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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

OR

        Commission file number 1-12454

RUBY TUESDAY, INC.
(Exact name of registrant as specified in charter)

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   No 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   No 

64,005,028

        (Number of shares of $0.01 par value common stock outstanding as of April 10, 2003)

RUBY TUESDAY, INC

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      PART I — FINANCIAL INFORMATION

ITEM 1

RUBY TUESDAY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER-SHARE DATA)

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

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RUBY TUESDAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER-SHARE DATA)
(UNAUDITED)

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

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RUBY TUESDAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A — BASIS OF PRESENTATION

Ruby Tuesday, Inc. (the “Company,” “RTI,” “we”, “our”) owns and operates Ruby Tuesday® casual dining restaurants. We also franchise the Ruby Tuesday concept in selected domestic and international markets. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirteen and thirty-nine week periods ended March 4, 2003 are not necessarily indicative of results that may be expected for the year ending June 3, 2003.

The balance sheet at June 4, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income.

For further information, refer to the consolidated financial statements and footnotes thereto included in Ruby Tuesday, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 4, 2002.

NOTE B — EARNINGS PER SHARE

Basic earnings per share is calculated using the weighted average number of shares outstanding during each period. The computation of diluted earnings per share gives effect to options outstanding during the applicable periods. The effect of stock options increased the diluted weighted average shares outstanding by approximately 1.0 million and 1.9 million for the thirteen weeks ended March 4, 2003 and March 5, 2002, respectively, and approximately 1.1 million and 1.8 million for the thirty-nine weeks ended March 4, 2003 and March 5, 2002, respectively. For the thirty-nine week period ended March 5, 2002, basic and diluted earnings per share before and after the cumulative effect of change in accounting principle are the same.

NOTE C – ALLOWANCE FOR DOUBTFUL NOTES

Amounts reflected for long-term notes receivable at March 4, 2003 and June 4, 2002 are net of a $19.5 million allowance for doubtful notes.

NOTE D — OTHER DEFERRED LIABILITIES

Other deferred liabilities at March 4, 2003 and June 4, 2002 included $15.1 million and $15.6 million, respectively, for the liability due to participants in our Deferred Compensation Plan and $10.1 million and $9.6 million, respectively, for the liability due to participants of the Company’s Executive Supplemental Pension Plan.

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NOTE E – FRANCHISE PROGRAMS

During the first two quarters of this fiscal year, RTI acquired an additional 49% equity interest in four franchises for $0.5 million each, pursuant to the terms of the applicable Limited Liability Company Operating Agreement or Limited Partnership Agreement, bringing the Company’s equity interest in those franchises to 50%. We currently hold a 50% equity interest in nine franchises which collectively operate 94 Ruby Tuesday restaurants. We apply the equity method of accounting to all 50%-owned franchises.

As part of our domestic franchise partner program, we have negotiated with various lenders a $48.0 million credit facility to assist our franchise partners with working capital needs and cash flows for operations. As sponsor of the credit facility, we serve as partial guarantor of the draws made on the revolving line-of-credit. See Note I to the Condensed Consolidated Financial Statements for further discussion of this and our other guarantees.

NOTE F — COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”) requires the disclosure of certain revenues, expenses, gains and losses that are excluded from net income in accordance with accounting principles generally accepted in the United States of America. Total comprehensive income for the thirteen and thirty-nine weeks ended March 4, 2003 and March 5, 2002 are as follows (in thousands):

See Note J to the Condensed Consolidated Financial Statements for more information regarding losses reclassified into the consolidated statement of earnings.

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NOTE G – REFINANCE OF OUR BANK-FINANCED OPERATING LEASE OBLIGATIONS

On July 26, 2002, RTI entered into a transaction to refinance its bank-financed (also called “synthetic”) operating lease obligations and revolving credit facility with traditional bank debt through RTI’s existing bank group. The new Revolving Credit and Term Loan Agreement (the “Credit Agreement”) consists of approximately $200.6 million revolving credit facility and approximately $70.4 million term loan. The term loan portion of the new Credit Agreement was scheduled to mature on October 2, 2003. This debt was settled on April 3, 2003 with proceeds from the Private Placement, as discussed below. The revolving credit portion of the new Credit Agreement will mature on October 10, 2005.

