**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 2, 2009**

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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. x

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 o   

Accelerated filer x

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 2, 2008 was $69,226,916 based on the closing stock price of $1.31 on December 2, 2008. 

The number of shares of the registrant's common stock outstanding as of July 30, 2009, the latest practicable date prior to the filing of this Annual Report, was 65,032,667.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of the Registrant’s definitive Proxy Statement for the Registrant’s 2009 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

9-15

Item 1B.

Unresolved Staff Comments

15

Item 2.

Properties

16-17

Item 3.

Legal Proceedings

17

Item 4.

Submission of Matters to a Vote of Security Holders

18

 

 

 

**PART II**

 

 

 

 

 

Item 5.

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

 

18

Item 6.

Selected Financial Data

19

Item 7.

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

20-37

Item 7A.

Quantitative and Qualitative Disclosure About Market Risk

37

Item 8.

Financial Statements and Supplementary Data

38-72

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

73

Item 9A.

Controls and Procedures

73

Item 9B.

Other Information

73-74

 

 

 

**PART III**

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

74

Item 11.

Executive Compensation

74

Item 12.

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

74

Item 13.

Certain Relationships and Related Transactions, and Director Independence

75

Item 14.

Principal Accounting Fees and Services

75

 

 

 

**PART IV**

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedule

75

Signatures

 

76

 

 

 

 

 

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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 repayments of debt, availability of debt financing on terms attractive to the Company, payment of dividends, stock repurchases, and restaurant and franchise acquisitions and refranchises.  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 (such statements include, but are not limited to, statements relating to cost savings that we estimate may result from any programs we implement, our estimates of future capital spendingand free cash flow, our targets for annual growth in same-restaurant sales and average annual sales per restaurant, and our strategy to obtain the equivalent of an investment-grade bond rating), including, without limitation, the following: 

 

 

**•**

general economic conditions;

 

 

**•**

changes in promotional, couponing and advertising strategies; 

 

 

**•**

guests’ acceptance of changes in menu items; 

 

 

**•**

guests’ acceptance of our development prototypes and remodeled restaurants; 

 

 

**•**

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; 

 

 

**•**

laws and regulations affecting labor and employee benefit costs, including further potential increases in state and federally mandated minimum wages; 

 

 

**•**

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; and

 

 

**•**

significant fluctuations in energy prices. 

 

 

 

-3-

 

 

**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 wholly-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 2, 2009, we had 49 franchisees, comprised of 13 franchise partnerships, 16 traditional domestic and 20 traditional international franchisees. Of these franchisees, we have signed agreements for the development of new franchised Ruby Tuesday restaurants with 13 franchise partnerships, 12 traditional domestic and 15 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 15 international franchisees (including Hawaii, Puerto Rico, and Guam) hold rights as of June 2, 2009 to develop Ruby Tuesday restaurants in 33 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.  We have since converted the acquired restaurant to a full-service Asian restaurant and opened a second Wok Hay.

**Operations**

We own and operate the Ruby Tuesday concept that offers food, quality, and service such that it is positioned to be 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 2, 2009, we owned and operated 672 casual dining restaurants, located in 27 states and the District of Columbia. Also, as of June 2, 2009, the franchise partnerships operated 119 restaurants and traditional franchisees operated 54 domestic and 56 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 serve simple, fresh, American food with a wide variety of appetizers, handcrafted burgers, a garden bar, which offers up to 46 items, steaks, fresh chicken, 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.  Where appropriate, we also offer our RubyTueGo curbside service and a delivered-meals catering program for businesses, organizations, and group events at both Company-owned and franchised restaurants.

 

Casual dining 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.  In 2005, our analysis of the bar and grill segment within casual dining indicated that many concepts, including Ruby Tuesday, 

 

-4-

 

 

were not clearly differentiated.  We believed that as the segment continued to mature, the lack of differentiation would make it increasingly difficult to attract new guests.  Consequently, we created brand reimaging initiatives discussed below to implement our strategy of clearly differentiating Ruby Tuesday from our competitors.  We implemented our strategy in stages, first focusing on food, then service, and in 2007, we embarked on the most capital intensive aspect of our reimaging program – the creation of a fresh new look for our restaurants.  We believe that Ruby Tuesday, as a result of these initiatives, is well positioned for the future.

 

*Uncompromising Freshness and Quality.*  Our first initiative to reimage our brand focused on our food, with an overall focus on freshness and an initial focus on our core burgers.  Our core burgers are now made from 100% choice, fresh, never frozen, beef and served with crisp leaf lettuce, and fresh, cold pack pickles on an artisan bun.  We then turned our attention to virtually every other item on our menu.  For example, our chicken breasts are now fresh, not frozen, all natural and contain no growth hormones.  We added several new differentiated high quality menu items such as crab cakes made from fresh jumbo lump crab meat and fresh, made-to-order guacamole.  We also upgraded our beverage offerings.  For example, we make non-alcoholic drinks to-order from fresh berries and fresh lemon, mango and pomegranatejuices.  Our cocktails are made with premium call-brand spirits and we also offer an array of craft beers.  

 

*Gracious Hospitality.*  In the second phase of the reimaging, we upgraded our restaurant level team by implementing new performance standards, advanced training, and a more rigorous selection process.  We also implemented a new service system to enable our servers to focus more attention on the guest.  Servers are now assisted by service support staff (“Quality Service Specialists”), similar to those found in higher-end restaurants.

 

*Fresh New Look.*  Only after the food and service improvements were implemented were we willing to undertake the capital intensive restaurant remodeling aspect of our reimaging.  We designed a contemporary appearance and atmosphere for our restaurants, which included the elimination of dated elements such as Tiffany-style lamps and antiques and memorabilia that previously adorned our walls.  Over an approximately 15-month period ending in the summer of 2008, we invested $62 million to reimage approximately 650 Company-operated restaurants.

 

*Compelling Value.*  We believe our guests perceive “value” as a combination of food quality, service, restaurant atmosphere, menu variety and price.  However, as the economy has weakened, we believe that price has become increasingly important to our guests.  With an average net check of approximately $11.50 for fiscal 2009, we believe our menu pricing provides a compelling value proposition and, based on guest surveys that we conducted at our restaurants, during the fourth quarter of fiscal 2009, over 91% of approximately 118,000 of our surveyed guests rated us a four or a five on a scale of one to five for overall value.

 

At June 2, 2009, we 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.  In part because of this, we have suspended our new restaurant openings and do not plan to open any Company-owned Ruby Tuesday restaurants during fiscal 2010.  

 

**Franchising**

As previously noted, as of June 2, 2009, we had franchise arrangements with 49 franchise groups which operate Ruby Tuesday restaurants in 27 states, Puerto Rico, Guam, and in 13 foreign countries.

 

As of June 2, 2009, there were 229 franchise restaurants, including 119 operated by franchise partnerships.  We acquired no restaurants from franchise partnerships in fiscal 2009 and 36 restaurants in fiscal 2008.  We acquired one restaurant from a traditional franchisee in fiscal 2009 and none in fiscal 2008.  Franchisees opened, or acquired from RTI, 19 restaurants in fiscal 2009, 14 restaurants in fiscal 2008, and 35 restaurants in fiscal 2007.  We anticipate that our franchisees will open approximately six restaurants in fiscal 2010.

 

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 

 

-5-

 

 

(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 0.5%, 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.

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 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 through our WOW-U® training sessions.  Programs include classroom instruction and various team building activities and competitions, which are designed to contribute to the skill and enhance the dedication of the Company and franchise teams in addition to strengthening our corporate culture.  Starting with fiscal 2008, we also offered all team member trainingmaterials in a computer-based training (“CBT”) format.  CBT enables us to leverage technology to provide an even higher quality interactive training experience and allows for testing at every level to calibrate our team members’ skill levels and promotes self-paced, ongoing development.  

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 day of instruction, trainees have the opportunity to dine and socialize with fellow team members in a relaxed and tranquil atmosphere where they are fully immersed in our culture.  We believe our emphasis on training and retaining high quality restaurant managers is critical to our long-term success and we are committed to the ongoing development of our employees. 

**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 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. 

 

-6-

 

 

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 approximately 20% 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, state, and international 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 that 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 2, 2009, we employed approximately 20,700 full-time and 16,000 part-time employees, including approximately 367 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. 

 

-7-

 

 

**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, Executive Compensation and Human Resources Committee Charter, Code of Business Conductand 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.

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 6, 2008, 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 July 31, 2009, is provided below. 

 

**Name**

 

**Age**

 

**Position**

 

 

 

Samuel E. Beall, III

59

Chairman of the Board, President and Chief Executive Officer

Kimberly M. Grant

38

Executive Vice President 

Marguerite N. Duffy

48

Senior Vice President, Chief Financial Officer

Nicolas N. Ibrahim

48

Senior Vice President, Chief Technology Officer

Robert F. LeBoeuf

47

Senior Vice President, Chief People Officer 

Mark D. Young

42

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, from June 2002 to September 2003, as Regional Partner, Operations, and served in various other positions from June 1992 until June 2002.  

