership Excellence. After a long day of instruction, trainees have the opportunity to dine and socialize with fellow team members in a relaxed and tranquil atmosphere to be fully immersed in the Ruby Tuesday culture. We believe our emphasis on training and retaining high quality restaurant managers is critical to our long-term success. 

**Research and Development**

We do not engage in any material research and development activities. However, we do engage in ongoing studies to assist with food and menu development. Additionally, we conduct extensive consumer research to determine our guests’ preferences, trends, and opinions, as well as to better understand other competitive brands. 

**Raw Materials**

We negotiate directly with our suppliers for the purchase of raw and processed materials and maintain contracts with select suppliers for both our Company-owned and franchised restaurants.  These contracts may include negotiations for distribution of raw materials under a cost plus delivery fee basis and/or specifications that maintain a term-based contract with a renewal option. If any major supplier or our distributor is unable to meet our supply needs, we would negotiate and enter into agreements with alternative providers to supply or distribute products to our restaurants. 

We use purchase commitment contracts to stabilize the potentially volatile prices of certain commodities. Because of the relatively short storage life of inventories, limited storage facilities at the restaurants, our requirement for fresh products and the numerous sources of goods, a minimum amount of inventory is maintained at our restaurants. In the event of a disruption of supply, all essential food, beverage and operational products can be obtained from secondary vendors and alternative suppliers.   We believe these alternative suppliers can provide, upon short notice, items of comparable quality.

**Trade and Service Marks of the Company**

We and our affiliates have registered certain trade and service marks with the United States Patent and Trademark Office, including the name “Ruby Tuesday.” RTI holds a license to use all such trade and service marks from our affiliates, including the right to sub-license the related trade and service marks. We believe that these and other related marks are of material importance to our business. Registration of the Ruby Tuesday trademark expires in 2015, unless renewed.  We expect to renew this registration at the appropriate time.

**Seasonality**

Our business is moderately seasonal. Average restaurant sales of our mall-based restaurants, which represent 

 

-6-

 

 

approximately 17% of our total restaurants, are slightly higher during the winter holiday season. Freestanding restaurant sales are generally higher in the spring and summer months. 

**Competition**

Our business is subject to intense competition with respect to prices, services, locations, and the types and quality of food. We are in competition with other food service operations, with locally-owned restaurants, and other national and regional restaurant chains that offer the same or similar types of services and products as we do.  In times of economic uncertainty, restaurants also compete with supermarkets as guests may choose to limit spending and eat at home.  Some of our competitors may be better established in the markets where our restaurants are or may be located. Changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the types, numbers and locations of competing restaurants often affect the restaurant business. There is active competition for management personnel and for attractive commercial real estate sites suitable for restaurants. 

**Government Regulation**

We and our franchisees are subject to various licensing requirements and regulations at both the state and local levels, related to zoning, land use, sanitation, alcoholic beverage control, and health and fire safety. We have not encountered any significant difficulties or failures in obtaining the required licenses or approvals that could delay the opening of a new restaurant or the operation of an existing restaurant nor do we presently anticipate the occurrence of any such difficulties in the future. Our business is subject to various other regulations by federal, state and local governments, such as compliance with various health care, minimum wage, immigration, and fair labor standards. Compliance with these regulations has not had, and is not expected to have, a material adverse effect on our operations. 

We are subject to a variety of federal and state laws governing franchise sales and the franchise relationship.  In general, these laws and regulations impose certain disclosure and registration requirements prior to the offer and sale of franchises.  Rulings of several state and federal courts and existing or proposed federal and state laws demonstrate a trend toward increased protection of the rights and interests of franchisees against franchisors.  Such decisions and laws may limit the ability of franchisors to enforce certain provisions of franchise agreements or to alter or terminate franchise agreements.  Due to the scope of our business and the complexity of franchise regulations, we may encounter minor compliance issues from time to time.  We do not believe, however, that any of these issues will have a material adverse effect on our business.

**Environmental Compliance**

Compliance with federal, state and local laws and regulations which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not expected to have a material effect on our capital expenditures, earnings or competitive position. 

**Personnel**

As of June 3, 2008, we employed approximately 26,400 full-time and 21,400 part-time employees, including approximately 380 support center management and staff personnel.  We believe that our employee relations are good and that working conditions and employee compensation are comparable with our major competitors. Our employees are not covered by a collective bargaining agreement. 

**Available Information**

We maintain a web site at www.rubytuesday.com.  Through the “Investors” section of our web site, we make available free of charge, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as it is reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.  We are not including the information contained on or available through our web site as a part of, or incorporating such information into, this Annual Report on Form 10-K.  In addition, copies of our corporate governance materials, including, Corporate Governance Guidelines, Nominating and Governance Committee Charter, Audit Committee Charter, Compensation and Stock Option Committee Charter, Code of Business Conduct and Ethics,Code of Ethical Conduct for Financial Professionals, Categorical Standards for Director Independence, and Whistleblower Policy, are available at the web site, free of charge.  We will make available on our web site any waiver of or substantive amendment to our Code of Business Conduct and Ethics or our Code of Ethical Conduct for Financial Professionals within four business days following the date of such waiver or amendment.

 

-7-

 

 

A copy of the aforementioned documents will be made available without charge to all shareholders upon written request to the Company. Shareholders are encouraged to direct such requests to our Investor Relations department at the Restaurant Support Services Center, 150 West Church Avenue, Maryville, Tennessee  37801.  As an alternative, our Form 10-K can also be printed from the “Investors” section of our web site at www.rubytuesday.com.

Our Chief Executive Officer, Samuel E. Beall, III, submitted to the New York Stock Exchange (NYSE) the Annual Written Affirmation on November 9, 2007, pursuant to Section 303A.12 of the NYSE’s corporate governance rules, certifying that he was not aware of any violation by the Company of the NYSE’s corporate governance listing standards as of that date. 

**Executive Officers**

Our executive officers are appointed by and serve at the discretion of our Board of Directors. Information regarding our executive officers as of June 3, 2008, is provided below. 

 

**Name**

 

**Age**

 

**Position**

 

 

 

Samuel E. Beall, III

58

Chairman of the Board, President and Chief Executive Officer

Kimberly M. Grant

37

Executive Vice President 

A. Richard Johnson

56

Senior Vice President

Marguerite N. Duffy

47

Senior Vice President, Chief Financial Officer

Nicolas N. Ibrahim

47

Senior Vice President, Chief Technology Officer

Robert F. LeBoeuf

46

Senior Vice President, Chief People Officer 

Mark S. Ingram

55

Senior Vice President – President, Franchise Development 

Kurt H. Juergens

57

Senior Vice President, Development

Mark D. Young

40

Senior Vice President, Chief Marketing Officer

Mr. Beall has served as Chairman of the Board and Chief Executive Officer of the Company since May 1995 and also as President of the Company since July 2004.  Mr. Beall served as President and Chief Executive Officer of the Company from June 1992 to May 1995 and President and Chief Operating Officer of the Company from September 1986 to June 1992.  Mr. Beall founded Ruby Tuesday in 1972.

Ms. Grant joined the Company in June 1992 and was named Executive Vice President in April 2007.  From January 2005 to April 2007, Ms. Grant served as Senior Vice President, Operations, from September 2003 to January 2005, as Vice President, Operations and, from June 2002 to September 2003, as Regional Partner, Operations.  

Mr. Johnson joined the Company in April 2000 and was named Senior Vice President in May 2000. Prior to joining the Company, Mr. Johnson was the President of Hopewell & Co. from February 1997 to April 2000.  

Ms. Duffy joined the Company in August 1990 and was named Senior Vice President and Chief Financial Officer in June 2001. Ms. Duffy served as Vice President, Operations Controller of the Company from October 1999 to May 2001.

Mr. Ibrahim joined the Company in July 2001 and was named Senior Vice President, Chief Technology Officer in April 2003. He served as Vice President, Chief Technology Officer from July 2001 to April 2003. Prior to joining the company, Mr. Ibrahim served as a consultant to the Company's Information Technology department from June 1997 to July 2001. 

Mr. LeBoeuf joined the Company in July 1986 and was named Senior Vice President, Chief People Officer in June 2003. From August 2001 to June 2003, Mr. LeBoeuf served as Vice President, Human Resources.  

Mr. Ingram joined the Company in September 1979 and was named Senior Vice President – President, Franchise Development in October 2007.  From May 2004 to October 2007, Mr. Ingram served as President of Franchise and served as President of World Wide Franchise Operations from December 2002 to May 2004.  

Mr. Juergens joined the Company in June 1992 and was named Senior Vice President, Development in January 2006.  From January 2002 to January 2006, Mr. Juergens served as Vice President, Development.

 

-8-

 

 

Mr. Young joined the Company in January 1995 and was named Senior Vice President, Chief Marketing Officer in June 2007.  From October 2003 to June 2007, Mr. Young served as Vice President, Advertising, and August 1998 to September 2003 as Vice President, Marketing and Culinary.  ****

**** 

**Item 1A. Risk Factors**

 

Our business and operations are subject to a number of risks and uncertainties.  The risk factors discussed below may not be exhaustive.  We operate in a continually changing business environment, and new risks may emerge from time to time.  We cannot predict such new risks, nor can we assess the impact, if any, of such new risks on our business or the extent to which any risk or combination of risks may cause actual results to differ materially from those expressed in any forward looking statement.

 

***We may fail to reach our Company’s sales and growth goals, which may negatively impact our continued financial and operational success.***

 

We establish sales and growth goals each fiscal year based on a strategy of new market development and further penetration of existing markets.  We believe the biggest risk to attaining our growth goals is our ability to maintain or increase restaurant sales in existing markets, which is dependent upon factors both within and outside our control.  Among other factors, these desired increases are dependent upon consumer spending, the overall state of the economy, our quality of operations, and the effectiveness of our advertising.    

 

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 have changed our look and feel, differentiating ourselves with a more contemporary and fresher look.  During fiscal 2007 and 2008, we completed remodeling substantially all of our Company-owned restaurants.  Many of our franchised restaurants have also been remodeled.  While we believe that the changes were necessary for the long-term success of our Company, they were begun at a time when our guests were facing economic pressures due to rising costs of gasoline, utilities and food.  As a result, we have lost a portion of our bar and grill customer base without gaining significant market share from our high quality casual dining competitors.  To turn around our declining sales we must continue to provide high levels of quality in terms of both food and service and astrong value to our guests.  We must also develop a memorable advertising message that overcomes our disadvantage in advertising dollars relative to some of our competitors.  The risk of inappropriate decisions could further negatively impact our overall sales strategy, and thus continued success.  

 

As mentioned above, one factor integral to our success is our ability to persuade our customers of the compelling value in paying our prices for higher-quality food and guest experience.  To deliver on our promise of “Simple, Fresh, American Dining,” we offer all fresh chicken, crab, steaks, and burgers, an enhanced garden bar, and premium beverages.  If we are not successful at educating our customer about the value and quality of our products or our customers reject our pricing approach, then we may have to change our marketing or pricing strategies which could also negatively impact our growth goals.         

 

Though believed to be a smaller risk than not achieving growth through increased same-restaurant sales, there are risks associated with new restaurant openings, including, but not limited to, finding sites that will support a profitable level of sales and generate returns on investment that exceed our cost of capital, the acceptance of our concept in new markets, and the recruitment of qualified operating personnel.  Although a significant portion of our historical growth has been attributable to opening new restaurants, due to a perceived saturation of the market with casual dining restaurants, we have changed our strategy, such that we only plan to open approximately four Company-owned restaurants in fiscal 2009.  Our domestic franchisees likewise expect to open fewer restaurants in fiscal 2009.    

 

Once opened, we anticipate new restaurants will take four to six months to reach planned operational profitability due to the associated start-up costs.  We can provide no assurance that any restaurant we open will be profitable or obtain operating results similar to those of our existing restaurants nor can we provide assurance that our remodeling efforts will produce incremental sales sufficient to offset the costs of the remodels.  

 

-9-

 

 

***We may be unable to remain competitive because we are a leveraged company with restrictive financial covenants, and any potential inability to meet financial covenants contained in any of our indebtedness or guarantees could adversely affect our liquidity, financial condition, or results of operations.***

The amount of debt we carry is significant.  At June 3, 2008, we had a total of $605.4 million in debt and capital lease obligations and guaranteed a further $51.5 million in debt.  The indebtedness requires us to dedicate a portion of our cash flows from operating activities to principal and interest payments, which could prevent or limit our ability to proceed with operational improvement initiatives.  

