XNYS:RT Ruby Tuesday Inc Quarterly Report 10-Q Filing - 2/28/2012

Effective Date 2/28/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended:  February 28, 2012
 
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 its 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)  (Zip Code)
 
        Registrant’s telephone number, including area code: (865) 379-5700
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No o
 
Indicate by check mark whether the registrant 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  x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x    Accelerated filer o    Non-accelerated filer o    Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

63,791,178
(Number of shares of common stock, $0.01 par value, outstanding as of April 3, 2012)
 
 
 

 
 
 
RUBY TUESDAY, INC.
 
INDEX
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
     ITEM 1. FINANCIAL STATEMENTS
 
 
                CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
 
                FEBRUARY 28, 2012 AND MAY 31, 2011
 
                CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
                FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED
 
                FEBRUARY 28, 2012 AND MARCH 1, 2011
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH
 
                FLOWS FOR THE THIRTY-NINE WEEKS ENDED
 
                FEBRUARY 28, 2012 MARCH 1, 2011
 
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL
 
                STATEMENTS
 
 
                OF FINANCIAL CONDITION AND RESULTS
 
                OF OPERATIONS
 
 
                MARKET RISK
 
 
 
PART II - OTHER INFORMATION
 
 
     ITEM 5. OTHER INFORMATION 42
     SIGNATURES




 
2

 
 
Special Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q 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 financing on terms attractive to the Company, payment of dividends, stock repurchases, restaurant acquisitions, and conversions of Company-owned restaurants to other dining concepts.  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 spending and free cash flow, and our targets for annual growth in same-restaurant sales and average annual sales per restaurant), including, without limitation, the following:

·  
general economic conditions;

·  
changes in promotional, couponing and advertising strategies;

·  
changes in our guests’ disposable income;

·  
consumer spending trends and habits;

·  
increased competition in the restaurant market;

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

·  
guests’ acceptance of changes in menu items;

·  
guests’ acceptance of our development prototypes, remodeled restaurants, and conversion strategy;

·  
mall-traffic trends;

·  
changes in the availability and cost of capital;

·  
weather conditions in the regions in which Company-owned and franchised restaurants are operated;

·  
costs and availability of food and beverage inventory;

·  
our ability to attract and retain qualified managers, franchisees and team members;

·  
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

 
 
ITEM 1.
 
RUBY TUESDAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER-SHARE DATA)
 
(UNAUDITED)
 
   
FEBRUARY 28,
   
MAY 31,
 
   
2012
   
2011
 
       
Assets
 
(NOTE A)
 
Current assets:
           
      Cash and short-term investments
  $ 8,862     $ 9,722  
      Accounts receivable
    6,942       7,531  
      Inventories:
               
        Merchandise
    23,804       25,627  
        China, silver and supplies
    9,501       8,843  
      Income tax receivable
    710       3,077  
      Deferred income taxes
    12,739       14,429  
      Prepaid rent and other expenses
    13,844       12,797  
      Assets held for sale
    39,077        1,340  
          Total current assets
    115,479       83,366  
                 
Property and equipment, net
    956,152       1,031,151  
Goodwill
    16,919       15,571  
Other assets
    54,060       56,938  
          Total assets
  $ 1,142,610     $ 1,187,026  
 
Liabilities & shareholders’ equity
               
Current liabilities:
               
      Accounts payable
  $ 27,112     $ 29,807  
      Accrued liabilities:
               
        Taxes, other than income and payroll
    11,132       13,695  
        Payroll and related costs
    29,448       27,559  
        Insurance
    7,069       6,581  
        Deferred revenue – gift cards
    11,776       8,731  
        Rent and other
    21,274       17,861  
      Current portion of long-term debt, including capital leases
    14,620       15,090  
          Total current liabilities
    122,431       119,324  
                 
Long-term debt and capital leases, less current maturities
    292,628       329,184  
Deferred income taxes
    37,805       42,923  
Deferred escalating minimum rent
    46,134       44,291  
Other deferred liabilities
    59,189       59,591  
          Total liabilities
    558,187       595,313  
                 
Commitments and contingencies
               
                 
Shareholders’ equity:
               
      Common stock, $0.01 par value; (authorized: 100,000 shares;
               
        issued: 63,791 shares at 2/28/12; 65,098 shares at 5/31/11)
    638       651  
      Capital in excess of par value
    91,113       104,941  
      Retained earnings
    504,801       499,173  
      Deferred compensation liability payable in
               
        Company stock
    1,487       1,556  
      Company stock held by Deferred Compensation Plan
    (1,487 )     (1,556 )
      Accumulated other comprehensive loss
    (12,129 )     (13,052 )
          Total shareholders’ equity
    584,423       591,713  
                 
          Total liabilities & shareholders’ equity
  $ 1,142,610     $ 1,187,026  
 
                   The accompanying notes are an integral part of the condensed consolidated financial statements.
 
4

 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER-SHARE DATA)
 
(UNAUDITED)
 
   
THIRTEEN WEEKS ENDED
   
THIRTY-NINE WEEKS ENDED
 
   
FEBRUARY 28,
   
MARCH 1,
   
FEBRUARY 28,
   
MARCH 1,
 
   
2012
   
2011
   
2012
   
2011
 
             
Revenue:
 
(NOTE A)
   
(NOTE A)
 
                         
     Restaurant sales and operating revenue
  $ 323,464     $ 317,158     $ 958,521     $ 906,745  
     Franchise revenue
    1,363       1,905       4,104       5,455  
      324,827       319,063       962,625       912,200  
Operating costs and expenses:
                               
     Cost of merchandise
    93,084       92,780       282,221       262,410  
     Payroll and related costs
    111,881       106,205       332,645       306,170  
     Other restaurant operating costs
    63,299       65,711       197,383       186,512  
     Depreciation
    16,239       15,597       48,939       46,338  
     Selling, general and administrative, net
    22,925       18,449       73,087       62,229  
     Closures and impairments
    12,317       783       13,415       2,869  
     Equity in losses of unconsolidated
                               
        franchises
            879               649  
     Interest expense, net
    3,850       3,114       11,793       8,133  
      323,595       303,518       959,483       875,310  
Income before income taxes
    1,232       15,545       3,142       36,890  
(Benefit)/provision for income taxes
    (3,304 )     (455 )     (2,486     3,928  
                                 
Net income
  $ 4,536     $ 16,000     $ 5,628     $ 32,962  
                                 
Earnings per share:
                               
                                 
      Basic
  $ 0.07     $ 0.25     $ 0.09     $ 0.52  
                                 
      Diluted
  $ 0.07     $ 0.25     $ 0.09     $ 0.51  
                                 
Weighted average shares:
                               
                                 
      Basic
    62,643       64,177       62,999       63,956  
                                 
      Diluted
    63,053       65,237       63,503       64,849  
                                 
Cash dividends declared per share
  $ -     $ -     $ -     $ -  
 
                 The accompanying notes are an integral part of the condensed consolidated financial statements.
 


 
5

 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 
(UNAUDITED)
 
  
 
THIRTY-NINE WEEKS ENDED
 
  
 
FEBRUARY 28,
2012
   
MARCH 1,
2011
 
             
   
(NOTE A)
 
Operating activities:
           
Net income
  $ 5,628     $ 32,962  
Adjustments to reconcile net income to net cash
               
  provided by operating activities:
               
  Depreciation
    48,939       46,338  
  Amortization of intangibles
    1,550       777  
  Provision for bad debts
    20       437  
  Deferred income taxes
    (5,179     (1,902
  Loss on impairments, including disposition of assets
    12,144       2,786  
  Equity in losses of unconsolidated franchises
            649  
  Share-based compensation expense
    4,448       6,745  
  Excess tax benefits from share-based compensation
    (31 )     (599 )
  Gain on franchise partnership acquisitions, net of settlement losses
    (420 )     (6,789 )
  Other
    462       724  
  Changes in operating assets and liabilities:
               
     Receivables
    (946 )     317  
     Inventories
    1,165       (7,043 )
     Income taxes
    2,367       (3,122 )
     Prepaid and other assets
    (922 )     (908 )
     Accounts payable, accrued and other liabilities
    6,807       5,118  
  Net cash provided by operating activities
    76,032       76,490  
                 
Investing activities:
               
Purchases of property and equipment
    (29,112 )     (18,319 )
Acquisition of franchise and other entities
            (4,369 )
Proceeds from disposal of assets
    5,330       4,721  
Reductions in Deferred Compensation Plan assets
    217       498  
Insurance proceeds from property claims
    1,548          
Other, net
    (429 )     (899 )
  Net cash used by investing activities
    (22,446 )     (18,368 )
                 
Financing activities:
               
Net payments on revolving credit facility
    (22,000 )     (43,700 )
Principal payments on other long-term debt
    (14,220 )     (14,767 )
Stock repurchases
    (18,441        
Proceeds from exercise of stock options
    184       1,903  
Excess tax benefits from share-based compensation
    31       599  
Payments for debt issuance costs
            (2,812 )
  Net cash used by financing activities
    (54,446 )     (58,777 )
                 
Decrease in cash and short-term investments
    (860 )     (655 )
Cash and short-term investments:
               
  Beginning of year
    9,722       9,569  
  End of year
  $ 8,862     $ 8,914  
                 
Supplemental disclosure of cash flow information:
               
      Cash paid/(received) for:
               
        Interest, net of amount capitalized
  $ 12,195     $ 7,874  
        Income taxes, net
  $ 1,571     $ 6,911  
Significant non-cash investing and financing activities:
               
        Retirement of fully depreciated assets
  $ 14,606     $ 13,393  
        Reclassification of properties to assets held for sale or receivables
  $ 40,808     $ 3,851  
        Assumption of debt and capital leases related to franchise
               
           partnership acquisitions
          $ 128,594  
       Liability for claim settlements and insurance receivables
  $ (260 )   $ (2,189 )
 
                 The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
6

 
 
 
NOTE A – BASIS OF PRESENTATION
 
Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” “we” or the “Company”), owns and operates Ruby Tuesday®, Lime Fresh Mexican Grill®, Marlin & Ray’s, Truffles®, and Wok Hay® casual dining restaurants.  We also franchise the Ruby Tuesday concept in select domestic and international markets.  The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring entries) considered necessary for a fair presentation have been included.  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  Operating results for the 13- and 39-week periods ended February 28, 2012 are not necessarily indicative of results that may be expected for the year ending June 5, 2012.
 