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 and served in various other accounting and finance positions from August 1990 until October 1999.

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. 

 

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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 and from July 1986 until August 2001, he held various other positions.  

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, from August 1998 to September 2003 as Vice President, Marketing and Culinary, and from January 1995 to August 1998, in various other positions.  ****

**** 

**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.

 

***The current economic situation could adversely affect our business, results of operations, liquidity and capital resources.***

 

The U.S. economy is currently undergoing significant slowdown and volatility due to uncertainties related to availability of credit, difficulties in the banking and financial services sectors, softness in the housing market, severely diminished market liquidity, falling consumer confidence and rising unemployment rates.  Our business is dependent to a significant extent on national, regional and local economic conditions, particularly those that affect our guests that frequently patronize our restaurants.  In particular, where our customers’ disposable income available for discretionary spending is reduced (such as by job losses, credit constraints and higher housing, taxes, energy, interest or other costs) or where the perceived wealth of customers has decreased (because of circumstances such as lower residential real estate values, increased foreclosure rates, increased tax rates or other economicdisruptions), our business could experience lower sales and customer traffic as potential customers choose lower-cost alternatives or choose alternatives to dining out.  Any resulting decreases in customer traffic or average value per transaction will negatively impact our financial performance, as reduced revenues result in downward pressure on margins.  These factors could reduce our Company-owned restaurants’ gross sales and profitability.  These factors could also reduce gross sales of franchised restaurants, resulting in lower royalty payments from franchisees, and reduce profitability of franchise restaurants, potentially impacting the ability of franchisees to make royalty payments as they become due.  Reduction in cash flows from either Company-owned or franchised restaurants could have a material adverse effect on our liquidity and capital resources.

 

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

 

We establish sales goals each fiscal year based on a strategy of maintaining and growing same-restaurant sales and, where practical, 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 marketing.    

 

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 the remodel of 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 completed 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 andservice and a strong value to our guests.  We must also develop a comprehensive marketing approach that overcomes our 

 

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disadvantage of having a substantially lower advertising budget relative to some of our competitors.  The risk of inappropriate marketing 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 steaks, all fresh chicken, crab, 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 because of our plan to engage in less new restaurant development, 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 do not plan to open any Company-owned restaurants in fiscal 2010.  We believe that our domestic franchisees likewise expect to open fewer restaurants in fiscal 2010.    

 

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 or our franchisees open will be profitable or obtain operating results similar to those of our or their existing restaurants nor can we provide assurance that our remodeling efforts will produce incremental sales sufficient to offset the costs of the remodels.  

 

***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 2, 2009, we had a total of $493.4 million in debt and capital lease obligations and guaranteed a further $52.1 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 ($319.1 million outstanding at June 2, 2009) (the “Credit Facility”) and our Series A and B senior notes ($77.1 million and $55.6 million, respectively, outstanding at June 2, 2009) (the “Private Placement”).  The Series A and B senior notes mature in fiscal 2010 and 2013, respectively, and, while it is our current intention and belief that we will repay the Series A senior notes from a combination of operating cash flows and borrowings under the Credit Facility, we cannot give assurance that our operating cash flows or our excess capacity under the Credit Facility will be sufficient at the April 1, 2010 maturity date to do so.  Should an unforeseen event occur which restricts our ability to repay the Series A senior notes, we also cannot give assurance we will be able to repay or refinance the Series A senior noteswhen due on favorable terms or at all, which could have a material adverse effect on us.  Likewise, we cannot give assurance that we will be able to repay or refinance the Series B senior notes or our other borrowings when due on favorable terms or at all, which could have a material adverse effect on us. 

 

We also provide a guaranty on a $48 million credit facility, which assists franchise partnerships with working capital needs (the “Franchise Facility”).  This guaranty can be partial or full for a particular franchise partnership depending upon the financial strength of the particular franchise partnership.  As of June 2, 2009, amounts outstanding under the Franchise Facility relating to all but one of the franchise partnerships that were borrowers thereunder were fully guaranteed by us.  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 franchise partnerships default.  Actions of the franchise partnerships that are outside of our control, such as three or more franchise partnerships defaulting under the Franchise Facility, could cause the FranchiseFacility to be unwound, which would mean that loan commitments under the Franchise Facility can no longer be established, extended or renewed.  Additionally, if we fail to pay any amount due under the Franchise Facility, breach any representations or 

 

-10-

 

 

warranties, fail to meet any covenants, file for bankruptcy, fail to pay any debt when due or if a judgment is awarded against us in excess of $10 million, then the lenders under the Franchise Facility could terminate the loan commitment and demand that we purchase all outstanding loans and loan commitments and assume the obligations.  Further, in such situation, if 51% of the participating lenders under the Franchise Facility request in writing, they can declare all loans due and payable, which could have a material adverse effect on us.  At June 2, 2009, the total amount outstanding under the Franchise Facility was $47.5 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, provided that we maintain these leverage thresholds after giving effect to any such dividend payment or stock repurchase.  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.  As of June 2, 2009, our original $500.0 million capacity had been reduced to $446.5 million.  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, including requiring immediate repayment of all borrowings, which could have a material adverse effect on us.  Moreover, if any agreements were reached with our lenders, they might require us to pay higher interest rates.  

 

***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 menu items with strong customer preference at attractive prices.

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 declining profitability of our restaurants is increased asset impairment charges.  This could be significant as property and equipment represented 88% of our total assets at June 2, 2009.  

 

***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 franchisees.  Further, as part of the franchise 

 

-11-

 

 

partnership program, we serve as guarantor for three credit facilities, two of which are no longer active.  The ability of these franchise groups to continually generate profits impacts our overall profitability and our brand image.  

 

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 periodically visit their restaurants to ensure compliance with 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 (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51” (“FIN 46(R)”) or, beginning with fiscal 2011, under the provisions of FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R).”  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 2, 2009 to consolidate any of them under the provisions of FIN 46(R).  However, as the U.S. economy continues to falter, we anticipate that we will receive increased requests forfinancial support from certain of our franchisees, particularly the franchise partnerships.  Should we opt to provide that support, the likelihood we would then be required to consolidate the entities making the requests (most likely those in the weakest financial condition) increases and, our financial performance likely would be negatively impacted.  Alternatively, should we opt to not provide requested support, our franchisees’ financial struggles could accelerate and possibly, in a worst case, lead certain of them to bankruptcy, at which point we would likely be required to make payments according to the terms of any loans for which we had previously provided a guaranty in addition to payments on any leases subleased to franchisees for which we remain primarily liable.

 

***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.  As discussed further in Note 7 to our Consolidated Financial Statements, given our lowered stock price, declines in same-restaurant sales, and the overall economic conditions and challenging environment for the restaurant industry, we concluded during the second quarter of fiscal 2009 that our goodwill was impaired and recorded a charge of $19.0 million ($14.0 million, net of tax), representing the full value of goodwill.  Additionally, during the third quarter of fiscal 2009 we implemented a plan to close 43 restaurants and announced our intention to close an additional 30 restaurants over the next several years.  Based upon our reviews in fiscal 2009, 2008, and 2007 we recorded impairments of $41.1 million, $4.3 million,and $0.6 million, respectively.  Excluding that relating to goodwill, the majority of these charges were for restaurant impairments.  If market conditions at either the restaurant or system-wide levels 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, pandemic illness 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:

 

-12-

 

 

 

•

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

 

•

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 such as the impact of the H1N1 influenza A virus, 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 guests, staff, locations, 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,

 

-13-

 

 

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

 

***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, 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 our competitors, could result in temporary store closings or other negativepublicity that could adversely affect our sales and profitability. 

 

***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 shareholders 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, increased again to $6.55 in July 2008 and increased once more to $7.25 in July 2009.  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 thenecessary licenses and permits needed to operate 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

 

-14-

 

 

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 comply with 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”) and the New York Stock Exchange.  Failure to timely comply with these guidelines could result in penalties and/or adverse reactions by our shareholders.

 

***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.  

 

***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. 

 

-15-

 

 

**** 

**Item 2. Properties**

Information regarding the locations of our Ruby Tuesday restaurants is shown in the list below. Of the 672 Company-owned and operated Ruby Tuesday restaurants as of June 2, 2009, we owned the land and buildings for 320 restaurants, owned the buildings and held non-cancelable long-term land leases for 220 restaurants, and held non-cancelable leases covering land and buildings for 132 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 2, 2009.  In addition to the Ruby Tuesday restaurants listed below, we also own and operate two Wok-Hay restaurants in Tennessee.