The three most significant loans we have are our revolving credit facility ($414.4 million outstanding at June 3, 2008) (the “Credit Facility”) and our Series A and B senior notes ($82.8 million and $62.4 million, respectively, outstanding at June 3, 2008) (the “Private Placement”).  The Series A and B senior notes mature in fiscal 2010 and 2013, respectively, and we cannot give assurance we will be able to renew the Private Placement at favorable terms, or that we will be able to renew our loans at all.

We also provide a partial guaranty on a $48 million credit facility, which assists franchise partnerships with working capital needs (the “Franchise Facility”).  Under the guaranty, if the Franchise Facility were to be unwound, we could be required to repay the lenders for all then-outstanding borrowings, not just the amounts which would be owed should individual franchises default.  At June 3, 2008, the total amount outstanding under the Franchise Facility was $46.6 million.  

On May 21, 2008, we entered into amendments of the Credit Facility, the notes issued in the Private Placement, and the Franchise Facility.  As a result of these amendments, we agreed to not make any further dividend payments or stock repurchases until we achieve certain leverage thresholds for two consecutive fiscal quarters.  Additionally, the amendments limit the amount of our capital expenditures, require prepayments of principal on the Private Placement, and reduce our borrowing capacity on the Credit Facility.  In connection with the amendment to the notes issued in the Private Placement, we also agreed to pay higher quarterly interest rates for the Series A and B senior notes (currently 8.19% and 8.92%, respectively).  See Note 6 to our Consolidated Financial Statements for further information on the terms of these amendments.  

While we were successful in negotiating amendments to the Credit Facility, the Private Placement, and the Franchise Facility, if we were to violate any of our covenants in the future and either agreements cannot be reached with our lenders or agreements are reached but we do not meet the revised covenants, our lenders could exercise their rights under the indebtedness and guaranty.  

 

***We may not be successful at operating profitable restaurants.***

The success of our brand is dependent upon operating profitable restaurants.  The profitability of our restaurants is dependent on several factors, including the following:

 

•

the hiring, training, and retention of excellent restaurant managers and staff;

 

•

the ability to timely and effectively meet customer demands and maintain our strong customer base; 

 

•

the ability to manage costs and prudently allocate capital resources;

 

•

the ability to create and implement an effective marketing/advertising strategy;

 

•

the ability to leverage sales following the completion of our re-imaging initiative; and

 

•

the ability to provide innovative products to our customers at a reasonable price.

The profitability of our restaurants also depends on our ability to adapt the brand in such a way that consumers see us as fresh and relevant.  In addition, the results of our currently high performing restaurants may not be indicative of their long-term performance, as factors affecting their success may change.  Among others, one potential impact of 

 

-10-

 

 

declining profitability of our restaurants is increased asset impairment charges.  This could be significant as property and equipment currently represents 86% of our total assets at June 3, 2008.  

***The inability of our franchises to operate profitable restaurants may negatively impact our continued financial success.***

We operate franchise programs with domestic franchise partnerships and traditional domestic and international franchisees.  In addition to the income (or offsetting the losses) we record under the equity method of accounting from our investment in certain of these franchises, we also collect royalties, marketing, and purchasing fees, and in some cases support service fees, as well as interest and other fees from the franchises.  Further, as part of the franchise partnership program, we serve as partial guarantor for three credit facilities, two of which are no longer active.  The ability of these franchise groups, particularly the franchise partnerships, to continually generate profits impacts our overall profitability and brand recognition.  

Growth within the existing franchise base is dependent upon many of the same factors that apply to our Company-owned restaurants, and sometimes the challenges of opening profitable restaurants prove to be more difficult for our franchisees.  For example, franchisees may not have access to the financial or management resources that they need to open or continue operating the restaurants contemplated by their franchise agreements with us.  In addition, our continued growth is also partially dependent upon our ability to find and retain qualified franchisees in new markets, which may include markets in which the Ruby Tuesday brand may be less well known.  Furthermore, the loss of any of our franchisees due to financial concerns and/or operational inefficiencies could impact our profitability and brand.

Our franchisees are obligated in many ways to operate their restaurants according to the specific guidelines set forth by us.  We provide training opportunities to our franchise operators to fully integrate them into our operating strategy.   However, since we do not have control over these restaurants, we cannot give assurance that there will not be differences in product quality or that there will be adherence to all Company guidelines at these franchise restaurants.  In order to mitigate these risks, we do require that our franchisees focus on the quality of their operations, and we expect full compliance with our Company standards.   

Concurrent with these risks, should the financial stability of our franchisees deteriorate and we opt for brand-protective or other reasons to increase our level of support, we could be required to consolidate certain of them under the provisions of Financial Accounting Standards Board Interpretation No. 46(R), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46R”).  We have concluded based on our most recent analyses prepared using financial information obtained from the franchise entities that we are not required as of June 3, 2008 to consolidate any of them under the provisions of FIN 46R.  However, if in the future we were required to consolidate any franchise entities, our financial performance could be negatively impacted.

 

***We may be required to recognize additional impairment charges.***

 

We assess our goodwill, trademarks and other long-lived assets as and when required by generally accepted accounting principles in the United States to determine whether they are impaired.  Based upon our reviews in fiscal 2008, 2007, and 2006 we recorded impairments of $4.3 million, $0.6 million, and $1.5 million, respectively.  The majority of these charges were for restaurant impairments.  If market conditions at either the restaurant store level or system-wide deteriorate, or if operating results decline unexpectedly, we may be required to record additional impairment charges.  Additional impairment charges would reduce our reported earnings for the periods in which they are recorded.

 

***Economic, demographic and other changes, seasonal fluctuations, natural disasters, and terrorism could adversely impact guest traffic and profitability in our restaurants.***

Our business can be negatively impacted by many factors, including those which affect the restaurant only at the local level as well as others which attract national or international attention.   Risks that could cause us to suffer losses include, but are not necessarily limited to, the following:

 

•

economic factors (including economic slowdowns or other inflation-related issues);

 

-11-

 

 

 

•

demographic changes, particularly with regard to dining and discretionary spending habits, in the areas in which our restaurants are located;

 

•

changes in consumer preferences;

 

•

changes in federal or state income tax laws;

 

•

seasonal fluctuations due to the days of the week on which holidays occur, which may impact spending patterns;

 

•

natural disasters such as hurricanes, tornados, blizzards, or other severe weather; 

 

•

concerns and/or unfavorable publicity over health issues, food quality or restaurant cleanliness; 

 

•

effects of war or terrorist activities and any governmental responses thereto; and

 

•

increased insurance and/or self-insurance costs.

Each of the above items could potentially negatively impact our guest traffic and/or our profitability.

***The potential for increased commodity, energy, and other costs may adversely affect our results of operations.***

We continually purchase basic commodities such as beef, chicken, cheese and other items for use in many of the products we sell.  Although we attempt to maintain control of commodity costs by engaging in volume commitments with third parties for many of our food-related supplies, we cannot assure that the costs of these commodities will not fluctuate, as we often have no control over such items.  In addition, we rely on third party distribution companies to frequently deliver perishable food and supplies to our restaurants.  We cannot make assurances regarding the continued supply of our inventory since we do not have control over the businesses of our suppliers.  Should our inventories lack in supply, our business could suffer, as we may be unable to meet customer demands.  These disruptions may also force us to purchase food supplies from suppliers at higher costs.  The result of this is that ouroperating costs may increase without the desire and/or ability to pass the price increases to our customers.

We must purchase energy-related products such as electricity, oil and natural gas for use in each of our restaurants.  Our suppliers must purchase gasoline in order to transport food and supplies to us.  Our guests purchase energy to heat and cool their homes and fuel their automobiles.  When energy prices, such as those for gasoline, heating and cooling increase, we incur greater costs to operate our restaurants.  Likewise our guests have lower disposable income and thus may reduce the frequency in which they dine out and/or feel compelled to choose more inexpensive restaurants when eating outside the home.  

The costs of these energy-related items will fluctuate due to factors that may not be predictable, such as the economy, current political/international relations and weather conditions.  Because we cannot control these types of factors, there is a risk that prices of energy/utility items will increase beyond our current projections and adversely affect our operations.

***We face continually increasing competition in the restaurant industry for locations, guests, staff, supplies, and new products.***

Our business is subject to intense competition with respect to prices, services, locations, qualified management personnel and quality of food.  We compete with other food service operations, with locally-owned restaurants, and with other national and regional restaurant chains that offer the same or similar types of services and products.  Some of our competitors may be better established in the markets where our restaurants are or may be located.  Changes in consumer tastes; national, regional, or local economic conditions; demographic trends; traffic patterns and the types, numbers and locations of competing restaurants often affect the restaurant business.  There is active competition for management personnel and for attractive commercial real estate sites suitable for restaurants.  In addition, factors such as inflation, increased food, labor, equipment, fixture and benefit costs, and difficulty in attracting qualified

 

-12-

 

 

management and hourly employees may adversely affect the restaurant industry in general and our restaurants in particular.

***Litigation could negatively impact our results of operations as well as our future business.***

 

We are subject to litigation and other customer complaints concerning our food safety, service, and/or other operational factors.  Guests may file formal litigation complaints that we are required to defend, whether or not we believe them to be true.  Substantial, complex or extended litigation could have an adverse effect on our results of operations if it develops into a costly situation and distracts our management.  Employees may also, from time to time, subject us to litigation regarding injury, discrimination and other employment issues.  Suppliers, landlords and distributors, particularly those with which we currently maintain purchase commitments/contracts, could also potentially allege non-compliance with their contracts should they consider our actions to be contrary to our commitments.  Additionally, we are subject to the risk of litigation by our stakeholders as a result of factors including, butnot limited to, matters of executive compensation or performance of our stock price.   

***The cost of compliance with various government regulations may negatively affect our business.***

We are subject to various forms of governmental regulations.  We are required to follow various international, federal, state, and local laws common to the food industry, including regulations relating to food and workplace safety, sanitation, the sale of alcoholic beverages, environmental issues, minimum wage, overtime, increasing complexity in immigration laws and regulations, and other labor issues.  The federal minimum wage increased to $5.85 in July 2007 and increased again to $6.55 in July 2008.  Further changes in these types of laws, including additional state or federal government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements, could harm our operating results.  Also, failure to obtain or maintain the necessary licenses and permits needed tooperate our restaurants could result in an inability to open new restaurants or force us to close existing restaurants.   

We are also subject to regulation by the Federal Trade Commission and to state and foreign laws that govern the offer, sale and termination of franchises and the refusal to renew franchises.  The failure to comply with these regulations in any jurisdiction or to obtain required approvals could result in a ban or temporary suspension on future franchise sales or fines or require us to rescind offers to franchisees, any of which could adversely affect our business and operating costs.  Further, any future legislation regulating franchise laws and relationships may negatively affect our operations.

Approximately 10% of our revenue is attributable to the sale of alcoholic beverages.  We are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located.  Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays.  Typically, the licenses are renewed annually and may be revoked or suspended for cause at any time.  Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages.  If we fail to complywith federal, state or local regulations, our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants.        

In certain states we are subject to “dram shop” statutes, which generally allow a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person.  Some dram shop litigation against restaurant companies has resulted in significant judgments, including punitive damages.  We carry liquor liability coverage as part of our existing comprehensive general liability insurance, but we cannot guarantee that this insurance will be adequate in the event we are found liable in a dram shop case.

As a publicly traded corporation, we are subject to various rules and regulations as mandated by the Securities and Exchange Commission (the “SEC”).  Failure to timely comply with these guidelines could result in penalties and/or adverse reactions by our shareholders.

 

 

-13-

 

 

 

***We are dependent on key personnel.***

 

Our future success is highly dependent upon our ability to attract and retain certain key executive and other employees.   These personnel serve to maintain a corporate vision for our Company, execute our business strategy, and maintain consistency in the operating standards of our restaurants.  The loss of our key personnel or a significant shortage of high quality restaurant team members could potentially impact our future growth decisions and our future profitability.  

 

While we maintain an employment agreement with Samuel E. Beall, III, our chief executive officer and founder, the term of this employment agreement ends on July 18, 2010 and may not provide sufficient incentives for him to continue employment with Ruby Tuesday.  While we are constantly focused on succession plans at all levels, in the event his employment terminates or he becomes incapacitated, we can make no assurance regarding the impact his loss could have on our business and financial results.  

***Food safety and food-borne illness concerns could adversely affect consumer confidence in our restaurants.***

We face food safety issues that are common to the food industry.  We work to provide a clean, safe environment for both our guests and employees.  Otherwise, we risk losing guests and/or employees due to unfavorable publicity and/or a lack of confidence in our ability to provide a safe dining and/or work experience.  