The condensed consolidated balance sheet at May 31, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
 
For further information, refer to the consolidated financial statements and footnotes thereto included in RTI’s Annual Report on Form 10-K for the fiscal year ended May 31, 2011.
 
NOTE B – EARNINGS PER SHARE AND STOCK REPURCHASES
 
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during each period presented.  Diluted earnings per share gives effect to stock options and restricted stock outstanding during the applicable periods.  The following table shows the calculation of weighted average common and dilutive potential common shares outstanding as presented in the accompanying Condensed Consolidated Statements of Income (in thousands):

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
February 28,
2012
   
March 1, 
2011
   
February 28,
2012
   
March 1, 
2011
 
  Net income
  $ 4,536     $ 16,000     $ 5,628     $ 32,962  
                                 
  Weighted average common
                               
    shares outstanding
    62,643       64,177       62,999       63,956  
  Dilutive effect of stock
                               
    options and restricted stock
    410       1,060       504       893  
  Weighted average common
                               
    and dilutive potential
                               
    common shares outstanding
    63,053       65,237       63,503       64,849  
  Basic earnings per share
  $ 0.07     $ 0.25     $ 0.09     $ 0.52  
  Diluted earnings per share
  $ 0.07     $ 0.25     $ 0.09     $ 0.51  
 
Stock options with an exercise price greater than the average market price of our common stock and certain options with unrecognized compensation expense do not impact the computation of diluted earnings per share because the effect would be anti-dilutive.  The following table summarizes stock options and restricted shares that did not impact the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect (in thousands):
 
   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
February 28,
2012
   
March 1, 
2011
   
February 28,
2012
   
March 1, 
2011
 
  Stock options
    2,564       2,326       2,237       2,810  
  Restricted shares
    917       388       905       439  
  Total
    3,481       2,714       3,142       3,249  
 
 
7

 
 
During the first quarter of fiscal 2012, we repurchased 2.0 million shares of our common stock at a cost of $18.4 million.  As of February 28, 2012, the total number of remaining shares authorized by our Board of Directors to be repurchased was 5.9 million.  No shares were repurchased during the quarter ended February 28, 2012.
 
NOTE C – FRANCHISE PROGRAMS
 
As of February 28, 2012, our traditional domestic and international franchisees collectively operated 85 Ruby Tuesday restaurants.  We do not own any equity interest in our traditional franchisees.  As discussed further in Note D to the Condensed Consolidated Financial Statements, during fiscal 2011 we acquired the remaining membership interests of 11 franchise partnerships which operated 105 Ruby Tuesday restaurants, an additional Ruby Tuesday restaurant from a twelfth franchise partnership, and three Ruby Tuesday restaurants from a traditional domestic franchise.

Under the terms of the franchise operating agreements, we require all domestic franchisees to contribute a percentage, currently 0.5%, of monthly gross sales to a national advertising fund formed to cover their pro rata portion of the production and airing costs associated with our national advertising campaign.  Under the terms of those agreements, we have the right to charge up to 3.0% of monthly gross sales for this national advertising fund.

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

In addition to the advertising fee discussed above, our franchise agreements allow us to charge up to a 1.5% support service fee and a 1.5% marketing and purchasing fee.  For the 13 and 39 weeks ended February 28, 2012 and March 1, 2011, we recorded $0.1 million and $0.8 million, respectively in fiscal 2012, and $0.9 million and $2.7 million, respectively in fiscal 2011, in support service and marketing and purchasing fees, which were an offset to Selling, general and administrative, net in our Condensed Consolidated Statements of Income.

NOTE D – FISCAL 2011 BUSINESS AND LICENSE ACQUISITIONS

As part of our strategy to generate incremental revenue and EBITDA through new concept conversions and franchise partnership acquisitions, as discussed below, during fiscal 2011 we acquired 109 Ruby Tuesday restaurants, including 106 purchased from certain of our franchise partnerships and three purchased from a traditional domestic franchisee.  Of these 109 Ruby Tuesday restaurants, 96 restaurants were acquired as a result of the following acquisitions during the first three quarters of fiscal 2011.

On August 4, 2010, we acquired the remaining 99% and 50% of the membership interests of RT Long Island Franchise, LLC (“RT Long Island”) and RT New England Franchise, LLC (“RT New England”), respectively, thereby increasing our ownership to 100% of these companies.  RT Long Island and RT New England, previously franchise partnerships with 10 Ruby Tuesday restaurants each, were acquired for $0.2 million plus assumed debt.  As further consideration for the RT Long Island transaction, we surrendered collection of the note receivable and line of credit due from the franchise.  The note and line of credit, net of allowances for doubtful accounts and unearned revenue, totaled $0.4 million at the time of the transaction. RT Long Island and RT New England had total debt of $24.3 million at the time of acquisition, $1.9 million of which was payable to RTI.

On October 13, 2010, we acquired three Ruby Tuesday restaurants from a traditional domestic franchise in Kentucky for $1.6 million in cash.

On February 2, 2011, we acquired the remaining 50% of the membership interests of RT Western Missouri Franchise, LLC; RT Omaha Franchise, LLC; RT KCMO Franchise, LLC (“RT KCMO”); and RT St. Louis Franchise, LLC (“RT St. Louis”); and the remaining 99% of the membership interests of RT Indianapolis Franchise, LLC; RT Portland Franchise, LLC; and RT Denver Franchise, LP; thereby increasing our ownership to 100% of these seven companies.  These franchise partnerships collectively operated 72 restaurants at the time of acquisition, and were acquired for $0.5 million plus assumed debt.  As further consideration for these transactions, we surrendered collection of notes receivable and lines of credit due from certain of these franchisees.  The notes and lines of credit, net of allowances for doubtful accounts,
 
 
8

 
 
totaled $0.9 million at the time of the transactions.  At the time of acquisition, these franchise partnerships had total debt of $106.6 million, $3.8 million of which was payable to RTI.

On February 25, 2011, we acquired one Ruby Tuesday restaurant from RT Utah Franchise, LLC (“RT Utah”), a franchise partnership in which we had a 1% ownership interest, for $2.0 million.  Shortly before completion of this transaction, RT Utah closed its other five restaurants.

We acquired the remaining 13 restaurants during the final quarter of fiscal 2011, as follows.

On May 4, 2011, we acquired the remaining 50% of the membership interest of RT Minneapolis Franchise, LLC; and the remaining 99% of the membership interest of RT Las Vegas Franchise, LLC; thereby increasing our ownership to 100% of these two companies.  These franchise partnerships collectively operated 13 restaurants at the time of acquisition, and were acquired for assumed debt.  At the time of acquisition, these franchise partnerships had total debt of $18.7 million, $0.9 million of which was payable to RTI.

Our Condensed Consolidated Financial Statements reflect the results of operations of these acquired restaurants subsequent to the dates of acquisition.

The purchase prices of acquisitions during fiscal 2011 have been allocated based on fair value estimates as follows (in thousands):
                   
   
As Previously
Reported
   
Adjustments
   
As Adjusted
 
Property and equipment
  $ 137,075     $     $ 137,075  
Goodwill
    15,571       1,348       16,919  
Reacquired franchise rights
    10,242             10,242  
Other intangible assets, net of liabilities of $1,288
    735             735  
Deferred income taxes
    380       (928 )     (548 )
Long-term debt and capital leases
    (147,005 )           (147,005 )
Other net liabilities
    (4,536 )           (4,536 )
Notes receivable
    (1,529 )           (1,529 )
   Net impact on Consolidated Balance Sheet
    10,933       420       11,353  
                         
Gain on settlement of preexisting contracts, net
    (4,906 )           (4,906 )
Gain on acquisitions
    (1,770 )     (420 )     (2,190 )
   Net impact on Consolidated Statements of Income
    (6,676 )     (420 )     (7,096 )
Aggregate cash purchase prices
  $ 4,257     $     $ 4,257  

The RT Long Island, RT St. Louis, and RT KCMO acquisitions were considered bargain purchases as the purchase prices were less than the values assigned to the assets and liabilities acquired.  For the 39 weeks ended March 1, 2011, a preliminary bargain purchase gain of $1.9 million, as well as a $4.9 million gain on settlement of preexisting contracts, was included in Other restaurant operating costs in our Condensed Consolidated Statements of Income.  The preliminary estimate of the gain on acquisitions was adjusted in the fourth quarter of fiscal 2011 and again in the third quarter of fiscal 2012 as additional information was received.
 
We recorded $16.9 million of goodwill due to the purchase price exceeding the estimated fair value of the net assets acquired in certain of the acquisitions.  Of the goodwill recorded, we anticipate that approximately $4.4 million will be nondeductible for tax purposes.
 
We amortize the $10.2 million of reacquired franchise rights associated with these acquisitions on a straight-line basis over the remaining term of the franchise operating agreements, which are approximately two to 12 years from the dates of acquisition.
 
Other intangible assets, net of liabilities consist of assets and liabilities resulting from the terms of acquired operating lease contracts being favorable or unfavorable relative to market terms of comparable leases on the acquisition date.  These assets and liabilities totaled $2.0 million and $1.3 million, respectively, at the
 
 
9

 
 
time of acquisition and will be amortized as a component of rent expense over the remaining lives of the leases, which are approximately one to 33 years.
 
The table below shows operating results attributable to the restaurants acquired from franchisees in fiscal 2011 that are included in our Condensed Consolidated Statements of Income for the 13 and 39 weeks  ended February 28, 2012 and March 1, 2011 (in thousands).  Amounts shown for the 13 and 39 weeks ended February 28, 2012 include results for all 109 restaurants acquired during fiscal 2011 while amounts shown for the 13 and 39 weeks ended March 1, 2011 include results for the 96 restaurants acquired during the first three quarters of fiscal 2011 (from the dates of acquisition as mentioned above through March 1, 2011).
 
