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EX-10.1 - AGREEMENT AND GENERAL RELEASE BETWEEN RUBY TUESDAY, INC. AND JEFF WOOD - RUBY TUESDAY INCex_10-1.htm
EX-32.2 - CFO 906 CERTIFICATION - RUBY TUESDAY INCex_32-2.htm
EX-32.1 - CEO 906 CERTIFICATION - RUBY TUESDAY INCex_32-1.htm
EX-31.2 - CFO 302 CERTIFICATION - RUBY TUESDAY INCex_31-2.htm
EXCEL - IDEA: XBRL DOCUMENT - RUBY TUESDAY INCFinancial_Report.xls
EX-12.1 - UNAUDITED COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES - RUBY TUESDAY INCex_12-1.htm
EX-31.1 - CEO 302 CERTIFICATION - RUBY TUESDAY INCex_31-1.htm
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:  September 2, 2014
 
 
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 o  Accelerated filer x
 Non-accelerated filer o (Do not check if a smaller reporting company)  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

 
61,923,945
 
(Number of shares of common stock, $0.01 par value, outstanding as of October 6, 2014)
 
 
 

 
 
RUBY TUESDAY, INC.
 
 
INDEX
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
     ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
 
 
                CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
 
                SEPTEMBER 2, 2014 AND JUNE 3, 2014
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
                ENDED SEPTEMBER 2, 2014 AND SEPTEMBER 3, 2013
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH
 
                FLOWS FOR THE THIRTEEN WEEKS ENDED
 
                SEPTEMBER 2, 2014 AND SEPTEMBER 3, 2013
 
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL
 
                STATEMENTS
 
 
                OF FINANCIAL CONDITION AND RESULTS
 
                OF OPERATIONS
 
 
                MARKET RISK
 
 
 
PART II - OTHER INFORMATION
 
 
     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 (including our estimates of annual growth in same-restaurant sales, average annual sales per restaurant, operating margins, expenses, and other items), future capital expenditures, the effect of strategic initiatives (including statements relating to cost savings initiatives and the benefits of our television marketing), the opening or closing of restaurants by us or our franchisees, sales of our real estate or purchases of new real estate, future borrowings and repayments of debt, availability of financing on terms attractive to the Company, compliance with financial covenants in our debt instruments, payment of dividends, stock and bond repurchases, restaurant acquisitions, and changes in senior management and in the Board of Directors.  We caution the reader that a number of important factors and uncertainties could, individually or in the aggregate, cause our actual results to differ materially from those included in the forward-looking statements, including, without limitation, the following:

·  
general economic conditions;

·  
changes in promotional, couponing and advertising strategies;

·  
changes in our customers’ 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;

·  
the impact of pending litigation;

·  
customers’ acceptance of changes in menu items;

·  
changes in the availability and cost of capital;

·  
potential limitations imposed by debt covenants under our debt instruments;

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

·  
costs and availability of food and beverage inventory;

·  
significant fluctuations in energy prices;

·  
security breaches of our customers’ or employees’ confidential information or personal data or the failure of our information technology and computer systems;

·  
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 one of our restaurant concepts or other competing restaurant concepts; and

·  
effects of actual or threatened future terrorist attacks in the United States.
 
 

3
 
PART I — FINANCIAL INFORMATION
ITEM 1.

RUBY TUESDAY, INC.
(IN THOUSANDS EXCEPT PER-SHARE DATA)

(UNAUDITED)
 
 
SEPTEMBER 2,
 
JUNE 3,
 
 
2014
 
2014
 
     
Assets
(NOTE A)
 
Current assets:
           
      Cash and cash equivalents
$
56,889
 
$
51,326
 
      Accounts receivable
 
4,531
   
4,861
 
      Inventories:
           
        Merchandise
 
12,029
   
12,924
 
        China, silver and supplies
 
7,965
   
8,250
 
      Income tax receivable
 
1,731
   
2,133
 
      Deferred income taxes
 
1,324
   
3,397
 
      Prepaid rent and other expenses
 
13,251
   
12,216
 
      Assets held for sale
 
7,097
   
4,683
 
           Total current assets
 
104,817
 
      
99,790
 
             
Property and equipment, net
 
785,056
   
794,846
 
Other assets
 
60,875
   
61,791
 
          Total assets
$
950,748
 
$
956,427
 
             
Liabilities & Shareholders’ Equity
           
Current liabilities:
           
      Accounts payable
$
23,121
 
$
26,201
 
      Accrued liabilities:
           
        Taxes, other than income and payroll
 
11,928
   
11,221
 
        Payroll and related costs
 
20,646
   
22,637
 
        Insurance
 
6,156
   
5,962
 
        Deferred revenue – gift cards
 
15,023
   
16,584
 
        Rent and other
 
29,616
   
26,402
 
      Current portion of long-term debt, including capital leases
 
4,851
   
4,816
 
          Total current liabilities
 
111,341
   
113,823
 
             
Long-term debt and capital leases, less current maturities
 
252,661
   
253,875
 
Deferred income taxes
 
3,578
   
3,500
 
Deferred escalating minimum rent
 
49,060
   
48,827
 
Other deferred liabilities
 
68,175
   
75,193
 
          Total liabilities
 
484,815
   
495,218
 
             
Commitments and contingencies (Note N)
           
             
Shareholders’ equity:
           
      Common stock, $0.01 par value; (authorized: 100,000 shares;
           
        issued: 61,882 shares at 9/02/14; 61,442 shares at 6/03/14)
 
619
   
614
 
      Capital in excess of par value
 
77,960
   
76,269
 
      Retained earnings
 
397,791
   
395,226
 
      Deferred compensation liability payable in
           
        Company stock
 
455
   
622
 
      Company stock held by Deferred Compensation Plan
 
(455
)
 
(622
)
      Accumulated other comprehensive loss
 
(10,437
)
 
(10,900
)
          Total shareholders’ equity
 
465,933
   
  461,209
 
             
          Total liabilities & shareholders’ equity
$
950,748
 
$
956,427
 
 
                   The accompanying notes are an integral part of the condensed consolidated financial statements.
 

4
 
RUBY TUESDAY, INC.
     COMPREHENSIVE INCOME/(LOSS)
(IN THOUSANDS EXCEPT PER-SHARE DATA)
 
(UNAUDITED)
 
 
THIRTEEN WEEKS ENDED
 
 
SEPTEMBER 2,
2014
 
SEPTEMBER 3,
2013
 
 
 
     
 
(NOTE A)
 
         
Revenue:
       
      Restaurant sales and operating revenue
$    279,457
 
$    288,092
 
      Franchise revenue
1,725
 
1,582
 
 
281,182
 
289,674
 
Operating costs and expenses:
       
      Cost of goods sold
75,147
 
79,938
 
      Payroll and related costs
95,842
 
102,733
 
      Other restaurant operating costs
59,799
 
67,534
 
      Depreciation
12,658
 
14,209
 
      Selling, general and administrative, net
30,901
 
37,015
 
      Closures and impairments
1,482
 
8,033
 
      Interest expense, net
5,422
 
6,753
 
      Loss on extinguishment of debt
 
511
 
 
281,251
 
316,726
 
         
Loss from continuing operations before income taxes
(69
)
(27,052
) 
Benefit for income taxes from continuing operations
(2,634
(5,153
 
Income/(loss) from continuing operations
2,565
 
(21,899
) 
         
Loss from discontinued operations, net of tax
 
(343
) 
Net income/(loss)
$        2,565
 
$   (22,242
) 
         
Other comprehensive income:
       
      Pension liability reclassification, net of tax
463
 
478
 
Total comprehensive income/(loss)
$        3,028
 
$   (21,764
) 
         
Basic income/(loss) per share:
       
      Income/(loss) from continuing operations
$          0.04
 
$       (0.36
) 
      Loss from discontinued operations
 
(0.01
 
         Net income/(loss) per share
$          0.04
 
$       (0.37
 
         
Diluted income/(loss) per share:
       
      Income/(loss) from continuing operations
$          0.04
 
$       (0.36
)
      Loss from discontinued operations
 
(0.01
         Net income/(loss) per share
$          0.04
 
$       (0.37
         
Weighted average shares:
       
      Basic
60,419
 
60,026
 
      Diluted
61,053
 
60,026
 
 
                 The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 

5
 
RUBY TUESDAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 
(UNAUDITED)
 
 
  
THIRTEEN WEEKS ENDED
 
 
  
SEPTEMBER 2,
2014
 
SEPTEMBER 3,
2013
 
 
 
 
 
(NOTE A)
 
Operating activities:
       
Net income/(loss)
$       2,565
 
$    (22,242
Adjustments to reconcile net income/(loss) to net cash
       
  provided by operating activities:
       
    Depreciation
12,658
 
14,209
 
    Amortization of intangibles
581
 
665
 
    Deferred income taxes
(2,840
)
(79
)
    Loss on impairments, including disposition of assets
1,462
 
5,494
 
    Loss on extinguishment of debt
 
511
 
    Share-based compensation expense
1,749
 
1,704
 
    Excess tax benefits from share-based compensation
 
(256
)
    Lease reserve adjustments
466
 
2,792
 
    Deferred escalating minimum rent
617
 
705
 
    Other, net
(225
)
1,193
 
  Changes in operating assets and liabilities:
       
     Receivables
227
 
428
 
     Inventories
1,180
 
2,104
 
     Income taxes
402
 
(1,434
)
     Prepaid and other assets
(978
)
(22
)
     Accounts payable, accrued and other liabilities
(4,782
)
3,092
 
  Net cash provided by operating activities
13,082
 
8,864
 
         
Investing activities:
       
Purchases of property and equipment
(6,977
)
(11,159
)
Proceeds from sale-leaseback transactions, net
 
5,637
 
Proceeds from disposal of assets
273
 
2,548
 
Insurance proceeds from property claims
135
 
218
 
Reductions in Deferred Compensation Plan assets
370
 
130
 
Other, net
 
(143
)
  Net cash used by investing activities
(6,199
)
(2,769
)
         
Financing activities:
       
Principal payments on long-term debt and capital leases
(1,205
)
(24,284
)
Stock repurchases
(55
(540
Payments for debt issuance costs
(60
)
 
Proceeds from exercise of stock options
 
1,419
 
Excess tax benefits from share-based compensation
 
256
 
  Net cash used by financing activities
(1,320
)
(23,149
)
         
Increase/(decrease) in cash and cash equivalents
5,563
 
(17,054
)
Cash and cash equivalents:
       
  Beginning of year
51,326
 
52,907
 
  End of quarter
$   56,889
 
$     35,853
 
         
Supplemental disclosure of cash flow information:
       
      Cash paid for:
       
        Interest, net of amount capitalized
$        919
 
$       2,176
 
        Income taxes, net
$          25
 
$            74
 
Significant non-cash investing and financing activities:
       
        Retirement of fully depreciated assets
$     5,115
 
$       6,101
 
        Reclassification of properties to assets held for sale
$     2,967
 
$       1,643
 
 
                 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,” the “Company,” “we,” and/or “our”), owns and operates Ruby Tuesday® casual dining and Lime Fresh Mexican Grill® (“Lime Fresh”) fast casual restaurants.  We also franchise the Ruby Tuesday and Lime Fresh concepts in selected 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-week period ended September 2, 2014 are not necessarily indicative of results that may be expected for the 52-week year ending June 2, 2015.
 
The Condensed Consolidated Balance Sheet at June 3, 2014 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.  We have made certain reclassifications to prior year amounts in our Condensed Consolidated Statements of Cash Flows to conform to the current period presentation (all reclassifications were within operating activities).
 
For further information, refer to the consolidated financial statements and footnotes thereto included in RTI’s Annual Report on Form 10-K for the fiscal year ended June 3, 2014.
 
NOTE B – INCOME/(LOSS) PER SHARE AND STOCK REPURCHASES
 
Basic income/(loss) per share is computed by dividing net income/(loss) by the weighted average number of common shares outstanding during each period presented.  Diluted income/(loss) per share gives effect to stock options and restricted stock outstanding during the applicable periods, if dilutive.  The following table reflects the calculation of weighted-average common and dilutive potential common shares outstanding as presented in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) (in thousands, except per share data):
 
   
Thirteen weeks ended
   
September 2,
 2014
 
September 3,
 2013
  Income/(loss) from continuing operations
$
     2,565
$
  (21,899)
  Loss from discontinued operations
 
         –
 
        (343)
  Net income/(loss)
$
     2,565
$
  (22,242)
 
       
  Weighted-average common shares outstanding
 
     60,419
 
60,026
  Dilutive effect of stock options and restricted stock
 
          634
 
         –
  Weighted average common and dilutive potential
       
    common shares outstanding
 
     61,053
 
60,026
         
Income/(loss) per share – Basic
       
  Income/(loss) from continuing operations
$
     0.04
$
     (0.36)
  Loss from discontinued operations
 
          –
 
     (0.01)
  Net income/(loss) per share
$
     0.04
$
     (0.37)
         
Income/(loss) per share – Diluted
       
  Income/(loss) from continuing operations
$
     0.04
$
     (0.36)
  Loss from discontinued operations
 
          –
 
     (0.01)
  Net income/(loss) per share
$
     0.04
$
     (0.37)
 
 

7
 
Stock options with an exercise price greater than the average market price of our common stock and certain options and restricted shares with unrecognized compensation expense do not impact the computation of diluted income/(loss) 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 income/(loss) per share because their inclusion would have had an anti-dilutive effect (in thousands):
 
   
Thirteen weeks ended
   
September 2,
2014
 
September 3,
 2013
  Stock options
 
  2,826
 
  3,114*
  Restricted shares
 
         8
 
  1,246*
  Total
 
  2,834
 
  4,360*
*Due to a net loss from continuing operations for the 13 weeks ended September 3, 2013, all outstanding share-based awards were excluded from the computation of diluted loss per share.