Terms of the new Credit Agreement are in many instances similar to the previous revolving credit facility. As with the previous revolving credit facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize. Our options for the rate can either be the Base Rate or LIBOR plus applicable margin. The Base Rate is defined to be the higher of the issuing bank’s prime lending rate or the Federal Funds rate plus 0.5%. Our other choice is to use the LIBOR rate plus the Applicable Margin, which is a percentage ranging from 0.875% to 1.50%. The Applicable Margin percent is based on a bank-defined financial ratio computed quarterly. We pay commitment fees quarterly ranging from 0.15% to 0.25% on the unused portion of the new credit facility. The new Credit Agreement contains restrictions on obtaining additional debt, the payment of dividends and has certain covenants regarding funded debt and fixed charge coverage. At July 26, 2002, we refinanced $208.2 million of bank-financed operating lease obligations with $139.3 million and $70.4 million of the revolving credit facility and the term loan, respectively (debt amounts include fees). The result of the refinancing was to put property and equipment and debt on our balance sheet and, therefore, depreciation and interest expense will be higher and rent expense lower than in prior periods. At March 4, 2003, we had a total of $206.1 million of borrowings outstanding under the new Credit Agreement, consisting of $135.7 million of borrowings under the revolving credit portion and $70.4 million under the term loan portion. On April 3, 2003, the Company paid off the term loan portion of the Credit Agreement and paid down $78.3 million of debt under the revolving credit facility of the Credit Agreement using funds received from a private sale of $150 million of Company promissory notes. See Note J to the Condensed Consolidated Financial Statements for more information.

NOTE H – RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”) which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The provisions of this Statement are effective for the Company beginning fiscal year 2004, with early application encouraged. We do not expect the adoption of this Statement to have a material impact on our financial condition or results of operations.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) which supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” Among other changes, SFAS 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets. We adopted SFAS 144 during the first quarter of this fiscal year. Adoption of this new accounting standard did not have a significant impact on year-to-date net income and is not expected to significantly impact net income in the future.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). Under SFAS 145, gains and losses on extinguishments of debt are to be classified as income or loss from continuing operations rather than extraordinary items. Adoption of this Statement was required for fiscal years beginning after May 15, 2002. We adopted SFAS 145 during the first quarter of this fiscal year. Adoption of this new accounting standard did not have a significant impact on year-to-date net income and is not expected to significantly impact net income in the future.

In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”) which addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This Statement also establishes that fair value is the objective for initial measurement of the liability. Severance pay under SFAS 146, in many cases, would be recognized over time rather than up front. We adopted SFAS 146 during this quarter. Adoption of this new accounting standard did not have a significant impact on net income during the current quarter and is not expected to significantly impact net income in the future.

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In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”) which addresses financial accounting and reporting for recording expenses for the fair value of stock options. SFAS 148 provides alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based employee compensation. Additionally, SFAS 148 requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. This Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. We will adopt the interim disclosure requirements beginning next quarter. We do not expect the adoption of this Statement to have a material impact on our financial condition or results of operations.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” (“FIN 45”), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 also requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple events. We adopted FIN 45 during this quarter. See Note I to the Condensed Consolidated Financial Statements for further detail.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" (“FIN 46”). FIN 46 addresses the consolidation of entities whose equity holders either (a) have not provided sufficient equity at risk to allow the entity to finance its own activities or (b) do not possess certain characteristics of a controlling financial interest. FIN 46 requires the consolidation of these entities, known as variable interest entities (“VIEs”), by a primary beneficiary of the entity. A primary beneficiary is the entity, if any, that is subject to a majority of the risk of loss from the VIEs activities, entitled to receive a majority of the VIEs residual returns, or both. FIN 46 applies immediately to variable interests in VIEs created or obtained after January 31, 2003. For variable interests in a VIE created before February 1, 2003, FIN 46 is applied to the VIE no later than the end of the first interim or annual reporting period beginning after June 15, 2003. FIN 46 requires certain disclosures in financial statements issued after January 31, 2003, if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when FIN 46 becomes effective.

We plan to adopt FIN 46 in Fiscal 2004. FIN 46’s consolidation criteria are based on analysis of risks and rewards, not control, and represent a significant and complex modification of previous accounting principles. FIN 46 represents an accounting change, not a change in the underlying economics of legally independent businesses. Under its provisions, the accounts of some or all of RTI’s franchisees could be consolidated on our books. In the event we consolidated these businesses, we would not reacquire any additional legal ownership, our legal rights and obligations would not change, and we would not become legally obligated for the franchisee’s liabilities. Even assuming the structure of, or the contractual relationships between, these legally independent entities and RTI are not changed between now and the effective date of FIN 46, the requirement for a franchise by franchise review under the complexity of the new consolidation rules and their evolving clarification make forecasting the complete impact on RTI’s consolidated financial statements impracticable at this time.