   
(Unaudited)
 
   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
February 28,
2012
   
March 1, 
2011
   
February 28,
2012
   
March 1, 
2011
 
  Total revenue
  $ 41,412     $ 19,649     $ 128,303     $ 32,975  
 
                               
  Cost of merchandise
    11,908       5,804       37,545       9,629  
  Payroll and related costs
    14,884       6,578       45,848       10,981  
  Other restaurant operating costs
    8,950       4,580       27,725       7,684  
  Depreciation
    2,089       848       6,356       1,665  
  Selling, general, and administrative, net
    2,384       1,009       8,232       1,807  
      40,215       18,819       125,706       31,766  
  Income before income taxes
  $ 1,197     $ 830     $ 2,597     $ 1,209  

The following table presents supplemental pro forma information for the 13 and 39 weeks ended March 1, 2011 as if the 106 restaurants acquired during fiscal 2011 from franchise partnerships had occurred on June 2, 2010 for the 13 and 39 weeks ended March 1, 2011 (in thousands except per-share data):

 
(Unaudited)
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
March 1, 2011
 
March 1, 2011
 
         
Total revenue
$ 345,061   $ 1,017,833  
Net income
$ 15,171   $ 31,992  
Basic earnings per share
$ 0.24   $ 0.50  
Diluted earnings per share
$ 0.23   $ 0.49  

The unaudited pro forma consolidated results were prepared using the acquisition method of accounting and are based on the historical financial information of RTI and the franchises, reflected in fiscal 2011 RTI and franchise results of operations.  The historical financial information has been adjusted to give effect to the pro forma events that are: (1) directly attributable to the acquisitions, (2) factually supportable and (3) expected to have a continuing impact on the combined results.  The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had we completed the acquisitions on June 2, 2010.  In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings or otherwise improved profits associated with the acquisitions.  The unaudited pro forma consolidated results for the 13 and 39 weeks ended March 1, 2011 reflect the following pro forma pre-tax adjustments:

·  
Elimination of the franchises’ historical intangible asset amortization expense (approximately $0.1 million and $0.2 million, respectively).
·  
Elimination of RTI’s franchise revenue (approximately $0.1 million and $0.5 million, respectively).
·  
Elimination of RTI’s support service fee income and marketing reimbursements (approximately $0.6 million and $1.9 million, respectively).
·  
Elimination of RTI’s equity in losses of unconsolidated franchises (approximately $0.9 million and $0.6 million, respectively).
 
 
10

 
 
·  
Elimination of RTI’s bad debt charges relating to notes receivable and lines of credit due from the acquired franchises (approximately $0.3 million and $0.2 million, respectively).
·  
Additional amortization expense (approximately $0.2 million and $0.8 million, respectively) related to reacquired franchise rights.
·  
Additional depreciation expense (approximately $0.1 million and $0.6 million, respectively) related to the fair value adjustments to property and equipment acquired.
·  
Reduced interest expense (approximately $0.2 million and $0.8 million, respectively) related to the fair value adjustments of acquired franchise debt.
·  
Elimination of acquisition-related expenses (approximately $0.1 million and $0.2 million, respectively).
 
All of the above adjustments were adjusted for the applicable tax impact, which for the above would be the statutory tax rate of 39.7%.  In addition, the pro forma net income and earnings per share amounts presented above reflect our estimates of the franchises’ FICA Tip and Work Opportunity Tax Credits for the portions of the fiscal year prior to the dates of acquisition.  These credits were $0.2 million and $0.6 million, respectively, for the 13 and 39 weeks ended March 1, 2011.

License Acquisitions
On September 13, 2010, we entered into a licensing agreement with LFMG International, LLC which allows us to operate multiple restaurants under the Lime Fresh Mexican Grill® (“Lime”) name.  Lime is a fast-casual Mexican concept that currently operates several restaurants primarily in the vicinity of Miami, Florida.  The Lime concept menu features items such as homemade tortilla chips, customizable nachos, flautas, salads, soups, fajitas, quesadillas, tacos, burritos, and salsa and guacamole.  Under the terms of the agreement, we paid an initial development fee of $1.0 million and agreed to pay a license agreement fee of $5,000 for each Lime restaurant we open, up to a maximum of 200 restaurants.  In addition, we agreed to pay a royalty fee of 2.0%, and an advertising fee of 1.0%, of gross sales of any Lime restaurant that we open.  As of February 28, 2012, we owned and operated three Lime restaurants.  As further discussed in Note Q to the Condensed Consolidated Financial Statements, subsequent to February 28, 2012, we initiated the acquisition of certain assets of Lime Fresh Mexican Grill, Inc. and certain of its affiliated companies for $24.0 million.  We expect this transaction to be completed during our fourth quarter of fiscal 2012.

Additionally, on July 22, 2010, following the approval of the Audit Committee of our Board of Directors, we entered into a licensing agreement with Gourmet Market, Inc. which is owned by our Chief Executive Officer’s brother, Price Beall.  The licensing agreement allows us to operate multiple restaurants under the Truffles® name.  Truffles is an upscale café concept that currently operates several restaurants in the vicinity of Hilton Head Island, South Carolina.  The Truffles concept offers a diverse menu featuring soups, salads, and sandwiches, a signature chicken pot pie, house-breaded fried shrimp, pasta, ribs, steaks, and a variety of desserts.

Under the terms of the agreement, we will pay a licensing fee to Gourmet Market, Inc. of 2.0% of gross sales of any Truffles we open.  Additionally, we will pay Gourmet Market, Inc. a monthly fee for up to two years for consulting services to be provided by Price Beall to assist us in developing and opening Truffles restaurants under the terms of the licensing agreement.  During the first 12 months of the agreement we will pay $20,833 per month for such services.  During the second 12 months of the agreement we will pay either $20,833 per month if we have a communicated plan to develop three or more Truffles restaurants or $10,417 per month if we have a communicated plan to develop two or fewer Truffles restaurants.  Gourmet Market, Inc. has the option to terminate future development rights if we do not operate 18 or more Truffles restaurants within five years or 40 or more Truffles within 10 years of the effective date of the agreement.  Management has yet to determine if it will open 18 or more Truffles restaurants within five years or 40 or more Truffles within 10 years.  We opened our first Truffles in Atlanta, Georgia in December 2010 and our second in Orlando, Florida in November 2011.  During the 13 and 39 weeks ended February 28, 2012 and March 1, 2011, we paid Gourmet Market, Inc. $49,108 and $147,205, and $70,912 and $154,246, respectively, under the terms of the agreement.
 
 
11

 
 
NOTE E – ACCOUNTS RECEIVABLE
 
Accounts receivable – current consist of the following (in thousands):
 
   
February 28, 2012
   
May 31, 2011
 
             
Rebates receivable
  $ 846     $ 1,055  
Amounts due from franchisees
    2,625       2,506  
Other receivables
    3,471       3,970  
    $ 6,942     $ 7,531  
 
We negotiate purchase arrangements, including price terms, with designated and approved suppliers on behalf of us and our franchise system.  We receive various volume discounts and rebates based on purchases for our Company-owned restaurants from numerous suppliers.
 
Amounts due from franchisees consist of royalties, license and other miscellaneous fees, a substantial portion of which represents current and recently-invoiced billings.  Also included in this amount is the current portion of the straight-lined rent receivable from franchise sublessees.
 
We defer recognition of 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 borrowed directly from us.  We also do not recognize franchise fee revenue from franchises with fees in excess of 60 days past due.  Accordingly, we have deferred recognition of a portion of franchise revenue from certain franchisees.  Unearned income for franchise fees was $2.1 million and $1.2 million as of February 28, 2012 and May 31, 2011, respectively, which is included in Other deferred liabilities and/or Accrued liabilities – rent and other in the Condensed Consolidated Balance Sheets.

As of February 28, 2012 and May 31, 2011, other receivables consisted primarily of amounts due for third-party gift card sales ($1.0 million and $1.3 million, respectively), amounts due from our distributor for purchases of lobster ($1.0 million and $0.7 million, respectively), and amounts due relating to insurance claims ($0.6 million and $1.2 million, respectively).  See Note F to the Condensed Consolidated Financial Statements for discussion of our lobster inventory.

NOTE F – INVENTORIES

Beginning in fiscal 2010, we have purchased lobster in advance of our needs and stored it in third-party facilities prior to our distributor taking possession of the inventory.  Once the lobster is moved to our distributor’s facilities, we transfer ownership to the distributor.  We later reacquire the inventory from our distributor upon its subsequent delivery to our restaurants.  Lobster purchases are included within merchandise inventory in our Condensed Consolidated Balance Sheets.  Our merchandise inventory was $23.8 million and $25.6 million as of February 28, 2012 and May 31, 2011, respectively.
 

 
12

 
 
NOTE G – PROPERTY, EQUIPMENT, ASSETS HELD FOR SALE, OPERATING LEASES, AND SALE-LEASEBACK TRANSACTIONS
 
Property and equipment, net, is comprised of the following (in thousands):
 
   
February 28, 2012
   
May 31, 2011
 
Land
  $ 241,091     $ 256,761  
Buildings
    478,283       512,177  
Improvements
    418,803       427,169  
Restaurant equipment
    273,853       279,319  
Other equipment
    94,230       93,944  
Construction in progress and other*
    24,061       28,077  
      1,530,321       1,597,447  
Less accumulated depreciation
    574,169       566,296  
    $ 956,152     $ 1,031,151  

* Included in Construction in progress and other as of February 28, 2012 and May 31, 2011 are $19.1 million and $23.3 million, respectively, of assets held for sale that are not classified as such in the Condensed Consolidated Balance Sheets as we do not expect to sell these assets within the next 12 months.  These assets primarily consist of parcels of land upon which we have no intention to build restaurants.