 

Number of Restaurants

State

Company

 

Franchise

 

Total System

 

 

 

 

 

 

Domestic:

 

 

 

 

 

Alabama

45

 

–

 

45

Arizona

7

 

–

 

7

Arkansas

–

 

7

 

7

California

1

 

5

 

6

Colorado

–

 

12

 

12

Connecticut

18

 

–

 

18

Delaware

7

 

–

 

7

Florida

82

 

1

 

83

Georgia

59

 

–

 

59

Idaho

–

 

1

 

1

Illinois

–

 

25

 

25

Indiana

5

 

9

 

14

Iowa

–

 

5

 

5

Kansas

–

 

3

 

3

Kentucky

5

 

5

 

10

Louisiana

6

 

–

 

6

Maine

–

 

10

 

10

Maryland

34

 

–

 

34

Massachusetts

10

 

–

 

10

Michigan

25

 

1

 

26

Minnesota

–

 

12

 

12

Mississippi

8

 

–

 

8

Missouri

–

 

27

 

27

Nebraska

–

 

8

 

8

Nevada

–

 

2

 

2

New Hampshire

5

 

–

 

5

New Jersey

26

 

–

 

26

New Mexico

–

 

1

 

1

New York

25

 

11

 

36

North Carolina

58

 

–

 

58

North Dakota

–

 

4

 

4

-16-

 

 

 

Ohio

36

 

–

 

36

Oklahoma

–

 

2

 

2

Oregon

–

 

3

 

3

Pennsylvania

46

 

–

 

46

Rhode Island

3

 

–

 

3

South Carolina

35

 

–

 

35

South Dakota

–

 

3

 

3

Tennessee

42

 

–

 

42

Texas

2

 

4

 

6

Utah

–

 

6

 

6

Virginia

70

 

–

 

70

Washington

–

 

5

 

5

Washington, DC

3

 

–

 

3

West Virginia

8

 

–

 

8

Wisconsin

1

 

1

 

2

Total Domestic

672

 

173

 

845

 

 

 

 

Number of Restaurants

Country

Company

 

Franchise

 

Total System

 

 

 

 

 

 

International:

 

 

 

 

 

Canada

–

 

1

 

1

Chile

–

 

10

 

10

Egypt

–

 

1

 

1

Greece

–

 

4

 

4

Guam*

–

 

1

 

1

Hawaii*

–

 

4

 

4

Honduras

–

 

1

 

1

Hong Kong

–

 

4

 

4

Iceland

–

 

2

 

2

India

–

 

11

 

11

Kuwait

–

 

5

 

5

Puerto Rico*

–

 

2

 

2

Romania

–

 

2

 

2

Saudi Arabia

–

 

2

 

2

Trinidad

–

 

3

 

3

United Arab Emirates

–

 

3

 

3

Total International

–

 

56

 

56

 

672

 

229

 

901

 

 

 

 
* 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.   

 

-17-

 

 

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

None. 

 

**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 intraday prices of our common stock and cash dividends paid thereon for each quarter during fiscal 2009 and 2008. 

 

**Fiscal Year Ended June 2, 2009**

 

Fiscal Year Ended June 3, 2008

 

 

 

**Per Share**

 

 

 

 

Per Share

 

 

 

**Cash**

 

 

 

 

Cash

**Quarter**

**High**

**Low**

**Dividends**

 

Quarter

High

Low

Dividends

**First**

**$8.65**

**$5.07**

**--**

 

First

$27.05

$21.42

$0.25

**Second**

**$8.84**

**$0.96**

**--**

 

Second

$22.48

$12.40

--

**Third**

**$2.00**

**$1.00**

**--**

 

Third

$13.82

$5.70

--

**Fourth**

**$8.58**

**$0.85**

**--**

 

Fourth

$9.25

$6.25

--

As of July 27, 2009, there were approximately 3,740 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 2, 2009, 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 2, 2009, 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.    

 

 

-18-

 

 

 

 

**Item 6. Selected Financial Data**

 

**Summary of Operations**

(In thousands except per-share data)

 

 

Fiscal Year

 

**2009**

 

2008

 

2007

 

2006

 

2005

 

 

Revenue

 

**$1,248,556**

 

 

$1,360,304

 

 

$1,410,227

 

 

$1,306,240

 

 

$1,110,294

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/income before income taxes (a)

**$      (42,866)**

 

$       23,699

 

$     132,398

 

$     150,958

 

$     154,946

 

(Benefit)/provision for income taxes

**(24,948)**

 

(2,678)

 

40,730

 

49,981

 

52,648

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss)/income

**$      (17,918)**

 

$       26,377

 

$       91,668

 

$    100,977

 

$     102,298

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/earnings per share:

 

 

 

 

 

 

 

 

 

 

Basic

**$                (0.35)**

 

$                 0.51

 

$                 1.60

 

$                 1.67

 

$                 1.59

 

Diluted

**$                (0.35)**

 

$                 0.51

 

$                 1.59

 

$                 1.65

 

$                 1.56

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common and

 

 

 

 

 

 

 

 

 

 

common equivalent shares:

 

 

 

 

 

 

 

 

 

 

Basic

**51,395**

 

51,572

 

57,204

 

60,544

 

64,538

 

Diluted

**51,395**

 

51,688

 

57,633

 

61,307

 

65,524

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal years 2005, 2007, 2008, and 2009 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

**$1,124,196**

 

$1,271,937

 

$1,230,256

 

$1,171,568

 

$1,074,067

 

Long-term debt and capital leases, less current

 

 

 

 

 

 

 

 

 

 

maturities

**$     476,566**

 

$     588,142

 

$     512,559

 

$     375,639

 

$     247,222

 

Shareholders’ equity

**$     416,366**

 

$     431,518

 

$     439,326

 

$     527,158

 

$     563,223

 

Cash dividends per share of common stock

--

 

$0.25

 

$0.50

 

$0.045

 

$0.045

 

 

(a) See Note 7 to the Consolidated Financial Statements for a description of closures and impairments expenses in fiscal 2009, 2008, and        2007 and discussion of a goodwill impairment charge recorded in fiscal 2009.

 

 

 

 

 

-19-

 

 

 

 

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

**of Financial Condition and Results of Operations**

**Introduction**

 

Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” the “Company,” “we” and/or “our”), owns and operates Ruby Tuesday® casual dining restaurants.  We also franchise the Ruby Tuesday concept in selected domestic and international markets.  Our mission is to be the best of the bar-grill sector of the restaurant industry by delivering to our guests a high quality casual dining experience with compelling value.  Our restaurants operate in the higher end of the bar and grill segment of casual dining.  As of June 2, 2009, we owned and operated 672 Ruby Tuesday restaurants, located in 27 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 werefer to as “franchise partnerships,” operated 119 restaurants.  We have a contractual right to acquire, at predetermined valuation formulas, the remaining equity of any or all of the franchise partnerships.  Our other franchisees operated 54 domestic and 56 international restaurants.  In total, our franchisees operate restaurants in 27 states, Puerto Rico, Guam, and 13 foreign countries.  In addition, we operate two Wok Hay full service Asian restaurants. The Company-owned and operated restaurants are concentrated primarily in the Northeast, Southeast, Mid-Atlantic and Midwest regions of the United States.  We consider these regions to be our core markets.

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 years 2009, 2008 and 2007 each contained 52 weeks.  

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.  In 2005, our analysis of the bar and grill segment within casual dining indicated that many concepts, including Ruby Tuesday, were not clearly differentiated.  We believed that as the segment continued to mature, the lack of differentiation would make it increasingly difficult to attract new guests.  Consequently, we created brand reimaging initiatives to implement our strategy of clearly differentiating Ruby Tuesday from our competitors, as discussed under the caption “Operations” included earlier in thisAnnual Report.  We implemented our strategy in stages, first focusing on food, then service, and in 2007, we embarked on the most capital intensive aspect of our reimaging program – the creation of a fresh new look for our restaurants.  We believe that Ruby Tuesday, as a result of these initiatives, is well positioned for the future.

 

While we were in the process of implementing our brand reimaging, consumer spending came under pressure for a variety of reasons, and further weakened in the fourth quarter of calendar 2008.  As the economic environment deteriorated, operating results for other casual dining concepts, as well as our operating results, declined significantly.  In response, in the second half of fiscal 2009, we implemented several initiatives intended to enhance our sales, reduce costs and improve cash flow, including the following:  

 

 

**•**

**Sales initiatives.**Our sales initiatives aim to increase guest traffic by focusing primarily on two areas, menu and marketing.  The menu emphasizes high quality and compelling value.  For example, our burgers now include “endless fries”, the majority of our Specialties and Premium Seafood items offer a complete meal for typically less than $12 and we offer 40 meals for under $10.  Through independently conducted studies, we regularly measure our guests’ perception of our menu offerings and will make item modifications to enhance their value proposition if necessary.  Our new brand image allows us to credibly offer higher end limited time 

-20-

 

 

 

menu items, such as lobster tails, which we believe allow us to better leverage our fixed costs and further differentiate our brand from our traditional competitors.