Food-borne illnesses, such as E. coli, hepatitis A, trichinosis, or salmonella, as well as the prospect of “mad cow” disease and avian flu, are also a concern for our industry.  We can and do attempt to purchase supplies from reputable suppliers/distributors and have certain procedures in place to test for safety and quality standards, but we can make no assurances regarding whether these supplies may contain contaminated goods.  In addition, we cannot ensure the continued health of each of our employees.  We provide health-related training for each of our staff and strive to keep ill employees away from food items.  However, we may not be able to detect when our employees are sick until the time that their symptoms occur, which may be too late if they have prepared/served food for our guests.  The occurrence of an outbreak of a food-borne illness, whether at one of our restaurants or one of ourcompetitors, could result in temporary store closings or other negative publicity that could adversely affect our sales and profitability. 

***Changes in financial accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.***

 

Changes in financial accounting standards can have a significant effect on our reported results and may affect our reporting of transactions completed before the new rules are required to be implemented.  Many existing accounting standards require management to make subjective assumptions, such as those required for stock compensation, tax matters, consolidation accounting, franchise acquisitions, litigation, and asset impairment calculations.  Changes in accounting standards or changes in underlying assumptions, estimates and judgments by our management could significantly change our reported or expected financial performance.  

 

***We could be adversely impacted if our information technology and computer systems do not perform properly or if we fail to protect customers’ credit card data.***

 

We rely heavily on information technology to conduct our business, and any material failure, interruption of service, or compromised data security could adversely affect our operations.  While we expend significant resources to ensure that our information technology operates securely and effectively, any security breaches could result in disruptions to operations or unauthorized disclosure of confidential information.  Additionally, if our customers’ credit card information or our employees’ personal data are compromised our operations could be adversely affected, our reputation could be harmed, and we could be subjected to litigation or the imposition of penalties.       ******

 

**Item 1B. Unresolved Staff Comments**

None. 

 

 

-14-

 

 

****

**Item 2. Properties**

Information regarding the locations of our Ruby Tuesday restaurants is shown in the list below. Of the 721 Company-owned and operated Ruby Tuesday restaurants as of June 3, 2008, we owned the land and buildings for 333 restaurants, owned the buildings and held non-cancelable long-term land leases for 228 restaurants, and held non-cancelable leases covering land and buildings for 160 restaurants.  Our Restaurant Support Services Center in Maryville, Tennessee, which was opened in fiscal 1998, is owned by the Company. Our executives and certain other administrative personnel are located in the Restaurant Support Services Center. Since fiscal 2001, we have expanded the Restaurant Support Services Center by opening second and third locations also in Maryville. 

Additional information concerning our properties and leasing arrangements is included in Note 5 to the Consolidated Financial Statements appearing in Part II, Item 8 of this Form 10-K. 

Under our franchise agreements, we have certain rights to gain control of a restaurant site in the event of default under the franchise agreements.

The following table lists the locations of the Company-owned and franchised Ruby Tuesday restaurants as of June 3, 2008.  In addition to the Ruby Tuesday restaurants listed below, we also lease the land and building for a Wok-Hay restaurant in Tennessee.

 

Number of Restaurants

State

Company

 

Franchise

 

Total System

 

 

 

 

 

 

Domestic:

 

 

 

 

 

Alabama

49

 

–

 

49

Arizona

8

 

–

 

8

Arkansas

–

 

7

 

7

California

1

 

2

 

3

Colorado

–

 

12

 

12

Connecticut

18

 

–

 

18

Delaware

7

 

–

 

7

Florida

89

 

–

 

89

Georgia

60

 

–

 

60

Illinois

–

 

26

 

26

Indiana

7

 

9

 

16

Iowa

–

 

4

 

4

Kansas

–

 

3

 

3

Kentucky

6

 

5

 

11

Louisiana

6

 

–

 

6

Maine

–

 

10

 

10

Maryland

35

 

–

 

35

Massachusetts

13

 

–

 

13

Michigan

29

 

–

 

29

Minnesota

–

 

12

 

12

Mississippi

10

 

–

 

10

Missouri

1

 

28

 

29

Nebraska

–

 

8

 

8

Nevada

–

 

2

 

2

New Hampshire

5

 

–

 

5

New Jersey

26

 

–

 

26

New Mexico

–

 

1

 

1

New York

28

 

12

 

40

North Carolina

59

 

–

 

59

North Dakota

–

 

3

 

3

Ohio

42

 

–

 

42

 

 

-15-

 

 

 

Oklahoma

–

 

2

 

2

Oregon

–

 

3

 

3

Pennsylvania

50

 

–

 

50

Rhode Island

3

 

–

 

3

South Carolina

36

 

–

 

36

South Dakota

–

 

4

 

4

Tennessee

48

 

–

 

48

Texas

1

 

6

 

7

Utah

–

 

6

 

6

Virginia

72

 

–

 

72

Washington

–

 

5

 

5

Washington, DC

3

 

–

 

3

West Virginia

8

 

–

 

8

Wisconsin

1

 

–

 

1

Total Domestic

721

 

170

 

891

 

 

 

 

Number of Restaurants

Country

Company

 

Franchise

 

Total System

 

 

 

 

 

 

International:

 

 

 

 

 

Canada

–

 

1

 

1

Chile

–

 

9

 

9

Greece

–

 

4

 

4

Guam*

–

 

1

 

1

Hawaii*

–

 

4

 

4

Honduras

–

 

1

 

1

Hong Kong

–

 

3

 

3

Iceland

–

 

2

 

2

India

–

 

15

 

15

Kuwait

–

 

3

 

3

Philippines

–

 

1

 

1

Puerto Rico*

–

 

3

 

3

Romania

–

 

2

 

2

Saudi Arabia

–

 

1

 

1

Trinidad

–

 

3

 

3

United Arab Emirates

–

 

1

 

1

Total International

–

 

54

 

54

 

721

 

224

 

945

 

 

 

 
* Guam, Hawaii, and Puerto Rico are treated as international locations for internal purposes.

 
**Item 3. 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”.  At this time, in the opinion of management, the ultimate resolution of pending legal proceedings will not have a material adverse effect on our consolidated operations, financial position or cash flows.   

 

**Item 4. Submission of Matters to a Vote of Security Holders**

None. 

-16-

 

 

**PART II**

**Item 5. Market for the Registrant's Common Equity,**

**Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

**Market for Registrant’s Common Equity and Related Stockholder Matters**

Ruby Tuesday, Inc. common stock is publicly traded on the New York Stock Exchange under the ticker symbol RT. The following table sets forth the reported high and low prices of our common stock and cash dividends paid thereon for each quarter during fiscal 2008 and 2007. 

 

**Fiscal Year Ended June 3, 2008**

 

Fiscal Year Ended June 5, 2007

 

 

 

**Per Share**

 

 

 

 

Per Share

 

 

 

**Cash**

 

 

 

 

Cash

**Quarter**

**High**

**Low**

**Dividends**

 

Quarter

High

Low

Dividends

**First**

**$27.05**

**$21.42**

**$0.25**

 

First

$27.67

$21.03

$0.25

**Second**

**$22.48**

**$12.40**

**--**

 

Second

$29.95

$25.84

--

**Third**

**$13.82**

**$5.70**

**--**

 

Third

$30.80

$26.49

$0.25

**Fourth**

**$9.25**

**$6.25**

**--**

 

Fourth

$30.48

$26.43

--

As of July 24, 2008, there were approximately 3,769 holders of record of the Company’s common stock. 

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, and thus no dividend was paid during fiscal 2008’s third quarter.  

 

On May 21, 2008, we entered into amendments of the Credit Facility and the notes issued in the Private Placement.  Under the terms of the amendments we may not pay a dividend until we achieve certain leverage thresholds for two consecutive fiscal quarters.  Were we to achieve these leverage thresholds, 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.

 

**Issuer Purchases of Equity Securities**

During the fourth quarter of the year ended June 3, 2008, there were no repurchases made by us or on our behalf, or by any “affiliated purchaser,” of shares of our common stock.  

 

On January 9, 2007, our Board of Directors authorized the repurchase of an additional 5.0 million shares of our common stock under our ongoing share repurchase program.  On July 11, 2007, the Board of Directors authorized the repurchase of an additional 6.5 million shares of our common stock.  As of June 3, 2008, 3.6 million shares of the January 2007 authorization have been repurchased at a cost of approximately $93.7 million and there were 7.9 million shares available to be repurchased under our share repurchase program.     

 

As previously mentioned, we entered into an amendment to the Credit Facility on May 21, 2008.  Under the terms of the amendment we may not engage in the repurchase of our stock until we achieve certain leverage thresholds for two consecutive fiscal quarters.  Were we to achieve these leverage thresholds, the repurchase of shares 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 shares will be repurchased in the future.    

 

-17-

 

 

 

 

**** 

**Item 6. Selected Financial Data**

 

**Summary of Operations**

(In thousands except per-share data)

 

 

Fiscal Year

 

**2008**

 

2007

 

2006

 

2005

 

2004

 

 

Revenue

 

**$ 1,360,304**

 

 

$ 1,410,227

 

 

$ 1,306,240

 

 

$ 1,110,294

 

 

$ 1,041,359

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

**$       23,699**

 

$    132,398

 

$    150,958

 

$    154,946

 

$    170,546

 

(Benefit)/provision for income taxes

**(2,678)**

 

40,730

 

49,981

 

52,648

 

60,699

 

 

 

 

 

 

 

 

 

 

 

 

Net income

**$       26,377**

 

$      91,668

 

$    100,977

 

$    102,298

 

$    109,847

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

Basic

**$            0.51**

 

$          1.60

 

$          1.67

 

$          1.59

 

$          1.68

 

Diluted

**$            0.51**

 

$          1.59

 

$          1.65

 

$          1.56

 

$          1.64

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and

 

 

 

 

 

 

 

 

 

 

common equivalent shares:

 

 

 

 

 

 

 

 

 

 

Basic

**51,572**

 

57,204

 

60,544

 

64,538

 

65,510

 

Diluted

**51,688**

 

57,633

 

61,307

 

65,524

 

67,076

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal years 2004, 2005, 2007, and 2008 each included 52 weeks.  Fiscal 2006 included 53 weeks.  The extra week in fiscal 2006

added $24.5 million to revenue and $0.04 to diluted earnings per share.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other financial data:

 

 

 

 

 

 

 

 

 

 

Total assets

**$ 1,271,937**

 

$ 1,230,256

 

$ 1,171,568

 

$ 1,074,067

 

$    936,435

 

Long-term debt and capital leases, less current

 

 

 

 

 

 

 

 

 

 

maturities

**$    588,142**

 

$    512,559

 

$    375,639

 

$    247,222

 

$    168,087

 

Shareholders’ equity

**$    431,518**

 

$    439,326

 

$    527,158

 

$    563,223

 

$    516,531

 

Cash dividends per share of common stock

**$0.25**

$0.50

$0.045

$0.045

$0.045

 

 

 

 

 

 

 

-18-

 

 

 

 

 

**Item 7. Management's Discussion and Analysis**

**of Financial Condition and Results of Operations**

**Introduction**

Ruby Tuesday, Inc. (“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 fiscal year end, we owned and operated 721 Ruby Tuesday restaurants, located in 28 states and the District of Columbia.  We also own 1% or 50% of the equity of each of 13 domestic franchisees, with the balance of the equity in these franchisees being owned by the various operators of the franchise businesses.  As of year end, these franchisees, which we refer to as “franchise partnerships,” operated 122 restaurants. We have a contractual right to acquire, at predetermined valuation formulas, the remaining equity of any or all of the franchisepartnerships.  Our other franchisees operated 102 restaurants, including 54 in international markets.  In total, our franchisees operate restaurants in 23 states, Puerto Rico, Guam, and 13 foreign countries.

 

Our fiscal year ends on the first Tuesday following May 30 and, as is the case once every five or six years, we have a 53-week year.  Fiscal 2006 was a 53-week year.  Fiscal years 2007 and 2008 each contained 52 weeks.  In fiscal 2006, the 53rd week added $24.5 million to restaurant sales and operating revenue and $0.04 to diluted earnings per share in our Consolidated Statement of Income.  