Amounts included in assets held for sale at February 28, 2012 and May 31, 2011 totaled $39.1 million and $1.3 million, respectively, primarily consisting of operating restaurants expected to be sold in sale-leaseback transactions, parcels of land upon which we have no intention to build restaurants, land and buildings of closed restaurants, and various liquor licenses.  In addition to operating restaurants sold and leased back, as discussed below, during the 13 and 39 weeks ended February 28, 2012, we sold surplus properties with carrying values of $1.5 million and $2.9 million, respectively, at net gains of $0.1 million and $0.2 million, respectively.  Cash proceeds, net of broker fees, from these sales during the 13 and 39 weeks ended February 28, 2012 totaled $1.5 million and $3.1 million, respectively.  During the 13 and 39 weeks ended March 1, 2011, we sold surplus and other properties with carrying values of $3.9 million and $4.8 million, respectively, at net losses of $0.1 million for each period.  Cash proceeds, net of broker fees, from these sales during the 13 and 39 weeks ended March 1, 2011 totaled $3.8 million and $4.7 million, respectively.

Approximately 51% of our 740 Ruby Tuesday restaurants are located on leased properties.  Of these, approximately 66% are land leases only; the other 34% are for both land and building.  The initial terms of these leases expire at various dates over the next 25 years.  These leases may also contain required increases in minimum rent at varying times during the lease term and have options to extend the terms of the leases at a rate that is included in the original lease agreement.  Most of our leases require the payment of additional (contingent) rent that is based upon a percentage of restaurant sales above agreed upon sales levels for the year.  These sales levels vary for each restaurant and are established in the lease agreements.  We recognize contingent rental expense (in annual as well as interim periods) prior to the achievement of the specified target that triggers the contingent rental expense, provided that achievement of that target is considered probable.

Sale-Leaseback Transactions
During the 13 weeks ended February 28, 2012, we completed the sale-leaseback of the land and building for a Company-owned Ruby Tuesday concept restaurant for gross cash proceeds of $2.3 million, exclusive of transaction costs of approximately $0.1 million.  Equipment was not included. The carrying value of the property sold was $1.5 million.  The lease has been classified as an operating lease and has an initial term of 15 years, with renewal options of up to 20 years.  Net proceeds from the sale-leaseback transaction were used to pay down certain of our mortgage loan obligations.

We realized a gain on this transaction of $0.7 million, which has been deferred and is being recognized on a straight-line basis over the initial term of the lease.  The current and long-term portions of the deferred gain are included in Accrued liabilities- Rent and other and Other deferred liabilities, respectively, in our
 
 
13

 
 
February 28, 2012 Condensed Consolidated Balance Sheet.  Amortization of the deferred gains is included as a reduction to rent expense and is included within Other restaurant operating costs in our Condensed Consolidated Statements of Income for the 13 and 39 weeks ended February 28, 2012.

As of February 28, 2012, 21 of our Ruby Tuesday concept restaurant properties have been classified within Assets held for sale in our Condensed Consolidated Balance Sheet in anticipation of future sale-leaseback transactions.  These properties had carrying values of $35.1 million as of February 28, 2012.  See Note Q to the Condensed Consolidated Financial Statements for a discussion of sale-leaseback transactions which occurred subsequent to February 28, 2012 but prior to the date of the filing of this Quarterly Report on Form 10-Q.

NOTE H – LONG-TERM DEBT AND CAPITAL LEASES

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

   
February 28, 2012
   
May 31, 2011
 
Revolving credit facility
  $ 155,000     $ 177,000  
Series B senior notes,
               
due April 2013
    44,442       44,442  
Mortgage loan obligations
    107,568       122,546  
Capital lease obligations
    238       286  
      307,248       344,274  
Less current maturities
    14,620       15,090  
    $ 292,628     $ 329,184  

On December 1, 2010, we entered into a five-year revolving credit agreement (the “Credit Facility”).  Under the original terms of the Credit Facility, we were allowed to borrow up to $320.0 million with the option to increase our capacity by $50.0 million to $370.0 million.  On July 19, 2011, we entered into an amendment of the Credit Facility to increase the amount of the optional additional revolving commitments available from $50.0 million to $60.0 million, thereby increasing the maximum aggregate revolving commitment amount under the Credit Facility from $370.0 million to $380.0 million.   On the same date, we exercised our option to increase the revolving commitments from $320.0 million to $380.0 million pursuant to new lender commitment agreements with the existing lenders and an additional new lender.

The terms of the Credit Facility provide for a $40.0 million swingline subcommitment and a $50.0 million letter of credit subcommitment.  The Credit Facility also includes a $50.0 million franchise facility subcommitment, which covered our guarantees of debt of the franchise partners (the “Franchise Facility Subcommitment”).  All amounts guaranteed under the Franchise Facility Subcommitment were settled during fiscal 2011.

The interest rates charged on borrowings pursuant to the Credit Facility can vary depending on the interest rate option we choose to utilize.  Our Base Rate for borrowings is defined to be the higher of Bank of America’s prime rate, the Federal Funds Rate plus 0.5%, or an adjusted LIBO Rate plus 1.00%, plus an applicable margin ranging from 0.25% to 1.25%.  The applicable margin for our Eurodollar Borrowings ranges from 1.25% to 2.25%.

Under the terms of the Credit Facility, we had borrowings of $155.0 million with an associated floating rate of interest of 2.50% at February 28, 2012.  As of May 31, 2011, we had $177.0 million outstanding with an associated floating rate of interest of 2.27%.  After consideration of letters of credit outstanding, we had $215.7 million available under the Credit Facility as of February 28, 2012.  The Credit Facility will mature on December 1, 2015.

The Credit Facility contains financial covenants relating to the maintenance of leverage and fixed charge coverage ratios and minimum net worth.  We were in compliance with our debt covenants as of February 28, 2012 and the date of this filing.

On April 3, 2003, we issued notes totaling $150.0 million through a private placement of debt (the “Private Placement”).  On December 1, 2010, we entered into an amendment of the notes issued in the Private Placement.  Among other changes, this amendment conformed the covenants in this agreement to the covenants contained in the Credit Facility discussed above.
 
 
14

 
 
At February 28, 2012 and May 31, 2011, the Private Placement consisted of $44.4 million in notes with an interest rate of 7.17% (the “Series B Notes”).  The Series B Notes mature on April 1, 2013, and thus have been classified as non-current in our February 28, 2012 and May 31, 2011 Condensed Consolidated Balance Sheets.

Our $107.6 million in mortgage loan obligations as of February 28, 2012 consists of various loans acquired upon franchise acquisitions.  These loans, which mature between June 2012 and March 2024, have balances which range from negligible to $8.4 million and interest rates of 3.37% to 11.28%.  Many of the properties acquired from franchisees collateralize the loans outstanding.
 
NOTE I – CLOSURES AND IMPAIRMENTS EXPENSE
 
Closures and impairment expenses include the following for the 13 and 39 weeks ended February 28, 2012 and March 1, 2011 (in thousands):
 
   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
February 28,
2012
   
March 1, 
2011
   
February 28,
2012
   
March 1, 
2011
 
  Property impairments
  $ 11,534     $ 888     $ 12,370     $ 2,226  
  Closed restaurant lease reserves
    776       (432 )     702       231  
  Other closing costs
    125       150       541       232  
  (Gain)/loss on sale of surplus properties
    (118 )     177       (198 )     180  
 
  $ 12,317     $ 783     $ 13,415     $ 2,869  

Included in the amounts shown above for the 13 and 39 weeks ended February 28, 2012 are property impairments of $9.6 million resulting from management’s third fiscal quarter decision to close 25 to 27 restaurants during the fourth quarter of fiscal 2012 and 10 restaurants thereafter upon expiration of the leases.  As discussed further in Note Q to the Condensed Consolidated Financial Statements, the Board of Directors approved management’s plan to close these restaurants at its regular Board meeting on April 4, 2012.

A rollforward of our future lease obligations associated with closed properties is as follows (in thousands):

   
Lease Obligations
 
  Balance at May 31, 2011
  $ 2,660  
  Closing expense including rent and other lease charges
    702  
  Payments
    (685 )
  Other adjustments
    (138 )
  Balance at February 28, 2012
  $ 2,539  

For the remainder of fiscal 2012 and beyond, our focus will be on obtaining settlements on as many of these leases as possible and these settlements could be higher or lower than the amounts recorded.  The actual amount of any cash payments made by the Company for lease contract termination costs will be dependent upon ongoing negotiations with the landlords of the leased restaurant properties.

At February 28, 2012, we had 37 restaurants that had been open more than one year with rolling 12-month negative cash flows of which 28 have been impaired to salvage value.  Of the nine which remained, we reviewed the plans to improve cash flows at each of the restaurants and recorded impairment expense as necessary.  The remaining net book value of these nine restaurants was $12.2 million at February 28, 2012.
 
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.

 
15

 
 
NOTE J – RETIREMENT BENEFITS
 
We sponsor three defined benefit pension plans for active employees and offer certain postretirement benefits for retirees.  A summary of each of these is presented below.
 
Retirement Plan
RTI sponsors the Morrison Restaurants Inc. Retirement Plan (the “Retirement Plan”).  Effective December 31, 1987, the Retirement Plan was amended so that no additional benefits would accrue and no new participants could enter the Retirement Plan after that date.  Participants receive benefits based upon salary and length of service.
 
Minimum funding for the Retirement Plan is determined in accordance with the guidelines set forth in employee benefit and tax laws.  From time to time we may contribute additional amounts as we deem appropriate.  We estimate that we will be required to make contributions totaling $0.2 million to the Retirement Plan during the remainder of fiscal 2012.
 
Executive Supplemental Pension Plan and Management Retirement Plan
Under these unfunded defined benefit pension plans, eligible employees earn supplemental retirement income based upon salary and length of service, reduced by social security benefits and amounts otherwise receivable under other specified Company retirement plans.  Effective June 1, 2001, the Management Retirement Plan was amended so that no additional benefits would accrue and no new participants could enter the plan after that date.

As discussed further in Note N to the Condensed Consolidated Financial Statements, we are contingently liable for retirement benefits accrued through March 1996 for certain employees of two companies formerly owned by RTI.