During the first quarter of fiscal 2015, we repurchased an insignificant number of shares of our common stock at a cost of $0.1 million.  As of September 2, 2014, the total number of remaining shares authorized by our Board of Directors to be repurchased was 11.8 million.  All shares repurchased during the current quarter were cancelled as of September 2, 2014.

NOTE C – FRANCHISE PROGRAMS

As of September 2, 2014, our domestic and international franchisees collectively operated 83 Ruby Tuesday restaurants and seven Lime Fresh restaurants.  We do not own any equity interest in our franchisees.

Under the terms of the franchise operating agreements, we charge a royalty fee (generally 4.0% of monthly gross sales for our Ruby Tuesday concept franchisees and 5.25% of monthly gross sales for our Lime Fresh concept franchisees) and require all domestic franchisees to contribute a percentage, 1.5% as of September 2, 2014, 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 can charge up to 3.0% of monthly gross sales for this national advertising fund.

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

In addition to the advertising fee discussed above, our Ruby Tuesday concept franchise agreements allow us to charge up to a 2.0% support service fee and a 1.5% marketing and purchasing fee.  For the 13 weeks ended September 2, 2014 and September 3, 2013, we recorded $0.5 million and $0.3 million, respectively, in support service and marketing and purchasing fees, which were an offset to Selling, general and administrative, net in our Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss).

NOTE D – DISCONTINUED OPERATIONS

In an effort to focus primarily on the sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our Lime Fresh concept, we closed all of our Marlin & Ray’s, Wok Hay, and Truffles restaurants during the fourth quarter of fiscal 2013.  We have classified the results of operations of our Company-owned Marlin & Ray’s, Wok Hay, and Truffles concepts as discontinued operations for the 13 weeks ended September 3, 2013.  The results of operations of our discontinued operations are as follows (in thousands):
 
   
Thirteen weeks
 ended
 
   
September 3, 2013
 
Restaurant sales and operating revenue
 
$           
 
Loss before income taxes
 
  $       (528)
 
Benefit for income taxes
 
           (185)
 
Loss from discontinued operations
 
  $       (343)
 
 
 

8
 
NOTE E – ACCOUNTS RECEIVABLE

Accounts receivable – current consist of the following (in thousands):
 
 
September 2, 2014
 
June 3, 2014
           
Rebates receivable
$
895
 
$
930
Amounts due from franchisees
 
1,820
   
1,281
Third-party gift card sales
 
1,041
   
1,636
Other receivables
 
775
   
1,014
 
$
4,531
 
$
4,861

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.

As of September 2, 2014 and June 3, 2014, Other receivables consisted primarily of amounts due from our distributor ($0.3 million and $0.4 million, respectively) and sales and other miscellaneous tax refunds ($0.2 million for both periods).
 
NOTE F – INVENTORIES
 
Our merchandise inventory was $12.0 million and $12.9 million as of September 2, 2014 and June 3, 2014, respectively.  In order to ensure adequate supply and competitive pricing, we sometimes purchase lobster in advance of our needs and store it in third-party facilities prior to our distributor taking possession of the inventory.  In anticipation of lower promotional levels, we have utilized substantially all of the lobster on hand as of September 2, 2014 and June 3, 2014.

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):
 
 
September 2, 2014
 
June 3, 2014
 
Land
$
214,217
 
$
214,277
 
Buildings
 
429,217
   
430,988
 
Improvements
 
364,780
   
365,599
 
Restaurant equipment
 
249,569
   
248,852
 
Other equipment
 
85,233
   
84,876
 
Construction in progress and other*
 
22,281
   
       22,246
   
1,365,297
   
1,366,838
Less accumulated depreciation
 
580,241
   
     571,992
 
  $
785,056
 
$
794,846

* Included in Construction in progress and other as of September 2, 2014 and June 3, 2014 are $16.6 million and $18.4 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 and closed properties which include a building.

Included within the current assets section of our Condensed Consolidated Balance Sheets at September 2, 2014 and June 3, 2014 are amounts classified as held for sale totaling $7.1 million and $4.7 million, respectively. Assets held for sale primarily consist of parcels of land upon which we have no intention to
 
 

9
 
build restaurants, land and buildings of closed restaurants, and various liquor licenses.  During the 13 weeks ended September 2, 2014, we sold liquor licenses with no carrying value at a gain of $0.3 million.  During the 13 weeks ended September 3, 2013, we sold surplus properties with carrying values of $2.6 million at a loss of $0.1 million.  Cash proceeds, net of broker fees, from these sales totaled $0.3 million and $2.5 million for the 13 weeks ended September 2, 2014 and September 3, 2013, respectively.

Approximately 55% of our 686 Company-owned restaurants are located on leased properties.  Of these, approximately 68% are land leases only; the other 32% are for both land and building.  The initial terms of these leases expire at various dates over the next 22 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.

During the 13 weeks ended September 3, 2013, we completed sale-leaseback transactions of the land and building for three Company-owned Ruby Tuesday concept restaurants for gross cash proceeds of $5.9 million, exclusive of transaction costs of approximately $0.3 million.  Equipment was not included.  The carrying value of the properties sold was $4.8 million.  The leases have been classified as operating leases and have initial terms of 15 years, with renewal options of up to 20 years following a rent reset based on fair market value at the end of the initial term.  Net proceeds from fiscal 2014’s sale-leaseback transactions were used for general corporate purposes, including debt payments and the repurchase of shares of our common stock.

We realized gains on these transactions during the 13 weeks ended September 3, 2013 of $0.8 million, which have been deferred and are being recognized on a straight-line basis over the initial terms of the leases.  The current portion of the deferred gains on all sale-leaseback transactions was $1.1 million as of both September 2, 2014 and June 3, 2014, and is included in Accrued liabilities – Rent and other in our Condensed Consolidated Balance Sheets.  The long-term portion of the deferred gains on all sale-leaseback transactions was $12.7 million and $13.0 million as of September 2, 2014 and June 3, 2014, respectively, and is included in Other deferred liabilities in our Condensed Consolidated Balance Sheets.  Amortization of the deferred gains of $0.3 million is included within Other restaurant operating costs in our Condensed Consolidated Statement of Operations and Comprehensive Income/(Loss) for both of the 13-week periods ended September 2, 2014 and September 3, 2013.
 
NOTE H – LONG-TERM DEBT AND CAPITAL LEASES
 
Long-term debt and capital lease obligations consist of the following (in thousands):
 
 
September 2, 2014
 
June 3, 2014
           
Senior unsecured notes
$
215,000
 
$
215,000
Unamortized discount
 
(2,420)
   
(2,503)
Senior unsecured notes less unamortized discount
 
212,580
   
212,497
Revolving credit facility
 
   
Mortgage loan obligations
 
44,720
   
45,993
Capital lease obligations
 
212
   
201
   
257,512
   
258,691
Less current maturities
 
4,851
   
4,816
 
$
252,661
 
$
253,875

On May 14, 2012, we entered into an indenture (the “Indenture”) among the Company, certain subsidiaries of the Company as guarantors and Wells Fargo Bank, National Association as trustee, governing the Company’s $250.0 million aggregate principal amount of 7.625% senior notes due 2020 (the “Senior Notes”).  The Senior Notes were issued at a discount of $3.7 million, which is being amortized using the effective interest method over the eight-year term of the notes.
 
 

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The Senior Notes are guaranteed on a senior unsecured basis by our existing and future domestic restricted subsidiaries, subject to certain exceptions.  They rank equal in right of payment with our existing and future senior indebtedness and senior in right of payment to any of our future subordinated indebtedness.  The Senior Notes are effectively subordinated to all of our secured debt, including borrowings outstanding under our revolving credit facility, to the extent of the value of the assets securing such debt and structurally subordinated to all of the liabilities of our existing and future subsidiaries that do not guarantee the Senior Notes.

Interest on the Senior Notes is calculated at 7.625% per annum, payable semiannually on each May 15 and November 15 to holders of record on the May 1 or November 1 immediately preceding the interest payment date.  Accrued interest on the Senior Notes and our other long-term debt and capital lease obligations is included in Accrued liabilities – Rent and other in our Condensed Consolidated Balance Sheets.  The Senior Notes mature on May 15, 2020.

At any time prior to May 15, 2016, we may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus an applicable “make-whole” premium and accrued and unpaid interest.  At any time on or after May 15, 2016, we may redeem the Senior Notes, in whole or in part, at the redemption prices specified in the Indenture plus accrued and unpaid interest.  At any time prior to May 15, 2015, we may redeem up to 35% of the Senior Notes from the proceeds of certain equity offerings.  There is no sinking fund for the Senior Notes.

The Indenture contains covenants that limit, among other things, our ability and the ability of certain of our subsidiaries to (i) incur or guarantee additional indebtedness; (ii) declare or pay dividends, redeem stock or make other distributions to stockholders; (iii) make certain investments; (iv) create liens or use assets as security in other transactions; (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of their assets; (vi) enter into transactions with affiliates; and (vii) sell or transfer certain assets.  These covenants are subject to a number of important exceptions and qualifications, as described in the Indenture, and certain covenants will not apply at any time when the Senior Notes are rated investment grade by the Rating Agencies, as defined in the Indenture.  The Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately.

Under the terms of our December 2013 four-year revolving credit agreement (the “Senior Credit Facility” discussed below) we are allowed, under certain circumstances, to repurchase up to $20.0 million of the Senior Notes in any fiscal year.  We did not repurchase any Senior Notes during the quarter ended September 2, 2014.  The balance on the Senior Notes was $215.0 million at September 2, 2014.

On December 3, 2013, we entered into the Senior Credit Facility under which we may borrow up to $50.0 million with the option, subject to certain conditions, to increase the facility by up to $35.0 million.  The Senior Credit Facility, which was obtained to provide access to capital for general corporate purposes, replaced a previous five-year $200.0 million credit facility that was set to expire in December 2015.  The terms of the Senior Credit Facility provide for a $25.0 million sublimit for the issuance of standby letters of credit.

Under the Senior Credit Facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize.  Our options for the rate are a Base Rate or LIBOR, plus an applicable margin.  The Base Rate is defined as the highest of the issuing bank’s prime rate, the Federal Funds rate plus 0.50%, or the Adjusted LIBO rate (as defined in the Senior Credit Facility) plus 1.0%.  The applicable margin for the LIBOR rate-based option is a percentage ranging from 2.50% to 3.50% and for the Base Rate option is a percentage ranging from 1.50% to 2.50%.  We pay commitment fees quarterly ranging from 0.40% to 0.75% on the unused portion of the Senior Credit Facility.

As security for the Senior Credit Facility, we granted the lenders liens and security interests in substantially all of the shares of capital stock of the Company and each of our present and future subsidiaries, substantially all of the personal property of the Company and each of our present and future subsidiaries, and the real property, improvements, and fixtures of 49 Ruby Tuesday restaurants.  The real property, improvements, and fixtures of the 49 restaurants pledged as collateral appraised at $101.4 million at the time of the transaction and have a September 2, 2014 net book value of $80.8 million.
 
 

11
 
Under the Senior Credit Facility, we had no borrowings outstanding at September 2, 2014.  After consideration of letters of credit outstanding, we had $37.5 million available under the Senior Credit Facility as of September 2, 2014.

The Senior Credit Facility contains a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability to incur liens, engage in mergers or other fundamental changes, make acquisitions, investments, loans and advances, pay dividends or other distributions, sell or otherwise dispose of certain assets, engage in certain transactions with affiliates, enter into burdensome agreements or certain hedging agreements, amend organizational documents, change accounting practices, incur additional indebtedness and prepay other indebtedness.  In addition, under the Senior Credit Facility, we are required to comply with financial covenants relating to the maintenance of a maximum leverage ratio and a minimum fixed charge coverage ratio.  The terms of the Senior Credit Facility require us to maintain a maximum leverage ratio of no more than 5.00 to 1.0 and a minimum fixed charge coverage ratio of 1.30 to 1.0 for the quarter ended September 2, 2014.  The minimum required ratios fluctuate thereafter as provided in the Senior Credit Facility.

The Senior Credit Facility terminates no later than December 3, 2017.  Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights under the Senior Credit Facility and any ancillary loan documents.

On December 3, 2013, in connection with our entry into the Senior Credit Facility, the Company and certain of its subsidiaries entered into loan modification agreements (the “Loan Modification Agreements”) with certain mortgage lenders to, among other things, provide waivers and consents under certain of our mortgage loan obligations to enter into the Senior Credit Facility.  The Loan Modification Agreements also, among other things, amend certain financial reporting requirements under the specified loans and modify and/or provide for certain financial covenants for the specified loans, including the minimum consolidated fixed charge coverage ratio and the minimum adjusted total debt to EBITDAR ratio.

Our $44.7 million in mortgage loan obligations as of September 2, 2014 consists of various loans acquired upon franchise acquisitions.  These loans, which mature between January 2015 and November 2022, have balances which range from negligible to $7.6 million and interest rates of 7.60% to 10.92%.  Many of the properties acquired from franchisees collateralize the loans outstanding.

