Attached files

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EX-32.2 - EXHIBIT 32.2 (906 CERTIFICATION FOR CFO) - RUBY TUESDAY INCex32-2.htm
EX-32.1 - EXHIBIT 32.1 (906 CERTIFICATION FOR CEO) - RUBY TUESDAY INCex32-1.htm
EX-31.2 - EXHIBIT 31.2 (302 CERTIFICATION FOR CFO) - RUBY TUESDAY INCex31-2.htm
EX-31.1 - EXHIBIT 31.1 (302 CERTIFICATION FOR CEO - RUBY TUESDAY INCex31-1.htm
EX-12.1 - EXHIBIT 12.1 (COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS FO FIXED CHARGES) - RUBY TUESDAY INCex12-1.htm
EX-10.4 - AMENDMENT TO THE RUBY TUESDAY, INC. EXECUTIVE SEVERANCE PLAN, DATED APRIL 4, 201 - RUBY TUESDAY INCex10-4.htm
EX-10.3 - AMENDMENT TO THE RUBY TUESDAY, INC. CHANGE IN CONTROL SEVERANCE PLAN, DATED APRI - RUBY TUESDAY INCex10-3.htm
EX-10.2 - LOAN MODIFICATION AGREEMENT AND WAIVER, DATED JANUARY 31, 2017. - RUBY TUESDAY INCex10-2.htm
EX-10.1 - SEVENTH AMENDMENT TO REVOLVING CREDIT AGREEMENT AND WAIVER, DATED JANUARY 31, 20 - RUBY TUESDAY INCex10-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

 


 FORM 10-Q

 

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

 

For the Quarterly Period Ended: February 28, 2017

 

OR

 

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

 

For the transition period from __________ to _________

 

Commission file number 1-12454

 

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

GEORGIA

 

63-0475239

(State or other jurisdiction of

incorporation or organization)

 

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

 

333 East Broadway Avenue, Maryville, Tennessee 37804
(Address of principal executive offices and zip code)

(865) 379-5700
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

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.

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

 

Smaller reporting company ☐

 

 

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

 

The number of shares of common stock outstanding as of April 4, 2017 was 60,564,134.

 

 

 

 

 

 

Index

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Thirteen and

Thirty-Nine Weeks Ended February 28, 2017 and March 1, 2016

4

 

Condensed Consolidated Balance Sheets as of February 28, 2017 and May 31, 2016

5

 

Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended February 28,

2017 and March 1, 2016

6

 

Notes to Condensed Consolidated Financial Statements

7-28

Item 2.

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

29-41

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4.

Controls and Procedures

42

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

42

Item 1A.

Risk Factors

42

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

Item 3.

Defaults Upon Senior Securities

43

Item 4.

Mine Safety Disclosures

43

Item 5.

Other Information

43

Item 6.

Exhibits

44

 

Signatures

45

 

 

 

 

 

 

2

 

 

Special Note Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent our expectations or beliefs concerning future events, including one or more of the following:  future financial performance (including our estimates of changes in same-restaurant sales, average unit volumes, operating margins, expenses, and other items), future capital expenditures, the effect of strategic initiatives (including statements relating to our review of strategic alternatives, asset rationalization project, cost savings initiatives, and the benefits of our 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 dispositions, 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 risks and uncertainties described in the Risk Factors included in Part I, Item A of our Annual Report on Form 10-K for the year ended May 31, 2016 and 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, including those affecting labor and employee benefit costs, such as further potential increases in state and federally mandated minimum wages and healthcare reform;

 

 

changes in senior management or in the Board of Directors;

 

 

the results of our ongoing exploration of strategic alternatives to maximize shareholder value;

 

 

the impact of pending litigation;

 

 

customers’ acceptance of changes in menu items;

 

 

changes in the availability and cost of capital, including the replacement of our existing revolving credit facility;

 

 

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, including supply and delivery shortages or interruptions;

 

 

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 our restaurants or other competing restaurant concepts;

 

 

●

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

 

 

prevailing conditions in the real estate market that may affect expected results under our Asset Rationalization Plan; and  

 

 

our ability to obtain waivers under, or amendments to, certain of our debt agreements.

 

3

 

 

Part I - Financial Information

Item 1.

 

Ruby Tuesday, Inc. and Subsidiaries

Condensed Consolidated Financial Statements

Condensed Consolidated Statements of Operations and

Comprehensive Loss

(In thousands, except per-share data)

 

(Unaudited)

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 
 

February 28, 2017

 

March 1, 2016

 

February 28, 2017

 

March 1, 2016

 
       

(as adjusted)

       

(as adjusted)

 

Revenue:

                       

     Restaurant sales and operating revenue

$

224,938

 

$

269,868

 

$

694,517

 

$

807,105

 

     Franchise revenue

 

794

   

1,602

   

2,591

   

4,801

 

        Total revenue

 

225,732

   

271,470

   

697,108

   

811,906

 
                         

Operating costs and expenses:

                       

     Cost of goods sold

 

64,340

   

75,143

   

198,672

   

221,689

 

     Payroll and related costs

 

80,080

   

93,357

   

251,105

   

280,976

 

     Other restaurant operating costs

 

45,086

   

55,311

   

149,069

   