Because our Chief Executive Officer (“CEO”) is currently retirement-eligible and would be entitled to receive his entire pension payment in a lump sum six months following his retirement, we have classified an amount representing that pension payment ($8.1 million) into Accrued liabilities – payroll and related costs in our February 28, 2012 and May 31, 2011 Condensed Consolidated Balance Sheets.

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

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

 
Pension Benefits
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
February 28,
 
March 1,
 
February 28,
 
March 1,
 
 
2012
 
2011
 
2012
 
2011
 
Service cost
  $ 134     $ 129     $ 402     $ 387  
Interest cost
    576       573       1,728       1,719  
Expected return on plan assets
    (126 )     (98 )     (378 )     (294 )
Amortization of prior service cost
    64       82       192       246  
Recognized actuarial loss
    426       398       1,278       1,194  
Net periodic benefit cost
  $ 1,074     $ 1,084     $ 3,222     $ 3,252  
     
 
 
16

 
     
 
Postretirement Medical and Life Benefits
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
February 28,
 
March 1,
 
February 28,
 
March 1,
 
 
2012
 
2011
 
2012
 
2011
 
Service cost
  $ 2     $ 2     $ 6     $ 6  
Interest cost
    18       19       54       57  
Amortization of prior service cost
    (14 )     (15 )     (42 )     (45 )
Recognized actuarial loss
    34       28       102       84  
Net periodic benefit cost
  $ 40     $ 34     $ 120     $ 102  
 
We also sponsor two defined contribution retirement savings plans. Information regarding these plans is included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2011.
 
NOTE K – INCOME TAXES
 
The effective tax rate for the 13- and 39- week periods ended February 28, 2012 was (268.2)% and (79.1)%, respectively, as compared to (2.9)% and 10.6%, respectively, for the same periods of the prior year.  The change in the effective tax rate for the 13-week period ended February 28, 2012 was attributable to a decrease in unrecognized tax benefits as a result of the expiration of statute of limitations in certain federal and state jurisdictions and an increase in FICA Tip and Work Opportunity Tax Credits recognized for the quarter.  The change in the effective tax rate for the 39-week period ended February 28, 2012 was further attributable to a higher percentage benefit for FICA Tip and Work Opportunity Tax Credits as a result of lower pretax income for the current quarter compared to the same period of the prior year.

Included in income tax expense for both the 13 and 39 weeks ended February 28, 2012 was $0.5 million, representing the change in our valuation allowance for state net operating losses that, in the judgment of management, are not more likely than not to be realized.  This determination factored in the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected taxable income, and tax-planning strategies.  Primarily as a result of state tax planning, the Company has a three-year cumulative pre-tax loss in certain states which was given significant weight in our assessment.

We had a liability for unrecognized tax benefits of $4.4 million and $5.2 million as of February 28, 2012 and May 31, 2011, respectively.  As of February 28, 2012 and May 31, 2011, the total amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate was $2.8 million and $3.4 million, respectively.  The liability for unrecognized tax benefits as of February 28, 2012 includes $1.6 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations and negotiations with tax authorities.  

Interest and penalties related to unrecognized tax benefits are recognized as components of income tax expense.  As of February 28, 2012 and May 31, 2011, we had accrued $1.4 million and $1.6 million, respectively, for the payment of interest and penalties.  During the first 39 weeks of fiscal 2012, accrued interest and penalties decreased by $0.1 million, the majority of which affected the effective tax rate for the same time period.

At February 28, 2012, we are no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2008 with the exception of our fiscal years 2004 and 2005 as a result of fiscal 2009 NOL carryback, and with few exceptions, state and local examinations by tax authorities prior to fiscal year 2008.
 

 
17

 
 
NOTE L – COMPREHENSIVE INCOME
 
U.S. GAAP require the disclosure of certain revenue, expenses, gains and losses that are excluded from net income.  Items that currently impact our other comprehensive income are pension liability adjustments.  Amounts shown in the table below are in thousands.

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
February 28,
2012
   
March 1, 
2011
   
February 28,
2012
   
March 1, 
2011
 
Net income
  $ 4,536     $ 16,000     $ 5,628     $ 32,962  
Pension liability reclassification, net of tax
    307       297       923       892  
Comprehensive income
  $ 4,843     $ 16,297     $ 6,551     $ 33,854  
 
NOTE M – SHARE-BASED EMPLOYEE COMPENSATION
 
We compensate our employees and Directors using share-based compensation through the following plans:

The Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan for Directors
Under the Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan for Directors (the “Directors’ Plan”), non-employee directors are eligible for awards of share-based incentives.  Restricted shares granted under the Directors’ Plan vest in equal amounts after one, two, and three years provided the Director continually serves on the Board.  Options issued under the Directors’ Plan become vested after 30 months and are exercisable until five years after the grant date.  Stock option exercises are settled with the issuance of new shares of common stock.

All options awarded under the Directors’ Plan have been at the fair market value at the time of grant.  A Committee, appointed by the Board, administers the Directors’ Plan.  At February 28, 2012, we had reserved 111,000 shares of common stock under the Directors’ Plan, 47,000 of which were subject to options outstanding, for a net of 64,000 shares of common stock currently available for issuance under the Directors’ Plan.

The Ruby Tuesday, Inc. 2003 Stock Incentive Plan and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan
A Committee, appointed by the Board, administers the Ruby Tuesday, Inc. 2003 Stock Incentive Plan (“2003 SIP”) and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan (“1996 SIP”), and has full authority in its discretion to determine the key employees and officers to whom share-based incentives are granted and the terms and provisions of share-based incentives.  Option grants under the 2003 SIP and 1996 SIP can have varying vesting provisions and exercise periods as determined by such Committee.  Options granted under the 2003 SIP and 1996 SIP vest in periods ranging from immediate to fiscal 2014, with the majority vesting within three years following the date of grant, and the majority expiring five or seven (but some up to 10) years after grant.  The majority of currently unvested restricted shares granted in fiscal 2012 and 2010 are performance-based.  All of the currently unvested restricted shares granted during fiscal 2011 are service-based.  The 2003 SIP and 1996 SIP permit the Committee to make awards of shares of common stock and awards of stock options or other derivative securities related to the value of the common stock.  These discretionary awards may be made on an individual basis or for the benefit of a group of eligible persons.  All options awarded under the 2003 SIP and 1996 SIP have been awarded with an exercise price equal to the fair market value at the time of grant.

At February 28, 2012, we had reserved a total of 5,090,000 and 1,024,000 shares of common stock for the 2003 SIP and 1996 SIP, respectively.  Of the reserved shares at February 28, 2012, 2,357,000 and 982,000 were subject to options outstanding for the 2003 SIP and 1996 SIP, respectively.  Stock option exercises are settled with the issuance of new shares.  Net shares of common stock available for issuance at February 28, 2012 under the 2003 SIP and 1996 SIP were 2,733,000 and 42,000, respectively.


 
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Stock Options
The following table summarizes the activity in options for the 39 weeks ended February 28, 2012 under these stock option plans (in thousands except per-share data):
 
         
Weighted
 
         
Average
 
   
Options
   
Exercise Price
 
Balance at May 31, 2011          3,239     $  13.10  
Granted
    253       7.87  
Exercised
    (35 )     5.26  
Forfeited
    (71 )     28.70  
Balance at February 28, 2012
    3,386     $ 12.46  
                 
Exercisable at February 28, 2012
    2,309     $ 14.31  
 
Included in the outstanding balance shown above are approximately 1,772,000 of out-of-the-money options.  Of this amount, we expect that approximately 845,000 of these options will expire out-of-the-money in the next year.
 
At February 28, 2012, there was approximately $0.6 million of unrecognized pre-tax compensation expense related to non-vested stock options.  This cost is expected to be recognized over a weighted average period of 1.0 years.
 
During the first quarter of fiscal 2012, we granted approximately 253,000 stock options to our CEO under the terms of the 2003 SIP.  These stock options vest in equal annual installments over a three-year period following grant of the award, and have a maximum life of seven years.  These stock options provide for immediate vesting if the optionee retires during the option period as well as if certain other events occur.  As our CEO was retirement-eligible at the time of grant, the accelerated vesting provision rendered the requisite service condition non-substantive under GAAP, and we therefore fully expensed the $1.2 million fair value of stock options awarded to our CEO on the date of grant.

Restricted Stock
The following table summarizes our restricted stock activity for the 39 weeks ended February 28, 2012 (in thousands except per-share data):

         
Weighted Average
 
   
Restricted
   
Grant-Date
 
Performance-based vesting:
 
Stock
   
Fair Value
 
Non-vested at May 31, 2011
    299     $ 7.24  
Granted
    384       7.87  
Vested
    (242 )     7.39  
Forfeited
           
Non-vested at February 28, 2012
    441     $ 7.70  
           
Weighted Average
 
   
Restricted
   
Grant-Date
 
Service-based vesting:
 
Stock
   
Fair Value
 
Non-vested at May 31, 2011
    551     $ 8.22  
Granted
    274       7.68  
Vested
    (122 )     8.02  
Forfeited
    (1 )     9.39  
Non-vested at February 28, 2012
    702     $ 8.04  

The fair values of the restricted share awards reflected above were based on the fair market value of our common stock at the time of grant.  At February 28, 2012, unrecognized compensation expense related to restricted stock grants expected to vest totaled approximately $2.9 million and will be recognized over a weighted average vesting period of approximately 1.4 years.

 
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During the second quarter of fiscal 2012, RTI granted approximately 88,000 restricted shares to non-employee directors under the terms of the Directors’ Plan.  These shares vest in equal annual installments over a three year period following grant of the award.

During the first quarter of fiscal 2012, we granted approximately 186,000 service-based restricted shares and 384,000 performance-based restricted shares of our common stock to certain employees under the terms of the 2003 SIP and 1996 SIP.  The service-based restricted shares cliff vest on December 1, 2013.  Vesting of the performance-based restricted shares, including 203,000 shares that were awarded to our CEO, is also contingent upon the Company’s achievement of certain performance conditions related to fiscal 2012 performance, which will be measured in the first quarter of fiscal 2013.  In addition to satisfaction of the performance conditions for the performance-based restricted shares, recipients must satisfy the same service condition as described above for the service-based restricted shares.