NOTE I – CLOSURES AND IMPAIRMENTS EXPENSE

Closures and impairments expense includes the following for the thirteen weeks ended September 2, 2014 and September 3, 2013 (in thousands):
 
September 2, 2014
 
September 3, 2013
           
Closures and impairments from continuing operations
         
  Property impairments
$
1,056
 
$
4,930
  Closed restaurant lease reserves
 
466
   
2,595
  Other closing expense
 
233
   
468
  (Gain)/loss on sale of surplus properties
 
(273)
   
40
Closures and impairments, net
$
1,482
 
$
8,033
           
Closures and impairments from discontinued operations
     
$
518

A rollforward of our reserve for future lease obligations associated with closed properties is as follows (in thousands):
 
Reserve for
Lease Obligations
 
  Balance at June 3, 2014
$
10,873
 
  Closing expense including rent and other lease charges
 
466
 
  Payments
 
(1,326
)
  Other adjustments
 
13
 
  Balance at September 2, 2014
$
10,026
 

The amounts comprising future lease obligations in the table above are estimated using certain assumptions, including the period of time it will take to settle the lease with the landlord or find a suitable sublease tenant, and the amount of actual future cash payments could differ from our recorded lease
 
 

12
 
obligations.  Of the total future lease obligations included in the table above, $9.7 million and $10.5 million are included within the Accrued liabilities – Rent and other caption in our Consolidated Balance Sheets as of September 2, 2014 and June 3, 2014, respectively.  For the remainder of fiscal 2015 and beyond, our focus will be on obtaining settlements, or subleases as necessary, 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 September 2, 2014, we had 57 restaurants that had been open more than one year with rolling 12-month negative cash flows of which 36 have been impaired to salvage value.  Of the 21 which remained, we reviewed the plans to improve cash flows at each of the restaurants and determined that no impairment was necessary.  The remaining net book value of these 21 restaurants, eight of which are located on owned properties, was $24.1 million at September 2, 2014.   
 
Should cash flows at these restaurants not improve within a reasonable period of time, further impairment charges are possible.  Considerable management judgment is necessary to determine 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.
 
NOTE J – EMPLOYEE POST-EMPLOYMENT 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 may 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 $0.4 million to the Retirement Plan during the remainder of fiscal 2015.

Executive Supplemental Pension Plan and Management Retirement Plan
Under these unfunded defined benefit pension plans, eligible employees earn supplemental retirement income based upon salary and length of service, reduced by social security benefits and amounts otherwise receivable under other specified Company retirement plans.  Effective June 1, 2001, the Management Retirement Plan was amended so that no additional benefits would accrue and no new participants may enter the plan after that date.
 
Included in our Condensed Consolidated Balance Sheets as of September 2, 2014 and June 3, 2014 are amounts within Accrued liabilities: Payroll and related costs of $3.3 million as of both dates and amounts within Other deferred liabilities of $32.4 million and $32.5 million, respectively, relating to our three defined benefit pension plans.

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.
 
 

13
 
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
 
September 2, 2014
 
September 3, 2013
Service cost
$         75
   
$         89
 
Interest cost
443
   
434
 
Expected return on plan assets
(124
)
 
(111
)
Recognized actuarial loss
430
   
428
 
Net periodic benefit cost
           $       824
   
           $      840
 
 
   
 
Postretirement Medical and Life Benefits
 
Thirteen weeks ended
 
September 2, 2014
 
September 3, 2013
Service cost
$           1
   
$          3
 
Interest cost
12
   
17
 
Amortization of prior service cost (a)
   
(11
)
Recognized actuarial loss
33
   
61
 
Net periodic benefit cost
$         46
   
$       70
 
 
(a)  
Prior service costs are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits.

During the 13 weeks ended September 2, 2014 and September 3, 2013, we reclassified recognized actuarial losses and amortized prior service costs out of accumulated other comprehensive loss and into pension expense, which is included in Selling, general and administrative, net within our Condensed Consolidated Statements of Operations, as follows (in thousands):

 
Thirteen weeks ended
 
 
September 2, 2014
 
September 3, 2013
 
Recognized actuarial loss
$
463
 
$
489
 
Amortization of prior service cost
 
   
(11
)
Pension liability reclassification
$
463
 
$
478
 

Accumulated other comprehensive loss in our Condensed Consolidated Balance Sheets as of September 2, 2014 and June 3, 2104 was $10.4 million and $10.9 million, respectively.  The change in accumulated other comprehensive loss during the 13 weeks ended September 2, 2014 was attributable to $0.5 million of recognized actuarial losses related to our pension plans.
 
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 June 3, 2014.

Executive Separations
On June 26, 2014, our then Executive Vice President, Chief Financial Officer separated employment with the Company.  Additionally, our Senior Vice President, Chief Development Officer departed the Company on July 24, 2014.  During the 13 weeks ended September 2, 2014, we recorded severance expense and made severance payments of $0.3 million in connection with the separation agreements for these former executives.
 
 

14
 
As of September 2, 2014, liabilities of $0.5 million and $0.1 million, representing unpaid obligations in connection with the staff reductions, were included within Accrued liabilities: Payroll and related costs and Other deferred liabilities, respectively, in our Condensed Consolidated Balance Sheet.  A roll forward of our obligations in connection with employee separations is as follows (in thousands):

  Balance at June 3, 2014
$
1,055
   
  Employee severance and unused vacation accruals
 
569
   
  Cash payments
 
(1,013
)
 
  Balance at September 2, 2014
$
611
   

See Note L to the Condensed Consolidated Financial Statements for discussion of the impact of executive separations to our share-based employee compensation costs.

NOTE K – INCOME TAXES

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  The guidance requires an entity to present its deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward net of unrecognized tax benefits when settlement in this manner is available under the tax law, which would be based on facts and circumstances as of the balance sheet reporting date and would not consider future events.  Gross presentation of an unrecognized tax benefit will still be required in the notes to the financial statements.  We adopted ASU 2013-11 on a prospective basis during the first quarter of fiscal 2015.  The adoption of this standard in the first quarter of fiscal 2015 resulted in a reclassification of $5.0 million of our liability for unrecognized tax benefits against our deferred tax assets.

Under Accounting Standards Codification 740 (“ASC 740”), companies are required to apply their estimated annual tax rate on a year-to-date basis in each interim period.  Under ASC 740, companies should not apply the estimated annual tax rate to interim financial results if the estimated annual tax rate is not reliably predictable.  In this situation, the interim tax rate should be based on the actual year-to-date results.  Due to changes in our projections, which have fluctuated as we work through our brand repositioning, a reliable projection of our annual effective rate has been difficult to determine.  As such, we recorded a tax provision for the first quarter of fiscal 2015 based on the actual year-to-date results, in accordance with ASC 740.

We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize the deferred tax assets in the future.  A valuation allowance assessment is performed each reporting period, with any additions or adjustments reflected in earnings in the period of assessment.  In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction.

Prior to the fourth quarter of fiscal 2013, we concluded that objective and subjective positive evidence outweighed negative evidence, and it was more likely than not we would realize all of our federal and most of our state deferred tax assets, except for loss carryforwards in certain states that have had cumulative losses and/or relatively short carryforward periods and annual limits of loss carryforward that is available for use to offset future taxable income.   During the fourth quarter of fiscal 2013, we recorded a valuation allowance following the conclusion that the negative evidence outweighed the positive evidence. 
 
We recorded a tax benefit from continuing operations of $2.6 million during the first quarter of fiscal 2015, compared to a tax benefit from continuing operations of $5.2 million in the prior year quarter.  Included in our $2.6 million tax benefit from continuing operations for the quarter ended September 2, 2014 was a benefit of $3.2 million representing an immaterial prior period correction to our deferred tax asset valuation allowance. 
 
Our valuation allowance for deferred tax assets totaled $53.8 million and $54.6 million as of September 2, 2014 and June 3, 2014, respectively.  
 
We had a gross liability for unrecognized tax benefits, exclusive of accrued interest and penalties, of $6.7 million and $7.0 million as of September 2, 2014 and June 3, 2014, respectively. As of September 2, 2014 and June 3, 2014, the total amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate was $2.4 million and $2.6 million, respectively. The liability for unrecognized tax
 
 

15
benefits as of September 2, 2014 includes $0.3 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 September 2, 2014 and June 3, 2014, we had accrued $0.4 million and $0.5 million, respectively, for the payment of interest and penalties.  During the first quarter of fiscal 2014, accrued interest and penalties decreased by an insignificant amount.

At September 2, 2014, we are no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2011, and with few exceptions, state and local examinations by tax authorities prior to fiscal year 2011.

NOTE L – SHARE-BASED EMPLOYEE COMPENSATION

We compensate our employees and directors using share-based compensation through the following plans:

The Ruby Tuesday, Inc. Stock Incentive Plan and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan
A committee, appointed by the Board of Directors, administers the Ruby Tuesday, Inc. Stock Incentive Plan (“SIP”) and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan (“1996 SIP”), and has full authority in its discretion to determine the key employees, officers, and non-employee directors to whom share-based  incentives are granted and the terms and provisions of share-based incentives.  Option grants under the SIP and 1996 SIP can have varying vesting provisions and exercise periods as determined by such committee.  A majority of currently outstanding options granted under the SIP and 1996 SIP vest within three years following the date of grant and expire seven years after the date of grant.  The SIP and 1996 SIP permit the committee to make awards of shares of common stock, awards of stock options or other derivative securities related to the value of the common stock, and certain cash awards to eligible persons.  These discretionary awards may be made on an individual basis or for the benefit of a group of eligible persons.  All options awarded under the SIP and 1996 SIP have been awarded with an exercise price equal to the fair market value at the time of grant.

At September 2, 2014, we had reserved a total of 4,469,000 and 77,000 shares of common stock for the SIP and 1996 SIP, respectively.  Of the reserved shares at September 2, 2014, 2,517,000 and 77,000 were subject to options outstanding for the 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 September 2, 2014 under the SIP and 1996 SIP were 1,952,000 and negligible, respectively.
 
Stock Options
The following table summarizes the activity in options for the 13 weeks ended September 2, 2014 under these stock option plans (in thousands, except per-share data):
 
 
 
Options
Weighted Average
Exercise Price
Service-based vesting:
       
Balance at June 3, 2014
1,953
 
$
8.66
Granted
810
   
5.91
Exercised
   
Forfeited
(31
)
 
9.35
Balance at September 2, 2014
2,732
 
$
7.84
Exercisable
1,308
 
$
8.72
         
Market-based vesting:
       
Balance at June 3, 2014
735
 
$
8.82
Forfeited
(120
)
 
9.34
Balance at September 2, 2014
615
 
$
8.72
Exercisable
 
$
 
At September 2, 2014, there was approximately $3.4 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 1.7 years.
 
 

16
During the first quarter of fiscal 2015, we granted 810,000 service-based stock options to certain employees under the terms of the SIP.  The stock options awarded vest in equal annual installments over a three-year period following grant of the award, and have a maximum life of seven years.  There are no performance-based vesting requirements associated with these stock options.

Restricted Stock
The following table summarizes our restricted stock activity for the 13 weeks ended September 2, 2014 (in thousands, except per-share data):

     
Weighted-Average
 
Restricted
 
Grant-Date
Performance-based vesting:
Stock
 
Fair Value
Unvested at June 3, 2014
68 
 
$    7.81
Granted
– 
 
Vested
– 
  
Forfeited
– 
  
Unvested at September 2, 2014
68 
 
$    7.81
       
     
Weighted-Average
 
Restricted
 
Grant-Date
Service-based vesting:
Stock
 
Fair Value
Unvested at June 3, 2014
1,008 
 
$    8.11
Granted
449 
  
6.04
Vested
(95)
 
8.63
Forfeited
(2)
 
7.81
Unvested at September 2, 2014
1,360 
 
$    7.39

The fair values of the restricted stock awards reflected above were based on the fair market value of our common stock at the time of grant.  At September 2, 2014, unrecognized compensation expense related to restricted stock grants expected to vest totaled approximately $5.4 million and will be recognized over a weighted average vesting period of approximately 1.7 years.

During the first quarter of fiscal 2015, we granted 449,000 shares of service-based restricted stock to certain employees under the terms of the SIP and 1996 SIP, 368,000 of which will cliff vest 2.5 years following the grant date and 81,000 of which will vest in three equal installments over a three-year period following the date of grant.
 
Share-based compensation expense of $1.7 million is included within Selling, general, and administrative, net in our Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) for both the 13 weeks ended September 2, 2014 and September 3, 2013.
 