We shifted our marketing strategy to more effectively communicate our brand and value message.  We broadened our strategy to encompass four pillars: print media, promotion, internet, and local market programs.  Part of our emphasis is greater promotional activity, with a local market focus, that is intended to address the current importance of price in consumers’ perception of value.  We are also evaluating programs to increase sales during off-peak times.  

 

 

**•**

**Cost savings.**  In the second half of fiscal 2009, we implemented initiatives designed to result in substantial cost savings.  These cost savings are a result of: labor initiatives, including new scheduling systems and the realignment of field supervisors, which are expected to account for approximately one-half of the savings, while disciplined food cost management, improved operating efficiencies and the closing of the underperforming restaurants are expected to account for the remainder.  We estimate that these initiatives resulted in cost savings of approximately $20.0 million in the second half of fiscal 2009.  Furthermore, lower management and labor turnover during fiscal 2009 compared to fiscal 2008 not only reduced training costs, but also resulted in a more experienced work force and improved customer service.  

 

 

**•**

**Restaurant closings.**During our second quarter of fiscal 2009 we conducted an analysis of all our Company-operated restaurants based on profitability, brand image, location, and other factors and identified 73 restaurants to close, 43 of which we closed in the third quarter of fiscal 2009.  The remaining 30 are to be closed over the next several years as their leases expire.    

 

 

**•**

**Generate free cash flow and improve our balance sheet.**  Because of our leverage, we are highly focused on maximizing our cash flow and paying our debt.  If we are successful in stabilizing same-restaurant sales and maintaining or lowering our costs, we have the opportunity to maintain substantial levels of free cash flow.  Furthermore, our near-term capital requirements are relatively modest as we don’t anticipate opening any new Ruby Tuesday restaurants in fiscal 2010, and our maintenance capital spending needs are low because we have remodeled virtually all the Company-owned restaurants within the last two years.  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 generated $85.4 million of free cash flow in fiscal 2009, all of which was dedicated to the reduction of debt.  We anticipate total capital spending in fiscal 2010 to be $17.0 to $20.0 million.  We also estimate we will generate $85.0 million to $95.0 million of free cash flow in fiscal 2010, a substantial portion of which will be dedicated to the reduction of debt.  Similarly, we intend to use free cash flow generated in the next few years following fiscal 2010 to reduce debt.  Our objective is to reduce debt as quickly as possible to strengthen our balance sheet and reduce the financial risk related to our leverage.  As another means of reducing our bank debt and strengthening our balance sheet, on July 28, 2009,we closed an underwritten public offering of 11.5 million shares of Ruby Tuesday, Inc. common stock, as further discussed in the Financing Activities section of this Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

 

Our same-restaurant sales for Company-owned restaurants declined 7.9% and our diluted earnings per share declined $0.86 in fiscal 2009 largely as a result of charges related to restaurant closures and impairments and goodwill impairment, the majority of which were non-cash.  Throughout this MD&A, we discuss our fiscal 2009 financial results in detail, provide insight for fiscal years 2007 and 2008, as well as discuss Known Events, Uncertainties and Trends.  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. 

 

-21-

 

 

 

**Results of Operations**

**Ruby Tuesday Restaurants**

The table below presents the number of Ruby Tuesday concept restaurants at each fiscal year end from fiscal 2005 through fiscal 2009:

 

**Fiscal Year**

 

**Company-Owned**

 

**Domestic Franchise**

**International Franchise**

 

**Total**

**2009**

**672** 

**173** 

**56**

**901**

2008

721 

170 

54

945

2007

680 

199 

54

933

2006

629 

204 

47

880

2005

579

188

38 

805 

 

 

During fiscal 2009:

 

•

Five Company-owned Ruby Tuesday restaurants were opened or acquired, including one purchased from a Texas franchisee;

 

•

54 Company-owned Ruby Tuesday restaurants were closed;

 

•

Aside from one restaurant sold to the Company, 19 (ten domestic and nine international) franchise restaurants were opened and 13 (six domestic and seven international) were closed;

 

•

One Wok-Hay was opened in a previously closed Ruby Tuesday location;

 

•

We formulated a plan to restructure our property portfolio, which included the closing of 43 restaurants in the third quarter of fiscal 2009 and the planned closing of approximately 30 additional restaurants over the next several years, and wrote-down properties held for sale to facilitate their disposal resulting in closures and impairments expenses as follows: impairments, $41.1 million; closed restaurant lease reserves, $10.3 million; dead site write-offs, $2.2 million; (gain)/loss on the sale of surplus properties, ($0.7) million; and other adjustments, $2.1 million; and

 

•

We wrote-off our goodwill of $19.0 million as a result of the overall poor economic conditions, declines in fair value, same-restaurant sales trends at Company-owned restaurants, and weak industry conditions.

 

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

 

•

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.

 

**Restaurant Sales**

Restaurant sales in fiscal 2009 decreased 8.0% from fiscal 2008 for Company-owned restaurants and 6.9% 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)**

**2009**

**$ 1,239.1**

**$ 383.7**

2008

   1,346.7

   412.0

2007

   1,395.2

   471.6

2006

   1,290.5

   458.7

2005

   1,094.5

   422.5

 

-22-

 

 

 

 

(a)

Information regarding the restaurant acquired from a franchisee in fiscal 2009 and the 36 restaurants acquired from franchisees in fiscal 2008 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:**

 

 

**2009**

2008

2007

 

Company restaurant sales (in thousands)

**$1,239,104**

$1,346,721

$1,395,212

 

Company restaurant sales growth-percentage

**(8.0)%**

(3.5)%

8.1%

 

 

 

 

 

 

Franchise revenue (in thousands) (a)

**$9,452**

$13,583

$15,015

 

Franchise revenue growth-percentage

**(30.4)%**

(9.5)%

(4.6)%

 

 

 

 

 

 

Total revenue (in thousands)

**$1,248,556**

$1,360,304

$1,410,227

 

Total revenue growth-percentage

**(8.2)%**

(3.5)%

8.0%

 

 

 

 

 

 

Company same-restaurant sales growth percentage

**(7.9)%**

(9.8)%

(1.4)%

 

 

 

 

 

 

Company average restaurant volumes

**$1.80 million**

$1.90 million

$2.10 million

 

Company average restaurant volumes growth percentage

 

**(5.1)%**

 

(9.5)%

 

0.0%

 

 

(a)

Franchise revenue includes royalty, license and development fees paid to us by our franchisees, exclusive of support service fees of $6.3 million, $6.5 million, and $11.3 million, in fiscal years 2009, 2008, and 2007, respectively, which are recorded as an offset to selling, general and administrative expenses.  

Our decrease in Company restaurant sales in fiscal 2009 is attributable to a 7.9% decrease in same-restaurant sales that contributed to lower overall average restaurant volumes and to a net decrease of 49 Ruby Tuesday restaurants from the prior year.  The decrease in same-restaurant sales is partially attributable to reductions in customer counts in the first three quarters of the year due to a challenging economic environment and various consumer pressures. 

Our decrease in Company restaurant sales in fiscal 2008 is attributable to a 9.8% decrease in same-restaurant sales that contributed to 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 were 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 in same-restaurant sales for both fiscal 2009 and 2008 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.                    

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 (up to 4% of monthly sales) are recognized as franchise revenue on the accrual basis.  Franchise revenue decreased 30.4% to $9.5 million in fiscal 2009 and 9.5% to $13.6 million in fiscal 2008.  Franchise revenue is predominantly comprised of domestic and international royalties, which totaled $8.8 million and $12.9 million in 2009 and 2008, respectively. The decreases in fiscal 2009 and 2008 are due to temporarily reduced royalty rates for certain franchisees, a decrease in same-restaurant sales for domestic franchise Ruby Tuesday restaurants of 6.6% and 7.6% for fiscal 2009 and 2008, respectively, and the acquisitions of franchisees in fiscal 2008.

Under our accounting policy, we do not recognize franchise fee revenue for any franchise 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.  We also do not recognize additional 

 

-23-

 

 

franchise fee revenue from franchisees with fees in excess of 60 days past due.  Accordingly, we have deferred recognition of a portion of franchise revenue from certain franchises.  Unearned income for franchise fees was $1.2 million and $3.9 million as of June 2, 2009 and June 3, 2008, respectively, which are included in other deferred liabilities and/or accrued liabilities – rent and other in the Consolidated Balance Sheets.  The reduction in unearned income is primarily attributable to fee rebates given to certain franchise partnerships during fiscal 2009.  For50%-owned franchise partnerships, these rebates created income of $2.2 million, of which $1.1 million is included in equity in (earnings)/losses of unconsolidated franchises in the Consolidated Statements of Operations for the year ended June 2, 2009 as discussed below. 