References to franchise system revenue contained in this section are presented solely for the purposes of enhancing the investor's understanding of the franchise system, including franchise partnerships and traditional domestic and international franchisees.  Franchise system revenue is not included in, and is not, revenue of Ruby Tuesday, Inc.  However, we believe that such information does provide the investor with a basis for a better understanding of our revenue from franchising activities, which includes royalties, and, in certain cases, support service income and equity in losses/ (earnings) of unconsolidated franchises.  Franchise system revenue contained in this section is based upon or derived from information that we obtain from our franchisees in our capacity as franchisor.

 

**Overview and Strategies**

 

Casual dining, the segment of the industry in which we operate, 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.  Three years ago, our analysis of the Bar and Grill sector of Casual Dining indicated that many of the concepts, including Ruby Tuesday, were not clearly differentiated and as the sector matures this lack of differentiation will make it increasingly difficult to attract new guests to all but the largest companies.  Consequently, in response to this analysis, we developed “brand strategies” focusing on Uncompromising Freshness and Quality (high-quality menu items), Gracious Hospitality (guest service), and 5-StarFacilities (the look and atmosphere of our restaurants).  Later we added Compelling Value to our strategic focus in response to the difficult operating and consumer environment.  

 

Our first priority was to improve our food with an emphasis on Uncompromising Freshness and Quality.  Our Gracious Hospitality initiative comprised upgrading our team selection, image, and performance standards.  In the last fiscal year, we reimaged more than 650 Company operated restaurants, creating a fresh, new, updated look for our restaurants and accomplishing our objective of having 5-Star Facilities.  The reimaging program was essentially finished in the fourth quarter of fiscal 2008, completing the strategic repositioning of our brand and putting us in position to deliver on our mission of delivering a memorable, high-quality casual dining experience with Compelling Value.

 

While we were in the process of implementing our brand strategies, consumer spending came under pressure for a variety of reasons and the casual dining segment of the restaurant industry has experienced a difficult operatingenvironment.  All of these factors have contributed to declines in same-restaurant sales and our not meeting our targeted financial results for the last two years even though our measures of guest satisfaction have shown increases.  

 

Our same-restaurant sales for Company-owned restaurants declined 9.8% and our diluted earnings per share declined 67.9% in fiscal 2008.  Throughout this Management’s Discussion and Analysis of Financial Condition and Results of 

-19-

 

 

Operations (“MD&A”), we discuss our fiscal 2008 financial results in detail as well as provide insight for fiscal years 2006 and 2007.  We hope our commentary provides insight as to the factors which impacted our performance.  We remind you, that, in order to best obtain an understanding of our financial performance during the last three fiscal years, this MD&A section should be read in conjunction with the Consolidated Financial Statements and related Notes. 

We remain committed to increasing shareholder value and have set the following financial goals for fiscal 2009 and beyond:

 

 

**•**

**Get more from our existing restaurants.**  Our principal focus is to grow same-restaurant sales (same-restaurants are defined as those that have been open at least 18 months) and average annual sales per restaurant, with long-term targets of 2-3% annual growth and $2.4 million, respectively.  As shown later in this MD&A section, our average annual sales per restaurant for Company-owned restaurants was $1.9 million in fiscal 2008.  Our first priority is to stabilize same-restaurant sales and arrest the current decline.  To achieve this, we will continue to focus on our core brand strategies that appear to be successful in improving customer satisfaction.  We will also introduce the new Ruby Tuesday brand through a combination of media advertising and local marketing initiatives.  Now that each element of the brand compliments theothers, we believe we are in a position to more effectively communicate our changes to our guests.  If our execution of our brand strategies leads to success in maintaining our current customers and the advertising and marketing initiatives draw in new customers, we believe we can grow same-restaurant sales and average annual restaurant volumes.

 

 

**•**

**Lower our costs.**  We constantly strive to reduce our cost of doing business at both the corporate and restaurant levels without having a negative impact on quality or our guests’ experience.  

 

 

**•**

**Generate free cash flow and improve our balance sheet.**  Because of our leverage, we are highly focused on maximizing our cash flow.  If we are successful in stabilizing same-restaurant sales and maintaining or lowering our costs, we should generate substantial cash flow.  Furthermore, our capital requirements are relatively modest as we anticipate only adding approximately four restaurants this year and our maintenance capital spending needs are low because we have remodeled virtually all the Company-owned restaurants within the last year.  We define “free cash flow” to be the net amount remaining when purchases of property and equipment are subtracted from net cash provided by operating activities.  We anticipate total capital spending in fiscal 2009 to be approximately $25 million, down from $117 million in fiscal 2008.  Wealso estimate we will generate $90-100 million of free cash flow in fiscal 2009, a substantial portion of which will be dedicated to the reduction of debt.  Similarly, free cash flow generated in the next few years following fiscal 2009 will also be used to reduce debt.  Our objective is to reduce debt as quickly as possible to the point where the payment of dividends and share repurchases will no longer be restricted by our loan agreements.  We are also evaluating other ways we could reduce bank debt and strengthen our balance sheet.

**Results of Operations**

**Ruby Tuesday Restaurants**

The table below presents the number of Ruby Tuesday concept restaurants at each fiscal year end from fiscal 2004 through fiscal 2008:

 

**Fiscal Year**

 

**Company-Owned**

 

**Domestic Franchise**

**International Franchise**

 

**Total**

** 2008**

**721** 

**170** 

**54**

**945**

 2007

680 

199 

54

933

 2006

629 

204 

47

880

 2005

579

188

38 

805 

 2004

484

216

36 

736 

During fiscal 2008:

 

•

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

 

•

13 Company-owned Ruby Tuesday restaurants were closed; and

 

-20-

 

 

 

•

Aside from the restaurants sold to the Company, 14 (nine domestic and five international) franchise restaurants were opened and seven (two domestic and five international) were closed.

 

During fiscal 2007:

 

•

73 Company-owned Ruby Tuesday restaurants were opened or acquired, including 28 purchased from our Orlando and South Florida franchisees;

 

•

22 Company-owned Ruby Tuesday restaurants were sold or closed, including seven sold or leased to our St. Louis and Western Missouri franchisees; and

 

•

Aside from the restaurants purchased or leased from or sold to the Company, 28 (18 domestic and 10 international) franchise restaurants were opened and five (two domestic and three international) were closed.

 

**Restaurant Sales**

Restaurant sales in fiscal 2008 decreased 3.5% from fiscal 2007 for Company-owned restaurants and 12.7% for domestic and international franchised restaurants as explained below. The tables presented below reflect restaurant sales for the last five years, and other revenue information for the last three years. 

Restaurant Sales (in millions): 

**Fiscal Year**

**Company-Owned (a)**

**Franchise (a, b)**

**2008**

**$ 1,346.7**

**$ 412.0**

 2007

1,395.2

471.6

 2006

1,290.5

458.7

 2005

1,094.5

422.5

 2004

1,023.3

454.0

 

(a)

Information regarding the 36 and 28 restaurants acquired from franchisees in fiscal 2008 and 2007, respectively, and the seven restaurants sold to franchisees in fiscal 2007 is presented in the “Ruby Tuesday Restaurants” section of MD&A shown above.  

 

(b)

Includes sales of all domestic and international franchised Ruby Tuesday restaurants.

**Other Revenue Information:**

 

 

**2008**

 

2007

2006

 

Company restaurant sales (in thousands)

**$1,346,721**

 

$1,395,212

$1,290,509

 

Company restaurant sales growth-percentage

**(3.5)%**

 

8.1%

17.9%

 

 

 

 

 

 

 

Franchise revenue (in thousands) (a)

**$13,583**

 

$15,015

$15,731

 

Franchise revenue growth-percentage

**(9.5)%**

 

(4.6)%

(0.5)%

 

 

 

 

 

 

 

Total revenue (in thousands)

**$1,360,304**

 

$1,410,227

$1,306,240

 

Total revenue growth-percentage

**(3.5)%**

 

8.0%

17.6%

 

 

 

 

 

 

 

Company same-restaurant sales growth percentage

**(9.8)%**

 

(1.4)%

1.4%

 

 

 

 

 

 

 

Company average restaurant volumes

**$1.90 million**

 

$2.10 million

$2.10 million

 

Company average restaurant volumes growth percentage

 

**(9.5)%**

 

 

0.0%

 

2.0%

 

 

(a)

Franchise revenue includes royalty, license and development fees paid to us by our franchisees, exclusive of support service fees of $6.5 million, $11.3 million, and $13.9 million, in fiscal years 2008, 2007, and 2006, respectively, which are recorded as an offset to selling, general and administrative expenses.  

 

-21-

 

 

 

Our decrease in Company restaurant sales in fiscal 2008 is attributable to a 9.8% decrease in same-restaurant sales and lower overall average restaurant volumes, which were partially offset by a net addition of 41 restaurants since the prior year.  The decrease in same-restaurant sales is partially attributable to reductions in customer counts, as there have been pressures on the consumer such as rising fuel prices, at a time concurrent with that of our move toward the higher end of casual dining.  We also believe that other factors contributing to the decline include the loss of some of our customers who do not feel as comfortable in our re-imaged restaurants, the impact of heavy price-focused advertising by some of our traditional competitors, and leveling of sales growth in the casual dining segment of the restaurant industry resulting from the growth of supply outpacing that of demand.                    

Our increase in Company restaurant sales in fiscal 2007 is attributable to the net growth in number of restaurants partially offset by a decrease in same-restaurant sales and the addition of a 53rd week in the prior year.  During the year, we added a net of 51 restaurants.  Same-restaurant sales for Company-owned restaurants decreased 1.4% in fiscal 2007.  The decrease in same-restaurant sales is partially attributable to a leveling of sales growth in the casual dining segment of the restaurant industry as new restaurant growth has outpaced demand, coupled with pressures on the consumer such as rising fuel prices and higher short-term interest rates.       

Franchise development and license fees received are recognized when we have substantially performed all material services and the restaurant has opened for business. Franchise royalties (generally 4% of monthly sales) are recognized as franchise revenue on the accrual basis.  Franchise revenue decreased 9.5% to $13.6 million in fiscal 2008 and 4.6% to $15.0 million in fiscal 2007.  Franchise revenue is predominantly comprised of domestic and international royalties, which totaled $12.9 million and $14.0 million in 2008 and 2007, respectively.  The decreases in fiscal 2008 and 2007 are due in part to the acquisition of certain franchise partnership entities in the respective fiscal years,  temporarily reduced royalty rates for certain franchisees, and the addition of a 53rd week in fiscal 2006.  

Total franchise restaurant sales are shown in the table below. 

 

**2008**

 

2007

2006

 

Franchise restaurant sales (in thousands) (a)

**$411,968**

 

$471,642

$458,712

 

Franchise restaurant sales growth-percentage

**(12.7)%**

 

2.8%

8.6%

 

 

(a)

Includes sales of all domestic and international franchised Ruby Tuesday restaurants.

The 12.7% decrease in fiscal 2008 franchise restaurant sales is due to a decrease in average restaurant volumes as a result of a 7.6% decrease in domestic same-restaurant sales coupled with the acquisition of three franchise partnerships during the current year.

The 2.8% increase in fiscal 2007 franchise restaurant sales is due in part to an increase in average restaurant volumes as a result of an increase in domestic same-restaurant sales, partially offset by the acquisition of two franchisepartnerships during fiscal 2007 and the addition of a 53rd week in fiscal 2006.

 

 

 

 

 

 

 

-22-

 

 

 

 

 

**Operating Profits**

The following table sets forth selected restaurant operating data as a percentage of revenue for the periods indicated.  All information is derived from our Consolidated Financial Statements located in Item 8 of this Annual Report.

 

 

**2008**

 

2007

 

2006

 

Restaurant sales and operating revenue

**99.0**

**%**

98.9

%

98.8

%

Franchise revenue

**1.0**

 

1.1

 

1.2

 

Total revenue

**100.0**

 

100.0

 

100.0

 

Operating costs and expenses:

 

 

 

 

 

 

(As a percentage of restaurant sales and operating

 

 

 

 

 

 

revenue):

 

 

 

 

 

 

Cost of merchandise

**27.5**

 

26.9

 

26.5

 

Payroll and related costs

**33.2**

 

30.9

 

30.9

 

Other restaurant operating costs

**20.5**

 

18.2

 

17.9

 

Depreciation and amortization

**7.0**

 

5.5

 

5.5

 

(As a percentage of total revenue):

 

 

 

 

 

 

Loss from Specialty Restaurant Group, LLC 

 

 

 

 

 

 

bankruptcy

 

 

0.4

 

 

 

Selling, general and administrative, net of support 

 

 

 

 

 

 

service fees

**8.4**

 

8.0

 

7.7

 

Equity in losses / (earnings) of unconsolidated

 

 

 

 

 

 

franchises

**0.3**

 

0.1

 

(0.1

)

Interest expense, net

**2.3**

 

1.4

 

1.0

 

Total operating costs and expenses

**98.3**

 

90.6

 

88.4

 

Income before income taxes

**1.7**

 

9.4

 

11.6

 

(Benefit)/provision for income taxes

**(0.2**

**)**

2.9

 

3.8

 

Net income

**1.9**

**%**

6.5

%

7.7

%

 

**Pre-tax Income**

For fiscal 2008, pre-tax profit was $23.7 million or 1.7% of total revenue, as compared to $132.4 million or 9.4% of total revenue, for fiscal 2007.  The decrease is primarily due to decreases in same-restaurant sales coupled 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, selling, general, and administrative expenses, equity in losses of unconsolidated franchises, and interest expense, net.  