173,903

 

     Depreciation and amortization

 

10,121

   

12,732

   

31,838

   

38,474

 

     General and administrative expenses

 

13,876

   

14,148

   

48,359

   

44,226

 

     Marketing expenses, net

 

13,807

   

13,230

   

43,328

   

40,396

 

     Closures and impairments, net

 

13,441

   

6,123

   

59,341

   

20,907

 

     Interest expense, net

 

4,870

   

4,995

   

14,591

   

16,100

 

        Total operating costs and expenses

 

245,621

   

275,039

   

796,303

   

836,671

 

     

                       

Loss before income taxes

 

(19,889

)

 

(3,569

)

 

(99,195

)

 

(24,765

)

Benefit for income taxes

 

(84

)  

(483

)

 

(1,742

)

 

(1,686

)

                         

Net loss

$

(19,805

)

$

(3,086

)

$

(97,453

)

$

(23,079

)

                         

Other comprehensive income:

                       

     Pension liability reclassification

 

356 

   

885

   

1,066

   

1,347

 

Total comprehensive loss

$

(19,449

)

$

(2,201

)

$

(96,387 

)

$

(21,732

)

                         

Loss per share:

                       

     Basic

$

(0.33

)

$

(0.05

)

$

(1.62

)

$

(0.38

)

     Diluted

$

(0.33

)

$

(0.05

)

$

(1.62

)

$

(0.38

)

                         

Weighted average shares:

                       

      Basic

 

60,262

   

60,918

   

60,074

   

61,239

 

      Diluted

 

60,262

   

60,918

   

60,074

   

61,239

 

 

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

 

4

 

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

 

(Unaudited)

 

 

February 28,

2017

 

 

May 31,

2016

 

Assets:

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,627

 

 

$

67,341

 

Accounts and other receivables

 

 

13,415

 

 

 

12,827

 

Inventories:

 

 

 

 

 

 

 

 

Merchandise

 

 

11,384

 

 

 

13,799

 

China, silver and supplies

 

 

6,633

 

 

 

7,796

 

Income tax receivable

 

 

4,738

 

 

 

3,003

 

Prepaid rent and other expenses

 

 

8,135

 

 

 

11,508

 

Assets held for sale

 

 

20,450

 

 

 

4,642

 

Total current assets

 

 

97,382

 

 

 

120,916

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

601,548

 

 

 

671,250

 

Other assets

 

 

43,880

 

 

 

45,751

 

Total assets

 

$

742,810

 

 

$

837,917

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity:

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

23,583

 

 

$

22,141

 

Accrued liabilities:

 

 

 

 

 

 

 

 

Taxes, other than income and payroll

 

 

8,390

 

 

 

10,769

 

Payroll and related costs

 

 

15,296

 

 

 

14,561

 

Insurance

 

 

5,337

 

 

 

5,109

 

Rent and other

 

 

39,976

 

 

 

18,838

 

Deferred revenue – gift cards

 

 

17,472

 

 

 

16,354

 

Current maturities of long-term debt, including capital leases

 

 

349

 

 

 

9,934

 

Total current liabilities

 

 

110,403

 

 

 

97,706

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital leases, less current maturities

 

 

213,533

 

 

 

213,803

 

Deferred escalating minimum rent

 

 

43,208

 

 

 

51,535

 

Other deferred liabilities

 

 

61,270

 

 

 

67,093

 

Total liabilities

 

 

428,414

 

 

 

430,137

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

    issued and outstanding: 2017 – 60,564 shares, 2016 – 60,137 shares)

 

 

605

 

 

 

601

 

Capital in excess of par value

 

 

78,937

 

 

 

75,938

 

Retained earnings

 

 

243,897

 

 

 

341,350

 

Deferred compensation liability payable in Company stock

 

 

365

 

 

 

521

 

Company stock held by Deferred Compensation Plan

 

 

(365

)

 

 

(521

)

Accumulated other comprehensive loss

 

 

(9,043

)

 

 

(10,109

)

    Total shareholders' equity

 

 

314,396

 

 

 

407,780

 

Total liabilities and shareholders' equity

 

$

742,810

 

 

$

837,917

 

 

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

 

5

 

Ruby Tuesday, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows

(In thousands)

 

(Unaudited)

 

 

Thirty-Nine Weeks Ended

 

 

 

February 28, 2017

 

 

March 1, 2016

 

 

 

 

 

 

 

(as adjusted) 

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(97,453

) 

 

$

(23,079

)

Adjustments to reconcile net loss to net cash (used)/provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

31,838

 

 

 

38,474

 

Deferred income taxes

 

 

 

 

 

(832

)

Loss on impairments, including disposition of assets

 

 

32,668

 

 

 

17,489

 

Inventory write-off

   

2,754

     

 

Share-based compensation expense

 

 

3,029

 

 

 

1,680

 

Lease reserve adjustments

 

 

17,445

 

 

 

3,118

 

Deferred escalating minimum rent

 

 

585

 

 

 

1,630

 

Other, net

 

 

520

 

 

 

3,125

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(5,137

)

 

 

(579

)

Inventories

 

 

1,045

 

 

 

(2,176

) 

Income taxes

 

 

(1,735

) 

 

 

(4,027

)