 

17
NOTE M – SEGMENT REPORTING

Our President and Chief Executive Officer, who is our chief operating decision maker, with the assistance of our senior management, reviews discrete financial information for both the Ruby Tuesday and Lime Fresh restaurant concepts to assess performance and allocate resources.  We consider the Ruby Tuesday and Lime Fresh concepts to be our reportable segments as we do not believe they have similar economic and other characteristics to be aggregated into a single reportable segment.  Financial results by reportable segment for the 13 weeks ended September 2, 2014 and September 3, 2013 are as follows (in thousands):
 
 
Thirteen weeks ended
 
September 2, 2014
September 3, 2013
Revenues:
           
   Ruby Tuesday concept
$
276,043
 
$
284,022
 
   Lime Fresh concept
 
5,139
   
5,652
 
      Total revenues
$
281,182
 
$
289,674
 
             
Segment profit:
           
   Ruby Tuesday concept
$
30,389
 
$
9,851
 
   Lime Fresh concept
 
(176
)
 
(2,454
)
      Total segment profit
$
30,213
 
$
7,397
 
             
Depreciation and amortization:
           
   Ruby Tuesday concept
$
12,263
 
$
13,792
 
   Lime Fresh concept
 
423
   
499
 
   Support center and other
 
552
   
583
 
      Total depreciation and amortization
$
13,238
 
$
14,874
 
             
Capital expenditures:
           
   Ruby Tuesday concept
$
6,341
 
$
8,242
 
   Lime Fresh concept
 
49
   
2,366
 
   Support center and other
 
587
   
551
 
      Total capital expenditures
$
6,977
 
$
11,159
 

Total assets by reportable segment as of September 2, 2014 and June 3, 2014 are as follows (in thousands):

 
September 2, 2014
June 3, 2014
Total assets:
           
   Ruby Tuesday concept
$
816,194
 
$
824,293
 
   Lime Fresh concept
 
14,522
   
15,203
 
   Support center and other
 
120,032
   
116,931
 
      Total assets
$
950,748
 
$
956,427
 

The following is a reconciliation of segment profit to loss from continuing operations before taxes for the 13 weeks ended September 2, 2014 and September 3, 2013 (in thousands):
 
     Thirteen weeks ended
 
September 2, 2014
   September 3, 2013  
Segment profit
$       30,213
 
$         7,397
 
Less:
       
   Depreciation and amortization
(13,238
)
(14,874
)
   Unallocated general and administrative expenses
(10,962
)
(11,897
)
   Interest expense, net
(5,422
)
(6,753
)
   Preopening expenses
(89
)
(354
)
   Other expense, net
(571
)
(571
)
Loss from continuing operations before income taxes
 $             (69
)
 $     (27,052
)
 
 

18
 
NOTE N – COMMITMENTS AND CONTINGENCIES

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 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 April 17, 2012, a wage and hour case styled Guttentag, et al vs. Ruby Tuesday, Inc. was filed in the United States District Court, Southern District of New York.  The named plaintiffs, and five additional former employees who have joined the suit as opt-in plaintiffs, alleged that the Company violated the Fair Labor Standards Act and state wage and hour laws in New York and Florida.  Plaintiffs filed their motion for conditional certification on March 8, 2013, which sought a nationwide putative class of all current and former servers, bartenders, and food runners who worked for the Company for the three-year period prior to the filing of the lawsuit.  On June 11, 2013, the court entered an order granting conditional certification of the nationwide class requested by plaintiffs, but for the time frame of June 11, 2010 to the present.  Notice of the lawsuit and the right to opt-in was mailed to the putative class members in November 2013, and approximately 5%, or about 4,170 of the putative class members, filed consents to opt-in.  The parties have been engaged in mediation and recently reached a preliminary settlement agreement that, when approved by the court, will resolve the lawsuit and result in its dismissal with prejudice.  The total settlement sum is $3.0 million, and would cover the claims of all named and opt-in plaintiffs, including plaintiffs’ claims for costs and attorneys’ fees.  Accordingly, included within Accrued liabilities – Rent and other in our September 2, 2014 Condensed Consolidated Balance Sheet is a $3.0 million accrual in connection with this case.  
 
On October 2, 2014, the court granted the motion to approve the settlement without modification.  After a thirty-day appeals period runs without the filing of any appeals, and none are anticipated, the settlement agreement will become effective, final, and binding.  At that point, the Company has an obligation to fund at least $2.0 million of the settlement fund within 21 days.  The Company can defer, at its option, funding the remaining $1.0 million for up to another 90 days, but will incur an obligation to pay 8% per annum simple interest on any amount deferred for the deferral period.  Per the court's approval order, the case has now been dismissed with prejudice, subject to the court retaining jurisdiction to enforce the terms of the settlement agreement. 

NOTE O – FAIR VALUE MEASUREMENTS

The following table presents the fair value of financial assets and liabilities measured on a recurring basis and the level within the fair value hierarchy in which the measurements fall (in thousands):
 
                 
 
Level
 
September 2,
 2014
 
June 3,
2014
 
Deferred compensation plan: other investments – Assets
1
 
$
8,808
 
$
8,930
 
Deferred compensation plan: other investments – Liabilities
1
   
(8,808
)
 
(8,930
)
Deferred compensation plan: RTI common stock – Equity
1
   
455
   
622
 
Deferred compensation plan: RTI common stock – Equity
1
   
(455
)
 
(622
)
   Total
   
$
 
$
 

During the 13 weeks ended September 2, 2014 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.  The investments held by these plans 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.
 
 

19
 
The following table presents the fair value of assets measured on a non-recurring basis during the quarter ended September 2, 2014 and the level within the fair value hierarchy in which the measurements fall (in thousands):

    Fair Value Measurements  
 
Level
 
September 2, 2014
 
Long-lived assets held for sale
2
 
$
2,525
 
Long-lived assets held for use
2
   
37
 
   Total
   
$
2,562
 

The following table presents losses recognized during the 13 weeks ended September 2, 2014 and September 3, 2013 resulting from non-recurring fair value measurements.  The losses associated with continuing operations are included in Closures and impairments, net and the losses associated with discontinued operations are included in Loss from discontinued operations, net of tax in our Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) (in thousands):

 
13 weeks ended
 
 
September 2,
 2014
 
September 3,
2013
 
Included within continuing operations
           
  Long-lived assets held for sale
$
599
 
$
269
 
  Long-lived assets held for use
 
457
   
4,661
 
   Total
$
1,056
 
$
4,930
 
             
Included within discontinued operations
     
$
153
 
             
 
Long-lived assets held for sale are valued using Level 2 inputs, primarily representing 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 restaurants or groups of restaurants that we have impaired.  From time to time, this will also include closed restaurants or surplus sites that do not meet the held for sale criteria that we have offered for sale at a price less than 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 September 2, 2014 and June 3, 2014 consisted of cash and cash equivalents, accounts receivable and payable, long-term debt, and letters of credit.  The fair value of cash and cash equivalents and accounts receivable and payable approximated carrying value due to the short-term nature of these instruments.  The carrying value and fair value of our other financial instruments not measured at fair value on a recurring basis, however subject to fair value disclosures, are as follows (in thousands):
 
 
September 2, 2014
 
June 3, 2014
 
Carrying
Value
 
Fair Value
(Level 2)
 
Carrying
Value
 
Fair Value
(Level 2)
Long-term debt and capital leases
$  257,512
 
$  264,196
 
$  258,691
 
$  263,526
Letters of credit
 
408
 
 
405
 
We estimated the fair value of debt and letters of credit using market quotes and present value calculations based on market rates.
 
 

20
 
NOTE P – SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

As discussed in Note H to the Condensed Consolidated Financial Statements, the Senior Notes held by Ruby Tuesday, Inc. (the “Parent”) are guaranteed on a senior unsecured basis by our existing and future domestic restricted subsidiaries, subject to certain exceptions (the “Guarantors”).  Each of the Guarantors is wholly-owned by Ruby Tuesday, Inc.  None of the few remaining subsidiaries of Ruby Tuesday, Inc., which were primarily created to hold liquor license assets, guarantee the Senior Notes (the “Non-Guarantors”).  Our Non-Guarantor subsidiaries are immaterial and are aggregated within the Parent information disclosed below.

The following condensed consolidating financial information, which has been prepared in accordance with the requirements for presentation of Rule 3-10(f) of Regulation S-X promulgated by the Securities and Exchange Commission, presents the condensed consolidating financial information separately for the Parent, the Guarantors, and elimination entries necessary to consolidate the Parent and Guarantors.  Investments in wholly-owned subsidiaries are accounted for using the equity method for purposes of the consolidated presentation.  The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
 
 

21
 
Condensed Consolidating Balance Sheet
As of September 2, 2014
(In thousands)

 
Parent
    Guarantors  
Eliminations
    Consolidated  
Assets
                     
Current assets:
                     
     Cash and cash equivalents
$
56,573
 
$
316
 
$
 
$
56,889
 
     Accounts receivable
 
1,568
   
2,963
   
   
4,531
 
     Inventories
 
14,260
   
5,734
   
   
19,994
 
     Income tax receivable
 
142,065
   
   
(140,334
)
 
1,731
 
     Deferred income taxes
 
(1,889
)
 
3,213
   
   
1,324
 
     Other current assets
 
17,236
   
3,112
   
   
20,348
 
          Total current assets
 
229,813
   
15,338
   
(140,334
)
 
104,817
 
     
                       
Property and equipment, net
 
580,924
   
204,132
   
   
785,056
 
Investment in subsidiaries
 
134,922
   
   
(134,922
)
 
 
Due from/(to) subsidiaries
 
73,041
   
217,057
   
(290,098
)
 
 
Other assets
 
48,399
   
12,476
   
   
60,875
 
          Total assets
$
1,067,099
 
$
449,003
 
$
(565,354
)
$
950,748
 
                         
Liabilities & Shareholders’ Equity
                       
Current liabilities:
                       
     Accounts payable
$
19,177
 
$
3,944
 
$
 
$
23,121
 
     Accrued and other current liabilities
 
49,406
   
33,963
   
   
83,369
 
     Current maturities of long-term debt,
                       
        including capital leases
 
(347
)
 
5,198
   
   
4,851
 
     Income tax payable
 
   
140,334
   
(140,334
)
 
 
          Total current liabilities
 
68,236
   
183,439
   
(140,334
)
 
111,341
 
     
                       
Long-term debt and capital leases,
                       
   less current maturities
 
213,139
   
39,522
   
   
252,661
 
Deferred income taxes
 
(1,078
)
 
4,656
   
   
3,578
 
Due to/(from) subsidiaries
 
217,057
   
73,041
   
(290,098
)
 
 
Other deferred liabilities
 
103,812
   
13,423
   
   
117,235
 
          Total liabilities
 
601,166
   
314,081
   
(430,432
)
 
484,815
 
                         
Shareholders’ equity:
                       
     Common stock
 
619
   
   
   
619
 
     Capital in excess of par value
 
77,960
   
   
   
77,960
 
     Retained earnings
 
397,791
   
134,922
   
(134,922
)
 
397,791
 
     Accumulated other comprehensive loss
 
(10,437
)
 
   
   
(10,437
)
          Total shareholders’ equity
 
465,933
   
134,922
   
(134,922
)
 
465,933
 
     
                       
          Total liabilities & shareholders’ equity
$
1,067,099
 
$
449,003
 
$
(565,354
)
$
950,748
 
 
 

22
 
Condensed Consolidating Balance Sheet
As of June 3, 2014
(In thousands)

 
Parent
    Guarantors  
Eliminations
    Consolidated  
Assets
                       
Current assets:
                       
     Cash and cash equivalents
$
51,012
 
$
314
 
$
 
$
51,326
 
     Accounts receivable
 
1,725
   
3,136
   
   
4,861
 
     Inventories
 
15,114
   
6,060
   
   
21,174
 
     Income tax receivable
 
138,524
   
   
(136,391
)
 
2,133
 
     Deferred income taxes
 
(548
)
 
3,945
   
   
3,397
 
     Other current assets
 
14,610
   
2,289
   
   
16,899
 
          Total current assets
 
220,437
   
15,744
   
(136,391
)
 
99,790
 
     
                       
Property and equipment, net
 
587,783
   
207,063
   
   
794,846
 
Investment in subsidiaries
 
158,266
   
   
(158,266
)
 
 
Due from/(to) subsidiaries
 
78,612
   
243,665
   
(322,277
)
 
 
Other assets
 
48,780
   
13,011
   
   
61,791
 
          Total assets
$
1,093,878
 
$
479,483
 
$
(616,934
)
$
956,427
 
                         
Liabilities & Shareholders’ Equity
                       
Current liabilities:
                       
     Accounts payable
$
20,545
 
$
5,656
 
$
 
$
26,201
 
     Accrued and other current liabilities
 
46,450
   
36,356
   
   
82,806
 
     Current maturities of long-term debt,
                       
        including capital leases
 
(341
)
 
5,157
         
4,816
 
     Income tax payable
 
   
136,391
   
(136,391
)
 
 
          Total current liabilities
 
66,654
   
183,560
   
(136,391
)
 
113,823
 
     
                       
Long-term debt and capital leases,
                       
   less current maturities
 
213,039
   
40,836
   
   
253,875
 
Deferred income taxes
 
(445
)
 
3,945
   
   
3,500
 
Due to/(from) subsidiaries
 
243,665
   
78,612
   
(322,277
)
 
 
Other deferred liabilities
 
109,756
   
14,264
   
   
124,020
 
          Total liabilities
 
632,669
   
321,217
   
(458,668
)
 
495,218
 
                         
Shareholders’ equity:
                       
     Common stock
 
614
   
   
   
614
 
     Capital in excess of par value
 
76,269
   
   
   
76,269
 
     Retained earnings
 
395,226
   
158,266
   
(158,266
)
 
395,226
 
     Accumulated other comprehensive loss
 
(10,900
)
 
   
   
(10,900
)
          Total shareholders’ equity
 
461,209
   
158,266
   
(158,266
)
 
461,209
 
     
                       
          Total liabilities & shareholders’ equity
$
1,093,878
 
$
479,483
 
$
(616,934
)
$
956,427
 
 
 

23

Condensed Consolidating Statement of Operations and
Comprehensive Income
For the Thirteen Weeks Ended September 2, 2014
(In thousands)

 
Parent
   
Guarantors
 
Eliminations
 
Consolidated
 
Revenue:
                       
     Restaurant sales and operating revenue
$
202,551
 
$
76,906
 
$
 
$
279,457
 
     Franchise revenue
 
146
   
1,579
   
   
1,725
 
 
 
202,697
   
78,485
   
   
281,182
 
     
                       
Operating costs and expenses:
                       
     Cost of goods sold
 
54,530
   
20,617
   
   
75,147
 
     Payroll and related costs
 
68,042
   
27,800
   
   
95,842
 
     Other restaurant operating costs
 
43,412
   
16,387
   
   
59,799
 
     Depreciation
 
9,387
   
3,271
   
   
12,658
 
     Selling, general, and administrative
 
20,221
   
10,680
   
   
30,901
 
     Intercompany selling, general, and
                       
        administrative allocations
 
11,142
   
(11,142
)
 
   
 
     Closures and impairments
 
1,231
   
251
   
   
1,482
 
     Equity in earnings of subsidiaries
 
(7,781
)
 
   
7,781
   
 
     Interest expense, net
 
4,511
   
911
   
   
5,422
 
     Intercompany interest expense/(income)
 
2,892
   
(2,892
)
 
   
 
 
 
207,587
   
65,883
   
7,781
   
281,251
 
                         
(Loss)/income before income taxes
 
(4,890
)
 
12,602
   
(7,781
)
 
(69
)
(Benefit)/provision for income taxes
 
(7,455
)
 
4,821
   
   
(2,634
)
                         