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NOTE I — GUARANTEES

At March 4, 2003, our third-party guarantees, which primarily arise in connection with our franchising and divestiture activities, approximated $24.9 million. Substantially all of these guarantees expire through 2013, with $21.0 million expiring over the next twelve months. Generally, we are required to perform under these guarantees in the event that a third-party fails to make contractual payments or achieve performance measures. All of these guarantees arose prior to December 31, 2002 and no liability has currently been recorded for these guarantees in the March 4, 2003 Condensed Consolidated Balance Sheet.

Franchise Guarantees

As part of our domestic franchise partner program, we have negotiated with various lenders a $48.0 million credit facility to assist our franchise partners with working capital needs and cash flows for operations. As sponsor of the credit facility, we serve as partial guarantor of the draws made on this revolving line-of-credit. RTI also has an arrangement with a different third party whereby we may choose, in our sole discretion, to partially guarantee (up to $10.0 million in total) specific loans for new franchisee restaurant development. Should payments be required under this guaranty, RTI has certain rights to acquire the operating restaurants after the third party debt is paid. As of March 4, 2003, the amounts we have guaranteed under these two facilities were $21.0 million and $1.1 million, respectively. Unless extended, guarantees under these programs expire at various dates through February 2004 and June 2013, respectively. To the best of our knowledge, all of our franchisees are current in the payment of their obligations due under these credit facilities.

Divestiture Guarantees

During fiscal 1996, our shareholders approved the distribution (the “Distribution”) of our family dining restaurant business, then called Morrison Fresh Cooking, Inc. (“MFC”), and our health care food and nutrition services business, then called Morrison Health Care, Inc. (“MHC”). Both of these companies have subsequently been acquired by other entities. Piccadilly Cafeterias, Inc. (“Piccadilly”) acquired MFC and Compass Group, PLC (“Compass”) acquired MHC. Prior to the Distribution, we entered into various guaranty agreements with both MFC and MHC, most of which have expired. We do remain contingently liable for payments due to MFC and MHC employees retiring under two non-qualified defined benefit plans based upon the level of benefits due those participants as of March 1996 and for payments due on eight named worker’s compensation and general liability claims. These guarantees, which are estimated at March 4, 2003 to be $2.5 million and $0.3 million, respectively, do not have an expiration date. The estimated $2.5 million employee benefit plan contingent liability is comprised of $1.0 million for MFC and $1.5 million for MHC. Should any payments be required under these guarantees, RTI would split the amounts due equally with the other non-defaulting entity (MFC or MHC). Amounts shown are RTI’s assumed 50% contingent liability only as management believes the balance due from the other guarantors would be paid as required.

NOTE J – SUBSEQUENT EVENT

On April 3, 2003, we completed the private sale of $150 million of non-collateralized senior notes (the “Private Placement”), including $85 million due April 2010 (the “Series A Notes”) and $65 million due April 2013 (the “Series B Notes”). The Series A Notes have a fixed interest rate of 4.69% and the Series B Notes have a fixed interest rate of 5.42%. Interest is payable semi-annually. Terms of the Private Placement include limitations on debt, disposition of assets and certain covenants regarding fixed charge coverage ratios, funded debt ratios, and minimum net worth. Proceeds from the sale of the Series A and Series B Notes were used to pay off the $70.4 million term loan portion of the Credit Agreement that was scheduled to mature on October 2, 2003, and, after the payment of approximately $1.3 million of transaction expenses, to pay down $78.3 million of the revolving credit portion of the Credit Agreement. As a result of this transaction, we have classified the term loan as non-current in the accompanying March 4, 2003 Condensed Consolidated Balance Sheet. Furthermore, one of our three interest rate swaps was deemed ineffective and the resulting after-tax loss of $0.2 million was reclassified from accumulated other comprehensive loss to the consolidated statement of income.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

General:

RTI generates revenues from the sale of food and beverages at our restaurants and revenues received from our franchisees. Franchise revenue is recognized when we have performed all material services and the restaurant has opened for business. Franchise revenue includes royalty, development and operating agreement fees. The following is an overview of the thirteen and thirty-nine week periods ended March 4, 2003.

OVERVIEW:

Net income was $25.4 million, or $0.39 per share, for the thirteen weeks ended March 4, 2003 and $5.0 million or $0.07 per share for the same period ended March 5, 2002. For the thirty-nine weeks ended March 4, 2003, net income was $63.2 million or $0.97 per share. For the same period ended March 5, 2002, net income was $37.0 million or $0.56 per share. Comparisons between the thirteen and thirty-nine week periods of the current year and the same periods of the prior year include the impact of an unusual item that occurred in the prior year which is discussed in the following paragraph and further below. Excluding this unusual item, net income for the thirteen and thirty-nine weeks ended March 5, 2002 would have been $22.6 million or $0.34 per share, and $54.5 million or $0.83 per share, respectively.