Prepaid and other assets

 

 

2,068

 

 

 

677

 

Accounts payable, accrued and other liabilities

 

 

(9,346

) 

 

 

(16,961

)

Net cash (used) provided by operating activities

 

 

(21,719

) 

 

 

18,539

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(26,952

) 

 

 

(27,346

)

Proceeds from sale of assets

 

 

22,044

 

 

 

6,193

 

Insurance proceeds from property claims

 

 

358

 

 

 

 

Reductions in Deferred Compensation Plan assets

 

 

1,702

 

 

 

833

 

Other, net

 

 

1,439

 

 

 

1,611 

 

Net cash used by investing activities

 

 

(1,409

) 

 

 

(18,709

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Principal payments on long-term debt and capital leases

 

 

(10,613

) 

 

 

(12,664

)

Stock repurchases

 

 

(26

) 

 

 

(10,009

)

Payments for debt issuance costs

 

 

(947

) 

 

 

(30

)

Net cash used by financing activities

 

 

(11,586

) 

 

 

(22,703

)

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(34,714

) 

 

 

(22,873

)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Beginning of fiscal year

 

 

67,341

 

 

 

75,331

 

End of quarter

 

$

32,627

 

 

$

52,458

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

  Interest, net of amount capitalized

 

$

9,009

 

 

$

10,666

 

  Income taxes, net

 

$

823

 

 

$

3,178

 

Significant non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Retirement of fully depreciated assets

 

$

23,347

 

 

$

22,393

 

Reclassification of properties to assets held for sale

 

$

25,753

 

 

$

3,387

 

Monetization of, and subsequent reinvestment into, life insurance policies   $     $ 5,642  

 

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

 

 

 

 

 

6

 

Ruby Tuesday, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements

 

1. Basis of Presentation

 

Description of Business

Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” the “Company,” “we,” and/or “our”), owns and operates Ruby Tuesday® casual dining restaurants. We also franchise the Ruby Tuesday concept in selected domestic and international markets.

 

As discussed further in Note 7 to the Condensed Consolidated Financial Statements, during the 39 weeks ended February 28,  2017, we closed 102 Company-owned restaurants, 95 of which were closed following a comprehensive review of the Company’s property portfolio due to perceived limited upside due to market concentration, challenged trade areas, and other factors. At February 28, 2017, we owned and operated 544 Ruby Tuesday restaurants concentrated primarily in the Southeast, Northeast, Mid-Atlantic, and Midwest of the United States, which we consider to be our core markets.

 

As further discussed in Note 4 to the Condensed Consolidated Financial Statements, we entered into an agreement during fiscal year 2016 to sell the assets related to eight Company-owned Lime Fresh Mexican Grill® (“Lime Fresh”) restaurants. Our last remaining Company-owned Lime Fresh restaurant closed and transferred to the buyer during the second quarter of fiscal year 2017.

 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (the “Condensed Consolidated Financial Statements”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. 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 considered necessary for a fair presentation have been included and are of a normal recurring nature. In addition, certain reclassifications were made to prior period amounts to conform to the current period presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates. Operating results for the 13 and 39 weeks ended February 28, 2017 are not necessarily indicative of results that may be expected for the 53-week year ending June 6, 2017. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in RTI’s Annual Report on Form 10-K for the fiscal year ended May 31, 2016.

 

Reclassifications

As shown in the table below, we split our previously reported expenses within Selling, general, and administrative, net into separately reported General and administrative expenses and Marketing expenses, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss for the prior periods to be comparable with the classification for the 13 and 39 weeks ended February 28, 2017. Additionally, we reclassified an impairment of the Lime Fresh trademark to Closures and impairments, net, in the Condensed Consolidated Statements of Operations and Comprehensive Loss for the 13 and 39 weeks ended March 1, 2016. Amounts presented are in thousands.

 

Thirteen Weeks Ended

 
 

As presented March 1, 2016

 

Reclassifications

 

As adjusted March 1, 2016

 

Selling, general, and administrative, net

$

27,378

 

$

(27,378

)

$

 

General and administrative expenses

 

   

14,148

   

14,148

 

Marketing expenses, net

 

   

13,230

   

13,230

 

Closures and impairments, net

 

6,123

   

   

6,123

 

 

 

Thirty-nine Weeks Ended

 
 

As presented March 1, 2016

 

Reclassifications

 

As adjusted March 1, 2016

 

Selling, general, and administrative, net

$

84,622

 

$

(84,622

)

$

 

General and administrative expenses

 

   

44,226

   

44,226

 

Marketing expenses, net

 

   

40,396

   

40,396

 

Closures and impairments, net

 

18,908

   

1,999

   

20,907

 

Trademark impairment

 

1,999

   

(1,999

)

 

 

 

7

 

As shown in the table below, we reclassified an impairment of the Lime Fresh trademark to Loss on impairments, including disposition of assets in the Condensed Consolidated Statement of Cash Flows for the 39 weeks ended March 1, 2016. Amounts presented are in thousands.