 

For fiscal 2007, pre-tax profit was $132.4 million or 9.4% of total revenue, as compared to $151.0 million or 11.6% of total revenue, for fiscal 2006.  The decrease is primarily due to decreases in same-restaurant sales coupled with increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of merchandise, other restaurant operating costs, selling, general and administrative expenses, and interest expense, net.  Other factors impacting the change in pre-tax income include the impact of the 53rd week in fiscal 2006, the loss from the Specialty Restaurant Group, LLC (“SRG”) bankruptcy, and increased losses from our equity in earnings of unconsolidated franchises as discussed below.  

**Cost of Merchandise**

Cost of merchandise, as a percentage of restaurant sales and operating revenue, increased 0.6% in fiscal 2008 primarily due to increased food and beverage costs as a result of offering higher quality menu items as part of our strategy to offer compelling value to our guests.  Enhancements during the year include increasing the size of steak with the sirloin and jumbo-lump crab cake entrée, adding salmon entrées to our menu, and offering promotions featuring ribs and seafood to our guests.  Additionally, we utilized direct mail and freestanding insert coupons for various promotions throughout the year, with heaviest usage occurring in the second fiscal quarter.  These promotionshad the impact of reducing our average food check and increasing the related food cost as a percentage of restaurant sales and operating revenue.  Wine cost also increased as we transitioned to higher grade premium wines. 

Cost of merchandise, as a percentage of restaurant sales and operating revenue, increased 0.4% in fiscal 2007 primarily due to increased food and beverage costs as a result of product enhancements including items rolled out as

 

-23-

 

 

part of our fresh program, an increase in the french fry portion size, a higher quality garden bar, and transitioning to premium wines and liquors.

**Payroll and Related Costs**

Payroll and related costs, as a percentage of restaurant sales and operating revenue, increased 2.3% in fiscal 2008 primarily due to higher hourly labor relating to the rollout of the quality service specialist program during the current year, minimum wage increases in several states during the current year, and higher management labor due to loss of leveraging with lower sales volumes.

Payroll and related costs, as a percentage of restaurant sales and operating revenue, remained consistent in fiscal 2007 with fiscal 2006 as increased wages were offset by favorable health claims experience.  Wages increased in both the front and back of the house due to the addition of training manager positions in fiscal 2007, increased spending on line cooks and food runners, as well as minimum wage increases in several states.

**Other Restaurant Operating Costs**

Other restaurant operating costs, as a percentage of restaurant sales and operating revenue, increased 2.3% in fiscal 2008 primarily due to higher utility costs, primarily electricity, higher repairs due to increased maintenance contracts and equipment replacement costs, higher credit card expense due to recognition of income in the prior year resulting from a settlement with a credit card vendor, higher rent and lease required expenses due to the acquisition of three franchise partnerships during the year, an increase in asset impairment charges, and loss of leveraging with lower sales volumes.  

Other restaurant operating costs, as a percentage of restaurant sales and operating revenue, increased 0.3% in fiscal 2007 primarily due to higher utility costs, primarily electricity, higher supplies as a result of upgraded plateware, glassware, and To Go containers, and higher building and equipment repairs.  Partially offsetting these increases were decreased bad debt expenses associated with certain franchise notes receivable and decreased losses from the sale or impairment of certain properties.  

**Depreciation and Amortization**

Depreciation and amortization, as a percentage of restaurant sales and operating revenue, increased 1.5% in fiscal 2008 primarily due to accelerated depreciation ($12.9 million) for restaurants re-imaged as part of our re-imaging initiative which had begun in the latter part of fiscal 2007 and loss of leveraging with lower sales volumes.   

Depreciation and amortization, as a percentage of restaurant sales and operating revenue, remained consistent in fiscal 2007 with fiscal 2006 as the increase resulting from accelerated depreciation ($1.3 million) for restaurants remodeled during 2007 was offset by reduced depreciation for older leased restaurants as initial leasehold improvements became fully depreciated.  

**Loss from Specialty Restaurant Group, LLC Bankruptcy**

SRG, the company to whom we sold our American Cafe and Tia’s Tex-Mex restaurants concepts in fiscal 2001, closed 20 restaurants on January 2, 2007 as well as several others earlier in fiscal 2007.  SRG declared Chapter 11 bankruptcy on February 14, 2007, leading RTI to record a pre-tax charge of $5.8 million during fiscal 2007 for leases for which we have primary liability.  See Note 10 to the Consolidated Financial Statements for more information regarding the SRG leases.  

**Selling, General and Administrative Expenses**

Selling, general and administrative expenses, as a percentage of total revenue, increased 0.4% in fiscal 2008.  The increase is attributable to higher share-based compensation expense due to expensing in fiscal 2008 of a restricted share grant awarded to a retirement-eligible executive.  Share-based compensation expense increased $2.8 million in fiscal 2008 to $13.0 million, net of amounts capitalized.  Additionally, advertising expense was higher due to utilizing a direct mail program in conjunction with the completion of re-imaged restaurants.  Support service, marketing and advertising fee income from franchisees, which is recorded as an offset to selling, general and administrative expenses, was lower due to the acquisitions of three franchise partnerships during the current year, temporarily reduced rates forcertain franchise partnerships, and reduced requirements for our national advertising fund.  These increased expenses (and reduced income amounts) were partially offset by lower cable and television expense due to less air time. 

Selling, general and administrative expenses, as a percentage of total revenue, increased 0.3% in fiscal 2007.  The increase is attributable to higher share-based compensation expense as a result of the adoption of the Statement of 

 

-24-

 

 

Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment.”  Share-based compensation expense increased $10.0 million in fiscal 2007 to $10.2 million, net of amounts capitalized.  This increase was partially offset by lower bonus expense.    

**Equity in Losses/(Earnings) of Unconsolidated Franchises**

For fiscal 2008, our equity in the losses of unconsolidated franchisees was $3.5 million as compared to $1.3 million in fiscal 2007.  The change primarily resulted from an increase in losses from investments in certain of the franchise partnerships, due in part to same-restaurant sales declines.  As of June 3, 2008, we held 50% equity investments in each of six franchise partnerships which collectively operate 73 Ruby Tuesday restaurants.  

For fiscal 2007, our equity in the losses of unconsolidated franchisees was a $1.3 million loss as compared to a $0.9 million income in fiscal 2006.  The change was primarily due to the acquisition of the Orlando franchise in the first quarter of fiscal 2007, coupled with increased losses associated with certain 50%-owned franchises due in part to same-restaurant sales declines of certain franchisees, primarily in the fourth fiscal quarter, coupled with higher interest expense due to increased debt associated with new restaurant openings and restaurant acquisitions from RTI and higher hourly labor costs as a result of minimum wage increases. 

**Net Interest Expense**

Net interest expense increased $11.4 million in fiscal 2008 primarily due to higher debt outstanding resulting from the Company acquiring 1.7 million shares of its stock during the year under our share repurchase program and the timing of repurchases in the prior year.  In addition, the increase is attributable to the acquisition of three franchise entities during the current fiscal year, which resulted in more interest expense due to additional assumed debt, and higher rates in the latter part of the year on certain of our restructured debt as discussed in the “Liquidity and Capital Resources” section following.

Net interest expense increased $7.3 million in fiscal 2007 primarily due to higher debt outstanding resulting from the Company acquiring 7.1 million shares of its stock during the year under our share repurchase program.  In addition, the increase is attributable to the acquisition of two franchise entities during fiscal 2007, which resulted in more interest expense due to additional assumed debt.

**(Benefit)/Provision for Income Taxes**

Our effective tax rate for fiscal 2008 was (11.3)% compared to 30.8% in fiscal 2007.  The change in the effective rate was primarily a result of the impact of tax credits, which remained consistent or increased, while taxable income decreased, and the tax impact of settlements of audits and expiration of certain statutes of limitations. 

Our effective tax rate for fiscal 2007 was 30.8%, down from 33.1% in fiscal 2006.  The change in the effective rate was primarily due to higher tax credits partially as a result of increased Work Opportunity Tax Credits.  These credits coupled with lower pre-tax income resulted in our already increased tax credits having a greater impact on the overall tax rate.    

**Liquidity and Capital Resources**

Our cash from operations and excess borrowing capacity previously allowed us to pursue our growth strategies and targeted capital structure. Accordingly, we had established certain priorities for our operating cash flow:

 

 

**•**

Invest with a focus on getting more from existing assets;

 

**•**

Invest wisely and prudently in new restaurants with a focus on achieving average restaurant volumes on new restaurants of $2.5 million or more;

 

**•**

Continue to make investments in our team members in order to provide superior guest and team satisfaction; and

 

**•**

Repurchase our common stock in order to maintain our target capital structure and return excess capital to our shareholders and provide further capital return to our shareholders through our dividend program, started in fiscal 1997.

 

In fiscal 2008, in part reflecting an overall slowdown in consumer spending, our sales and operating cash flow declined and we renegotiated certain of our loan agreements.  As discussed in more detail below, these revised loan agreements place restrictions on the use of our free cash flow, limit our ability to borrow additional funds, and require us

 

-25-

 

 

 

to reduce our outstanding indebtedness with our excess free cash flow.  Accordingly, going forward, our cash from operations will be principally used to reduce debt and to pursue our revised targeted capital structure.

 

**Sources and Uses of Cash**

Our primary source of liquidity is cash provided by operations.  The following table presents a summary of our cash flows from operating, investing and financing activities for the last three fiscal years (in thousands). 

 

**2008**

2007

2006

Net cash provided by operating activities

**$**

**101,889**

 

$

184,662

 

$

191,697

 

Net cash used by investing activities

 

**(104,219**

**)**

 

(114,575

)

 

(169,745

)

Net cash used by financing activities

 

**(7,530**

**)**

 

(66,560

)

 

(19,374

)

 

 

 

 

Net (decrease)/increase in cash and short-term

 

 

 

 

 

 

 

 

 

investments 

**$**

**(9,860**

**)**

$

3,527

 

$

2,578

 

 

**Operating Activities**

Cash provided by operating activities in fiscal 2008 decreased 44.8% to $101.9 million due to lower net income and changes in net operating assets, primarily reductions in accounts payable, accrued and other liabilities, offset by higher depreciation expense.  The reduction in cash associated with changes in accounts payable, accrued and other liabilities is attributable to a decrease in accounts payable during fiscal 2008 compared to an increase in accounts payable in the prior year due in part to an accrual in the prior year for losses from the SRG bankruptcy, and a decrease in insurance reserves in the current year due to settlement of a dram shop liability case.  The increase in depreciation expense is primarily due to accelerated depreciation ($12.9 million) for restaurants re-imaged as part of our re-imaging initiative which had begun in the latter part of fiscal 2007 coupled with additional restaurantsattributable to new restaurant openings and franchise acquisitions.  

 

Cash provided by operating activities was $184.7 million in fiscal 2007 compared to $191.7 million in 2006.  This decrease was driven by a decrease in net income coupled with changes in deferred income taxes.  These changes were partially offset by share-based compensation expense due to the adoption of SFAS 123(R), an increase in depreciation and amortization, and changes in operating assets and liabilities.

Our working capital deficiency and current ratio as of June 3, 2008 were $10.2 million and 0.9:1, respectively.  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) or debt reduction (a long-term liability) and receivable and inventory levels are generally not significant. 