Net income
$
2,565
 
$
7,781
 
$
(7,781
)
$
2,565
 
                         
Other comprehensive income:
                       
     Pension liability reclassification, net of tax
 
463
   
   
   
463
 
Total comprehensive income
$
3,028
 
$
7,781
 
$
(7,781
)
$
3,028
 
 
 

24
 
Condensed Consolidating Statement of Operations and
Comprehensive (Loss)/Income
For the Thirteen Weeks Ended September 3, 2013
(In thousands)

 
Parent
    Guarantors  
Eliminations
 
Consolidated
 
Revenue:
                       
     Restaurant sales and operating revenue
$
210,082
 
$
78,010
 
$
 
$
288,092
 
     Franchise revenue
 
21
   
1,561
   
   
1,582
 
 
 
210,103
   
79,571
   
   
289,674
 
     
                       
Operating costs and expenses:
                       
     Cost of goods sold
 
58,527
   
21,411
   
   
79,938
 
     Payroll and related costs
 
73,526
   
29,207
   
   
102,733
 
     Other restaurant operating costs
 
48,402
   
19,132
   
   
67,534
 
     Depreciation
 
10,364
   
3,845
   
   
14,209
 
     Selling, general, and administrative
 
25,994
   
11,021
   
   
37,015
 
     Intercompany selling, general, and
                       
        administrative allocations
 
14,763
   
(14,763
)
 
   
 
     Closures and impairments
 
5,165
   
2,868
   
   
8,033
 
     Equity in earnings of subsidiaries
 
(4,525
)
 
   
4,525
   
 
     Interest expense, net
 
5,060
   
1,693
   
   
6,753
 
     Intercompany interest expense/(income)
 
3,185
   
(3,185
)
 
   
 
     Loss on extinguishment of debt
 
511
   
   
   
511
 
 
 
240,972
   
71,229
   
4,525
   
316,726
 
                         
(Loss)/income from continuing operations
                       
     before income taxes
 
(30,869
)
 
8,342
   
(4,525
)
 
(27,052
)
(Benefit)/provision for income taxes from
                       
     continuing operations
 
(8,970
)
 
3,817
   
   
(5,153
)
(Loss)/income from continuing operations
 
(21,899
)
 
4,525
   
(4,525
)
 
(21,899
)
     
                       
Loss from discontinued operations, net of tax
 
(343
)
 
   
   
(343
)
Net (loss)/income
$
(22,242
)
$
4,525
 
$
(4,525
)
$
(22,242
)
                         
Other comprehensive income:
                       
     Pension liability reclassification, net of tax
 
478
   
   
   
478
 
Total comprehensive (loss)/income
$
(21,764
)
$
4,525
 
$
(4,525
)
$
(21,764
)
 
 

25
 
Condensed Consolidating Statement of Cash Flows
For the Thirteen Weeks Ended September 2, 2014
(In thousands)

 
Parent
    Guarantors  
Eliminations
 
Consolidated
 
                         
Net cash provided by operating activities
$
37,370
 
$
33,445
 
$
(57,733
)
$
13,082
 
     
                       
Investing activities:
                       
     Purchases of property and equipment
 
(5,717
)
 
(1,260
)
 
   
(6,977
)
     Proceeds from disposal of assets
 
250
   
23
   
   
273
 
     Other, net
 
370
   
135
   
   
505
 
Net cash used by investing activities
 
(5,097
)
 
(1,102
)
 
   
(6,199
)
                         
Financing activities:
                       
     Principal payments on long-term debt
 
11
   
(1,216
)
 
   
(1,205
)
     Stock repurchases
 
(55
)
 
   
   
(55
)
     Payments for debt issuance costs
 
(60
)
 
   
   
(60
)
     Intercompany transactions
 
(26,608
)
 
(31,125
)
 
57,733
   
 
Net cash used by financing activities
 
(26,712
)
 
(32,341
)
 
57,733
   
(1,320
)
                         
Increase in cash and cash equivalents
 
5,561
   
2
   
   
5,563
 
Cash and cash equivalents:
                       
     Beginning of year
 
51,012
   
314
   
   
51,326
 
     End of quarter
$
56,573
 
$
316
 
$
 
$
56,889
 
 
 

26
 
Condensed Consolidating Statement of Cash Flows
For the Thirteen Weeks Ended September 3, 2013
(In thousands)

 
Parent
    Guarantors  
Eliminations
 
Consolidated
 
                         
Net cash provided by operating activities
$
(7,987
)
$
25,540
 
$
(8,689
)
$
8,864
 
     
                       
Investing activities:
                       
     Purchases of property and equipment
 
(7,850
)
 
(3,309
)
 
   
(11,159
)
     Proceeds from sale-leaseback transactions, net
 
5,637
   
   
   
5,637
 
     Proceeds from disposal of assets
 
1,525
   
1,023
   
   
2,548
 
     Other, net
 
205
   
   
   
205
 
Net cash used by investing activities
 
(483
)
 
(2,286
)
 
   
(2,769
)
                         
Financing activities:
                       
     Principal payments on long-term debt
 
(12,941
)
 
(11,343
)
 
   
(24,284
)
     Stock repurchases
 
(540
)
 
   
   
(540
)
     Proceeds from exercise of stock options
 
1,419
   
   
   
1,419
 
     Excess tax benefits from share-based
                       
        compensation
 
256
   
   
   
256
 
     Intercompany transactions
 
3,186
   
(11,875
)
 
8,689
   
 
Net cash used by financing activities
 
(8,620
)
 
(23,218
)
 
8,689
   
(23,149
)
                         
Decrease in cash and cash equivalents
 
(17,090
)
 
36
   
   
(17,054
)
Cash and cash equivalents:
                       
     Beginning of year
 
52,635
   
272
   
   
52,907
 
     End of quarter
$
35,545
 
$
308
 
$
 
$
35,853
 
 
 

27
 
NOTE Q – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Adopted During Fiscal 2015
As discussed further in Note K to the Condensed Consolidated Financial Statements, we adopted ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists during the first quarter of fiscal 2015.

Accounting Pronouncements Not Yet Adopted
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances.  The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter (our fiscal 2017).  Early application is permitted.  We do not believe the adoption of this guidance will have a significant impact on our Condensed Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The ASU is a jointly converged standard between the FASB and the International Accounting Standards Board, and will replace almost all existing revenue recognition guidance, including industry specific guidance, upon its effective date. The standard’s core principle is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 also enhances disclosures about revenue, provides guidance for transactions that were not addressed comprehensively in previous guidance, and improves guidance for multiple-element arrangements. The standard permits the use of either the retrospective or cumulative effect transition method.  The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 (our fiscal 2018 first quarter).  We have not yet selected a transition method and are currently evaluating the impact of this guidance on our Condensed Consolidated Financial Statements.

NOTE R – SUBSEQUENT EVENTS

Subsequent to September 2, 2014, we prepaid and retired three mortgage loan obligations with a September 2, 2014 aggregate balance of $3.9 million using cash on hand.  Additionally, we paid $0.4 million in prepayment premiums in connection with the retirement of these obligations.
 
 

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ITEM 2.  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® casual dining and Lime Fresh Mexican Grill® (“Lime Fresh”) fast casual restaurants.  As of September 2, 2014, we owned and operated 666, and franchised 83, Ruby Tuesday restaurants.  Ruby Tuesday restaurants can be found in 45 states, the District of Columbia, 12 foreign countries, and Guam.

As of September 2, 2014, there were 20 Company-owned and operated Lime Fresh restaurants, as well as seven domestic Lime Fresh restaurants operated by franchisees.

Overview and Strategies

The bar and grill segment of the casual dining industry in which we primarily operate is intensely competitive with respect to prices, services, convenience, locations, employees, 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.  We continue to believe there are opportunities to grow our business, strengthen our competitive position, enhance our profitability, and create value through the execution of the following strategies:
 
Enhance Sales and Margins Through Repositioning of Our Core Brand
We are in the process of executing a strategic brand transformation of the Ruby Tuesday concept which we believe will result in a more energetic, affordable, and broadly appealing brand.  We further believe the execution of this strategy provides opportunities for increased customer counts, same-restaurant sales growth, and increased shareholder value.  Our brand transformation is supported by four key pillars: core menu transformation, service and atmosphere enhancements, and communication.  As part of our transformation strategy, we have taken what we believe to be meaningful steps to improve our food, customer experience, organizational capabilities, and business model.  We have worked aggressively to transform our menu and, through successive menu launches throughout the past year, we introduced new menu platforms and offerings that provide a compelling value throughout the menu at a wide-range of price points.  Enhancing our service and atmosphere are also critical components of our brand transformation strategy.  As we introduced new menu and culinary platforms, we also simplified recipes and operational processes which we believe resulted in better and more consistent food and service execution.  Most recently, we introduced more casual and colorful new team uniforms and have a new menu design, both of which better reflect our brand personality.  We believe these changes have combined to deliver improved customer service and create a more energetic dining atmosphere for our customers.  The fourth pillar of our brand transformation strategy is our communication and marketing programs.  Historically our marketing strategy has primarily focused on print promotions, digital media and local marketing programs, with a minimal amount spent on television.  Over the past year, we have deployed what we believe to be a more balanced marketing program comprised of a mixture of national cable television advertising supported with direct mail and other print and electronic promotions.  Our television advertising is designed to reshape consumer perceptions of the Ruby Tuesday brand, by showcasing our brand personality in a fresh and energetic way, featuring compelling new food products, highlighting the freshness and variety of our Garden Bar, and effectively communicating value and affordability.  The four key areas of menu, service, atmosphere, and communication will continue to be foundational drivers of our brand transformation and key to building a stronger business model.

Focus on Low-Capital Intensive Potential Growth in the Fast Casual Sector
We have been focused on growing our Company in a low-capital intensive manner through Lime Fresh, our Mexican fast casual concept.  We initially opened Lime Fresh restaurants under a licensing agreement and,
 

29
 
after over a year of experience that enabled us to better understand the concept’s positioning and potential in the high-quality fast casual segment, we acquired the business in fiscal 2012 since we believed we could more effectively grow the concept if we owned it.  The fast casual segment of our industry is a growing segment where demand has historically exceeded supply, and we believe opening smaller, inline locations under the Lime Fresh brand provides a low-capital intensive potential growth option for us.  While the concept is still in its early stages, we believe it has the potential to generate attractive returns for us if we are able to realize our revenue and profitability targets.  Over the last fiscal year, we have made improvements to the business model, which include menu improvements, including better flavor profiles and increased portion size of our proteins, as well as improvements in cost of goods sold, labor productivity, and site selection criteria.

Enhancing Our Business Model
Over the past year, we made significant progress towards lowering our overall cost structure with identified reductions in cost of goods sold and selling, general, and administrative expenses that are estimated to result in annualized savings of $6.0 million and $7.0 million, respectively.  We are in the process of implementing enhanced business processes and capabilities, such as new platforms for guest count forecasting, labor management, and food waste management that should benefit our business model and result in a better guest experience and improved profitability.  We believe there is opportunity to further improve our business model with a continued focus on improving our restaurant-level returns and through a continued focus on lowering our overall cost structure through the implementation of business technology platforms.
 
Strengthen our Balance Sheet to Facilitate Growth and Value Creation
During the second quarter of fiscal 2014, we entered into a four-year $50.0 million revolving credit agreement (the “Senior Credit Facility”).  Our Senior Credit Facility, which is secured by substantially all of the shares of capital stock of the Company’s subsidiaries, real property, improvements and fixtures of 49 Ruby Tuesday restaurants, and substantially all of the personal property of the Company and each of its present and future subsidiaries, was obtained to provide access to capital for general corporate purposes and provides us with more covenant flexibility than our previous revolving credit facility.  The Senior Credit Facility has a $35.0 million accordion feature which provides us with additional liquidity if needed.  Aside from the $12.5 million allocated to letters of credit issued primarily in conjunction with our insurance programs, the $50.0 million revolving Senior Credit Facility has remained undrawn.

Our objective over the next several years is to continue to reduce outstanding debt levels in order to lower our leverage and focus on prudent restaurant development.  Our success in the key strategic initiatives outlined above should enable us to improve both our return on assets and return on equity, and to create additional shareholder value.
 
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make subjective or complex judgments that may affect the reported financial condition and results of operations.  We base our estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  We continually evaluate the information used to make these estimates as our business and the economic environment changes.
 
Results of Operations: 

 
The following is an overview of our results of operations for the 13-week period ended September 2, 2014:
 
Net income was $2.6 million for the 13 weeks ended September 2, 2014 compared to a net loss of $22.2 million for the same quarter of the previous year.  Diluted earnings per share for the fiscal quarter ended September 2, 2014 was $0.04 compared to a diluted loss per share of $0.37 for the corresponding period of the prior year as a result of the decrease in net loss as discussed below.
 
 

30
During the 13 weeks ended September 2, 2014:
 
·  
Same-restaurant sales* at Company-owned Ruby Tuesday restaurants increased 1.1%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants increased 6.0%.
 
·  
Two Company-owned Ruby Tuesday restaurants were closed;
 
·  
One franchised Lime Fresh restaurant was opened;
 
·  
Four franchised Ruby Tuesday restaurants were opened;

·  
Michael O. Moore stepped down as our Chief Financial Officer on June 26, 2014 and Jill M. Golder was appointed Executive Vice President, Chief Financial Officer, and Treasurer on the same date.  Mr. Moore left the Company on August 4, 2014; and

·  
Jeffrey C. Wood, our former Senior Vice President and Chief Development Officer, left the Company on July 24, 2014.
 