 

 

Thirty-nine Weeks Ended

 

As presented March 1, 2016

 

Reclassifications

 

As adjusted March 1, 2016

Loss on impairments, including disposition of assets

$

15,490

 

$

1,999

 

$

17,489

Trademark impairment

 

1,999

   

(1,999

)

 

 

2. Loss Per Share

 

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during each period presented. Diluted earnings per share gives effect to stock options and restricted stock outstanding during the applicable periods, except during loss periods as the effect would be anti-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 Loss (in thousands, except per-share data):

 

 

Thirteen Weeks Ended

 

Thirty-nine Weeks Ended

 
 

February 28, 2017

 

March 1, 2016

 

February 28, 2017

 

March 1, 2016

 

Net loss

$

(19,805

)

$

(3,086

)

$

(97,453

)

$

(23,079

)

                         

Weighted-average common shares outstanding

 

60,262

   

60,918

   

60,074

   

61,239

 

Dilutive effect of stock options and restricted stock

 

   

   

   

 

Weighted average common and dilutive potential common shares outstanding

 

60,262

   

60,918

   

60,074

   

61,239

 
                         

Basic loss per share 

$

(0.33

)

$

(0.05

)

$

(1.62

)

$

(0.38

)

Diluted loss per share

$

(0.33

)

$

(0.05

)

$

(1.62

)

$

(0.38

)

 

The following table summarizes on a weighted-average basis stock options, restricted stock, and restricted stock units that were excluded from the computation of diluted loss per share because their inclusion would have had an anti-dilutive effect (in thousands):

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 

February 28, 2017 

 

March 1, 2016

 

February 28, 2017

 

March 1, 2016

Stock options

1,927

 

2,140

 

2,422

 

2,509

Restricted shares / Restricted share units

565

 

871

 

635

 

862

Total

2,492

 

3,011

 

3,057

 

3,371

 

3. Franchise Programs

 

As of February 28, 2017, our franchisees collectively operated 63 domestic and international Ruby Tuesday restaurants. We do not own any equity interests in our franchisees.

 

Under the terms of the franchise operating agreements, we charge a royalty fee (generally 4.0% of monthly gross sales), a marketing and purchasing fee (generally 1.5% of monthly gross sales), and a national advertising fee (generally 1.5% of monthly gross sales as of February 28, 2017, but up to a maximum of 3.0% under the terms of the franchise operating agreements).

 

Amounts received from franchisees for the marketing and purchasing fee and national advertising fee are considered by RTI to be reimbursements, recorded on an accrual basis as earned, and have been netted against Marketing expenses, net in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

8

 

For the 13 and 39 weeks ended February 28, 2017, we recorded $0.4 million and $0.8 million, respectively, and for the 13 and 39 weeks ended March 1, 2016, we recorded $0.5 million and $1.6 million, respectively, in marketing and purchasing fees and national advertising fund fees.

 

4. Accounts and Other Receivables

 

Accounts and other receivables consist of the following (in thousands):

 

 

 

February 28, 2017

 

 

May 31, 2016

 

Insurance receivable

 

$

5,000

 

 

$

 

Amounts due from franchisees

 

 

3,799

 

 

 

3,013

 

Amounts due from distributor     1,317       560  

Third-party gift card sales

 

 

984

 

 

 

1,272

 

Rebates receivable

   

786

     

1,001

 

Receivables from sales of Lime Fresh Mexican Grill assets

 

 

 

 

 

5,289

 

Other receivables

 

 

1,529

 

 

 

1,692

 

 

 

$

13,415

 

 

$

12,827

 

 

The insurance receivable reflected in the table above represents the amount of an insurance recovery in connection with the settlement of a class action case.  See Notes 11 and 15 to the Condensed Consolidated Financial Statements for further information.

 

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 portion of which represents current and recently-invoiced billings.

 

As of February 28, 2017 and May 31, 2016, other receivables consisted primarily of amounts due from online ordering, sales and other miscellaneous tax refunds, and other receivables.

 

Sales of Lime Fresh Mexican Grill Assets

On May 31, 2016, we entered into agreements with two separate buyers to sell various Lime Fresh assets. Pursuant to the terms of an asset purchase agreement, we agreed to sell our eight remaining Company-owned Lime Fresh restaurants for $6.0 million. Given that closing requirements were satisfied for only six of the eight restaurants, an amendment was agreed upon which allowed for the payment of $5.0 million upon the transfer of the six restaurants and the holdback of $1.0 million until such time that both of the remaining two restaurants had closed and transferred to the buyer. The six restaurants closed and were transferred to the buyer on May 31, 2016. During the 39 weeks ended February 28, 2017, the two remaining restaurants closed and were transferred to the buyer. As a result of this, we collected the $1.0 million previously withheld.

 

The $5.3 million of receivables from sales of Lime Fresh assets included in the table above as of May 31, 2016 consists of $5.0 million due from the buyer of the formerly Company-owned Lime Fresh restaurants, which was collected on the first day of fiscal year 2017, and $0.3 million due from the buyer of the Lime Fresh brand.