Total franchise restaurant sales are shown in the table below. 

 

**2009**

2008

2007

 

Franchise restaurant sales (in thousands) (a)

**$383,738**

$411,968

$471,642

 

Franchise restaurant sales growth-percentage

**(6.9)%**

(12.7)%

2.8%

 

 

(a)

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

The 6.9% decrease in fiscal 2009 franchise restaurant sales is primarily due to a decrease in average restaurant volumes as a result of a 6.6% decrease in domestic same-restaurant sales.

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, which collectively operated 36 restaurants during fiscal 2008.

 

**Operating Profits**

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

 

 

**2009**

 

2008

 

2007

 

Restaurant sales and operating revenue

**99.2**

**%**

99.0

%

98.9

%

Franchise revenue

**0.8**

 

1.0

 

1.1

 

Total revenue

**100.0**

 

100.0

 

100.0

 

Operating costs and expenses:

 

 

 

 

 

 

(As a percentage of restaurant sales and operating

 

 

 

 

 

 

revenue):

 

 

 

 

 

 

Cost of merchandise

**28.2**

 

27.5

 

26.9

 

Payroll and related costs

**34.0**

 

33.2

 

30.9

 

Other restaurant operating costs

**20.7**

 

20.0

 

18.1

 

Depreciation and amortization

**6.1**

 

7.0

 

5.5

 

(As a percentage of total revenue):

 

 

 

 

 

 

(Income)/loss from Specialty Restaurant Group, LLC 

 

 

 

 

 

 

bankruptcy

 

 

 

 

0.4

 

Selling, general and administrative, net of support 

 

 

 

 

 

 

service fees

**6.6**

 

8.4

 

8.0

 

Closures and impairments

**4.4**

 

0.5

 

 

 

Goodwill impairment

**1.5**

 

 

 

 

 

Equity in (earnings)/losses of unconsolidated franchises

 

 

0.3

 

0.1

 

Interest expense, net

**2.7**

 

2.3

 

1.4

 

Total operating costs and expenses

**103.4**

 

98.3

 

90.6

 

(Loss)/income before income taxes

**(3.4**

**)**

1.7

 

9.4

 

(Benefit)/provision for income taxes

**(2.0**

**)**

(0.2

)

2.9

 

Net (loss)/income

**(1.4**

**)%**

1.9

%

6.5

%

 

**Pre-tax (Loss)/Income**

For fiscal 2009, pre-tax loss was $(42.9) million or (3.4)% of total revenue, as compared to pre-tax profit of $23.7 million or 1.7% of total revenue, for fiscal 2008.  The decrease is primarily due to decreases in same-restaurant sales 

 

-24-

 

 

and a net decrease of 49 Ruby Tuesday restaurants since the prior year, 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, closures and impairment expenses, goodwill impairment, and interest expense, net. 

 

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, closures and impairment expenses, equity in losses of unconsolidated franchises, and interest expense, net.  

 

**Cost of Merchandise**

Cost of merchandise, as a percentage of restaurant sales and operating revenue, increased 0.7% in fiscal 2009 due primarily to value initiatives related to our marketing and our menu.  Our marketing initiatives included several promotions offered in the current year including freestanding insert and internet coupons offering a buy one get one free on various menu items.  The menu initiatives included enhancements such as the introduction of lobster and steak menu items and increasing the Triple Prime burger to eight ounces while offering endless fries with all burgers.  The marketing initiatives had the impact in the current year of reducing average food check which increased the related food cost as a percentage of restaurants sales and operating revenue.   

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 promotions had 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.   

**Payroll and Related Costs**

Payroll and related costs, as a percentage of restaurant sales and operating revenue, increased 0.8% in fiscal 2009 primarily due to minimum wage increases in several states during the current year and higher management labor due to loss of leveraging with lower sales volumes.  These increased costs were partially offset by cost savings initiatives implemented in the second half of fiscal 2009 including new labor scheduling systems.

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.

**Other Restaurant Operating Costs**

Other restaurant operating costs, as a percentage of restaurant sales and operating revenue, increased 0.7% in fiscal 2009 primarily due to higher utility costs, primarily electricity, higher bad debt expense, and higher rent expense due to loss of leveraging with lower sales volumes.  These increases were partially offset by decreases, as a percentage ofrestaurant sales and operating revenue, of repairs and maintenance costs as a result of lower building repairs due to the completion of a re-imaging of our restaurants in fiscal 2008.

Other restaurant operating costs, as a percentage of restaurant sales and operating revenue, increased 1.9% 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, and loss of leveraging with lower sales volumes.  

**Depreciation and Amortization**

Depreciation and amortization, as a percentage of restaurant sales and operating revenue, decreased 0.9% in fiscal 

 

-25-

 

 

2009 primarily due to accelerated depreciation in the prior year ($12.9 million) for restaurants re-imaged as part of our re-imaging initiative.   

Depreciation and amortization, as a percentage of restaurant sales and operating revenue, increased 1.5% in fiscal 2008 primarily due to accelerated depreciation 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.   

 

**(Income)/Loss from Specialty Restaurant Group, LLC Bankruptcy**

Specialty Restaurant Group, LLC (“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 11 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, decreased 1.8% in fiscal 2009.  The decrease is partially attributable to a reduction in advertising expense as a result of decreases in cable television advertising due to less air time, advertising agency fees, and new menu printing expense.  This reduction was enabled by our shift in marketing strategy to include more coupons, the effect of which is to lower the average check and increase food costs as described above.  Additionally, management labor was lower due to the elimination and reduction of certain positions.  Share-based employee compensation decreased $7.0 million due to smaller grants in fiscal 2009 following a shift in compensation strategy in which management’s annual award, formerly issued each April, was transitioned to July to better coincide with the fiscal year to which it relates.  Also contributing tothe $7.0 million decrease in share-based compensation for fiscal 2009 was the expensing in fiscal 2008 of $4.3 million for stock options and restricted shares awarded to a retirement-eligible executive. 

 

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 fiscal 2008, temporarily reduced rates for certain 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.  

 

**Closures and Impairments**

Closures and impairments, as a percentage of total revenue, increased 3.9% in fiscal 2009.  The increase is due primarily to charges associated with 54 restaurants we closed during 2009 and approximately 30 restaurants we expect to close over the next several years, impairments for discounting surplus properties and the Company airplane in order to better market them for immediate sale, and additional dead-site write-offs.  See Note 7 to our Consolidated Financial Statements for further information on our closures and impairment charges.  

 

Closures and impairments, as a percentage of total revenue, increased 0.5% in fiscal 2008 due to greater asset impairment charges triggered by our sales declines coupled with lesser gains on sales of surplus properties in fiscal 2008 as compared to the prior year.  

 

**Goodwill Impairment**

We concluded during the second quarter of fiscal 2009 that our goodwill was impaired.  As a result, we recorded an impairment charge during the fiscal quarter ended December 2, 2008 of $19.0 million.  See Note 7 to our Consolidated Financial Statements for further information on our goodwill impairment. 

 

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

For fiscal 2009, our equity in the earnings of unconsolidated franchisees was negligible as compared to equity in losses of $3.5 million in fiscal 2008.  The change primarily resulted from decreased losses from investments in each of our six 50%-owned franchise partnerships, including three franchise partnerships that experienced losses in the prior 

-26-

 

 

 

year.  The decrease in losses primarily resulted from reduced fees charged to various of the 50%-owned franchise partnerships during fiscal 2009 as compared to the prior year, along with rebates from RTI for $2.2 million of fees, which had the impact of increasing equity in earnings by $1.1 million.  The reduced fees, while contributing to improved equity in earnings, had the contrasting impact of lowering our franchise revenue, as previously discussed.  As of June 2, 2009, we held 50% equity investments in each of six franchise partnerships which collectivelyoperate 71 Ruby Tuesday restaurants.  

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.  

**Net Interest Expense**

Net interest expense increased $2.6 million in fiscal 2009 due to higher rates on certain of our debt which was restructured in the latter part of fiscal 2008 as discussed in the “Liquidity and Capital Resources” section, which was partially offset by lower average debt balances for the fiscal year due to applying our free cash flow to the pay down of debt. 

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 borrowings.

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

Our effective tax rate for fiscal 2009 was 58.2% compared to (11.3)% in fiscal 2008.  The change in the effective rate was primarily a result of the Company recording a net loss from operations coupled with an increase in tax credits compared to the prior year.

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. 

**Liquidity and Capital Resources**

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 to reduce our outstanding indebtedness with our excess free cash flow.  Accordingly, during 2009 our cash from operations was principally used to reduce debt.     