During the third quarter of Fiscal 2002, we recorded a pre-tax loss of $28.9 million related to the Specialty Restaurant Group, LLC (“SRG”) note receivable (the “SRG Note”). We wrote-off the SRG Note in the fourth quarter of Fiscal 2002 due to a number of factors all relating to SRG’s declining operating performance and the receipt of notification on April 26, 2002 from SRG’s senior lender that payments due to us under the SRG Note were to be halted as a result of SRG’s covenant defaults. A reconciliation of earnings excluding the loss of valuation of the SRG Note to reported financial statement amounts is as follows:

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We believe these comparisons in our discussions and analyses, excluding the loss on valuation of the SRG Note, are more useful to investors because they reflect adjustments for a one-time non-recurring charge. This permits a more meaningful comparison of our operating performance between current and previous periods.

        During the thirteen weeks ended March 4, 2003:

• six Company-owned Ruby Tuesday restaurants were opened and none were closed; and
• eight franchise restaurants were opened, including two international franchise units, and two were closed.

        During the thirty-nine weeks ended March 4, 2003:

• 35 Company-owned Ruby Tuesday restaurants were opened;
• five Company-owned Ruby Tuesday restaurants were closed. These restaurants were closed as part of upgrading our portfolio of restaurants; and
• 17 franchise restaurants were opened, five of which were international franchise units. Four domestic franchise units and one international unit were closed.

Results of Operations:

The following table sets forth selected restaurant operating data as a percentage of total revenues, except where otherwise noted, for the periods indicated. All information is derived from our unaudited condensed consolidated financial statements located within this Form 10-Q.

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* Includes 3 units acquired from an existing franchise partner.
** Includes 19 units sold to franchisees during the third quarter of Fiscal 2002.

We estimate that approximately 15 additional Company-owned Ruby Tuesday restaurants will be opened during the remainder of Fiscal 2003. Additionally, we expect domestic and international franchisees to open approximately 8 to 12 Ruby Tuesday restaurants during the remainder of Fiscal 2003.

Revenues

        RTI’s restaurant sales for the thirteen and thirty-nine week periods ended March 4, 2003, increased $19.2 million (9.2%) to $228.8 million and $50.6 million (8.4%) to $655.6 million, respectively, compared to the same periods of the prior year. The increases primarily resulted from a net addition of 36 units over the prior year. Franchise revenues totaled $4.0 million for the thirteen weeks ended March 4, 2003 compared to $4.1 million for the same period in the prior year and $11.3 million compared to $10.7 million for the thirty-nine week period ended March 4, 2003. Franchise revenues are predominately comprised of domestic and international royalties, which totaled $3.6 million and $3.5 million for the thirteen-week periods ended March 4, 2003 and March 5, 2002, respectively, and $10.2 million and $9.3 million for the thirty-nine week periods ending March 4, 2003 and March 5, 2002, respectively.

Pre-tax Income

        Pre-tax income increased $33.1 million for the thirteen weeks ended March 4, 2003, to $38.9 million, primarily due to the prior year loss on valuation of the SRG Note coupled with an increase in sales described above and (as a percentage of Company restaurant sales or total revenue, as applicable) lower cost of merchandise, other restaurant operating costs, selling, general and administrative expenses and higher income recorded from our 50% share of the earnings of unconsolidated franchises, offset by higher payroll and related costs, depreciation and interest expense.

        For the thirty-nine week period ended March 4, 2003, pre-tax income was $96.9 million, a $41.4 million increase over the corresponding period of the prior year. The increase was primarily due to the prior year loss on valuation of the SRG Note coupled with unit growth and increases in franchise revenues, increased income from our equity in earnings of unconsolidated franchises, and a reduction (as a percentage of Company restaurant sales or total revenue, as applicable) in cost of merchandise, other restaurant operating costs and selling, general and administrative expenses, offset by higher payroll and related costs, depreciation and interest expense.

Cost of Merchandise

        Cost of merchandise increased $3.9 million (6.9%) to $60.8 million for the thirteen weeks ended March 4, 2003 compared to the same period of the prior year. As a percentage of Company restaurant sales, the cost of merchandise decreased from 27.1% to 26.6% for the thirteen weeks ended March 4, 2003. For the thirty-nine week period ended March 4, 2003, cost of merchandise increased $12.4 million (7.6%) to $175.2 million compared to the same period of the prior year. As a percentage of Company restaurant sales, the cost of merchandise decreased from 26.9% to 26.7% for the thirty-nine weeks ended March 4, 2003. For both periods the decrease is primarily due to higher unit volume discounts.