**Investing Activities**

We require capital principally for the maintenance and upkeep of our existing restaurants, limited new restaurant construction, investments in technology, equipment, remodeling of existing restaurants, and on occasion for the acquisition of franchisees or other restaurant concepts.  Property and equipment expenditures purchased primarily with internally generated cash flows for fiscal 2008, 2007, and 2006 were $116.9 million, $125.8 million, and $171.6 million, respectively.  Amounts reflected for fiscal 2008 included $57.0 million for a Company-wide re-image project which is discussed later in this MD&A.  In addition, during fiscal 2008, we spent $2.5 million, plus assumed debt, to acquire, directly and through our subsidiaries, the remaining member or limited partnership interests of three franchise partnerships and certain assets from Wok Hay, LLC.  These acquisitions added 37 restaurants to theCompany.  Further acquisitions, particularly from franchisees in the eastern United States, may occur either during fiscal 2009 or thereafter. 

Capital expenditures for fiscal 2009 are budgeted to be approximately $25.0 million based on our planned improvements for existing restaurants and our expectation that we will open approximately four Company-owned Ruby Tuesday restaurants in fiscal 2009.  We intend to fund capital expenditures for Company-owned restaurants with cash provided by operations.   

**Financing Activities**

During the past three fiscal years, we required capital to repurchase shares of our common stock and to pay dividends to our common shareholders. Cash used for share repurchases totaled $39.5 million, $203.3 million, and $189.4 million for fiscal years 2008, 2007, and 2006, respectively.  Cash used for dividend payments during those same periods totaled $13.1 million, $29.1 million, and $2.7 million, respectively.  As discussed further in the “Known 

-26-

 

 

Events, Uncertainties and Trends” section below, on January 9, 2008, our Board of Directors announced a plan of moving our semi-annual dividend to an annual review for payment.  Consequently, no dividend was paid in the third quarter of fiscal 2008.  As a result of amendments to certain of our debt agreements, on May 21, 2008, as discussed below, we are restricted from paying dividends or repurchasing any shares until we achieve certain leveragethresholds for two consecutive fiscal quarters.   

Historically our primary sources of cash have been operating activities and proceeds from stock option exercises and refranchising transactions.  When these alone have not provided sufficient funds for both our capital and other needs, we have obtained funds through the issuance of indebtedness.  Our current borrowings and credit facilities are summarized below.

On November 19, 2004, we entered into a five-year revolving credit agreement (the “Credit Facility”) under which we could borrow up to $300.0 million for general corporate purposes.  On February 28, 2007, we entered into an amendment and restatement of the Credit Facility such that the aggregate amount we could borrow increased to $500.0 million.  This amount included a $50.0 million subcommitment for the issuance of standby letters of credit and a $50.0 million subcommitment for swingline loans.  Due to concerns that at some point in the future we might not have been in compliance with the ratios required in the original agreement, we entered into an amendment of the Credit Facility on November 30, 2007 to amend the minimum fixed charge coverage and maximum funded debt ratios through the fiscal quarter ending June 2, 2009 and thereafter.  As reported in our Form 10-Q for the fiscal quarter endedMarch 3, 2008, due to concerns that, at some point during the next twelve months, our maximum funded debt ratio might have exceeded, and our minimum fixed charge coverage ratio might have been below, the threshold levels established under the November 30, 2007 amended covenants, we obtained waivers of these possible debt covenants and continued working for more favorable amendments of the debt.  On May 21, 2008, we entered into a second amendment and restatement of the Credit Facility.  

Following the May 21, 2008 amendment to the Credit Facility, our original $500.0 million capacity was reduced by $14.6 million to $485.4 million due to regularly scheduled quarterly amortization and other reductions.  We expect the capacity of the Credit Facility to be further reduced by an estimated $42.2 million in fiscal 2009 due to a series of scheduled quarterly and other required reductions.  

Under the amended and restated 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 to 2.5% for the Base Rate loans and a percentage ranging from 1.0% to 3.5% for the LIBO Rate-based option. We pay commitment fees quarterly ranging from 0.2% to 0.5% on the unused portion of the Credit Facility.****

Under the terms of the Credit Facility, we had borrowings of $414.4 million with an associated floating rate of interest of 5.86% at June 3, 2008.  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, we had $54.4 million available under the Credit Facility as of June 3, 2008.  The Credit Facility will mature on February 23, 2012. 

On April 3, 2003, we issued notes totaling $150.0 million through a private placement of debt (the “Private Placement”).  The Private Placement initially consisted 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 and B Notes mature on April 1, 2010 and April 1, 2013, respectively.  Given similar circumstances as those with the Credit Facility discussed above, we entered into amendments of the notes issued in the Private Placement on both November 30, 2007 and on May 21, 2008. 

Under the original terms of the Private Placement, we were not required to make principal payments on either the Series A or B Notes prior to their respective maturity dates.  Under the terms of the May 21, 2008 amended and restated agreement, we are required to offer scheduled prepayments of principal on the Series A and B Notes prior to their respective maturity dates.  During the fourth quarter of 2008, we offered, and our noteholders accepted, principalprepayments of $2.2 million and $2.6 million on the Series A and B Notes, respectively.  Accordingly, at June 3, 2008, the balances outstanding under the Private Placement consisted of $82.8 million for the Series A Notes and $62.4 million for the Series B Notes.  We estimate that we will offer prepayments totaling $13.0 million during fiscal 2009 and have classified that amount as current.  The $13.0 million includes four quarterly offers of $2.0 million each, two required offers of $1.4 million each, and an additional amount to be determined based upon excess cash flows as 

 

-27-

 

 

defined in the amendment and restatement to the Private Placement.  Following the amendment and restatement of the notes issued under the Private Placement, the interest rates associated with the Series A and B Notes increased to 8.19% and 8.92%, respectively.  

The May 21, 2008 amendment to the Credit Facility and the amendment and restatement of the notes issued in the Private Placement eased financial covenants regarding minimum fixed charge coverage ratio and maximum funded debt ratio.  We are currently in compliance with our debt covenants.  In exchange for the new covenant requirements, in addition to higher interest rate spreads and mandatory prepayments of principal as previously discussed, the amendments also imposed restrictions on future capital expenditures and require us to achieve certain leverage thresholds for two consecutive fiscal quarters before we may pay dividends or repurchase any of our stock.        

During fiscal 2009, we expect to fund operations, capital expansion, and any purchase of franchise partnership equity, from operating cash flows, our Credit Facility, and operating leases.  Repurchases of common stock and/or payment of dividends, if allowed, would be similarly funded.   

**Share Repurchases**

From time to time our Board of Directors has authorized the repurchase of shares of our common stock as a means to return excess capital to our shareholders.  The timing, price, quantity and manner of the purchases can be made at the discretion of management, depending upon market conditions and the restrictions contained in our loan agreements.  During fiscal 2008 we repurchased 1.7 million shares at an average price of $23.74 per share.  In July 2007, the Board of Directors authorized the repurchase of 6.5 million shares.  Although 7.9 million shares remained available for purchase under existing programs at June 3, 2008, our loan agreements, as amended in fiscal 2008, prohibit the repurchase of our common stock until we achieve certain leverage thresholds for two consecutive fiscal quarters.  Were we to achieve these leverage thresholds, the repurchase of shares in any particular future period and theactual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.      

**Significant Contractual Obligations and Commercial Commitments**

Long-term financial obligations were as follows as of June 3, 2008 (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) 

$     45,812

 

$      4,331

 

$       9,195

 

$     10,265

 

$     22,021

 

Revolving credit facility (a)

414,400

 

 

 

75,610

 

338,790

 

 

 

Unsecured senior notes

(Series A and B) (a)

 

145,231

 

12,970

 

 

96,865

 

 

35,396

 

 

 

Interest (b)

56,168

 

14,569

 

22,556

 

10,578

 

8,465

 

Operating leases (c)

449,635

 

46,142

 

79,521

 

69,962

 

254,010

 

Purchase obligations (d)

174,877

 

77,078

 

59,105

 

26,602

 

12,092

 

Pension obligations (e)

31,507

 

3,906

 

12,427

 

7,807

 

7,367

 

Total (f)

$1,317,630

 

$  158,996

 

$   355,279

 

$   499,400

 

$   303,955

 

 

(a)

See Note 6 to the Consolidated Financial Statements for more information.

(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 $414.4 million and $3.5 million, respectively, as of June 3, 2008 have been excluded from the amounts shown above, primarily because the balance outstanding under our revolving credit facility, described further in Note 6 of the Consolidated Financial Statements, fluctuates daily.  Additionally, the amounts shown above include interest payments on the Series A and B Notes at the current interest rates of 8.19% and 8.92%, respectively.  These rates could be different in the future based upon certain leverage ratios.      

(c)

This amount includes operating leases totaling $19.7 million for which sublease income from franchisees or others is expected.  Certain of these leases obligate us to pay maintenance costs, utilities, real estate taxes, and insurance, which are excluded from the amounts shown above.  See Note 5 to the Consolidated Financial Statements for more information.

 

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(d)

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

(e)

See Note 8 to the Consolidated Financial Statements for more information.

(f)

This amount excludes $4.4 million of unrecognized tax benefits under Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”) due to the uncertainty regarding the timing of future cash outflows associated with such obligations.

 

Commercial commitments were as follows as of June 3, 2008 (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)

$    16,665

 

$    16,365

 

$        300

 

$            

 

$            

 

Franchise loan guarantees (a)

47,437

 

46,661

 

98

 

678

 

 

 

Divestiture guarantees

6,821

 

176

 

379

 

393

 

5,873

 

Total

$    70,923

 

$    63,202

 

$        777 

 

$   1,071

 

$   5,873

 

(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 guarantees totaling $47.4 million also shown in the table exclude the guarantee of $4.2 million for construction to date on the restaurants being financed under the facility.

See Note 10 to the Consolidated Financial Statements for more information. 

**Off-Balance Sheet Arrangements**

*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 and cash flows from operations (the “Franchise Facility”). As sponsor of the Franchise Facility, we serve as partial guarantor, and in certain circumstances full 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.  The Franchise Facility expires on October 5, 2011.

The Franchise Facility contains 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 May 21, 2008, concurrent with amendments of the Credit Facility and the notes issued in the Private Placement, we entered into an amendment of the Franchise Facility.  Among other changes, this amendment changed both the minimum fixed charge coverage and maximum funded debt ratios.

The amount guaranteed under this program totaled $46.6 million as of June 3, 2008.  As consideration for providing this guaranty, we received $1.3 million in fiscal 2008 and $1.2 million in fiscal 2007.

 

Prior to July 1, 2004, we 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”).  On July 1, 2004, we terminated the Cancelled Facility and notified this third party lender that we would no longer enter into additional guarantee arrangements.  We will honor the partial guarantees of the remaining two loans to franchise partnerships that were in existence as of the termination of the Credit Facility.  Should payments be required under the Cancelled Facility, we have certain rights to acquire the operating restaurants after the third party debt is paid.  This program had remaining outstanding guarantees of $0.8 million at June 3, 2008.

Also in July 2004, we entered into a new program, similar to the Cancelled Facility, with a different third party lender (the “Franchise Development Facility”).  The Franchise Development Facility expired on July 1, 2007, although theguarantees outstanding at that time survived the expiration of the arrangement.  We had a guarantee of $4.1 million outstanding under this program as of June 3, 2008. 

 

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*Divestiture Guarantees*

On November 20, 2000, we completed the sale of all 69 of our 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.  We remain 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.  This declaration left us and/or SRG either primarily or indirectly liable for certain of the older Tia’s leases.  As of June 3, 2008, RTI has settled almost all of the Tia’s leases.  Future payments to the remaining landlords are expected to be insignificant.    

 

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, we 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 $0.3 million was recorded during fiscal 2008.  

 

As of June 3, 2008, RTI remains primarily liable for five SRG leases which cover closed restaurants.  Scheduled cash payments for rent remaining on these five leases at June 3, 2008 totaled $2.1 million.  Because many of these restaurants were located in malls, we 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 $0.5 million for previously scheduled rent and related payments on these leases had not been paid as of June 3, 2008.  As of June, 3, 2008, RTI has recorded an estimated liability of $2.1 million based on the five SRG unsettled claims to date.  

 

Three leases, which, at June 5, 2007, comprised $1.2 million of the lease liability reserve, were settled in fiscal 2008 at a total cost of $1.2 million.  A fourth lease was resolved during fiscal 2008 due to lease expiration.  An additional $1.0 million was paid on currently unresolved leases during fiscal 2008.  

See Note 10 to the Consolidated Financial Statements for more information.  