 

**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). 

 

 

**2009**

2008

2007

Net cash provided by operating activities

**$**

**102,569**

 

$

101,889

 

$

184,662

 

Net cash provided/(used) by investing activities

 

**3,195**

 

 

(104,219

)

 

(114,575

)

Net cash used by financing activities

 

**(112,036**

**)**

 

(7,530

)

 

(66,560

)

 

 

 

 

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

 

 

 

 

 

 

 

 

 

investments 

**$**

**(6,272**

**)**

$

(9,860

)

$

3,527

 

 

**Operating Activities**

Cash provided by operating activities in fiscal 2009 was comparable to that of fiscal 2008 as many of the charges which contributed to our net loss, such as higher asset impairment expense associated with the closing of restaurants and discounting surplus properties, the goodwill impairment, and an increase in bad debt expense were non-cash.  Also 

 

 

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contributing to the stabilization of our operating cash flow were our net operating assets and liabilities, which collectively produced $23.3 million more cash flow in fiscal 2009 than in the prior year.   

 

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 fiscal 2008 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.  

Our working capital deficiency and current ratio as of June 2, 2009 were $21.0 million and 0.8:1, 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 2009, 2008, and 2007 were $17.2 million, $116.9 million, and $125.8 million, respectively.  In addition, proceeds from the disposal of assets produced $11.7 million of cash in fiscal 2009 following an action taken to aggressively market surplus properties in order to pay down debt. 

Amounts reflected for fiscal 2008 included $57.0 million for a Company-wide re-image project.  Also 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 the Company.  Further acquisitions, particularly from franchisees in the eastern United States, may occur either during fiscal 2010 or thereafter. 

Capital expenditures for fiscal 2010 are budgeted to be $17.0 to $20.0 million based on our planned improvements for existing restaurants and our expectation that we will not open any Company-owned Ruby Tuesday restaurants in fiscal 2010.  We intend to fund capital expenditures for Company-owned restaurants with cash provided by operations.   

**Financing Activities**

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”) to provide capital for general corporate purposes.  On February 28, 2007, we amended and restated our Credit Facility such that the aggregate amount we may 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 be in compliance with certain of our debt covenants, we entered into an additional amendment of the amended and restated Credit Facility on May 21, 2008. 

 

The May 21, 2008 amendment to the Credit Facility, as well as a similarly-dated amendment and restatement of the notes issued in the Private Placement as discussed below, 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 reductions in capacity and/or prepayments of principal, 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. 

 

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Following the May 21, 2008 amendment to the Credit Facility, through a series of scheduled quarterly and other required reductions, our original $500.0 million capacity has been reduced, as of June 2, 2009, to $446.5 million.  We expect the capacity of the Credit Facility to be further reduced by $39.6 million in fiscal 2010.  

 

Under the Credit Facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize.  Our options for the rate are the Base Rate or an adjusted LIBO Rate plus an applicable margin.  The Base Rate is defined to be the higher of the issuing bank’s prime lending rate or the Federal Funds rate plus 0.5%.  The applicable margin is zero 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 $319.1 million with an associated floating rate of interest of 2.96% at June 2, 2009.  As of June 3, 2008, we had $414.4 million outstanding with an associated floating rate of interest of 5.86%.  After consideration of letters of credit outstanding, we had $113.5 million available under the Credit Facility as of June 2, 2009.  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”).  On May 21, 2008, given similar circumstances as those with the Credit Facility discussed above, we amended and restated the notes issued in the Private Placement.  The May 21, 2008 amendment requires us to offer quarterly and other prepayments, which predominantly consist of semi-annual prepayments to be determined based upon excess cash flows as defined in the Private Placement.  

 

At June 2, 2009, the Private Placement consisted of $77.1 million in notes with an interest rate of 8.19% (the “Series A Notes”) and $55.6 million in notes with an interest rate of 8.92% (the “Series B Notes”).  The Series A Notes and Series B Notes mature on April 1, 2010 and April 1, 2013, respectively.  During fiscal 2009, we offered, and our noteholders accepted, principal prepayments of $5.7 million and $6.7 million on the Series A and B Notes, respectively.  We estimate that we will offer prepayments totaling $12.3 million during the next twelve months.  Accordingly, we have classified $12.3 million as current as of June 2, 2009.  This amount includes four quarterly offers of $2.0 million each and additional amounts to be determined based upon excess cash flows.   

 

We currently project that $71.1 million will be outstanding on April 1, 2010, the maturity date of our Series A Notes.  In accordance with SFAS No. 6, “Classification of Short-Term Obligations Expected to be Refinanced,” because of our ability and intent to refinance the balance on a long-term basis by utilizing the available capacity on our Credit Facility, we have classified this amount as non-current in our June 2, 2009 Consolidated Balance Sheet.

 

Simultaneous with the other May 21, 2008 amendments, we entered into a pledge agreement with our Credit Facility and Private Placement creditors, as well as those creditors associated with our Franchise Facility (discussed in Note 11 to the Consolidated Financial Statements), whereby we pledged certain subsidiary equity interests as security for the repayment of our obligations under these agreements.

There were no share repurchases or dividends paid during fiscal 2009.  For fiscal 2008 and 2007, cash used for share repurchases totaled $39.5 million and $203.3 million, respectively.  Cash used for dividend payments during those same periods totaled $13.1 million and $29.1 million, respectively.

As discussed in Note 14 to the Consolidated Financial Statements, on July 28, 2009, we closed an underwritten public offering of 11.5 million shares of Ruby Tuesday, Inc. common stock at $6.75 per share, less underwriting discounts.  The amount sold included 1.5 million shares sold in connection with the exercise of an over-allotment option granted to the underwriters.We received approximately $73.2 million in net proceeds from the sale of the shares, after deducting underwriting discounts and estimated offering expenses.  Wells Fargo Securities and BofA Merrill Lynch acted as joint book-running managers for the offering and SunTrust Robinson Humphrey and Morgan Keegan & Company, Inc. were co-managers of the offering.  The net proceeds were used to repay indebtedness under our Credit Facility.

 

**Covenant Compliance**

Under the terms of the Credit Facility and the notes issued in the Private Placement, we are required to satisfy and maintain specified financial ratios and other financial condition tests and covenants.  The financial ratios include maximum funded debt, minimum fixed charge coverage and minimum net worth covenants.  Our continued ability to

 

-29-

 

 

 

 meet those financial ratios, tests and covenants can be affected by events beyond our control, and we cannot assure you that we will meet those ratios, tests and covenants.  

Our maximum funded debt covenant is an Adjusted Total Debt to Consolidated EBITDAR ratio.  Adjusted Total Debt, as defined in our covenants, includes items both on-balance sheet (debt and capital lease obligations) and off-balance sheet (such as the present value of operating leases, letters of credit and guarantees).  Consolidated EBITDAR is consolidated net income (for the Company and its majority-owned subsidiaries) plus interest charges, income tax, depreciation, amortization, rent and other non-cash charges.  Among other charges, we have reflected share-based compensation, asset impairment and bad debt expense, as non-cash.  Until the end of the quarter ended March 3, 2009, we could add back the costs (up to $10.0 million) incurred in connection with the closing of restaurants recorded in accordance with generally accepted accounting principles (“GAAP”).

Our fixed charge coverage ratio compares Consolidated EBITDAR (as discussed above) to interest and cash-based rents.  

Consolidated EBITDAR and Adjusted Total Debt are not presentations made in accordance with GAAP, and, as such, should not be considered a measure of financial performance or condition, liquidity or profitability.  They also should not be considered alternatives to GAAP-based net income or balance sheet amounts or operating cash flows or indicators of the amount of free cash flow available for discretionary use by management, as Consolidated EBITDAR does not consider certain cash requirements such as interest payments, tax payments or debt service requirements and Adjusted Total Debt includes certain off-balance sheet items.  Further, because not all companies use identical calculations, amounts reflected by RTI as Consolidated EBITDAR or Adjusted Total Debt may not be comparable to similarly-titled measures of other companies.  We believe that the information shown below is relevant as it presents the amountsused to calculate covenants which are provided to our lenders.  Non-compliance with our debt covenants could result in the requirement to immediately repay all amounts outstanding under such agreements.  