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Payroll and Related Costs

        Payroll and related costs increased $6.4 million (9.5%) for the thirteen weeks ended March 4, 2003, as compared to the same period in the prior year. As a percentage of Company restaurant sales, payroll and related costs increased from 32.2% to 32.3%. This increase resulted primarily from an increase in hourly labor due to our continued focus on staffing levels. We believe that increasing staffing levels will better allow us to drive same-store sales, margins and returns through better operations. For the thirty-nine week period ended March 4, 2003, payroll and related costs increased $21.9 million (11.1%) as compared to the same period in the prior year. As a percentage of Company restaurant sales, these expenses increased from 32.6% to 33.4%. The increase was primarily due to an increase in staffing and additional training costs associated with our service initiatives.

Other Restaurant Operating Costs

        Other restaurant operating costs decreased $0.5 million (1.3%) for the thirteen-week period ended March 4, 2003, as compared to the same period in the prior year. As a percentage of Company restaurant sales, these costs decreased from 17.8% to 16.1%. The decrease was primarily a result of lower rent expense in conjunction with the refinancing of our bank-financed operating leases. Also contributing to the decrease was a reduction of $0.4 million in asset impairment charges due to charges recorded in the prior year for three under-performing units.

        For the thirty-nine week period ended March 4, 2003, other restaurant operating costs decreased $6.5 million (5.5%) as compared to the same periods in the prior year. As a percentage of Company restaurant sales, these costs decreased from 19.4% to 16.9% primarily due to decreased rent expense which resulted from the July 26, 2002 refinancing of our bank-financed operating leases, lower closing expense and lower asset impairment charges as compared to the same period in the prior year.

Depreciation and Amortization

        Depreciation and amortization expenses increased $3.3 million (39.4%) for the thirteen-week period ended March 4, 2003 as compared to the same period in the prior year. As a percentage of Company restaurant sales, these expenses increased from 4.0% to 5.1% primarily as a result of the refinancing of the bank-financed operating leases with traditional bank debt. For the thirteen-week period ended March 4, 2003, the additional depreciation recorded as a direct result of the refinancing of bank-financed operating leased units was approximately $1.5 million.

        For the thirty-nine week period ended March 4, 2003, depreciation and amortization expenses increased $8.3 million (33.4%) as compared to the same period in the prior year. As a percentage of Company restaurant sales, these expenses increased from 4.1% to 5.1% likewise due to the refinancing discussed above. For the thirty-nine week period ended March 4, 2003, the additional depreciation recorded as a direct result of the refinancing of bank-financed operating leased units was approximately $3.7 million.

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Loss on Valuation of SRG Note Receivable

        The loss on valuation of SRG Note was a $28.9 million expense for the thirteen and thirty-nine week periods ended March 5, 2002. We fully reserved the SRG Note in fiscal 2002‘s third quarter due to a number of factors all relating to SRG’s declining operating performance.

Selling, General and Administrative Expenses

        Selling, general and administrative expenses were consistent with the prior period for the thirteen-week period ended March 4, 2003. As a percentage of total operating revenues, these expenses decreased from 5.1% to 4.7%. For the thirty-nine week period ended March 4, 2003, selling, general and administrative expenses decreased $1.5 million (4.3%) as compared to the same period of the prior year. As a percentage of total operating revenues, these expenses decreased from 5.5% to 4.9%. These decreases were primarily due to an increase in support service fee income, (which reduced selling, general and administrative costs), lower equipment rent due to the buyout of certain computer leases and lower information technology expenses due to bringing unit level technology projects in-house.

Equity in Earnings of Unconsolidated Franchises

        Our equity in the earnings of unconsolidated franchises increased $0.9 million for the thirteen weeks ended March 4, 2003, as compared to the same period in the prior year. For the thirty-nine week period ended March 4, 2003, equity in earnings of unconsolidated franchises increased $2.1 million as compared to the same period of the prior year due to additional investments in franchisees that were made in Fiscal 2003 and increased profitability from franchises previously 50% owned. During the thirty-nine weeks ended March 4, 2003, we exercised our purchase option to acquire an additional 49% equity interest in four franchisees. As of March 4, 2003, we held 50% equity investments in nine franchisees operating (collectively) 94 Ruby Tuesday restaurants.