For the same reason as mentioned above in regards to our stock options, we recorded during the first quarter of fiscal 2012 an expense of $0.7 million related to the performance-based restricted shares awarded on August 23, 2011 to our CEO.  Should our CEO retire prior to the end of the performance period, the number of restricted shares he would receive would not be determinable until the completion of the performance period.  The expense we recorded for this award was determined using a model that estimated the projected achievement of the performance conditions.

NOTE N – COMMITMENTS AND CONTINGENCIES

Guarantees
At February 28, 2012, we had certain third-party guarantees, which primarily arose in connection with our divestiture activities.  The majority of these guarantees have no expiration date.  Generally, we are required to perform under these guarantees in the event that a third-party fails to make contractual payments.

During fiscal 1996, our shareholders approved the distribution of our family dining restaurant business (Morrison Fresh Cooking, Inc., “MFC”) and our health care food and nutrition services business (Morrison Health Care, Inc., “MHC”). Subsequently, Piccadilly Cafeterias, Inc. (“Piccadilly”) acquired MFC and Compass Group (“Compass”) acquired MHC. Prior to the distribution, we entered into various guarantee agreements with both MFC and MHC, most of which have expired. As agreed upon at the time of the distribution, we have been contingently liable for payments to MFC and MHC employees retiring under MFC’s and MHC’s versions of the Management Retirement Plan and the Executive Supplemental Pension Plan (the two non-qualified defined benefit plans) for the accrued benefits earned by those participants as of March 1996.

On October 29, 2003, Piccadilly filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court in Fort Lauderdale, Florida.  Following this, we have recorded, and begun to pay, our pro-rata share of the Piccadilly liabilities for which we have provided guarantees, including those for MFC employee benefit plans.

We estimated our divestiture guarantees related to MHC at February 28, 2012 to be $2.7 million for employee benefit plans.  In addition, we remain contingently liable for MHC’s portion (estimated to be $1.9 million) of the MFC employee benefit plan liability for which MHC is currently responsible under the divestiture guarantee agreements.  We believe the likelihood of being required to make payments for MHC’s portion to be remote due to the size and financial strength of MHC and Compass.

Litigation
We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business.  We provide reserves for such claims when payment is probable and estimable in accordance with U.S. GAAP.  At this time, in the opinion of management, the ultimate resolution of pending legal proceedings, including the matter referred to below, will not have a material adverse effect on our operations, financial position, or cash flows.

On September 30, 2009, the U.S. Equal Employment Opportunity Commission (“EEOC”) Pittsburgh Area Office filed suit in the United States District Court for the Western District of Pennsylvania, Civil Action No. 2:09-cv-01330-DSC, alleging the Company was in violation of the Age Discrimination in Employment Act (“ADEA”) by failing to hire employees within the protected age group in five Pennsylvania restaurants and one Ohio restaurant.
 
 
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On October 19, 2009, the EEOC filed a Notice of an ADEA Directed Investigation (“DI”), Charge No. 533-2010-00062, regarding potential age discrimination in violation of the ADEA in hiring and discharge for all positions at all restaurant facilities.  On September 20, 2011, the EEOC issued a subpoena for records relating to the DI.  On January 10, 2012, the EEOC sought to enforce the subpoena in federal court in Pittsburgh.  We have denied the allegations in the lawsuit and are vigorously defending against both the suit and the DI.  Discovery in both matters is underway.  Despite the pending suit and DI, we do not believe that this matter will have a material adverse effect on our operations, financial position, or cash flows.

On November 8, 2010, a personal injury case styled Dan Maddy v. Ruby Tuesday, Inc., which had been filed in the Circuit Court for Rutherford County, Tennessee, was resolved through mediation.  Given that we maintain primary and secondary insurance coverage for claims such as the Maddy case, and we had previously paid the amount required by our self-insured retention limit, no payment was made by us at settlement.

Included in the Maddy settlement was a payment made by our secondary insurance carrier of $2,750,000.  Despite making this voluntary payment, our secondary insurance carrier has now filed a counterclaim against us in the coverage suit we had brought against that carrier prior to the Maddy settlement.  The counterclaim is based on our alleged failure to timely notify the carrier of the underlying case in accordance with the terms of the policy and that we have been “unjustly enriched” by the settlement as a result of the carrier’s payment of a portion of the Maddy settlement. 

Following the settlement, we dismissed our claims for bad faith, breach of contract and violation of the state consumer act, which we had pursued against that carrier.  We preserved certain claims, including a claim for attorney’s fees, against that carrier in the event we are successful in this litigation.  We believe our secondary insurance carrier received timely notice in accordance with the policy and we will vigorously defend this matter.  Should we incur potential liability to our secondary carrier, we believe we have indemnification claims against two claims administrators. 

We believe, and have obtained a consistent opinion from outside counsel, that we have valid coverage under our insurance policies for any amounts in excess of our self-insured retention.  We believe this provides a basis for not recording a liability for any contingency associated with the Maddy settlement.  We further believe we have the right to the indemnification referred to above.  Based on the information currently available, our February 28, 2012 and May 31, 2011 Condensed Consolidated Balance Sheets reflect no accrual relating to the Maddy case.  There can be no assurance, however, that we will be successful in our defense of our carrier’s counterclaim against us.

NOTE O – FAIR VALUE MEASUREMENTS

The following table presents the fair values of our financial assets and liabilities measured at fair value on a recurring basis as of February 28, 2012 and May 31, 2011 (in thousands):

   
Fair Value Measurements
 
   
Level
   
February 28, 2012
   
May 31, 2011
 
Deferred compensation plan – Assets
    1     $ 8,551     $ 8,792  
Deferred compensation plan – Liabilities
    1       (8,551 )     (8,792 )
   Total
          $     $  

During the 39 weeks ended February 28, 2012 and March 1, 2011, there were no transfers among levels within the fair value hierarchy.

The Ruby Tuesday, Inc. 2005 Deferred Compensation Plan (the “Deferred Compensation Plan”) and the Ruby Tuesday, Inc. Restated Deferred Compensation Plan (the “Predecessor Plan”) are unfunded, non-qualified deferred compensation plans for eligible employees.  Assets earmarked to pay benefits under the Deferred Compensation Plan and Predecessor Plan are held by a rabbi trust.  We report the accounts of the rabbi trust in our Condensed Consolidated Financial Statements.  With the exception of the investment in RTI common stock, the investments held by these plans are considered trading securities and are reported at fair value based on third-party broker statements.  The realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, is recorded in Selling, general and administrative expense in the Condensed Consolidated Financial Statements.

 
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The investment in RTI common stock and related liability payable in RTI common stock, which are reflected in Shareholders’ Equity in the Condensed Consolidated Balance Sheets, are excluded from the fair value table above as these are considered treasury shares and reported at cost.

The following table presents the fair values for those assets and liabilities measured on a non-recurring basis and remaining on our Condensed Consolidated Balance Sheets as of February 28, 2012 and May 31, 2011 (in thousands):
 
   
Fair Value Measurements
 
   
Level
   
February 28, 2012
   
May 31, 2011
 
Long-lived assets held for sale *
    2     $ 58,161     $ 24,686  
Long-lived assets held for use
    2       4,145       747  
   Total
          $ 62,306     $ 25,433  

* Included in the carrying value of long-lived assets held for sale as of February 28, 2012 and May 31, 2011 are $19.1 million and $23.3 million, respectively, of assets included in Construction in progress in the Condensed Consolidated Balance Sheets as we do not expect to sell these assets within the next 12 months.

The following table presents the losses recognized during the 13 and 39 weeks ended February 28, 2012 and March 1, 2011 resulting from fair value measurements of assets and liabilities measured on a non-recurring basis.  These losses are included in Closures and impairments in our Condensed Consolidated Statements of Income (in thousands):

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
February 28,
2012
   
March 1, 
2011
   
February 28,
2012
   
March 1, 
2011
 
  Long-lived assets held for sale
  $ 141     $ 888     $ 347     $ 1,877  
  Long-lived assets held for use
    11,393             12,023       349  
 
  $ 11,534     $ 888     $ 12,370     $ 2,226  

Long-lived assets held for sale are valued using Level 2 inputs, primarily information obtained through broker listings and sales agreements.  Costs to market and/or sell the assets are factored into the estimates of fair value for those assets included in Assets held for sale on our Condensed Consolidated Balance Sheets.

We review our long-lived assets (primarily property, equipment, and, as appropriate, reacquired franchise rights and favorable leases) related to each restaurant to be held and used in the business, whenever events or changes in circumstances indicate that the carrying amount of the long-lived asset may not be recoverable.

Long-lived assets held for use presented in the table above include our Company airplane and restaurants or groups of restaurants that were impaired as a result of our quarterly impairment review.  From time to time, the table will also include closed restaurants or surplus sites not meeting held for sale criteria that have been offered for sale at a price less than their carrying value.  

The Level 2 fair values of our long-lived assets held for use are based on broker estimates of the value of the land, building, leasehold improvements, and other residual assets.
 
Our financial instruments at February 28, 2012 and May 31, 2011 consisted of cash and short-term investments, accounts receivable and payable, long-term debt, letters of credit, and, as previously discussed, deferred compensation plan investments.  The fair values of cash and short-term investments and accounts receivable and payable approximated carrying value because of the short-term nature of these instruments.  The carrying amounts and fair values of our other financial instruments not measured on a recurring basis using fair value, however subject to fair value disclosures are as follows (in thousands):
 
 
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February 28, 2012
   
May 31, 2011
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Deferred Compensation Plan
                       
  investment in RTI common stock
  $ 1,487     $ 1,205     $ 1,556     $ 1,653  
Long-term debt and capital leases
    307,248       311,500       344,274       348,272  
Letters of credit
          222             178  
 
We estimated the fair value of debt and letters of credit using market quotes and present value calculations based on market rates.
 