 

5. Property, Equipment, and Assets Held for Sale

 

Property and equipment, net, is comprised of the following (in thousands):

 

 

February 28, 2017

 

 

May 31, 2016

 

Land

 

$

182,785

 

 

$

209,930

 

Buildings

 

 

372,430

 

 

 

398,984

 

Improvements

 

 

257,147

 

 

 

303,032

 

Restaurant equipment

 

 

206,107

 

 

 

222,646

 

Other equipment

 

 

74,712

 

 

 

82,204

 

Surplus properties*

 

 

17,894

 

 

 

4,354

 

Construction in progress and other

 

 

4,306

 

 

 

3,325

 

 

 

 

1,115,381

 

 

 

1,224,475

 

Less accumulated depreciation

 

 

513,833

 

 

 

553,225

 

Property and equipment, net

 

$

601,548

 

 

$

671,250

 

 

9

 

* Surplus properties represent assets held for sale that are not classified as such in the Condensed Consolidated Balance Sheets as we have yet to conclude that we can 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, closed properties which include a building, and liquor licenses not needed for operations.

 

Included within the current assets section of our Condensed Consolidated Balance Sheets at February 28, 2017 and May 31, 2016 are amounts classified as assets held for sale totaling $20.5 million and $4.6 million, respectively. Assets held for sale primarily consist of parcels of land upon which we have no intention to build restaurants, land and buildings of closed restaurants, and various liquor licenses. During the 13 and 39 weeks ended February 28, 2017, we sold properties with carrying values of $7.5 million and $15.9 million, at net gains that were $2.3 million and negligible, respectively. Cash proceeds, net of broker fees, from these sales during the 13 and 39 weeks ended February 28, 2017 totaled $9.8 million and $15.9 million, respectively. During the 13 and 39 weeks ended March 1, 2016, we sold properties with carrying values of $2.4 million and $5.2 million, respectively, at net gains of $0.1 million and $1.0 million, respectively. Cash proceeds, net of broker fees, from these sales during the 13 and 39 weeks ended March 1, 2016 totaled $2.5 million and $6.2 million, respectively.    

 

6. Long-Term Debt and Capital Leases

 

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

 

 

 

February 28, 2017

 

 

May 31, 2016

 

Senior unsecured notes

 

$

212,546

 

 

$

212,546

 

Unamortized discount

 

 

(1,476

)

 

 

(1,771

)

Unamortized debt issuance costs

 

 

(2,497

)

 

 

(2,995

)

Senior unsecured notes less unamortized discount and 

 

 

 

 

 

 

 

 

debt issuance costs

 

 

208,573

 

 

 

207,780

 

Senior credit facility

 

 

 

 

 

 

Mortgage loan obligations

 

 

5,135

 

 

 

15,745

 

Unamortized (discount)/premium - mortgage loan obligations

 

 

(2

)

 

 

75

 

Unamortized debt issuance costs - mortgage loan obligations

 

 

(31

)

 

 

(74

)

Capital lease obligations

 

 

207

 

 

 

211

 

   Total long-term debt and capital leases

 

 

213,882

 

 

 

223,737

 

Less current maturities

 

 

349

 

 

 

9,934

 

   Long-term debt and capital leases, less current maturities

 

$

213,533

 

 

$

213,803

 

 

On May 14, 2012, we entered into an indenture (the “Indenture”) among Ruby Tuesday, Inc., 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 to interest expense, net 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 was $4.9 million and $1.0 million as of February 28, 2017 and May 31, 2016, respectively, and is included in Accrued liabilities:– Rent and other in our Condensed Consolidated Balance Sheets.

 

We may redeem the Senior Notes, in whole or in part, at the redemption prices specified in the Indenture plus accrued and unpaid interest. There is no sinking fund for the Senior Notes, which mature on May 15, 2020.

 

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.

 

10

 

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.

On December 3, 2013, we entered into a four-year revolving credit agreement (the “Senior Credit Facility”).  Under the terms of 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.  As of November 30, 2016, we did not attain the minimum fixed charge coverage ratio as required under the terms of the Senior Credit Facility.  While we obtained a waiver of this covenant violation through January 31, 2017 from our lenders, we believed, without certain modifications, that it was possible at some point during the next twelve months that we would again be in violation of the minimum fixed charge coverage ratio covenant.  Accordingly, on January 31, 2017, we entered into a seventh amendment and waiver to the Senior Credit Facility (the "Seventh Amendment and Waiver"). 

 

Among other things, the Seventh Amendment and Waiver reduces the amount the Company may borrow pursuant to the revolving loan commitment under the Senior Credit Facility from $50.0 million (including a $25.0 million sublimit for standby letters of credit),  to $30.0 million (including a $15.0 million sublimit for standby letters of credit), amends the termination date of the Senior Credit Facility from December 3, 2017 to June 2, 2017, and increases the flexibility of the financial covenants under the Senior Credit Facility.  Additionally, the Senior Credit Facility and the Seventh Amendment and Waiver contain 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, guarantee indebtedness, and prepay other indebtedness.

 

Under the Seventh Amendment and Waiver, 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 Seventh Amendment and Waiver require us to maintain a maximum leverage ratio of no more than 4.65 to 1.0 and a minimum fixed charge coverage ratio of no less than 1.25 to 1.0 for the quarter ended February 28, 2017.  We were in compliance with our maximum leverage ratio and minimum fixed charge coverage ratio as of February 28, 2017.