Net Interest Expense/Income

        Net interest expense increased $2.6 million and $6.0 million for the thirteen and thirty-nine week periods ended March 4, 2003, respectively, as compared to the same periods of the prior year. These increases resulted primarily from an increase in interest expense due to refinancing of the bank-financed operating leases with the new Credit Agreement during first quarter of the current fiscal year and the failure of Specialty Restaurant Group, LLC to pay interest on the SRG Note, which we wrote off in the fourth quarter of Fiscal 2002.

Provision for Income Taxes

        The effective tax rate was 34.8% for both the thirteen and the thirty-nine week periods ended March 4, 2003 compared to 14.0% and 33.2% for the corresponding periods of the prior year. The effective income tax rates for Fiscal 2002 excluding the loss on valuation of the SRG Note were 35.0% and 35.3% for the thirteen and thirty-nine weeks ended March 5, 2002, respectively. These assessments are based on our calculations that the provisions for income taxes in fiscal 2002 would have been $11.3 million higher had the loss not been recorded. Our effective income tax rates decreased due to tax saving strategies implemented in Fiscal 2002 which were continued in Fiscal 2003.

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Liquidity and Capital Resources

Sources and Uses of Cash

The following table presents a summary of the Company’s cash flows from operating, investing, and financing activities for the periods indicated (in thousands).

As discussed further under Borrowings and Credit Facilities, RTI entered into a transaction on July 26, 2002 to refinance all of our bank-financed operating lease obligations and our revolving credit facility with traditional bank debt. Among other changes which resulted from this transaction, an increased amount of property and equipment purchases are now reflected on our cash flow statement. The net decrease in cash and short-term investments for the thirty-nine weeks ended March 4, 2003 shown in the table above reflects property and equipment acquisitions that exceed those of the comparable period in the prior year by $44.0 million. During the first thirty-nine weeks of Fiscal 2002 expenditures for property and equipment under the bank-financed operating lease program totaled $42.1 million. Also contributing to the $14.9 million decrease in cash and short-term investments is a decrease of $17.6 million in proceeds from issuance of stock from the previous year resulting from fewer employee stock option exercises, coupled with a decrease of $20.7 million for proceeds from refranchising that occurred during the thirty-nine weeks ended March 5, 2002 which did not occur for the same period in the current year. This increase was partially offset by the increase of $28.9 million in conjunction with the recording of the loss on valuation of the SRG Note that occurred during the thirty-nine weeks ended March 5, 2002.

Our working capital deficiency and current ratio for the thirty-nine week period ended March 4, 2003 were $24.8 million and 0.7:1, respectively. As is common in the restaurant industry, we carry current liabilities in excess of current assets because cash (a current asset) generated from operating activities is reinvested in capital expenditures (a long-term asset) and receivable and inventory levels are generally not significant.

Capital Expenditures

We require capital principally for new restaurant construction, equipment replacement, and remodeling of existing restaurants. Property and equipment expenditures for the thirty-nine weeks ended March 4, 2003 were $114.1 million. Capital expenditures for the remainder of Fiscal 2003 are projected to be approximately $45.0 — $50.0 million which we intend to fund with cash provided by operations and financing activities. See “Special Note Regarding Forward-Looking Information.”

Pension Plan Funded Status

The Company is a sponsor of the Morrison Restaurants, Inc. Retirement Plan (the “Plan”), along with Piccadilly and Compass. The Plan was established to provide retirement benefits for qualifying employees of Morrison Restaurants, Inc. Under the Plan, participants are entitled to receive benefits based upon salary and length of service. The Plan was amended as of December 31, 1987, so that no additional benefits will accrue and no new participants will enter the Plan after that date. Certain responsibilities involving the administration of the Plan are jointly shared by each of the three companies. The sponsors have agreed to voluntarily contribute such amounts as are necessary to provide assets sufficient to meet benefits to be paid to participants. For the thirty-nine weeks ended March 4, 2003, RTI made total contributions of $0.1 million and expects to make contributions for the remainder of Fiscal 2003 of $0.3 million. RTI contributions to the Plan for Fiscal 2004 are projected to be $1.7 million. To the best of our knowledge, both Piccadilly and Compass have made all required contributions.

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Significant Contractual Obligations and Commercial Commitments

Long-term financial obligations were as follows as of March 4, 2003 (in thousands):

* The maturity dates reflected in the above table for the term loan and revolving credit facility give effect to the changes occurring with the private sale of the Series A and Series B Notes pursuant to the Private Placement transaction.

See Notes G and J to the Condensed Consolidated Financial Statements for further discussion on our long-term obligations and subsequent event, respectively.