NOTE P – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
Accounting Pronouncements Not Yet Adopted
In June 2011, the Financial Accounting Standards Board issued guidance on the presentation of total comprehensive income, the components of net income, and the components of other comprehensive income.  This guidance is intended to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 (our fiscal 2013 first quarter).  We do not expect the adoption of this guidance to have a material impact on our Condensed Consolidated Financial Statements.

In September 2011, the Financial Accounting Standards Board issued guidance modifying the impairment test for goodwill by allowing businesses to first decide whether they need to do the two-step impairment test.  Under the guidance, a business no longer has to calculate the fair value of a reporting unit unless it believes it is very likely that the reporting unit’s fair value is less than the carrying value.  The guidance is effective for impairment tests for fiscal years beginning after December 15, 2011 (our fiscal 2013).  We do not expect the adoption of this guidance to have a material impact on our Condensed Consolidated Financial Statements.
 
NOTE Q – SUBSEQUENT EVENTS
 
Sale-leaseback transactions
During March 2012, we completed sale-leaseback transactions of the land and building for eight Company-owned Ruby Tuesday concept restaurants for gross cash proceeds of $17.5 million, exclusive of transaction costs of approximately $0.8 million.  Equipment was not included.  The carrying value of the properties sold was $13.6 million.  The leases have been classified as operating leases and have an initial term of 15 years, with renewal options of up to 20 years.  We realized gains on these transactions totaling $3.1 million, which have been deferred and are being recognized on a straight-line basis over the initial terms of the leases.

Acquisition of Lime Fresh Mexican Grill
Subsequent to February 28, 2012, we initiated the acquisition of certain assets, including seven Lime concept restaurants, the royalty stream from five Lime concept franchised restaurants, and the intellectual property of Lime Fresh Mexican Grill, Inc. and certain of its affiliated companies for $24.0 million.  Not to be included in the asset acquisition is one restaurant owned by Lime Fresh Mexican Grill, Inc. which will continue to operate as a franchisee of RTI and four restaurants which will continue to be operated under license by existing franchisees.  We expect this transaction to be completed during our fourth quarter of fiscal 2012.

Restaurant Closings
In the Company’s third fiscal quarter, management working closely with the Board of Directors, adopted a plan to close 25 to 27 restaurants during the fourth quarter of fiscal 2012 and 10 restaurants thereafter upon expiration of the leases.  The Board of Directors formally approved management’s plan at its regular Board meeting on April 4, 2012   As discussed in Note I to the Condensed Consolidated Financial Statements, in addition to impairments recorded for stores which were not part of management’s plan, we recorded impairments of $9.6 million during the 13 weeks ended February 28, 2012 associated with restaurants which will be closed.
 
 
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Share-Based Employee Compensation Award
On April 4, 2012, in order to assist with employee retention, the Executive Compensation and Human Resources Committee of the Board of Directors approved a special grant of 220,750 time-based restricted shares of common stock to certain employees under the terms of the 2003 SIP.  The shares will vest in equal amounts over the next 3 to 5 years.

 

 
 

 
 

 
 

 
 

 

 
 

 
 

 
 
 
 
 
 

 
 
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
 
The discussion and analysis below for the Company should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and the notes to such financial statements included elsewhere in this Quarterly Report on Form 10-Q.  The discussion below contains forward-looking statements which should be read in conjunction with the “Special Note Regarding Forward-Looking Information” included elsewhere in this Quarterly Report on Form 10-Q.
 
General: 

 
Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” the “Company,” “we” and/or “our”), owns and operates Ruby Tuesday®, Lime Fresh Mexican Grill®, Marlin & Ray’s, Truffles®, and Wok Hay® casual dining restaurants.  We also franchise the Ruby Tuesday and Wok Hay concepts in select domestic and international markets.  As of February 28, 2012 we owned and operated 740, and franchised 85, Ruby Tuesday restaurants.  Ruby Tuesday restaurants can now be found in 45 states, the District of Columbia, 14 foreign countries, and Guam.
 
Overview and Strategies

Casual dining, the segment of the industry in which we operate, is intensely competitive with respect to prices, services, convenience, locations, advertising and promotion, 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 similar types of services and products as we do.  In 2007 we deployed a brand repositioning initiative designed to clearly differentiate Ruby Tuesday from our competitors since we believed, as the bar and grill segment continued to mature, our lack of differentiation in this segment would potentially make it increasingly difficult to attract new guests.  Our brand repositioning initiative first focused on food, then service, and finally on the creation of a fresh new look for our restaurants, which was the most capital-intensive aspect of our brand reimaging program.  Our marketing strategy for the last several years has focused on the key pillars of print promotions, digital media, and local marketing programs to entice guests to see the new Ruby Tuesday, increase frequency of visits, and enhance brand visibility.  We plan to increase the amount we spend on television marketing to be more competitive with our peer group in order to drive traffic and trial of the Ruby Tuesday brand, partly aided by various limited time offers and other promotions.

As we strategically look out over the next three to five years, our long-range plan is to further strengthen our business in a low-risk, low-capital, and high-return manner by focusing in the following four areas:

·  
Enhance Sales and Margins of Our Core Brand.  We have evolved our existing menu items to support our high-quality casual dining position, broaden our appeal with product extensions offering more variety and cravability, and provide our guests with compelling value.  Late in the second quarter of fiscal 2010, we introduced a menu which included an expanded appetizer line and new dinner entrees featuring a variety of lobster combinations.  Additionally, we launched a Sunday brunch offering and enhanced our bar area with high definition televisions and an enhanced food and drink menu, both of which have driven incremental sales and traffic while enhancing the overall perception of the Ruby Tuesday brand.  In the first quarter of fiscal 2011, we rolled out a new menu, began offering a complimentary bread program, and enhanced our fresh garden bar and Sunday brunch.  Our most recent menu includes seven new entrees and three new appetizers; Fit & Trim offerings, which includes menu items that are 700 calories or less; side offerings, which now include fresh grilled green beans, fresh grilled zucchini, baked mac ‘n cheese, and sugar snap peas; and a Sunday brunch menu with 15 total items including French toast and new omelets.  We now offer a complimentary garden bar with the purchase of an entrée at several of our restaurants.  We also added our fresh baked garlic cheese biscuits which we believe should further increase the overall value perception of our brand, in line with other high-quality casual dining restaurants.  Recently we have been focused on increasing our value position in certain test markets through our free Fresh Endless Garden Bar and fresh-baked garlic cheese biscuits complimentary with over 30 entrees and a starting price of $9.99, which provides compelling value to consumers and is a big point of differentiation for Ruby Tuesday since
 
 
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our competitors typically do not offer a garden bar with the purchase of an entree.  Additionally, we recently launched a new menu offering new high flavor profile entrees including Jamaican jerk shrimp, asiago peppercorn sirloin, and triple prime meatloaf.
 
In order to better promote our new value-oriented offerings to drive traffic and same-restaurant sales, we have been increasing the amount we spend on television marketing as we believe this is necessary in order to remain competitive with our peer group.  To that end, we have engaged a leading enterprise improvement consulting firm to assist us in identifying potential savings opportunities in a number of key areas including procurement, occupancy, and maintenance costs.  We are estimating annualized savings from these initiatives of approximately $35.0 to $40.0 million, or approximately $20.0 million higher than our previous estimates, a small portion of which is expected to be realized during the remainder of fiscal 2012.  We plan to reinvest a significant portion of these cost savings in our television marketing programs, with approximately 20% of our restaurants being covered by television advertising during the fiscal third quarter.  Additionally, at the start of the fiscal fourth quarter we increased our television advertising coverage to approximately 50% of our restaurants and have plans to increase our television advertising coverage to 100% of the system by the middle of the fourth quarter by using a combination of network and local cable to support a pure value and other advertising.

·  
Focus on Low Risk, Low Capital-Intensive, High-Return Growth.  In an effort to be prudent with our capital and in order to enhance our returns, we have a strategy to grow our Company in a low risk, low capital-intensive and high-return manner.  On September 13, 2010, we entered into a licensing agreement with LFMG International, LLC which allows us to operate multiple restaurants under the Lime Fresh Mexican Grill® (“Lime”) name.  Lime is a fast casual Mexican concept that currently operates several restaurants primarily in the vicinity of Miami, Florida.  The fast casual segment of our industry has experienced high growth in recent years, and we believe opening smaller, inline locations under the Lime brand represents a good potential growth opportunity for us.  We opened three Company-owned Lime restaurants during the 39 weeks ended February 28, 2012 and expect to open three to five Company-owned Lime restaurants during the remainder of fiscal 2012.  Over time, we also plan to open Company-owned, smaller inline-type Ruby Tuesday restaurants as well.

In light of the growth potential of the Lime brand in the fast casual segment, we recently initiated the acquisition of certain assets, including seven Lime concept restaurants, the royalty stream from five Lime concept franchised restaurants, and the intellectual property of Lime Fresh Mexican Grill, Inc. and certain of its affiliated companies for $24.0 million.  We expect this transaction to be completed during the fourth quarter of fiscal 2012 and believe the growth potential that Lime offers can create good long-term value for our shareholders with relatively low risk.

·  
Increase Shareholder Returns Through New Concept Conversions.  Another part of our long-term plan is to increase average restaurant volumes in our existing restaurants thereby increasing profit and cash flow with minimal capital investment.  To this end, we have been converting certain underperforming Ruby Tuesday concept restaurants into other high-quality casual dining brands which might be better suited for success in selected markets, with the main conversion concept being our internally-developed seafood concept, Marlin & Ray’s.  We converted six Company-owned Ruby Tuesday restaurants to the Marlin & Ray’s concept during the 39 weeks ended February 28, 2012 and plan to convert another two to four during the remainder of fiscal 2012.  We believe the low capital requirement and potential increased revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization) from these conversions, in addition to the revenue increases we are seeing at neighboring Ruby Tuesday locations, offer opportunities for attractive cash-on-cash returns.

·  
Allocate Capital to Enhance Shareholder Value.  We continue to maintain a strong balance sheet and have a five-year revolving credit facility (the “Credit Facility”) in place which provides us with adequate liquidity.  If we are able to stabilize our same-restaurant sales without increasing our cost structure, we have the opportunity to increase our free cash flow assuming our capital expenditure needs remain at historic levels.  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.  Our near-term capital expenditure requirements will consist of converting approximately two to four Ruby Tuesday concept restaurants to other high-quality casual dining
 
 
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concepts and opening approximately three to five smaller, inline Lime restaurants during the remainder of fiscal 2012.
 