As further discussed in Note 10 to the Consolidated Financial Statements and noted below, during fiscal 1996, our shareholders approved the distribution (the “Distribution”) of our family dining restaurant business, then called Morrison Fresh Cooking, Inc. (“MFC”), and our health care food and nutrition services business, then called Morrison Health Care, Inc. (“MHC”). Subsequently, Piccadilly Cafeterias, Inc. (“Piccadilly”) acquired MFC and Compass Group, PLC (“Compass”) acquired MHC. Prior to the Distribution, we entered into various guarantee agreements with both MFC and MHC, most of which have expired.  As agreed upon at the time of the Distribution, we have been 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 benefits earned by those participants as of March 1996, and (b) funding obligations under the Morrison Retirement Plan (the “Retirement Plan”) maintained collectively by us, MFC, and MHC following the Distribution (the qualified plan) until 2004, and (2) payments due on certain workers’ compensation claims.  

 

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 we and MHC were, at the time, the remaining sponsors of the Retirement Plan, both RTI and MHC were jointly and severally required to make contributions to the Retirement Plan, or any successor plan, in such amounts as were necessary to satisfy all benefit obligations under the Retirement Plan. 

 

Assets and obligations attributable to MHC participants, as well as the 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, we remained the sole sponsor of the Retirement Plan.

 

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As of June 3, 2008, we have received partial settlements of the Piccadilly bankruptcy totaling $2.0 million to date.****We hope to recover further amounts upon final settlement of the bankruptcy, although further payments, if any, are expected to be insignificant.  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 June 3, 2008 to be $3.3 million for employee benefit plans.  In addition, we remain contingently liable for MHC’s portion (estimated to be $2.5 million) of the MFC employee benefit plan liability 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. 

 

*Employment Agreement*

We have an employment agreement with Samuel E. Beall, III, whereby he has agreed to serve as Chief Executive Officer of the Company until July 18, 2010.  In accordance with the agreement, Mr. Beall is compensated at a base salary (adjusted annually based on various Company or market factors) and is entitled to an annual bonus opportunity and a long-term incentive compensation program, which currently includes stock option and restricted stock grants and life insurance coverage.  The employment agreement also provides for certain severance payments to be made in the event of an involuntary termination without cause and certain types of voluntary resignation, the circumstances of which are defined in the agreement.  As of June 3, 2008, the total of the potential liability for severance payments with regard to the employment agreement was approximately $9.1 million.

 

**Critical Accounting Policies**

Our MD&A is based upon our 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. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. 

**Share-based Employee Compensation**

Beginning in the first quarter of fiscal 2007, we account for share-based compensation in accordance with 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 Notes 1 and 9 to the Consolidated Financial Statements for further discussion of share-based employee compensation. 

 

**Impairment of Long-Lived Assets**

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 lossis 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. 

 

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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 June 3, 2008, we had 46 restaurants that had been open more than one year with rolling 12-month negative cash flows.  Of these 46 restaurants, nine are recorded at salvage value.  We reviewed the plans to improve cash flows at each of the other 37 restaurants and concluded that impairments existed at certain of them.  Impairment charges of $3.0 million were recorded during fiscal 2008 for restaurants open as of June 3, 2008.  Should sales at these restaurants not improve within a reasonable period of time, further impairment charges are possible.  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.  In addition to the above, impairments totaling $1.3 million were recorded during fiscal 2008 onnon-operating assets, including those classified as held for sale in our June 3, 2008 Consolidated Balance Sheet. 

Our goodwill, which totaled $18.9 million at June 3, 2008, is not amortized.  We perform tests for impairment annually, or more frequently if events or circumstances indicate it might be impaired.  Impairment tests for goodwill include comparing the fair value of the respective reporting unit with its carrying value, including goodwill.  We use a variety of methodologies in conducting these impairment assessments, including cash flow analyses that are consistent with the assumptions we believe hypothetical marketplace participants would use, estimates of sales proceeds and other measures, such as fair market price of our common stock, as evidenced by closing trading price.  Where applicable, we use an appropriate discount rate that is commensurate with the risk inherent in the projected cash flows.  If market conditions at either the restaurant store level or system-wide deteriorate, or if operating resultsdecline unexpectedly, we may be required to record additional impairment charges.

 

**Franchise Accounting**

 

***Equity Method Accounting***

As of June 3, 2008, we were the franchisor of 122 franchise partnership Ruby Tuesday restaurants and 102 traditional domestic and international franchised restaurants.  Based on an analysis prepared using financial information obtained, when necessary, from the franchise entities, we concluded that, for all periods presented, we were not required to consolidate any of the franchise entities under the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46R”).  This conclusion was based on our determination that the franchise entities met the criteria to be considered “businesses,” and therefore were not subject to consolidation due to the “business scope exception” of FIN 46R.  

 

We apply the equity method of accounting to our six 50%-owned franchise partnerships. Accordingly, we recognize our pro rata share of the earnings or losses of the franchise partnerships in the Consolidated Statements of Income when reported by those franchisees.  The cost method of accounting is applied to all 1%-owned franchise partnerships.

 

***Revenue Recognition***

We charge our franchise partnerships various monthly fees that are calculated as a percentage of the respective franchise’s monthly sales.  Our franchise agreements allow us to charge up to a 4.0% royalty fee, a 2.5% support service fee, a 1.5% marketing and purchasing fee, and a 3.0% advertising fee.  We defer recognition of franchise fee revenue for any franchise partnership with negative cash flows at times when the negative cash flows are deemed to be anything other than temporary and the franchise has either borrowed directly from us or through a facility for which we provide a guarantee.  Unearned income for franchise fees was $3.4 million and $2.2 million as of June 3, 2008 and June 5, 2007, respectively, which are included in other deferred liabilities and/or accrued liabilities – rent and other in the Consolidated Balance Sheets.    

 

***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); 

 

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**•**

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 to 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 June 3, 2008 the allowance for doubtful notes was $3.0 million, substantially all of which is allocated to the $6.8 million of debt due from seven 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 10 to the Consolidated Financial Statements for more information), the third party debt referred to above is not guaranteed by RTI.  We believe 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**

We lease a significant number of our 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 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 

 

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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 June 3, 2008, 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 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. 

**Recently Issued Accounting Standards 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 2009 for RTI).  In February 2008, the FASB issued FSP 157-2, “Effective Date of FASB Statement No. 157” which permits a one-year deferral for the implementation of the provisions of SFAS 157 with regard to non-financial assets and liabilities that are not carried at fair value on a recurring basis in financialstatements.  We intend to defer adoption of SFAS 157 for such items.  We are currently evaluating the impact of SFAS 157 on our 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 that ends after December 31, 2008 (fiscal 2009 for RTI).  Our plans currently have measurement dates that do not coincide with our fiscal year end.  Accordingly, we will be required to change their measurement dates in fiscal2009.  The impact of the transition, including the net periodic benefit cost computed for the period between our previous measurement dates and our fiscal year end, as well as changes in the fair value of plan assets and benefit obligations, will be recorded directly to Shareholders’ Equity on June 4, 2008.  We expect the adoption of this requirement to result in a one-time charge to retained earnings of approximately $0.4 million.    

 

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 do not expect to elect to begin reporting any financial assets or liabilities at fair value upon adoption of SFAS 159.

 

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 

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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 June 3, 2008 we have recorded a $2.8 million asset within our Consolidated Balance Sheet for our collateral assignment in eight split-dollar life insurance arrangements.  We expect the adoption of this Issue toresult in a one-time charge to retained earnings of approximately $1.0 million.    

 

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 the accounting for anyfuture 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 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 has periodically allowed us to repurchase RTI common stock. During the year ended June 3, 2008, 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 June 3, 2008, is approximately 7.9 million.  This amount reflects repurchase authorizations of 5.0 million and 6.5 million shares approved by our Board of Directors on January 9, 2007 and July 11, 2007, respectively.  To the extent not funded with cash from operating activities and proceeds from stock option exercises, additional repurchases, if any, maybe funded by borrowings.  However, as previously discussed, under the terms of the amendment to the Credit Facility and the amendment and restatement of the Private Placement, we may not engage in the repurchase of our stock until we achieve certain leverage thresholds for two consecutive fiscal quarters.  Were we to achieve these leverage thresholds, the repurchase of shares 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 shares will be repurchased in the future.    

 

**Re-image 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 have changed our look and feel, in order to differentiate ourselves with a more contemporary and fresher look.  As of June 3, 2008, we have completed the re-imaging of 655 Company-owned restaurants.  We completed the re-imaging of 12 additional restaurants prior to the date of this filing.  We do not plan to re-image the remaining 54 Company-owned restaurants.  Capital expenditures to date, excluding the costs to accelerate depreciation or write-off existing assets, totaled $61.7 million, of which $57.0 million was spent in fiscal 2008.  

 

**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, and thus no dividend was paid during fiscal 2008’s third quarter.  As noted above, following the amendment to the Credit Facility and the amendment and restatement of the Private 

 

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Placement we may not pay a dividend until we achieve certain leverage thresholds for two consecutive fiscal quarters.  Were we to achieve these leverage thresholds, the****payment of a dividend in any particular future period and the actual amount thereof remain, however, at the discretion of the Boardof Directors and no assurance can be given that dividends will be paid in the future.  

**Franchising and Development Agreements**

Our agreements with franchise partnerships allow us to purchase an additional 49% equity interest for a specified price. We have chosen to exercise that option in situations in which we expect to earn a return similar to or better than that which we expect when we invest in new restaurants.  During fiscal 2008 and 2007, we did not exercise our right to acquire an additional 49% equity interest in any franchise partnerships.  We currently have a 1% ownership in seven of our 13 franchise partnerships which collectively operated 49 Ruby Tuesday restaurants at June 3, 2008. 

Our franchise agreements with the franchise partnerships allow us to purchase all remaining equity interests beyond the 1% or 50% we already own, for an amount to be calculated based upon a predetermined valuation formula.  During fiscal 2008, we acquired the remaining 50% partnership interests of RT West Palm Beach Franchise, LP, RT Michigan Franchise, LLC, and RT Detroit Franchise, LLC, bringing our equity interest in these franchises to 100%.  At the time of the acquisitions, the franchisees operated 11, 14, and 11 Ruby Tuesday restaurants, respectively. 

To the extent allowable under our debt facilities, we may choose to sell existing restaurants or exercise our rights to acquire an additional equity interest in franchise partnerships in fiscal 2009 and beyond. 

**Fiscal Year**

RTI’s fiscal 2009 will contain 52 weeks and end on June 2, 2009.  Fiscal year 2008 and 2007 contained 52 weeks, while fiscal year 2006 contained 53 weeks.

**Impact of Inflation**

The impact of inflation on the cost of food, labor, supplies, utilities, real estate and construction costs could adversely impact our operating results.  Historically, we have been able to recover certain inflationary cost increases through increased menu prices coupled with more efficient purchasing practices and productivity improvements. Competitive pressures may limit our ability to completely recover such cost increases. Historically, the effect of inflation has not significantly impacted our net income. 

**** 

**Item 7A. Quantitative and Qualitative**

**Disclosure 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 for the LIBO Rate-based option is a percentage ranging from 1.0% to 3.5%.  As of June 3, 2008, the total amount of outstanding debt subject to interest rate fluctuations was $417.9 million.  A hypothetical 100 basis point change in short-term interest rates would result in an increase or decrease in interest expense of $4.2 million per year, assuming a consistent capital structure. 

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. 