Commercial Commitments (in thousands):

See Notes E and I to the Condensed Consolidated Financial Statements for further discussion of our franchise programs and guarantees.

Borrowings and Credit Facilities

See Note G to the Condensed Consolidated Financial Statements for further discussion of the refinance of our bank-financed operating lease obligations as well as a discussion of the impact to our interest rate swap agreements. See Note J to the Condensed Consolidated Financial Statements for further discussion of the completion of the Private Placement transaction.

During the quarter, two of our five interest rate swap agreements expired. A third interest rate swap was deemed ineffective during the quarter due to paying off the $70.4 million term loan with the Private Placement proceeds. The remaining two interest rate swap agreements have notional amounts aggregating $50.0 million. These swap agreements fix the interest rate on an equivalent amount of our floating-rate obligations of rates ranging from 5.05% to 5.73%, plus applicable spreads ranging from 0.875% to 1.50%, for periods up through December 8, 2003 (see Note G to the Condensed Consolidated Financial Statements).

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During the remainder of Fiscal 2003, we expect to fund operations, capital expansion, the repurchase of common stock, and the payment of dividends from operating cash flows, the Credit Agreement, and through operating leases. See “Special Note Regarding Forward-Looking Information.”

Total long-term debt including current maturities and short-term borrowings increased a net $205.7 million during the current year primarily due to the refinancing of our bank-financed operating lease agreements with traditional bank debt during the first quarter of this fiscal year as discussed above.

New Accounting Standards and Interpretations Not Yet Adopted

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" (“FIN 46”). FIN 46 addresses the consolidation of entities whose equity holders either (a) have not provided sufficient equity at risk to allow the entity to finance its own activities or (b) do not possess certain characteristics of a controlling financial interest. FIN 46 requires the consolidation of these entities, known as variable interest entities (“VIEs”), by a primary beneficiary of the entity. A primary beneficiary is the entity, if any, that is subject to a majority of the risk of loss from the VIEs activities, entitled to receive a majority of the VIEs residual returns, or both. FIN 46 applies immediately to variable interests in VIEs created or obtained after January 31, 2003. For variable interests in a VIE created before February 1, 2003, FIN 46 is applied to the VIE no later than the end of the first interim or annual reporting period beginning after June 15, 2003. FIN 46 requires certain disclosures in financial statements issued after January 31, 2003, if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when FIN 46 becomes effective. We plan to adopt FIN 46 in Fiscal 2004. FIN 46‘s consolidation criteria are based on analysis of risks and rewards, not control, and represent a significant and complex modification of previous accounting principles. FIN 46 represents an accounting change, not a change in the underlying economics of legally independent businesses. Under its provisions, the accounts of some or all of RTI’s franchisees could be consolidated on our books. In the event we consolidated these businesses, we would not reacquire any additional legal ownership, our legal rights and obligations would not change, and we would not become legally obligated for the franchisee’s liabilities. Even assuming the structure of, or the contractual relationships between, these legally independent entities and RTI are not changed between now and the effective date of FIN 46, the requirement for a franchise by franchise review under the complexity of the new consolidation rules and their evolving clarification make forecasting the complete impact on RTI’s consolidated financial statements impracticable at this time. However, if consolidation of all of our franchise partners is required, we currently believe that the potential negative impact on our consolidated statement of income for Fiscal 2004 will be approximately $0.01 to $0.03 per share based upon our current analysis of each franchisee’s expected net income or loss and the related assignment of the net income or loss of the minority owners.

See Note H to the Condensed Consolidated Financial Statements for further discussion of other new accounting standards and interpretations not yet adopted.

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KNOWN EVENTS, UNCERTAINTIES AND TRENDS

Financial Strategy and Stock Repurchase Plan

Our financial strategy is to utilize a prudent amount of debt, including operating leases, to minimize the weighted average cost of capital while allowing financial flexibility and the equivalent of an investment-grade bond rating. This strategy allows us to repurchase RTI common stock at times when cash flow exceeds capital expenditures and other funding requirements. During the thirty-nine weeks ended March 4, 2003, we purchased 0.6 million shares of RTI common stock for a total purchase price of $11.8 million. The total number of remaining shares authorized to be repurchased, as of March 4, 2003, is 5.3 million. To the extent not funded with cash from operating activities, additional repurchases may be funded by borrowings on the credit facilities.

Dividends

During Fiscal 1997, our Board of Directors approved a dividend policy as an additional means of returning capital to RTI’s shareholders. In accordance with this policy, we paid dividends of $2.9 million during the thirty-nine week period ended March 4, 2003. The payment of a dividend in any particular future period and the actual amount thereof remain, however, at the discretion of the Board of Directors and no assurance can be given that dividends will be paid in the future. Additionally, our credit facilities contain certain limitations on the payment of dividends. See “Special Note Regarding Forward-Looking Information.”