 

Under the terms of 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, provided that the rate shall not be less than zero. 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 LIBOR (as defined in the Senior Credit Facility) plus 1.0%. The applicable margin for the LIBOR-based option is a percentage ranging from 3.00% to 3.50% and for the Base Rate option is a percentage ranging from 2.00% to 2.50%. We pay commitment fees quarterly ranging from 0.50% 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 substantially all 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 February 28, 2017 net book value of $80.0 million.

 

The Senior Credit Facility terminates no later than June 2, 2017.  Aside from the $11.1 million letters of credit outstanding as of February 28, 2017, we had no borrowings under the Senior Credit Facility.  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.  There are no assurances that our lenders will provide any future waivers of covenant violations or agree to any future amendments of our Senior Credit Facility. 

 

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 amended certain financial reporting requirements under the specified loans and modified and/or provided for certain financial covenants for the specified loans, including the maximum leverage ratio and the minimum fixed charge coverage ratio.

 

11

 

Additionally, as of November 29, 2016, we did not attain the minimum fixed charge coverage ratio required under the terms of the mortgage loan obligations.  While we obtained a waiver of the covenant violation through January 31, 2017 from our lender, we believed without certain modifications, that it was possible at some point during the next twelve months, that we would again be in violation of the minimum fixed charge coverage ratio covenant under our mortgage loan obligations.  Accordingly, on January 31, 2017, we entered into a loan modification and waiver (the "Mortgage Loan Modification and Waiver").

Among other things, the Mortgage Loan Modification and Waiver increases the flexibility of the financial covenants under the mortgage loan obligations, restricts the Company to make certain acquisitions, and requires additional certain monthly financial reporting to the lender.  While we were in compliance with the financial covenants under the mortgage loan obligations as of February 28, 2017, there are no assurances that our lender will provide any future waivers of covenant violations or agree to any future amendments of our mortgage loan agreements.

Our $5.1 million in mortgage loan obligations as of February 28, 2017 consists of various loans acquired upon franchise acquisitions. These loans, which mature between February 2019 and October 2021, have balances which range from $0.5 million to $1.0 million and interest rates of 7.78% to 10.17%.  Many of the properties acquired from franchisees collateralize the loans outstanding.

 

7. Closures and Impairments Expense

 

Closures and impairments, net include the following (in thousands):

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 
 

February 28, 2017

 

March 1, 2016

 

February 28, 2017

 

March 1, 2016

 

Property impairments

$

14,946

 

$

6,938

 

$

32,774

 

$

15,730

 

Closed restaurant lease reserves

 

(133

)

 

(1,207

)  

17,445

   

3,118

 

Inventory write-off

 

   

   

2,754

   

 

Severance benefits

 

13

 

 

68

   

1,606

   

213

 

Other closing expense

 

949

   

403

   

4,830

   

877

 

Gain on sale of properties

 

(2,334

)  

(79

)

 

(68

)  

(1,030

)

Lime Fresh trademark impairment

 

   

   

   

1,999

 

Closures and impairments, net

$

13,441

 

$

6,123

 

$

59,341

 

$

20,907

 

 

During the 39 weeks ended February 28, 2017, we closed 102 Company-owned restaurants, 95 of which were closed in connection with an asset rationalization plan announced on August 11, 2016. The plan was formulated in response to a comprehensive review of our property portfolio which included the planned closure of restaurants with perceived limited upside due to market concentration, challenged trade areas, or other factors. Included within Closures and impairments, net for the 39 weeks ended February 28, 2017 are closed restaurant lease reserves, inventory write-off, severance benefits, and other closing expense of $30.2 million related to the closures in connection with the asset rationalization plan.

 

During the 39 weeks ended February 28, 2017, we sold one of two office buildings comprising our Restaurant Support Center in Maryville, Tennessee for net proceeds of $2.6 million. The building sold had a net book value of $5.8 million at the time of the sale. Accordingly, included within the loss on sale of surplus properties in the table above for the 39 weeks ended February 28, 2017 was a loss of $3.2 million related to the sale of the building. Our two Tennessee Restaurant Support Center office buildings were consolidated into the one remaining building during our third quarter of fiscal year 2017.

 

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

 

 

 

Reserve for

Lease Obligations

 

Balance at May 31, 2016

 

$

6,270

 

Closing expense including rent and other lease charges

 

 

17,445

 

Payments

 

 

(13,772

)

Adjustments to deferred escalating minimum rent and other

 

 

9,196

 

Balance at February 28, 2017

 

$

19,139

 

 

The amounts comprising future lease obligations associated with closed restaurants 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 obligations. Of the total future lease obligations included in the table above, $18.1 million is included

12

 

within Accrued liabilities:– Rent and other, $0.5 million is included within Deferred escalating minimum rent, and $0.5 million is included within Other deferred liabilities in our Condensed Consolidated Balance Sheet as of February 28, 2017.  For the remainder of fiscal year 2017 and beyond, our focus will be to obtain settlements, or subleases on as many leases as possible.

 

Settlements could be higher or lower than the lease obligations 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.

 

8. Employee Post-Employment Benefits

 

Pension and Postretirement Medical and Life Benefits

We sponsor three defined benefit pension plans for certain active employees and offer certain postretirement benefits for retirees. A summary of each of these is presented below.