* 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
 
September 2,
 
September 3,
 
2014
 
2013
Revenue:
         
       Restaurant sales and operating revenue
99
.4%
 
99
.5%
       Franchise revenue
0
.6
 
0
.5
           Total revenue
100
.0
 
100
.0
Operating costs and expenses:
         
       Cost of goods sold (1)
26
.9
 
27
.7
       Payroll and related costs (1)
34
.3
 
35
.7
       Other restaurant operating costs (1)
21
.4
 
23
.4
       Depreciation (1)
4
.5
 
4
.9
       Selling, general and administrative, net
11
.0
 
12
.8
       Closures and impairments
0
.5
 
2
.8
       Interest expense, net
1
.9
 
2
.3
       Loss on extinguishment of debt
 
 –
 
0
.2
Total operating costs and expenses
100
.0
 
109
.3
Loss from continuing operations before income taxes
(0
.0)
 
(9
.3)
Benefit for income taxes from continuing operations
(0
.9)
 
(1
.8)
Income/(loss) from continuing operations
0
.9
 
(7
.6)
Loss from discontinued operations, net of tax
 
 –
 
(0
.1)
Net income/(loss)
0
.9%
 
(7
.7)%
 
 (1)     As a percentage of restaurant sales and operating revenue.
 
The following table shows Company-owned Ruby Tuesday and Lime Fresh concept restaurant activity for the 13-week periods ended September 2, 2014 and September 3, 2013.
 
 
Ruby
Tuesday
 
Lime
 Fresh
 
 
Total
13 weeks ended September 2, 2014
 
       
     Beginning number
668 
 
20
 
688 
     Opened
– 
 
 
– 
     Closed
(2))
 
 
(2))
     Ending number
666 
 
20
 
686 
 
 

31
 
           
13 weeks ended September 3, 2013
 
       
     Beginning number
706 
 
18
 
724 
     Opened
– 
 
3
 
     Closed
(3))
 
 
(3))
     Ending number
703 
 
21
 
724 
 
The following table shows franchised Ruby Tuesday and Lime Fresh concept restaurant activity for the 13-week periods ended September 2, 2014 and September 3, 2013.
 
 
Ruby
 Tuesday
 
Lime
 Fresh
 
13 weeks ended September 2, 2014
 
     
     Beginning number
79
 
6
 
     Opened
4
 
1
 
     Closed
 
 
     Ending number
83
 
7
 
         
13 weeks ended September 3, 2013
 
     
     Beginning number
77
 
6
 
     Opened
 
2
 
     Closed
(2)
 
 
     Ending number
75
 
8
 

Revenue

RTI’s restaurant sales and operating revenue for the 13 weeks ended September 2, 2014 decreased 3.0% to $279.5 million compared to the same period of the prior year.  This decrease is primarily a result of restaurant closings since the first quarter of the prior year offset by a 1.1% increase in same-restaurant sales at Company-owned Ruby Tuesday restaurants.  The increase in Ruby Tuesday concept same-restaurant sales is attributable to a 1.3% increase in customer traffic offset by a slight decrease in net check.  First quarter of fiscal 2015 marked the second consecutive quarter of positive customer traffic driven in our opinion by a more effective promotional strategy and perceived positive customer response to our brand transformation efforts.

Franchise revenue for the 13 weeks ended September 2, 2014 increased 9.0% to $1.7 million compared to the same period of the prior year.  Franchise revenue is predominately comprised of domestic and international franchise royalties, which totaled $1.6 million for both 13-week periods ended September 2, 2014 and September 3, 2013.  The increase in franchise revenue for the 13 weeks ended September 2, 2014 was due to a $0.1 million increase in international franchise license fees as compared to the same quarter of the prior year.

Segment Profit

Our President and Chief Executive Officer, who is our chief operating decision maker, with the assistance of our senior management, reviews discrete financial information for both the Ruby Tuesday and Lime Fresh restaurant concepts to assess performance and allocate resources.  We consider the Ruby Tuesday and Lime Fresh concepts to be our reportable segments as we do not believe they have similar economic and other characteristics to be aggregated into a single reportable segment.  Segment profit/(loss) by reportable segment for the 13 weeks ended September 2, 2014 and September 3, 2013 are as follows (in thousands):
             
 
Thirteen weeks ended
 
September 2, 2014
September 3, 2013
Segment profit/(loss):
           
   Ruby Tuesday concept
$
30,389
 
$
9,851
 
   Lime Fresh concept
 
(176
)
 
(2,454
)
      Total segment profit
$
30,213
 
$
7,397
 

 
 
 

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Segment profit for the 13 weeks ended September 2, 2014 for the Ruby Tuesday concept increased $20.5 million to $30.4 million compared to the first quarter of fiscal 2014 due primarily to the 1.1% increase in same-restaurant sales at Company-owned Ruby Tuesday restaurants discussed above, improvements in cost of goods sold, payroll and related costs, and other restaurant operating costs due to initiatives discussed later within this MD&A, and decreases in closures and impairments expense of $5.3 million and advertising spending of $4.1 million. The reduction in closures and impairments expense is attributable to the prior year impairment of 13 open restaurants, four of which closed in January 2014 and two thereafter. During the current year, only one Ruby Tuesday concept open restaurant was impaired for poor performance.  The reduction in advertising spending relates to reduced television advertising.

Segment losses for the 13 weeks ended September 2, 2014 for the Lime Fresh concept decreased $2.3 million compared to the first quarter of fiscal 2014 to $0.2 million due primarily to decreases in closures and impairments expense of $1.8 million as the prior year Lime Fresh segment losses included lease reserve charges related to four undeveloped sites for which a management decision was reached to forego restaurant development.

The following is a reconciliation of segment profit to loss from continuing operations before taxes for the 13 weeks ended September 2, 2014 and September 3, 2013 (in thousands):
         
     Thirteen weeks ended
 
September 2, 2014
   September 3, 2013
Segment profit
$       30,213
 
$         7,397
 
Less:
       
   Depreciation and amortization
(13,238
)
(14,874
)
   Unallocated general and administrative expenses
(10,962
)
(11,897
)
   Interest expense, net
(5,422
)
(6,753
)
   Preopening expenses
(89
)
(354
)
   Other expense, net
(571
)
(571
)
Loss from continuing operations before income taxes
 $             (69
)
 $     (27,052
)
 
 
Pre-tax Loss from Continuing Operations

Pre-tax loss from continuing operations was $0.1 million for the 13 weeks ended September 2, 2014 compared to $27.1 million for the corresponding period of the prior year.  The decrease in pre-tax loss is due to an increase in same-restaurant sales of 1.1% at Company-owned Ruby Tuesday restaurants, lower closures and impairments expense ($6.6 million) and interest expense ($1.3 million), and decreases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of goods sold, payroll and related costs, other restaurant operating costs, depreciation, and selling general, and administrative, net.

In the paragraphs that follow, we discuss in more detail the components of the decrease in pre-tax loss from continuing operations for the 13-week period ended September 2, 2014, as compared to the comparable period in the prior year.  Because a significant portion of the costs recorded in the cost of goods sold, payroll and related costs, other restaurant operating costs, and depreciation categories are either variable or highly correlative with the number of restaurants we operate, we evaluate our trends by comparing the costs as a percentage of restaurant sales and operating revenue, as well as the absolute dollar change, to the comparable prior year period.

Cost of Goods Sold

Cost of goods sold decreased $4.8 million (6.0%) to $75.1 million for the 13 weeks ended September 2, 2014, over the corresponding period of the prior year.  As a percentage of restaurant sales and operating revenue, cost of goods sold decreased from 27.7% to 26.9%.

The absolute dollar decrease in cost of goods sold for the 13-week period ended September 2, 2014 was the result of restaurant closures and cost savings on certain products as a result of renegotiated contracts with certain vendors since the first quarter of fiscal 2014.  These were partially offset by price increases on seafood, dairy, and certain other products since the same quarter of the prior year.

 
 

33
 
As a percentage of restaurant sales and operating revenue, the decrease in cost of goods sold for the 13-week period ended September 2, 2014 is primarily the result of renegotiated contracts with certain vendors since the first quarter of fiscal 2014.

Payroll and Related Costs

Payroll and related costs decreased $6.9 million (6.7%) to $95.8 million for the 13 weeks ended September 2, 2014, as compared to the corresponding period in the prior year. As a percentage of restaurant sales and operating revenue, payroll and related costs decreased from 35.7% to 34.3%.
 
The absolute dollar decrease in payroll and related costs for the 13-week period ended September 2, 2014 was due to restaurant closures, decreases in hourly labor as a result of scheduling improvements with the rollout of a new labor forecasting system in our restaurants, and lower management labor, which were partially offset by higher bonus expense as more restaurants achieved the performance goals as compared to the same quarter of the prior year.

As a percentage of restaurant sales and operating revenue, the decrease in payroll and related costs for the 13 weeks ended September 2, 2014 was primarily the result of decreased hourly and management labor due to reasons as discussed above coupled with leveraging associated with higher sales volumes.

Other Restaurant Operating Costs

Other restaurant operating costs decreased $7.7 million (11.5%) to $59.8 million for the 13-week period ended September 2, 2014, as compared to the corresponding period in the prior year.  As a percentage of restaurant sales and operating revenue, these costs decreased from 23.4% to 21.4%.

For the 13 weeks ended September 2, 2014, the decrease in other restaurant operating costs related to the following (in thousands):

Repairs
$    2,092
 
Legal
1,180
 
Utilities
1,075
 
Business interruption recoveries
1,050
 
Rent and leasing
1,017
 
Other decreases, net
1,321
 
Net decrease
 $    7,735
 

In both absolute dollars and as a percentage of restaurant sales and operating revenue for the 13-week period ended September 2, 2014, the decrease was a result of reduced building repairs, utilities, and rent and leasing due primarily to restaurant closures since the same quarter of the prior year, lower legal costs related to pending litigation, business interruption recoveries related to claims collected for certain of our restaurants in the Gulf Coast area, and leveraging associated with higher sales volumes.

Depreciation

Depreciation expense decreased $1.6 million (10.9%) to $12.7 million for the 13-week period ended September 2, 2014, as compared to the corresponding period in the prior year.  As a percentage of restaurant sales and operating revenue, depreciation expense decreased from 4.9% to 4.5%.

In terms of absolute dollars and as a percentage of restaurant sales and operating revenue, the decrease for the 13-week period ended September 2, 2014 is due primarily to assets that became fully depreciated since the first quarter of the prior year coupled with restaurant closures and leveraging associated with higher sales volumes.

Selling, General and Administrative Expenses, Net

Selling, general and administrative expenses, net decreased $6.1 million (16.5%) to $30.9 million for the 13-week period ended September 2, 2014, as compared to the corresponding period in the prior year.

The decrease for the 13-week period ended September 2, 2014 is due to lower advertising costs ($4.2 million), primarily as a result of decreased television advertising, and a reduction in general and 
 

34
 
administrative costs ($1.9 million) due to lower management labor from reductions in staffing, lower health insurance costs as a result of favorable claims experience, and lower legal fees, which were partially offset by higher accruals for support center bonus.
 
Closures and Impairments

Closures and impairments decreased $6.6 million to $1.5 million for the 13-week period ended September 2, 2014, as compared to the corresponding period of the prior year. The decrease for the 13-week period ended September 2, 2014 is primarily due to lower property impairment charges ($3.9 million) as the prior year included, among other charges, impairments on 13 open Ruby Tuesday concept restaurants, closed restaurant lease reserve expense ($2.1 million) due to the establishment in the prior year of lease reserves on four undeveloped Lime Fresh concept sites for which a management decision was reached to forego restaurant development, other closing costs ($0.2 million), and higher gains on the sale of surplus properties ($0.3 million).  See Note I to our Condensed Consolidated Financial Statements for further information on our closures and impairment charges recorded during the first quarters of fiscal 2015 and 2014.

Interest Expense, Net

Interest expense, net decreased $1.3 million to $5.4 million for the 13 weeks ended September 2, 2014, as compared to the corresponding period in the prior year, primarily due to lower interest expense on our Senior Notes due to repurchases and the early payoff of certain mortgage loans since the first quarter of fiscal 2014.

Benefit for Income Taxes from Continuing Operations

Under Accounting Standards Codification 740 (“ASC 740”), companies are required to apply their estimated annual tax rate on a year-to-date basis in each interim period.  Under ASC 740, companies should not apply the estimated annual tax rate to interim financial results if the estimated annual tax rate is not reliably predictable.  In this situation, the interim tax rate should be based on the actual year-to-date results.  Due to changes in our projections, which have fluctuated as we work through our brand repositioning, a reliable projection of our annual effective rate has been difficult to determine.  As such, we recorded a tax provision for the first quarter of fiscal 2015 based on the actual year-to-date results, in accordance with ASC 740.

We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize the deferred tax assets in the future.  A valuation allowance assessment is performed each reporting period, with any additions or adjustments reflected in earnings in the period of assessment.  In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction.

Prior to the fourth quarter of fiscal 2013, we concluded that objective and subjective positive evidence outweighed negative evidence, and it was more likely than not that we would realize all of our federal and most of our state deferred tax assets, except for loss carryforwards in certain states that have had cumulative losses and/or relatively short carryforward periods and annual limits of loss carryforward that is available for use to offset future taxable income.   During the fourth quarter of fiscal 2013, we recorded a valuation allowance following the conclusion that the negative evidence outweighed the positive evidence. 

We recorded a tax benefit from continuing operations of $2.6 million during the first quarter of fiscal 2015, compared to a tax benefit from continuing operations of $5.2 million in the prior year quarter. Included in our $2.6 million tax benefit from continuing operations for the quarter ended September 2, 2014 was a benefit of $3.2 million representing an immaterial prior period correction to our deferred tax asset valuation allowance. 
 