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

The foregoing section contains various “forward-looking statements,” which represent the Company’s expectations or beliefs concerning future events, including the following: future financial performance and restaurant growth (both Company-owned and franchised), future capital expenditures, future borrowings and repayment of debt, and payment of dividends. The Company cautions that a number of important factors could, individually or in the aggregate, cause actual results to differ materially from those included in the forward-looking statements, including, without limitation, the following: consumer spending trends and habits; mall-traffic trends; increased competition in the casual dining restaurant market; weather conditions in the regions in which Company-owned and franchised restaurants are operated; consumers’ acceptance of our development prototypes; laws and regulations affecting labor and employee benefit costs; costs and availability of food and beverage inventory; our ability to attract qualified managers, franchisees and team members; changes in the availability of capital; and general economic conditions.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosures about Market Risk

We manage our exposure to changes in short-term interest rates, particularly to reduce the impact on debt obligations, by entering into interest rate swap agreements. These agreements are with high credit quality commercial banks. Consequently, credit risk, which is inherent in all swaps, has been minimized to a large extent. Interest expense is adjusted for the difference to be paid or received as interest rates change. During the thirty-nine week period ended March 4, 2003, our interest rate swaps required us to pay the banks $3.4 million because the fixed rates we paid were higher than current floating market rates. We charged these amounts to rent or interest expense.

A hypothetical 100 basis point increase in short-term interest rates would result in a reduction of approximately $0.1 million in annual pre-tax earnings. The estimated reduction is based upon the unhedged portion of our floating rate debt obligations and the Private Placement of notes which was completed on April 3, 2003. See Note J to the Condensed Consolidated Financial Statements for further discussion on the Private Placement.

In addition, a hypothetical 100 basis point increase in short-term rates, at March 4, 2003, would decrease the fair value of our interest rate swaps approximately $0.3 million at that date.

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ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures within 90 days of this report. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the evaluation date.

Changes in Internal Controls

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.

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PART II — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these pending legal proceedings will not have a material adverse effect on our operations, financial position or liquidity.

In addition, the Company, as successor to Morrison Restaurants Inc. (“Morrison”), is a party to a case (Morrison Restaurants Inc. v. United States of America, et al.,) originally filed by Morrison in 1994 to claim a refund of taxes paid in the amount of approximately $3,000 and abatement of taxes assessed by the Internal Revenue Service (“IRS”) against Morrison on account of the employer’s share of FICA taxes on unreported tips allegedly received by employees. The IRS filed a counterclaim for approximately $7,000 in additional taxes. The case was decided by the U.S. District Court in favor of the Company in February 1996 on summary judgment. The IRS appealed the District Court’s decision and, in August 1997, the U.S. Court of Appeals for the Eleventh Circuit reversed the award of summary judgment and remanded the case to the District Court for proceedings consistent with the court’s opinion. In its reversal, the Eleventh Circuit upheld the IRS’ enforcement policy with respect to the employer’s share of FICA taxes on allegedly unreported tips. The Company subsequently petitioned the U.S. Court of Appeals for a review of the matter by the full Court. Such petition was denied. To date, no additional liability, based on comparable assessments for the Company’s other units, has been pursued by the IRS. On June 17, 2002, the U.S. Supreme Court, in United States v. Fior d Italia, upheld the IRS’ enforcement policy. Notwithstanding the ruling in Fior, it is our position that additional assessments are unlikely. We believe that a dollar-for-dollar business tax credit would be available to the Company to offset, over a period of years, a majority of any additional taxes determined to be due. Moreover, we have, since January 1997, been a participant in the IRS’ enforcement program which would eliminate the risk of additional assessments in return for our proactive role in promoting employee tip reporting. We believe that the protection against additional assessments afforded by this agreement would be available to the Company.

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ITEM 5.

OTHER INFORMATION

The Audit Committee has reviewed and approved certain non-audit services to be provided by the independent accountants during the remainder of Fiscal 2003 to assure compliance with the Company’s and the Committee’s policies restricting the independent accountants from performing services that might impair their independence.

ITEM 6.

EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

        The following exhibits are filed as part of this report:

Exhibit No.

REPORTS ON FORM 8-K

None.

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SIGNATURES

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

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CERTIFICATIONS

I, Samuel E. Beall, III, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Ruby Tuesday, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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I, Marguerite N. Duffy, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Ruby Tuesday, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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