-36-

 

 

**** 

 

**Item 8. Financial Statements and Supplementary Data**

      Ruby Tuesday, Inc. and Subsidiaries

**      Index to Consolidated Financial Statements**

 

 

Consolidated Statements of Income for the Fiscal Years Ended

 

June 3, 2008, June 5, 2007, and June 6, 2006

38

 

 

Consolidated Balance Sheets as of June 3, 2008 and June 5, 2007

39

 

 

Consolidated Statements of Shareholders' Equity and Comprehensive Income

 

for the Fiscal Years Ended June 3, 2008, June 5, 2007, and June 6, 2006

40

 

 

Consolidated Statements of Cash Flows for the Fiscal Years Ended

 

June 3, 2008, June 5, 2007, and June 6, 2006

41

 

 

Notes to Consolidated Financial Statements

42-67

 

 

Reports of Independent Registered Public Accounting Firm

68-69

 

 

 

 

 

 

 

 

 

 

-37-

 

 

 

 

Ruby Tuesday, Inc. and Subsidiaries

 

**Consolidated Financial Statements**

 

**Consolidated Statements of Income**

 

(In thousands, except per-share data)

 

 

 

 

For the Fiscal Year Ended

 

**June 3,**

June 5,

June 6,

 

**2008**

2007

2006

 

 

 

 

Revenue:

 

 

 

Restaurant sales and operating revenue

**$**  **1,346,721**

 

$  1,395,212

 

$  1,290,509

 

Franchise revenue

**13,583**

 

15,015

 

15,731

 

 

**1,360,304**

 

1,410,227

 

1,306,240

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

Cost of merchandise

**370,693**

 

375,836

 

342,604

 

Payroll and related costs

**446,910**

 

431,456

 

398,636

 

Other restaurant operating costs

**275,579**

 

253,462

 

230,887

 

Depreciation and amortization

**93,845**

 

77,351

 

71,056

 

Loss from Specialty Restaurant Group, LLC bankruptcy

**288**

 

5,812

 

 

 

Selling, general and administrative, net of support service

 

 

 

 

 

 

fee income totaling $6,511 in 2008, $11,326 in 2007

 

 

 

 

 

 

and $13,918 in 2006

**114,403**

 

112,619

 

100,340

 

Equity in losses / (earnings) of unconsolidated franchises

**3,535**

 

1,328

 

(948

)

Interest expense, net of interest income totaling

 

 

 

 

 

 

$1,411 in 2008, $2,492 in 2007 and $3,102 in 2006

**31,352**

 

19,965

 

12,707

 

 

**1,336,605**

 

1,277,829

 

1,155,282

 

 

 

 

 

 

 

 

Income before income taxes

**23,699**

 

132,398

 

150,958

 

(Benefit)/provision for income taxes

**(2,678**

**)**

40,730

 

49,981

 

 

 

 

 

 

 

 

Net income

**$**      **26,377**

 

$       91,668

 

$      100,977

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic

**$**          **0.51**

 

$           1.60

 

$            1.67

 

Diluted

**$**          **0.51**

 

$           1.59

 

$            1.65

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

Basic

**51,572**

 

57,204

 

60,512

 

Diluted

**51,688**

 

57,633

 

61,307

 

 

 

 

 

 

 

 

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

 

 

 

-38-

 

 

 

Ruby Tuesday, Inc. and Subsidiaries****

**Consolidated Balance Sheets**

(In thousands, except per-share data)****

 

**June 3,**

**2008**

 

June 5,

2007

 

Assets:

 

 

 

 

Current assets:

 

 

 

 

Cash and short-term investments

**$**      **16,032**

 

$       25,892

 

Accounts and notes receivable, net

**10,515**

 

14,773

 

Inventories:

 

 

 

 

Merchandise

**12,511**

 

11,825

 

China, silver and supplies

**8,812**

 

8,207

 

Income tax receivable

**7,708**

 

 

 

Deferred income taxes

**4,525**

 

5,239

 

Prepaid rent and other expenses

**20,538**

 

15,551

 

Assets held for sale

**24,268**

 

20,368

 

Total current assets

**104,909**

 

101,855

 

 

 

 

 

 

Property and equipment, net

**1,088,356**

 

1,033,336

 

Goodwill

**18,927**

 

16,935

 

Notes receivable, net

**1,884**

 

9,212

 

Other assets

**57,861**

 

68,918

 

Total assets

**$  1,271,937**

 

$  1,230,256

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

**$**      **26,681**

 

$        39,435

 

Accrued liabilities:

 

 

 

 

Taxes, other than income taxes

**20,532**

 

19,986

 

Payroll and related costs

**15,579**

 

9,749

 

Insurance

**6,596**

 

13,525

 

Deferred revenue – gift cards

**9,197**

 

8,578

 

Rent and other

**19,267**

 

25,985

 

Current maturities of long-term debt, including capital leases

**17,301**

 

1,779

 

Income tax payable

 

 

5,730

 

Total current liabilities

**115,153**

 

124,767

 

 

 

 

 

 

Long-term debt and capital leases, less current maturities

**588,142**

 

512,559

 

Deferred income taxes

**27,422**

 

37,507

 

Deferred escalating minimum rent

**42,450**

 

39,824

 

Other deferred liabilities

**67,252**

 

76,273

 

Total liabilities

**840,419**

 

790,930

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

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

 

 

 

 

issued:  2008 – 52,772 shares, 2007 – 53,240 shares)

**528**

 

532

 

Capital in excess of par value

**15,081**

 

2,246

 

Retained earnings

**425,606**

 

446,584

 

Deferred compensation liability payable in Company stock

**2,877**

 

3,861

 

Company stock held by Deferred Compensation Plan

**(2,877**

**)**

(3,861

)

Accumulated other comprehensive loss

**(9,697**

**)**

(10,036

)

 

**431,518**

 

439,326

 

Total liabilities and shareholders' equity

**$  1,271,937**

 

$  1,230,256

 

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

 

-39-

 

 

 

Ruby Tuesday, Inc. and Subsidiaries

**Consolidated Statements of Shareholders’ Equity**

**and Comprehensive Income**

(In thousands, except per-share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

Company Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held by the 

 

Accumulated

 

 

 

 

Common Stock

 

Capital In

 

 

 

Deferred 

 

 

 

Deferred

 

Other

 

Total

 

 

Issued

 

Excess of 

 

Retained

 

Compensation

 

Unearned

 

Compensation 

 

Comprehensive

 

Shareholders’

 

Shares

 

Amount

Par Value

Earnings

Liability

Compensation 

Plan

Loss

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, May 31, 2005

63,687

 

$637

 

$1,509

 

$569,815

 

$5,103

 

$-

 

$(5,103

)

$(8,738

)

$563,223

 

Net income

 

 

 

 

 

 

100,977

 

 

 

 

 

 

 

 

 

100,977

 

Minimum pension

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

liability adjustment,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of taxes of $988

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,501

 

1,501

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,478

 

Issuance of restricted stock

50

 

 

 

1,057

 

 

 

 

 

(1,057

)

 

 

 

 

0

 

Amortization of  restricted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stock

 

 

 

 

 

 

 

 

 

 

186

 

 

 

 

 

186

 

Shares issued under stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonus and stock option plans

2,293

 

23

 

53,374

 

 

 

 

 

 

 

 

 

 

 

53,397

 

Cash dividends of 4.5¢

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

per common share

 

 

 

 

 

 

(2,742

)

 

 

 

 

 

 

 

 

(2,742

)

Stock repurchases

(7,839

)

(78

)

(48,928

)

(140,378

)

 

 

 

 

 

 

 

 

(189,384

)

Changes in Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation Plan

 

 

 

 

 

 

 

 

(675

)

 

 

675

 

 

 

0

 

Balance, June 6, 2006

58,191

 

582

 

7,012

 

527,672

 

4,428

 

(871

)

(4,428

)

(7,237

)

527,158

 

Net income

 

 

 

 

 

 

91,668

 

 

 

 

 

 

 

 

 

91,668

 

Minimum pension

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

liability adjustment,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of taxes of $31

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47

 

47

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

91,715

 

Adjustment to initially apply   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SFAS 158, net of taxes of 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,846

)

(2,846

)

Issuance of restricted stock

267

 

2

 

(2

)

 

 

 

 

 

 

 

 

 

 

0

 

Reclassification for adoption of 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SFAS 123(R)

 

 

 

 

(871

)

 

 

 

 

871

 

 

 

 

 

0

 

Stock-based compensation

 

 

 

 

10,231

 

 

 

 

 

 

 

 

 

 

 

10,231

 

Shares issued under stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

bonus and stock option plans

1,871

 

19

 

45,472

 

 

 

 

 

 

 

 

 

 

 

45,491

 

Cash dividends of $0.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

per common share

 

 

 

 

 

 

(29,147

)

 

 

 

 

 

 

 

 

(29,147

)

Stock repurchases

(7,089

)

(71

)

(59,596

)

(143,609

)

 

 

 

 

 

 

 

 

(203,276

)

Changes in Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation Plan

 

 

 

 

 

 

 

 

(567

)

 

 

567

 

 

 

0

 

Balance, June 5, 2007

53,240

 

532

 

2,246

 

446,584

 

3,861

 

-

 

(3,861

)

(10,036

)

439,326

 

**Net income**

 

 

 

 

 

 

**26,377**

 

 

 

 

 

 

 

 

 

**26,377**

 

**Pension and post-retirement**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**benefit plans, net of taxes**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**of $223**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**339**

 

**339**

 

**Comprehensive income**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**26,716**

 

**Adjustment to initially apply**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**FIN 48**

 

 

 

 

 

 

**(34**

**)**

 

 

 

 

 

 

 

 

**(34**

**)**

**Issuance of restricted stock**

**1,073**

 

**11**

 

**(11**

**)**

 

 

 

 

 

 

 

 

 

 

**0**

 

**Stock-based compensation**

 

 

 

 

**13,385**

 

 

 

 

 

 

 

 

 

 

 

**13,385**

 

**Shares issued under stock**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**bonus and stock option plans**

**124**

 

**1**

 

**4,741**

 

 

 

 

 

 

 

 

 

 

 

**4,742**

 

**Cash dividends of $0.25**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**per common share**

 

 

 

 

 

 

**(13,126**

**)**

 

 

 

 

 

 

 

 

**(13,126**

**)**

**Stock repurchases**

**(1,665**

**)**

**(16**

**)**

**(5,280**

**)**

**(34,195**

**)**

 

 

 

 

 

 

 

 

**(39,491**

**)**

**Changes in Deferred**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Compensation Plan**

 

 

 

 

 

 

 

 

**(984**

**)**

 

 

**984**

 

 

 

**0**

 

**Balance, June 3, 2008**

**52,772**

 

**$528**

 

**$15,081**

 

**$425,606**

 

**$2,877**

 

**$-**

 

**$(2,877**

**)**

**$(9,697**

**)**

**$431,518**

 

 

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

 

 

 

-40-

 

 

Ruby Tuesday, Inc. and Subsidiaries

**Consolidated Statements of Cash Flows**(In thousands)

 

For the Fiscal Year Ended

 

**June 3, 2008**

****

 

June 5, 2007

 

June 6, 2006 

 

Operating activities:

 

 

 

 

 

 

Net income

**$     26,377 **

 

$   91,668 

 

$    100,977 

 

Adjustments to reconcile net income to net

 

 

 

 

 

 

cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

**93,845 **

 

77,351 

 

71,056 

 

Amortization of intangibles

**716 **

 

437 

 

385 

 

Provision for bad debts

**837 **

****

(197)

 

2,046 

 

Deferred income taxes

**(5,679)**

****

(13,274)

(1,939)

 

Loss on impairments, including disposition of assets

**4,172 **

 

478 

 

3,141 

Equity in losses/(earnings) of unconsolidated franchises

**3,535 **

 

1,328 

(948)

 

Share-based compensation expense

**12,989 **

 

10,177 

 

 

 

Distributions received from unconsolidated franchises

**68 **

 

914 

 

1,127 

 

Income tax benefit from exercise of stock options

 

 

 

 

8,137 

 

Excess tax benefits from share-based compensation

**(384)**

****

(5,540)

 

 

 

Amortization of unearned compensation

 

 

 

 

186 

 

Other

**653 **

 

475 

 

675 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables

**5,268 **

 

10,500 

(1,172)

 

Inventories

**(247)**

****

(1,797)

(440)

Income tax receivable

**(13,054)**

 

11,516 

(543)

 

Prepaid and other assets

**(3,390)**

****

(4,071)

 

(585)

Accounts payable, accrued and other liabilities

**(23,817)**

 

4,697 

 

9,594 

 

Net cash provided by operating activities

**101,889 **

 

184,662 

 

191,697 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

Purchases of property and equipment

**(116,918)**

****

(125,827)

(171,640)

Acquisition of franchise entities

**(2,464)**

****

(4,669)

 

 

Proceeds from disposal of assets

**8,395 **

 

17,289 

 

4,387 

 

Insurance proceeds from property claims

**511 **

 

2,852 

 

1,089 

 

Reductions in/(additions to) Deferred Compensation Plan assets

**8,220 **

 

(2,353)

 

(1,746)

 

Other, net

**(1,963)**

****

(1,867)

(1,835)

Net cash used by investing activities

**(104,219)**

****

(114,575)

(169,745)

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

Proceeds from long-term debt

**68,412 **

 

156,400 

 

140,700 

 

Principal payments on long-term debt

**(21,220)**

****

(35,316)

(13,148)

Proceeds from issuance of stock, including treasury stock

**2,225 **

 

39,951 

 

45,200 

 

Excess tax benefits from share-based compensation

** 384 **

 

5,540 

 

 

 

Stock repurchases

**(39,491)**

****

(203,276)

(189,384)

Dividends paid

**(13,126)**

****

(29,147)

(2,742)

Payments for debt issuance costs

****

****