The following is a reconciliation of net income, which is a GAAP-based measure of our operating results, to Consolidated EBITDAR as defined in our bank covenants (in thousands):  

 

**Fiscal Year**

 

 

**Ended**

 

 

**June 2, 2009**

 

Net (loss)

$

(17,918

)

Interest expense

 

34,992

 

Benefit for income taxes

 

(24,948

)

Depreciation 

 

74,973

 

Amortization of intangibles

 

726

 

Rent expense

 

52,127

 

Share-based compensation expense 

 

6,007

 

Goodwill impairment

 

18,957

 

Asset impairments

 

41,143

 

Equity in earnings of subsidiaries

 

(14

)

Bad debt expense

 

3,690

 

Dead site write-offs

 

2,159

 

Amortization of debt issuance costs

 

1,869

 

Non-cash accruals

 

2,425

 

Restaurant closing costs

 

4,452

 

Other

 

168

 

 

 

 

 

Consolidated EBITDAR

$

200,808

 

 

Our covenant requirements and actual ratios for the fiscal quarter ended June 2, 2009 are as follows:

 

Covenant

Actual

 

Requirements

Ratios

Maximum funded debt ratio (1)

4.25x

3.75x

Minimum fixed charge coverage ratio (2)

2.25x

2.56x

 

 

-30-

 

 

(1) The Credit Facility and notes issued in the Private Placement require us to maintain a maximum funded debt ratio, defined as Adjusted Total Debt to Consolidated EBITDAR, of 4.25x from December 3, 2008 to September 1, 2009 (the end of the first quarter of fiscal 2010), 4.00x from September 2, 2009 to March 2, 2010 (the end of the third quarter of fiscal 2010), 3.75x from March 3, 2010 to March 1, 2011 (the end of the third quarter of fiscal 2011), 3.50x from March 2, 2011 to March 1, 2012 (the end of the third quarter of fiscal 2012), and, for the notes issued in the Private Placement only, 3.25x thereafter.    

We expect to generate free cash flow of $85.0 to $95.0 million during fiscal 2010, a substantial portion of which will be dedicated to the reduction of debt.  

(2) The Credit Facility and notes issued in the Private Placement require us to maintain a minimum fixed charge coverage ratio of 2.25x through March 1, 2011, 2.50x from March 2, 2011 to March 1, 2012, and, for the notes issued in conjunction with the Private Placement, 2.75x thereafter. 

Our minimum Consolidated Net Worth covenant requires us to maintain a net worth, primarily comprised of the par value of our common stock, plus additional paid in capital and retained earnings, of $300,000,000 plus 25% of our consolidated net income for each completed fiscal year ending after June 4, 2003 (years with net losses are to be excluded from the calculation).  For purposes of this requirement, we are allowed to exclude from retained earnings charges recorded for the impairment of goodwill or other intangible assets.  During fiscal 2009, we recorded impairment charges of $19.0 million and $0.5 million relating to impairments of goodwill and other intangible assets, respectively.  

We reported net income of $431.2 million for the period of fiscal 2004-2008 and a net loss for fiscal 2009.  Under our covenants, this level of net income results in a consolidated net worth requirement, as defined, of $407.8 million.  Excluding the impact of the goodwill impairment ($14.0 million, net of tax) and other intangible asset impairments ($0.3 million, net of tax), the sum of the par value of our common stock, additional paid in capital and retained earnings as of June 2, 2009 was $442.6 million. 

During fiscal 2010, we expect to fund operations, capital expansion, if any, and any other investments, from operating cash flows, our Credit Facility, and operating leases.     

 

**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 have been made at the discretion of management, depending upon market conditions and the restrictions contained in our loan agreements.  Although 7.9 million shares remained available for purchase under existing programs at June 2, 2009, 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.  These thresholds were not achieved during fiscal 2009 and thus we did not repurchase any shares of RTI common stock.  Were we to achieve these leverage thresholds, the repurchase of shares in any particular future period and the actual amount thereof remain at the discretion of the Board ofDirectors, 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 2, 2009 (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) 

$     41,515

 

$       4,497

 

$      9,285

 

$      9,820

 

$     17,913

 

Revolving credit facility (a)

319,100

 

 

 

319,100

 

 

 

 

 

Senior notes (Series A and B) (a)

132,792

 

83,481

 

20,163

 

29,148

 

 

 

Interest (b)

41,179

 

14,483

 

13,590

 

6,417

 

6,689

 

Operating leases (c)

366,513

 

40,053

 

71,261

 

62,721

 

192,478

 

Purchase obligations (d)

136,393

 

57,508

 

40,538

 

22,689

 

15,658

 

Pension obligations (e)

34,646

 

4,371

 

12,168

 

5,439

 

12,668

 

Total (f)

$ 1,072,138

 

$   204,393

 

$   486,105

 

$   136,234

 

$   245,406

 

 

-31-

 

 

(a)

Included in the “Less than 1 year” category of our Series A and B senior notes is the full balance of our Series A notes, which is due April 1, 2010.  As previously noted, the $71.1 million currently projected to be then outstanding has been classified as long-term in our consolidated balance sheet because of our ability and intent to refinance the balance on a long-term basis by utilizing the available capacity on our Credit Facility.  See Note 6 to the Consolidated Financial Statements for more information on our debt.

(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 $319.1 million and $2.9 million, respectively, as of June 2, 2009 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 $21.3 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.

(d)

The amounts for purchase obligations include commitments for food items and supplies, utility contracts, and other miscellaneous commitments.

(e)

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

(f)

This amount excludes $4.5 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 2, 2009 (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)

$    13,981

 

$    13,981

 

$             

 

$               

 

$               

 

Franchise loan guarantees (a)

48,251

 

47,525

 

392

 

334

 

 

 

Divestiture guarantees

6,972

 

476

 

966

 

996

 

4,534

 

Total

$    69,204

 

$    61,982

 

$    1,358

 

$      1,330

 

$      4,534

 

(a)

Includes a $3.9 million letter of credit which secures franchisees’ borrowings for construction of restaurants being financed under a franchise loan facility.  The franchise loan guarantees totaling $48.3 million also shown in the table exclude the guarantee of $3.9 million for construction to date on the restaurants being financed under the facility.

See Note 11 to the Consolidated Financial Statements for more information. 

**Off-Balance Sheet Arrangements**

See Note 11 to the Consolidated Financial Statements for information regarding our franchise partnership and divestiture guarantees.

 

*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 2, 2009, the total of the potential liability for severance payments with regard to the employment agreement was approximately $5.9 million.

 

-32-

 

 

 

**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**

Share-based compensation expense is estimated for equity awards at fair value at the grant date.  We determine the fair value of restricted stock awards based on the closing price of our common stock on the date prior to approval of the award by our Board of Directors.  We determine the fair value of stock option awards using the Black-Scholes option pricing model.  The Black-Scholes option pricing model requires various highly judgmental assumptions including the expected dividend yield, stock price volatility and life of the award.  If any of the assumptions used in the model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period.  See Note 10 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 loss is recognized for the amount by which the net book value of the asset exceeds its fair value. Otherwise, an impairment loss is not recognized. Fair value is based upon estimated discounted future cash flows expected to be generated from continuing use through the expected disposal date and the expected salvage value.  In the instance ofa potential sale of a restaurant in a refranchising transaction, the expected purchase price is used as the estimate of fair value.

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

At June 2, 2009, we had 32 restaurants that had been open more than one year with rolling 12 month negative cash flows of which 19 have been impaired to salvage value.  Of the 13 which remained, we reviewed the plans to improvecash flows at each of the restaurants and determined that no impairment was necessary.   The remaining net book value of these 13 restaurants was $13.7 million at June 2, 2009.

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. 

 

**Franchise Accounting**

 

***Equity Method Accounting***

As of June 2, 2009, we were the franchisor of 119 franchise partnership Ruby Tuesday restaurants and 110 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 

 

-33-

 

 

No. 51” (“FIN 46(R)”).  Although we do have loans to and provide guarantees for certain of our franchise partnerships, they each have substantial other business activities.  We have not consolidated these entities, as we believe that each of these entities meets the definition of a business and we do not providemore than half of the total of the equity, subordinated debt, and other forms of subordinated financial support to these entities based on an analysis of the fair values of our interests in these entities. 

 

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 Operations 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 an advertising fee of up to 3.0%.  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.  We also do not recognize franchise fee revenue from franchises with fees in excess of 60 days past due.  Unearned income for franchise fees was $1.2 million and $3.9 million as of June 2, 2009 and June 3, 2008, respectively, which are included in other deferred liabilities and/or accrued liabilities – rent andother 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); 

 

**•**

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. 

The allowance for doubtful notes represents our best estimate of losses inherent in the notes receivable at the balance sheet date.  During fiscal 2009, 2008, and 2007, we increased/(decreased) the reserve $3.7 million, $0.8 million, and ($0.2) million, respectively, based on our estimate of the extent of those losses.  

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. 

-34-

 

 

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 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 2, 2009, 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 should a taxing authority take a position on a matter contrary to our position.  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 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.

 

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.  We adopted the provisions of SFAS 157 for

 

-35-

 

 

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, on June 4, 2008.  See Note 12 to our Consolidated Financial Statements for further information.  In February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157” which delayed the effective date of SFAS 157 for most non-financial assets and liabilities until fiscal years beginning after November 15, 2008 (fiscal 2010 for RTI).  We do not expect the adoption of SFAS 157 fornon-financial assets and liabilities will have a material impact on our consolidated financial position, results of operations or cash flows.    