35
 
Discontinued Operations

In an effort to focus primarily on the sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our Lime Fresh concept, we closed all 13 Marlin & Ray’s restaurants, the Company’s one Wok Hay restaurant, and our two Truffles restaurants during the fourth quarter of fiscal 2013.  We have classified the results of operations of our Company-owned Marlin & Ray’s, Wok Hay, and Truffles concepts as discontinued operations for the 13 weeks ended September 3, 2013.  The results of operations of our discontinued operations are as follows (in thousands):
    
    Thirteen weeks ended
    September 3, 2013
Restaurant sales and operating revenue
 $
          
Loss before income taxes
 $
       (528)
Benefit for income taxes
         (185)
Loss from discontinued operations
 $
       (343)

Liquidity and Capital Resources:

 
Cash and cash equivalents increased/(decreased) by $5.6 million and $(17.1) million during the first 13 weeks of fiscal 2015 and 2014, respectively.  The change in cash and cash equivalents is as follows (in thousands):
 
 
Thirteen weeks ended
 
 
September 2,
 
September 3,
 
 
2014
 
2013
 
Cash provided by operating activities
$
13,082
 
$
8,864
 
Cash used by investing activities
 
(6,199
)
 
(2,769
)
Cash used by financing activities
 
(1,320
)
 
(23,149
)
Increase/(decrease) in cash and cash equivalents
$
5,563
 
$
(17,054
)

Operating Activities

Our cash provided by operations is generally derived from cash receipts generated by our restaurant customers and franchisees.  Substantially all of the $279.5 million and $288.1 million of restaurant sales and operating revenue disclosed in our Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) for the 13 weeks ended September 2, 2014 and September 3, 2013, respectively, was received in cash either at the point of sale or within two to four days (when our customers paid with debit or credit cards).  Our primary uses of cash for operating activities are food and beverage purchases, payroll and benefit costs, restaurant operating costs, general and administrative expenses, and marketing, a significant portion of which are incurred and paid in the same period.

Cash provided by operating activities for the first 13 weeks of fiscal 2015 increased $4.2 million (47.6%) from the corresponding period in the prior year to $13.1 million.  The increase is due primarily to higher Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA") as a result of a 1.1% increase in same-restaurant sales at Company-owned Ruby Tuesday concept restaurants, coupled with lower cash paid for interest ($1.3 million) due to the prepayment of certain of our mortgage obligations and repurchases of a portion of our Senior Notes since the same quarter of the prior year, and reductions in amounts spent to acquire inventory (approximately $0.9 million).  These were partially offset by decreases in accounts payable, accrued, and other liabilities due to the timing of payments (approximately $7.9 million) and higher amounts spent on media advertising (approximately $6.3 million).

Our working capital deficiency and current ratio as of September 2, 2014 were $6.5 million and 0.9:1, respectively.  As is common in the restaurant industry, we typically 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), debt reduction (a long-term liability), or stock repurchases (thereby reducing equity), and receivable and inventory levels are generally not significant.
 
 

36
 
Investing Activities

We require capital principally for the maintenance and upkeep of our existing restaurants, limited new restaurant construction, investments in technology, equipment, remodeling of existing restaurants, and on occasion for the acquisition of franchisees or other restaurant concepts.  Property and equipment expenditures purchased with internally generated cash flows and/or proceeds from sale-leaseback transactions for the 13 weeks ended September 2, 2014 and September 3, 2013 were $7.0 million and $11.2 million, respectively.

During the 13 weeks ended September 3, 2013, we completed sale-leaseback transactions of the land and buildings for three Company-owned Ruby Tuesday concept restaurants for gross cash proceeds of $5.9 million, exclusive of transaction costs of approximately $0.3 million.  Equipment was not included.  Net proceeds from the sale-leaseback transactions were used for general corporate purposes, including debt payments.

Capital expenditures for the remainder of the fiscal year are projected to be approximately $21.0 to $25.0 million.  We intend to fund our investing activities with cash currently on hand, cash provided by operations, or borrowings on the Senior Credit Facility.

Financing Activities

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

On May 14, 2012, we entered into an indenture (the “Indenture”) among the Company, certain subsidiaries of the Company as guarantors and Wells Fargo Bank, National Association as trustee, governing the Company’s $250.0 million aggregate principal amount of 7.625% senior notes due 2020 (the “Senior Notes”).  The Senior Notes were issued at a discount of $3.7 million, which is being amortized using the effective interest method over the eight-year term of the notes.

The Senior Notes are guaranteed on a senior unsecured basis by our existing and future domestic restricted subsidiaries, subject to certain exceptions.  They rank equal in right of payment with our existing and future senior indebtedness and senior in right of payment to any of our future subordinated indebtedness.  The Senior Notes are effectively subordinated to all of our secured debt, including borrowings outstanding under our revolving credit facility, to the extent of the value of the assets securing such debt and structurally subordinated to all of the liabilities of our existing and future subsidiaries that do not guarantee the Senior Notes.

Interest on the Senior Notes is calculated at 7.625% per annum, payable semiannually on each May 15 and November 15 to holders of record on the May 1 or November 1 immediately preceding the interest payment date.  Accrued interest on the Senior Notes and our other long-term debt and capital lease obligations is included in Accrued liabilities – Rent and other in our Condensed Consolidated Balance Sheets.  The Senior Notes mature on May 15, 2020.

At any time prior to May 15, 2016, we may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus an applicable “make-whole” premium and accrued and unpaid interest.  At any time on or after May 15, 2016, we may redeem the Senior Notes, in whole or in part, at the redemption prices specified in the Indenture plus accrued and unpaid interest.  At any time prior to May 15, 2015, we may redeem up to 35% of the Senior Notes from the proceeds of certain equity offerings.  There is no sinking fund for the Senior Notes.

The Indenture contains covenants that limit, among other things, our ability and the ability of certain of our subsidiaries to (i) incur or guarantee additional indebtedness; (ii) declare or pay dividends, redeem stock or make other distributions to stockholders; (iii) make certain investments; (iv) create liens or use assets as security in other transactions; (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of their assets; (vi) enter into transactions with affiliates; and (vii) sell or transfer certain assets.  These covenants are subject to a number of important exceptions and qualifications, as described in the Indenture, and certain covenants will not apply at any time when the Senior Notes are rated investment grade by the Rating Agencies, as defined in the Indenture.  The Indenture also provides for events of default, which, if
 
 

37
 
any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately.

Under the terms of our December 2013 four-year revolving credit agreement (the “Senior Credit Facility” discussed below) we are allowed, under certain circumstances, to repurchase up to $20.0 million of the Senior Notes in any fiscal year.  During the quarter ended September 2, 2014, we did not repurchase any of the Senior Notes.  The balance on the Senior Notes was $215.0 million at September 2, 2014.

On December 3, 2013, we entered into the Senior Credit Facility under which we may borrow up to $50.0 million with the option, subject to certain conditions, to increase the facility by up to $35.0 million.  The Senior Credit Facility, which was obtained to provide access to capital for general corporate purposes, replaced a previous five-year $200.0 million credit facility that was set to expire in December 2015.  The terms of the Senior Credit Facility provide for a $25.0 million sublimit for the issuance of standby letters of credit.

Under the Senior Credit Facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize.  Our options for the rate are a Base Rate or LIBOR, plus an applicable margin.  The Base Rate is defined as the highest of the issuing bank’s prime rate, the Federal Funds rate plus 0.50%, or the Adjusted LIBO rate (as defined in the Senior Credit Facility) plus 1.0%.  The applicable margin for the LIBOR rate-based option is a percentage ranging from 2.50% to 3.50% and for the Base Rate option is a percentage ranging from 1.50% to 2.50%.  We pay commitment fees quarterly ranging from 0.40% to 0.75% on the unused portion of the Senior Credit Facility.

As security for the Senior Credit Facility, we granted the lenders liens and security interests in substantially all of the shares of capital stock of the Company and each of our present and future subsidiaries, substantially all of the personal property of the Company and each of our present and future subsidiaries, and the real property, improvements, and fixtures of 49 Ruby Tuesday restaurants.  The real property, improvements, and fixtures of the 49 restaurants pledged as collateral appraised at $101.4 million at the time of the transaction and have a September 2, 2014 net book value of $80.8 million.

Under the Senior Credit Facility, we had no borrowings outstanding at September 2, 2014.  After consideration of letters of credit outstanding, we had $37.5 million available under the Senior Credit Facility as of September 2, 2014.

The Senior Credit Facility contains a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability to incur liens, engage in mergers or other fundamental changes, make acquisitions, investments, loans and advances, pay dividends or other distributions, sell or otherwise dispose of certain assets, engage in certain transactions with affiliates, enter into burdensome agreements or certain hedging agreements, amend organizational documents, change accounting practices, incur additional indebtedness and prepay other indebtedness.  In addition, under the Senior Credit Facility, we are required to comply with financial covenants relating to the maintenance of a maximum leverage ratio and a minimum fixed charge coverage ratio.  The terms of the Senior Credit Facility require us to maintain a maximum leverage ratio of no more than 5.00 to 1.0 and a minimum fixed charge coverage ratio of 1.30 to 1.0 for the quarter ended September 2, 2014.  The minimum required ratios fluctuate thereafter as provided in the Senior Credit Facility.

The Senior Credit Facility terminates no later than December 3, 2017.  Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights under the Senior Credit Facility and any ancillary loan documents.

On December 3, 2013, in connection with our entry into the Senior Credit Facility, the Company and certain of its subsidiaries entered into loan modification agreements (the “Loan Modification Agreements”) with certain mortgage lenders to, among other things, provide waivers and consents under certain of our mortgage loan obligations to enter into the Senior Credit Facility.  The Loan Modification Agreements also, among other things, amend certain financial reporting requirements under the specified loans and modify and/or provide for certain financial covenants for the specified loans, including the minimum consolidated fixed charge coverage ratio and the minimum adjusted total debt to EBITDAR ratio.

Our $44.7 million in mortgage loan obligations as of September 2, 2014 consists of various loans acquired upon franchise acquisitions.  These loans, which mature between January 2015 and November 2022, have
 
 

38
 
balances which range from negligible to $7.6 million and interest rates of 7.60% to 10.92%.  Many of the properties acquired from franchisees collateralize the loans outstanding.

During the 13 weeks ended September 2, 2014, we spent an insignificant amount to repurchase 0.1 million shares of RTI common stock.  As of September 2, 2014, the total number of remaining shares authorized to be repurchased was 11.8 million.  We spent $0.5 million to repurchase 0.1 million shares of RTI common stock during the 13 weeks ended September 3, 2013.

During the remainder of fiscal 2015, we expect to fund operations, capital expansion, and any other investments from cash currently on hand, operating cash flows, or our Senior Credit Facility.

Covenant Compliance

Under the terms of the Senior Credit Facility, we are required to satisfy and maintain specified financial ratios and other financial condition tests and covenants.  The financial ratios include maximum funded debt and minimum fixed charge coverage covenants.  While as of September 2, 2014 we were in compliance with the financial ratios contained in our Senior Credit Facility, our continued ability to meet those financial ratios, tests, and covenants can be affected by events beyond our control, and we cannot assure you that we will meet those ratios, tests, and covenants.

Maximum Funded Debt Covenant
Our maximum funded debt covenant is an Adjusted Total Debt to Consolidated EBITDAR ratio.  Adjusted Total Debt, as defined in our covenants, includes items both on-balance sheet (debt and capital lease obligations) and off-balance sheet (such as the present value of leases, letters of credit and guarantees).  Consolidated EBITDAR is consolidated net income/(loss) (for the Company and its majority-owned subsidiaries) plus interest charges, income tax, depreciation, amortization, rent and other non-cash charges.  Among other charges, we have reflected share-based compensation, asset impairment and bad debt expense, as non-cash.

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

 
September 2, 2014
 
Current portion of long-term debt, including capital leases
$
4,851
 
Long-term debt and capital leases, less current maturities
 
252,661
 
Total long-term debt and capital leases
 
257,512
 
Present value of operating leases*
 
213,058
 
Letters of credit*
 
12,502
 
Unrestricted cash in excess of $10.0 million
 
(46,858
)
Unamortized discount of senior unsecured notes
 
2,420
 
Unamortized premium of mortgage loan obligations
 
(685
)
Adjusted Total Debt
$
437,949
 
 
 * Non-GAAP measure.  See below for discussion regarding reconciliation to GAAP-based amounts.
 
 

39
 
The following is a reconciliation of net loss, which is a GAAP-based measure of our operating results, to Consolidated EBITDAR as defined in our bank covenants (in thousands):
 
 
Twelve Months
 
 
Ended
 
 
September 2, 2014
 
Net loss
$
(39,539
)
Income taxes
 
(2,067
)
Rent expense
 
54,933
 
Depreciation
 
53,277
 
Interest expense
 
23,671
 
Asset impairments
 
21,341
 
Share-based compensation expense
 
7,624
 
Restructuring costs
 
3,210
 
Restaurant closing costs
 
2,542
 
Amortization of intangibles
 
2,435
 
Non-cash accruals
 
1,313
 
Other
 
1,144
 
Consolidated EBITDAR
$
129,884
 
       
Adjusted Total Debt to Consolidated EBITDAR – Actual
 
3.37x
 
Maximum allowed per covenant (1)
 
5.00x
 

(1) For fiscal 2015, the Senior Credit Facility requires us to maintain quarterly maximum Adjusted Total Debt to EBITDAR ratios of less than or equal to 5.00x (for our first fiscal quarter), 4.85x (for our second and third fiscal quarters), and 4.75x (for our fourth fiscal quarter). For fiscal 2016 and thereafter, the maximum Adjusted Total Debt to EBITDAR ratio fluctuates as provided in Article VII of the Senior Credit Facility.

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

The following shows our computation of our fixed charge coverage ratio (in thousands):

 
Twelve Months
 
 
Ended
 
 
September 2, 2014
 
Consolidated EBITDAR
$
129,884
 
       
Interest*
$
21,399
 
Cash rents*
 
51,994
 
Total
$
73,393
 
* Non-GAAP measure.  See below for discussion regarding reconciliation to GAAP-based amounts.