 

Retirement Plan
RTI sponsors the Morrison Restaurants Inc. Retirement Plan (the "Retirement Plan"). Effective December 31, 1987, the Retirement Plan was amended so that no additional benefits would accrue and no new participants could enter the Retirement Plan after that date. Participants receive benefits based upon salary and length of service.

 

Minimum funding for the Retirement Plan is determined in accordance with the guidelines set forth in employee benefit and tax laws. From time to time we may contribute additional amounts as we deem appropriate. We estimate that all required contributions for fiscal year 2017 have been made. 

 

Executive Supplemental Pension Plan and Management Retirement Plan
Under these unfunded defined benefit pension plans, eligible employees earn supplemental retirement income based upon salary and length of service, reduced by social security benefits and amounts otherwise receivable under other specified Company retirement plans. Effective June 1, 2001, the Management Retirement Plan was amended so that no additional benefits would accrue and no new participants could enter the plan after that date. In December 2015, the Executive Supplemental Pension Plan was similarly amended effective as of January 1, 2016 for current participants, and as of January 1, 2018 for two specified potential participants, who are currently not named executive officers.

 

Included in our Condensed Consolidated Balance Sheets as of February 28, 2017 and May 31, 2016 are amounts within Accrued liabilities: Payroll and related costs of $3.9 million and $2.5 million, respectively, and amounts within Other deferred liabilities of $33.1 million and $35.7 million, respectively, relating to our three defined benefit pension plans.

 

Postretirement Medical and Life Benefits
Our Postretirement Medical and Life Benefits plans provide medical benefits to substantially all retired employees 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.

 

Included in our Condensed Consolidated Balance Sheets as of February 28, 2017 and May 31, 2016 are amounts within Accrued liabilities: Payroll and related costs of $0.1 million as of both dates and amounts within Other deferred liabilities of $1.0 million as of both dates relating to our postretirement medical and life benefits.

 

The following tables detail the components of net periodic benefit cost 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, which is recorded as a component of General and administrative expenses in our Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands):

 

 

Pension Plans

 
 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 
 

February 28, 2017

 

March 1, 2016

 

February 28, 2017

 

March 1, 2016

 

Service cost

$

5

 

$

33

 

$

18

 

$

305

 

Interest cost

 

420

   

495

   

1,260

   

1,535

 

Expected return on plan assets

 

(91)

 

 

(103

)

 

(273

)

 

(308

)

Recognized actuarial loss

 

339

   

730

    1,014    

1,831

 
Curtailment expense       1         1  

Net periodic benefit cost

$

673

 

$

1,156

 

$

2,019

 

$

3,364

 

 

13

 

 

 

Postretirement Medical and Life Benefits

 
 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 
 

February 28, 2017

 

March 1, 2016

 

February 28, 2017

 

March 1, 2016

 

Service cost

$

2

 

$

1

 

$

3

 

$

3

 

Interest cost

 

9

   

12

   

27

   

36

 

Recognized actuarial loss

 

17

   

32

   

51

   

97

 

Net periodic benefit cost

$

28

 

$

45

 

$

81

 

$

136

 

 

We reclassified recognized actuarial losses of $0.4 million and $1.1 million during the 13 and 39 weeks ended February 28, 2017, respectively, and $0.8 million and $1.9 million during the 13 and 39 weeks ended March 1, 2016, respectively, out of accumulated other comprehensive loss and into pension expense, which is included in General and administrative expenses within our Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

We also sponsor two defined contribution retirement savings plans. Information regarding these plans is included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2016.

 

Restaurant Closures and Corporate Restructuring

We closed 102 Company-owned restaurants during the 39 weeks ended February 28, 2017, 95 of which were closed in connection with an asset rationalization plan as previously discussed in Note 7 to the Condensed Consolidated Financial Statements.

 

On September 13, 2016, James J. Buettgen resigned as Chairman of the Board of Directors, President, and Chief Executive Officer of the Company. On the same date, F. Lane Cardwell, Jr., a member of the Company’s Board of Directors since October 2012 and an executive with approximately 38 years of leadership experience in the restaurant industry, was appointed Interim President and Chief Executive Officer, Stephen I. Sadove, the Company’s then Lead Director, was appointed Chairman of the Board and Sue Briley was appointed Chief Financial Officer. Ms. Briley had been serving as Interim Chief Financial Officer since June 2016.  Included in the employee severance and unused vacation accruals in the table below are $3.1 million in severance accruals and other benefits in connection with Mr. Buettgen’s resignation.

 

As of February 28, 2017 and May 31, 2016, we had no accrued liability and $0.3 million, respectively, representing unpaid obligations related to employee severance and vacation accruals, were included within Accrued liabilities: Payroll and related costs in our Condensed Consolidated Balance Sheet. Costs of $3.3 million and $1.6 million reflected in the table below related to employee severance and unused vacation accruals are included within General and administrative expenses and Closures and impairments, net, respectively, in our Condensed Consolidated Statements of Operations and Comprehensive Loss for the 39 weeks ended February 28, 2017. A roll forward of our obligations in connection with employee separations is as follows (in thousands):

 

Balance at May 31, 2016

 

$

317

 

Employee severance and unused vacation accruals

 

 

4,890

 

Cash payments

 

 

(5,207

)

Balance at February 28, 2017

 

$

 

 

9. Income Taxes

 

Companies are required to apply their estimated annual tax rate on a year-to-date basis in each interim period. 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 13 and 39 weeks ended February 28, 2017 and March 1, 2016 based on the actual year-to-date results.