 

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: 1) noncontrolling interests to be reported as a component of equity; 2) changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions; and 3) 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.

In April 2009, the FASB issued Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”).  FSP FAS 107-1 requires fair value disclosures on an interim basis for financial instruments that are not reflected in the consolidated balance sheets at fair value.  Prior to the issuance of FSP FAS 107-1, the fair values of those financial instruments were only disclosed on an annual basis.  FSP FAS 107-1 is effective for interim reporting periods that end after June 15, 2009 (our fiscal 2010 first quarter).  

In May 2009, the FASB issued Statement No. 165, “Subsequent Events” (“SFAS 165”).  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  SFAS 165 is effective for interim or annual reporting periods ending after June 15, 2009 (our fiscal 2010 first quarter).  We do not expect the adoption of SFAS 165 will have a material impact on our Consolidated Financial Statements.  

In June 2009, the FASB issued Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”).  SFAS 167 eliminates FIN 46(R)’s exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity.  SFAS 167 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FIN 46(R)’s provisions.  SFAS 167 is effective for fiscal years beginning after November 15, 2009 (fiscal 2011 forRTI).  We are currently evaluating the impact of SFAS 167 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 attaining the equivalent of an investment-grade bond rating. This strategy has periodically allowed us to repurchase RTI common stock.  During the year ended June 2, 2009, we did not repurchase any shares of RTI common stock.  The total number of remaining shares authorized to be repurchased, as of June 2, 2009, 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, may be funded by borrowings.  However, aspreviously 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.    

 

-36-

 

 

 

**Dividends**

During fiscal 1997, our Board of Directors approved a dividend policy as an additional means of returning capital to our shareholders.  As noted above, following the amendment to the Credit Facility and the amendment and restatement of the notes issued in the Private 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 Board of 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 2009 and 2008, 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 48 Ruby Tuesday restaurants at June 2, 2009. 

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.  We did not exercise our right to acquire the remaining equity interests of any of our franchise partnerships during fiscal 2009.  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 2010 and beyond.   

**Fiscal Year**

RTI’s fiscal 2010 will contain 52 weeks and end on June 1, 2010.  

**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 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.  As of June 2, 2009, the total amount of outstanding debt subject to interest rate fluctuations was $322.0 million.  A hypothetical 100 basis point change in short-term interest rates would result in an increase or decrease in interest expense of $3.2 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.

-37-

 

 

 

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

Ruby Tuesday, Inc. and Subsidiaries

**Index to Consolidated Financial Statements**

 

 

Consolidated Statements of Operations for the Fiscal Years Ended

 

June 2, 2009, June 3, 2008, and June 5, 2007

39

 

 

Consolidated Balance Sheets as of June 2, 2009 and June 3, 2008

40

 

 

Consolidated Statements of Shareholders' Equity and Comprehensive (Loss)/Income

 

for the Fiscal Years Ended June 2, 2009, June 3, 2008, and June 5, 2007

41

 

 

Consolidated Statements of Cash Flows for the Fiscal Years Ended

 

June 2, 2009, June 3, 2008, and June 5, 2007

42

 

 

Notes to Consolidated Financial Statements

43-70

 

 

Reports of Independent Registered Public Accounting Firm

71-72

 

 

-38-

 

 

 

Ruby Tuesday, Inc. and Subsidiaries

 

**Consolidated Financial Statements**

 

**Consolidated Statements of Operations**

 

(In thousands, except per-share data)

 

 

 

 

For the Fiscal Year Ended

 

**June 2,**

June 3,

June 5,

 

**2009**

2008

2007

 

 

 

 

Revenue:

 

 

 

Restaurant sales and operating revenue

**$**  **1,239,104**

 

$  1,346,721

 

$  1,395,212

 

Franchise revenue

**9,452**

 

13,583

 

15,015

 

 

**1,248,556**

 

1,360,304

 

1,410,227

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

Cost of merchandise

**349,362**

 

370,693

 

375,836

 

Payroll and related costs

**421,023**

 

446,910

 

431,456

 

Other restaurant operating costs

**256,063**

 

269,414

 

253,134

 

Depreciation and amortization

**74,973**

 

93,845

 

77,351

 

(Income)/loss from Specialty Restaurant Group, LLC

 

 

 

 

 

 

bankruptcy

**(52**

**)**

288

 

5,812

 

Selling, general and administrative, net of support service

 

 

 

 

 

 

fee income totaling $6,295 in 2009, $6,511 in 2008

 

 

 

 

 

 

and $11,326 in 2007

**82,167**

 

114,403

 

112,619

 

Closures and impairments

**55,003**

 

6,165

 

328

 

Goodwill impairment

**18,957**

 

 

 

 

 

Equity in (earnings)/losses of unconsolidated franchises

**(14**

**)**

3,535

 

1,328

 

Interest expense, net of interest income totaling

 

 

 

 

 

 

$1,052 in 2009, $1,411 in 2008 and $2,492 in 2007

**33,940**

 

31,352

 

19,965

 

 

**1,291,422**

 

1,336,605

 

1,277,829

 

 

 

 

 

 

 

 

(Loss)/income before income taxes

**(42,866**

**)**

23,699

 

132,398

 

(Benefit)/provision for income taxes

**(24,948**

**)**

(2,678

)

40,730

 

 

 

 

 

 

 

 

Net (loss)/income

**$**     **(17,918**

**)**

$       26,377

 

$       91,668

 

 

 

 

 

 

 

 

(Loss)/earnings per share:

 

 

 

 

 

 

Basic

**$**         **(0.35**

**)**

$           0.51

 

$           1.60

 

Diluted

**$**         **(0.35**

**)**

$           0.51

 

$           1.59

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

Basic

**51,395**

 

51,572

 

57,204

 

Diluted

**51,395**

 

51,688

 

57,633

 

 

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

 

 

-39-

 

 

Ruby Tuesday, Inc. and Subsidiaries**Consolidated Balance Sheets**(In thousands, except per-share data)

 

**June 2,**

**2009**

 

June 3,

2008

 

Assets:

 

 

 

 

Current assets:

 

 

 

 

Cash and short-term investments

**$**      **9,760**

 

$       16,032

 

Accounts and notes receivable, net

**8,095**

 

10,515

 

Inventories:

 

 

 

 

Merchandise

**12,838**

 

12,511

 

China, silver and supplies

**8,187**

 

8,812

 

Income tax receivable

**8,632**

 

7,708

 

Deferred income taxes

**15,918**

 

4,525

 

Prepaid rent and other expenses

**13,423**

 

20,538

 

Assets held for sale

**16,120**

 

24,268

 

Total current assets

**92,973**

 

104,909

 

 

 

 

 

 

Property and equipment, net

**985,099**

 

1,088,356

 

Goodwill

 

 

18,927

 

Notes receivable, net

**713**

 

1,884

 

Other assets

**45,411**

 

57,861

 

Total assets

**$  1,124,196**

 

$  1,271,937

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

**$**      **21,859**

 

$        26,681

 

Accrued liabilities:

 

 

 

 

Taxes, other than income taxes

**19,120**

 

20,532

 

Payroll and related costs

**12,688**

 

15,579

 

Insurance

**8,369**

 

6,596

 

Deferred revenue – gift cards

**8,046**

 

9,197

 

Rent and other

**27,076**

 

19,267

 

Current maturities of long-term debt, including capital leases

**16,841**

 

17,301

 

Total current liabilities

**113,999**

 

115,153

 

 

 

 

 

 

Long-term debt and capital leases, less current maturities

**476,566**

 

588,142

 

Deferred income taxes

**20,706**

 

27,422

 

Deferred escalating minimum rent

**41,010**

 

42,450

 

Other deferred liabilities

**55,549**

 

67,252

 

Total liabilities

**707,830**

 

840,419

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

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

 

 

 

 

issued:  2009 – 52,806 shares, 2008 – 52,772 shares)

**528**

 

528

 

Capital in excess of par value

**20,804**

 

15,081

 

Retained earnings

**406,951**

 

425,606

 

Deferred compensation liability payable in Company stock

**2,200**

 

2,877

 

Company stock held by Deferred Compensation Plan

**(2,200**

**)**

(2,877

)

Accumulated other comprehensive loss

**(11,917**

**)**

(9,697

)

 

**416,366**

 

431,518

 

Total liabilities and shareholders' equity

**$  1,124,196**

 

$  1,271,937

 

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

-40-

 

 

 

Ruby Tuesday, Inc. and Subsidiaries

**Consolidated Statements of Shareholders’ Equity**

**and Comprehensive (Loss)/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, 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