Fixed Charge Covenant – Actual
 
1.77x
 
Minimum allowed per covenant (2)
 
1.30x
 

(2) For fiscal 2015, the Senior Credit Facility requires us to maintain quarterly minimum fixed charge coverage ratios of greater than or equal to 1.30x (for our first fiscal quarter), 1.35x (for our second and third fiscal quarters), and 1.40x (for our fourth fiscal quarter). For fiscal 2016 and thereafter, the minimum fixed charge coverage ratio fluctuates as provided in Article VII of the Senior Credit Facility.

Non-GAAP Amounts Used in Debt Covenant Calculations
As previously discussed, we use various non-GAAP amounts in our Adjusted Total Debt, Consolidated EBITDAR, and Fixed Charge covenant calculations.  Two of the amounts presented in the Adjusted Total Debt calculation, the present value of operating leases and letters of credit, are off-balance sheet and there is no corresponding amount presented in our Condensed Consolidated Balance Sheets.
 
 

40
 
Our Minimum Fixed Charge Coverage ratio requires interest to be included in the denominator.  The amount we reflect for interest in the denominator of this calculation ($21.4 million on a rolling 12 month basis) differs from interest expense determined in accordance with GAAP ($23.7 million) because of three adjustments we make.  As shown below, we exclude brokerage fees, prepayment penalties, and the amortization of loan fees and fair market value adjustments.  While these items are reflected as interest expense in our Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss), they do not require on-going cash payments for servicing and therefore are not impacted by future Consolidated EBITDAR.  The table below reconciles debt covenant interest for the preceding 12 months to GAAP interest for the same time period (amounts in thousands):

Interest
$
21,399
 
Brokerage fees
 
1,965
 
Prepayment penalties
 
344
 
Amortization of loan fees and fair market
     
   value adjustments
 
(37
)
GAAP-based interest expense
$
23,671
 

Our Minimum Fixed Charge Coverage ratio also allows for recurring cash rents to be included in the denominator.  Cash rents ($52.0 million on a rolling 12 month basis) differ from rents determined in accordance with GAAP ($55.7 million) by the following (amounts in thousands):

Cash rents
$
51,994
 
Change in rent accruals
 
1,037
 
Rent settlement payments
 
2,714
 
GAAP-based rent expense
$
55,745
 

Significant Contractual Obligations and Commercial Commitments

Long-term financial obligations were as follows as of September 2, 2014 (in thousands):

 
Payments Due By Period
     
Less than
 
1-3
 
3-5
 
More than 5
 
Total
 
1 year
 
years
 
years
 
years
Notes payable and other
   long-term debt, including
                           
   current maturities (a)
$
44,247
 
$
4,982
 
$
19,583
 
$
11,788
 
$
7,894
Senior unsecured notes (a)
 
215,000
   
   
   
   
215,000
Interest (b)
 
111,291
   
19,765
   
37,827
   
35,113
   
18,586
Operating leases (c)
 
370,999
   
47,910
   
86,750
   
73,105
   
163,234
Purchase obligations (d)
 
82,375
   
48,222
   
28,972
   
3,124
   
2,057
Pension obligations (e)
 
33,125
   
3,751
   
4,944
   
4,766
   
19,664
   Total (f)
$
857,037
 
$
124,630
 
$
178,076
 
$
127,896
 
$
426,435
 
(a)  
See Note H to the Condensed Consolidated Financial Statements for more information.
(b)  
Amounts represent contractual interest payments on our fixed-rate debt instruments.  Interest payments on our variable-rate notes payable with balances of $2.4 million as of September 2, 2014 have been excluded from the amounts shown above, primarily because the balances outstanding can fluctuate monthly.  Additionally, the amounts shown above include interest payments on the Senior Notes at the current interest rate of 7.625%.
(c)  
This amount includes operating leases totaling $2.4 million for which sublease income from franchisees or others is expected.  Certain of these leases obligate us to pay maintenance costs, utilities, real estate taxes, and insurance, which are excluded from the amounts shown above.  See Note G to the Condensed Consolidated Financial Statements for more information.
(d)  
The amounts for purchase obligations include cash commitments under contract for food items and supplies, advertising, utility contracts, and other miscellaneous commitments.
(e)  
See Note J to the Condensed Consolidated Financial Statements for more information.
(f)  
This amount excludes $6.7 million of gross unrecognized tax benefits due to the uncertainty regarding the timing of future cash outflows associated with such obligations.
 
 

41
 
Commercial Commitments as of September 2, 2014 (in thousands):
 
 
Payments Due By Period
           Less than
 
 
1-3
     3-5
 
More than 5
     Total
 
   1 year
 
   years      years  
years
Letters of credit
  $
  12,502
    $
  12,502
    $
       
    $
         
   $  
Divestiture guarantees
 
6,010
   
856
   
2,002
   
1,778
      1,374
Lease guarantees
 
1,561
   
264
   
541
   
506
     250
   Total
  $
   20,073
    $
  13,622
    $
 2,543
    $
    2,284
      $   1,624

At September 2, 2014, we had divestiture guarantees, which arose in fiscal 1996, when 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”). Subsequent to that date Piccadilly Cafeterias, Inc. (“Piccadilly”) acquired MFC and Compass Group (“Compass”) acquired MHC. 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.

We estimated our divestiture guarantees at September 2, 2014 to be $5.5 million for employee benefit plans (all of which resides with MHC following Piccadilly’s bankruptcy in fiscal 2004).  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.

As of September 2, 2014, we are the guarantor of two third-party leases associated with closed concept restaurants.  Lease guarantee amounts in the table above represent lease payments for which we are contingently liable.  While we believe that the likelihood of being required to make these lease payments is remote, we recorded a guarantee liability of $0.1 million in our Condensed Consolidated Balance Sheets at both September 2, 2014 and June 3, 2014.

Accounting Pronouncements Adopted During Fiscal 2015
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.  The guidance requires an entity to present its deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward net of unrecognized tax benefits when settlement in this manner is available under the tax law, which would be based on facts and circumstances as of the balance sheet reporting date and would not consider future events.  Gross presentation of an unrecognized tax benefit will still be required in the notes to the financial statements.  We adopted ASU 2013-11 on a prospective basis during the first quarter of fiscal 2015.  The adoption of this standard did not have a significant impact on our Condensed Consolidated Financial Statements.
 
Accounting Pronouncements Not Yet Adopted
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances.  The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter (our fiscal 2017).  Early application is permitted.  We do not believe the adoption of this guidance will have a significant impact on our Condensed Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606).  The ASU is a jointly converged standard between the FASB and the International Accounting Standards Board, and will replace almost all existing revenue recognition guidance, including industry specific guidance, upon its effective date. The standard’s core principle is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 also enhances disclosures about revenue, provides guidance for transactions that were not addressed comprehensively in previous
 
 

42
guidance, and improves guidance for multiple-element arrangements. The standard permits the use of either the retrospective or cumulative effect transition method.  The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 (our fiscal 2018 first quarter).  We have not yet selected a transition method and are currently evaluating the impact of this guidance on our Condensed Consolidated Financial Statements.
 
Known Events, Uncertainties and Trends:

 
Financial Strategy and Stock Repurchase Plan
Our financial strategy is to utilize a prudent amount of debt, including operating leases, letters of credit, and any guarantees, to minimize the weighted average cost of capital while allowing financial flexibility.  This strategy has periodically allowed us to repurchase our common stock.  During the first quarter of fiscal 2015, we repurchased an insignificant number of shares of our common stock at an aggregate cost of $0.1 million.  As of September 2, 2014, the total number of remaining shares authorized to be repurchased was 11.8 million.  To the extent not funded with cash on hand or cash from operating activities, additional repurchases, if any, may be funded by available cash on hand or borrowings on the Senior Credit Facility.  The repurchase of shares in any particular future period and the actual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.

Mortgage Loan Payoffs and Repurchases of Senior Notes
Subsequent to September 2, 2014, we prepaid and retired three mortgage loan obligations with a September 2, 2014 aggregate balance of $3.9 million using cash on hand.  Additionally, we paid $0.4 million in prepayment premiums in connection with the retirement of these obligations.

We are allowed under the terms of the Senior Credit Facility to prepay up to $20.0 million of indebtedness in any fiscal year to various holders of the Senior Notes.  We did not repurchase any of the Senior Notes during the 13 weeks ended September 2, 2014.  As of the date of this filing, we may repurchase $20.0 million of the Senior Notes during the remainder of fiscal 2015.  Any future repurchases of the Senior Notes, if any, will be funded with available cash on hand.

Dividends
During fiscal 1997, our Board of Directors approved a dividend policy as an additional means of returning capital to our shareholders.  No dividends were declared or paid during the 13 weeks ended September 2, 2014 or September 3, 2013.  The payment of a dividend in any particular period and the actual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that dividends will be paid in the future.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Disclosures about Market Risk
We are exposed to market risk from fluctuations in interest rates and changes in commodity prices. The interest rate charged on our Senior Credit Facility can vary based on the interest rate option we choose to utilize. Our options for the rate are LIBOR or a Base Rate plus an applicable margin. The Base Rate is defined as the highest of the issuing bank’s prime rate, the Federal Funds rate plus 0.50%, or the Adjusted LIBO rate (as defined in the Senior Credit Facility) plus 1.0%. The applicable margin for the LIBOR rate-based option is a percentage ranging from 2.50% to 3.50% and for the Base Rate option is a percentage ranging from 1.50% to 2.50%. As of September 2, 2014, the total amount of outstanding debt subject to interest rate fluctuations was $2.4 million. A hypothetical 100 basis point change in short-term interest rates would result in an increase or decrease in interest expense of an insignificant amount per year, assuming a consistent capital structure.

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

43
 
ITEM 4.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
Our management, with the participation and under the supervision of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 2, 2014.

Changes in Internal Controls
During the fiscal quarter ended September 2, 2014, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II — OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business, including claims relating to injury or wrongful death under “dram shop” laws, workers’ compensation and employment matters, claims relating to lease and contractual obligations, and claims from customers alleging illness or injury.  We provide reserves for such claims when payment is probable and estimable in accordance with U.S. generally accepted accounting principles.  At this time, in the opinion of management, the ultimate resolution of pending legal proceedings will not have a material adverse effect on our consolidated operations, financial position, or cash flows.  See Note N to the Condensed Consolidated Financial Statements for further information about our legal proceedings as of September 2, 2014.
 
ITEM 1A.  RISK FACTORS
 
 
Information regarding risk factors appears in our Annual Report on Form 10-K for the year ended June 3, 2014 in Part I, Item 1A. Risk Factors.  There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.
 
 

44
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
The following table includes information regarding purchases of our common stock made by us during the first quarter ended September 2, 2014:
 
   
(a)
 
(b)
 
(c)
 
(d)
 
   
Total number
 
Average
 
Total number of shares
 
Maximum number of shares
 
   
of shares
 
price paid
 
purchased as part of publicly
 
that may yet be purchased
 
Period
 
purchased (1)
 
per share
 
announced plans or programs (1)
 
under the plans or programs (2)
 
                   
Month #1
                 
(June 4 to July 8)
 
   7,066
 
$7.76
 
  7,066
 
11,766,305
 
Month #2
                 
(July 9 to August 5)
 
         –
 
       –
 
         –
 
11,766,305
 
Month #3
                 
(August 6 to September 2)
 
         –
 
       –
 
         –
 
11,766,305
 
Total
 
   7,066
 
$7.76
 
  7,066
     
 
(1) No shares were repurchased other than through our publicly-announced repurchase programs and authorizations during the first quarter of our year ending June 2, 2015.
 
 
(2) As of September 2, 2014, 11.8 million shares remained available for purchase under existing programs, which consists of 1.8 million shares remaining under a July 11, 2007 authorization by the Board of Directors to repurchase 6.5 million shares and a January 8, 2013 authorization by the Board of Directors, not yet begun, to repurchase 10.0 million shares.  The timing, price, quantity, and manner of the purchases to be made are at the discretion of management upon instruction from the Board of Directors, depending upon market conditions.  The repurchase of shares in any particular future period and the actual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.
 
 
 
None.
 
 
Not applicable.
 
 
 
None.
 
 
 

45
 
ITEM 6. EXHIBITS
 

 
The following exhibits are filed as part of this report:
 
 
 Exhibit No.
 
10
.1
  Agreement and General Release between Ruby Tuesday, Inc. and Jeff Wood.
 
       
12
.1
  Statement regarding computation of Consolidated Ratio of Earnings to Fixed Charges.
 
       
31
.1
  Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
31
.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
32
.1
  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
 
   
      Sarbanes-Oxley Act of 2002.
 
       
32
.2
  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
 
   
      Sarbanes-Oxley Act of 2002.
 
       
10
1.INS
  XBRL Instance Document.
 
       
10
1.SCH
  XBRL Schema Document.
 
       
10
1.CAL
  XBRL Calculation Linkbase Document.
 
       
10
1.DEF
  XBRL Definition Linkbase Document.
 
       
10
1.LAB
  XBRL Labels Linkbase Document.
 
       
10
1.PRE
  XBRL Presentation Linkbase Document.
 
       
       
       
 
 
 

46
 
 

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
RUBY TUESDAY, INC.
 
 
(Registrant)
 
Date: October 14, 2014
 
 BY: /s/ JILL M. GOLDER
——————————————
Jill M. Golder
Executive Vice President – Chief Financial Officer, Treasurer and Assistant Secretary
(Principal Financial Officer)

Date: October 14, 2014
 
 BY: /s/ FRANKLIN E. SOUTHALL, JR.
—————————————————
Franklin E. Southall, Jr.
Vice President – Corporate Controller and
Principal Accounting Officer
(Principal Accounting Officer)
 
 

47