We generated $46.9 million of free cash flow during the first three quarters of fiscal 2012, which was used to pay down debt and repurchase stock.  We estimate we will generate approximately $28.0 to $38.0 million of free cash flow during the remainder of fiscal 2012.  Included in these estimates is anticipated capital spending of approximately $4.0 to $8.0 million.  Our objective over the next several years is to continue to reduce outstanding debt levels in order to reduce our leverage and provide the flexibility to repurchase outstanding shares under our share repurchase program.  Additionally, we have commenced a sale-leaseback program on a portion of our real estate in order to create greater financial flexibility.  We are targeting to raise approximately $50.0 million of gross proceeds over the next one to two quarters to be utilized for debt reduction and opportunistic share repurchases.  See further discussion in the Financing Activities section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

Our success in the four key long-range plan initiatives outlined above should enable us to improve both our return on assets and return on equity, and to create additional shareholder value.
 
Results of Operations:

 
The following is an overview of our results of operations for the 13- and 39-week periods ended February 28, 2012:
 
Net income was $4.5 million for the 13 weeks ended February 28, 2012 compared to $16.0 million for the same quarter of the previous year.  Diluted earnings per share for the fiscal quarter ended February 28, 2012 was $0.07 compared to diluted earnings per share of $0.25 for the corresponding period of the prior year as a result of the decrease in net income as discussed below.

During the 13 weeks ended February 28, 2012:

·  
Two Company-owned Ruby Tuesday restaurants were converted to Marlin & Ray’s concept restaurants;
·  
Two Company-owned Lime restaurants were opened;
·  
Two Company-owned Ruby Tuesday restaurants were closed, one of which is anticipated to be converted to a Marlin & Ray’s concept restaurant later in fiscal 2012;
·  
Two franchised Ruby Tuesday restaurants were opened and four were closed;
·  
We recorded impairment charges of $11.5 million, which included $9.6 million relating to 25 to 27 restaurants we intend to close during the fourth fiscal quarter and 10 restaurants thereafter upon expiration of the leases; and
·  
Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 5.0%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 5.8%.

Net income was $5.6 million for the 39 weeks ended February 28, 2012 compared to $33.0 million for the same period of the previous year.  Diluted earnings per share for the 39 weeks ended February 28, 2012 was $0.09 compared to $0.51 for the corresponding period of the prior year as a result of the decrease in net income as discussed below.

During the 39 weeks ended February 28, 2012:

·  
Six Company-owned Ruby Tuesday restaurants were converted to Marlin & Ray’s concept restaurants;
·  
One Company-owned Truffles restaurant was opened;
·  
Three Company-owned Lime restaurants were opened;
·  
One Company-owned Wok Hay restaurant was opened and one franchised Wok Hay restaurant was closed;
·  
10 Company-owned Ruby Tuesday restaurants were closed, five of which were converted into Marlin & Ray’s concept restaurants, and one of which is anticipated to be converted to a Marlin & Ray’s restaurant later in fiscal 2012;
 
 
27

 
·  
Five franchised Ruby Tuesday restaurants were opened and 16 were closed;
·  
We recorded impairment charges of $12.4 million, which included $9.6 million relating to 25 to 27 restaurants we intend to close during the fourth fiscal quarter and 10 restaurants thereafter upon expiration of the leases;
·  
Two million shares of common stock were repurchased at an aggregate cost of $18.4 million; and
·  
Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 4.4%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 5.1%.

* We define same-restaurant sales as a year-over-year comparison of sales volumes for restaurants that in the current year have been open at least 18 months, in order to remove the impact of new openings in comparing the operations of existing restaurants.
 
The following table sets forth selected restaurant operating data as a percentage of total revenue, except where otherwise noted, for the periods indicated.  All information is derived from our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
February 28,
 
March 1,
 
February 28,
 
March 1,
 
2012
 
2011
 
2012
 
2011
Revenue:
                     
       Restaurant sales and operating revenue
99
.6%
 
99
.4%
 
99
.6%
 
99
.4%
       Franchise revenue
0
.4
 
0
.6
 
0
.4
 
0
.6
           Total revenue
100
.0
 
100
.0
 
100
.0
 
100
.0
Operating costs and expenses:
                     
       Cost of merchandise (1)
28
.8
 
29
.3
 
29
.4
 
28
.9
       Payroll and related costs (1)
34
.6
 
33
.5
 
34
.7
 
33
.8
       Other restaurant operating costs (1)
19
.6
 
20
.7
 
20
.6
 
20
.6
       Depreciation (1)
5
.0
 
4
.9
 
5
.1
 
5
.1
       Selling, general and administrative, net
7
.1
 
5
.8
 
7
.6
 
6
.8
       Closures and impairments
3
.8
 
0
.2
 
1
.4
 
0
.3
       Equity in losses of unconsolidated
                     
         franchises
     
0
.3
       
0
.1
       Interest expense, net
1
.2
 
1
.0
 
1
.2
 
0
.9
Income before income taxes
0
.4
 
4
.9
 
0
.3
 
4
.0
(Benefit)/provision for income taxes
(1
.0)
 
(0
.1)
 
(0
.3)
 
0
.4
Net income
1
.4%
 
5
.0%
 
0
.6%
 
3
.6%
 
(1)     As a percentage of restaurant sales and operating revenue.
 
The following table shows Company-owned Ruby Tuesday, Lime, Marlin & Ray’s, Truffles, and Wok Hay concept restaurant activity for the 13- and 39-week periods ended February 28, 2012 and March 1, 2011.
 
   
Ruby
Tuesday
   
Lime
   
Marlin &
Ray’s
   
Truffles
   
Wok Hay
   
Total
 
13 weeks ended February 28, 2012
 
 
                               
     Beginning number
    742       1       5       2       3       753  
     Opened
          2       2                   4  
     Closed
    (2 )                             (2 )
     Ending number
    740       3       7       2       3       755  
                                                 
39 weeks ended February 28, 2012
                                               
     Beginning number
    750             1       1       2       754  
     Opened
          3       6       1       1       11  
     Closed
    (10 )                             (10 )
     Ending number
    740       3       7       2       3       755  
                                                 
                                                 
 
 
28

 
13 weeks ended March 1, 2011
                                               
     Beginning number
    676                         2       678  
     Opened
                1       1             2  
     Acquired from franchisees
    73                               73  
     Closed
    (7 )                             (7 )
     Ending number
    742             1       1       2       746  
                                                 
39 weeks ended March 1, 2011
                                               
     Beginning number
    656                         2       658  
     Opened
                1       1             2  
     Acquired from franchisees
    96                               96  
     Closed
    (10 )                             (10 )
     Ending number
    742             1       1       2       746  
 
The following table shows franchised Ruby Tuesday concept restaurant activity for the 13- and 39-week periods ended February 28, 2012 and March 1, 2011.
 
   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
February 28,
2012
   
March 1, 
2011
   
February 28,
2012
   
March 1, 
2011
 
       Beginning number
    87       198       96       223  
          Opened
    2       1       5       6  
          Sold to RTI
          (73 )           (96 )
          Closed
    (4 )     (13 )     (16 )     (20 )
       Ending number
    85       113       85       113  
 
In addition to the Ruby Tuesday concept restaurant activity in the table above, a traditional international franchisee closed its Wok Hay concept franchised restaurant during the 39 weeks ended February 28, 2012.
 
We expect our domestic and international franchisees to open approximately one to three additional Ruby Tuesday restaurants during the remainder of fiscal 2012.  We currently anticipate converting two to four Company-owned Ruby Tuesday concept restaurants to other high-quality casual dining concepts, and opening approximately three to five smaller prototype, inline Company-owned Lime concept restaurants during the fourth quarter of fiscal 2012.
 
Revenue

RTI’s restaurant sales and operating revenue for the 13 weeks ended February 28, 2012 increased 2.0% to $323.5 million compared to the same period of the prior year.  This increase primarily resulted from the acquisition of 86 formerly franchised restaurants during the third and fourth quarters of fiscal 2011 as discussed below, partially offset by a 5.0% decrease in Ruby Tuesday concept same-restaurant sales.  The decrease in same-restaurant sales is attributable to lower guest counts, which was partially offset by an increase in average net check in the third quarter of fiscal 2012 compared with the same quarter of the prior year.  The increase in average net check was a result of menu price increases and a shift in menu mix.

Franchise revenue for the 13 weeks ended February 28, 2012 decreased 28.5% to $1.4 million compared to the same period of the prior year.  Franchise revenue is predominately comprised of domestic and international royalties, which totaled $1.3 million and $1.8 million for the 13-week periods ended February 28, 2012 and March 1, 2011, respectively.  This decrease is due to a $0.4 million decline in royalties from our traditional domestic franchisees and a $0.1 million reduction in royalties from our franchise partnerships due to the acquisition of 109 restaurants from our franchise partners during fiscal 2011.

For the 39 weeks ended February 28, 2012, sales at Company-owned restaurants increased 5.7% to $958.5 million compared to the same period of the prior year.  This increase primarily resulted from the acquisition of 109 formerly franchised restaurants during fiscal 2011 as discussed below, partially offset by a 4.4% decrease in Ruby Tuesday concept same-restaurant sales.  The decrease in same-restaurant sales is attributable to lower guest counts, which was partially offset by an increase in average net check in the first three quarters of fiscal 2012 compared with the same period of the prior year.  The increase in average net check was a result of menu price increases and a shift in menu mix.
 
 
29

 
 
For the 39-week period ended February 28, 2012, franchise revenues decreased 24.8% to $4.1 million compared to the same period in the prior year.  Domestic and international royalties totaled $3.9 million and $5.0 million for the 39-week periods ending February 28, 2012 and March 1, 2011, respectively.  This decrease is due to a $0.6 million decline in royalties from our traditional domestic fran