 

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. As of February 28, 2017, we have rolling three-year historical operating losses and have concluded that the negative evidence outweighs the positive evidence.

 

14

 

In accordance with the applicable accounting standards, we are unable to use future income projections to support the realization of our deferred tax assets as a consequence of the above conclusion.   Instead, in determining the appropriate amount of the valuation allowance, we considered the timing of future reversal of our taxable temporary differences and available tax strategies that, if implemented, would result in the realization of deferred tax assets. Our valuation allowance for deferred tax assets totaled $131.3 million and $89.9 million as of February 28, 2017 and May 31, 2016, respectively.

We recorded a tax benefit of $0.1 million and $1.7 million for the 13 and 39 weeks ended February 28, 2017, respectively. We recorded a tax benefit of $0.5 million and $1.7 million for the 13 and 39 weeks ended March 1, 2016, respectively. Netted against our tax benefit for the 13 and 39 weeks ended February 28, 2017 were charges of $10.3 million and $44.1 million, respectively, representing increases in the valuation allowance for deferred tax assets recorded primarily against general business credit carryforwards and federal and state net operating loss carryforwards.

We had a gross liability for unrecognized tax benefits, exclusive of accrued interest and penalties, of $3.8 million and $4.5 million, respectively, as of February 28, 2017 and May 31, 2016, of which $3.3 million and $3.7 million were reclassified against our deferred tax assets, respectively. As of February 28, 2017 and May 31, 2016, the total amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate was $2.4 million and $2.3 million, respectively. The liability for unrecognized tax benefits as of February 28, 2017 does not include anything 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 both February 28, 2017 and May 31, 2016, we had accrued $0.4 million for the payment of interest and penalties. During the first three quarters of fiscal year 2017, accrued interest and penalties increased by an insignificant amount.

 

At February 28, 2017, we are no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2012, and with few exceptions, we are no longer subject to state and local examinations by tax authorities prior to fiscal year 2014.

 

10. Share-Based Employee Compensation

 

Preferred Stock

RTI is authorized, under its Certificate of Incorporation, to issue up to 250,000 shares of preferred stock with a par value of $0.01. These shares may be issued from time to time in one or more series. Each series will have dividend rates, rights of conversion and redemption, liquidation prices, and other terms or conditions as determined by the Board of Directors. No preferred shares have been issued as of February 28, 2017 and May 31, 2016.

 

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. Stock 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 stock 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 stock 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 February 28, 2017, we had reserved a total of 6,557,000 shares of common stock for the SIP and 1996 SIP. Of the reserved shares at February 28, 2017, 1,749,000 were subject to stock options outstanding. Stock option exercises are settled with the issuance of new shares. Net shares of common stock available for issuance at February 28, 2017 were 4,808,000. 

 

15

 

Stock Options

The following table summarizes our stock option activity under these stock option plans for the 39 weeks ended February 28, 2017 (Stock Options and Aggregate Intrinsic Value are in thousands):

 

  

 

 

Stock

Options

 

 

Weighted Average

Exercise

Price

 

 

Weighted Average

Remaining Contractual

Term (years)

 

 

Aggregate

Intrinsic Value

 

Service-based vesting:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at May 31, 2016

 

 

2,066

 

 

$

7.89

 

 

 

 

 

 

 

 

 

Granted

   

1,126

     

3.46

                 

Cancellations and forfeitures

 

 

(40

)

 

 

4.53

 

 

 

 

 

 

 

 

 

Expired

 

 

(1,403

)

 

 

6.62

 

 

 

 

 

 

 

 

 

Outstanding at February 28, 2017

 

 

1,749

 

 

$

6.13

 

 

 

3.64

 

 

$

 

Exercisable at February 28, 2017

 

 

910

 

 

$

8.62

 

 

 

1.10

 

 

$

 

 

At February 28, 2017, there was approximately $0.6 million of unrecognized pre-tax compensation expense related to non-vested stock options. This cost is expected to be recognized over a weighted average period of 1.4 years.

 

During the 39 weeks ended February 28, 2017, we granted 247,000 service-based stock options to our Interim Chief Executive Officer under the terms of the SIP. The stock options awarded cliff vest at the end of fiscal year 2017 and have a maximum life of seven years.

 

During the 39 weeks ended February 28 2017, we granted 878,000 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.

 

Restricted Stock and Restricted Stock Units (“RSU”)

The following table summarizes our restricted stock and RSU activity for the 39 weeks ended February 28, 2017 (in thousands, except per-share data):

 

 

 

 

 

Shares

 

 

Weighted Average

Fair Value

 

Service-Based Vesting:

 

 

 

 

 

 

 

 

Unvested at May 31, 2016

 

 

564

 

 

$

6.29

 

Granted

 

 

538

 

 

 

3.22

 

Vested

 

 

(535

)

 

 

5.79

 

Cancellations and forfeitures

 

 

(41

)

 

 

5.70

 

Unvested at February 28, 2017

 

 

526

 

 

$

3.71

 

 

 

 

 

 

 

 

 

 

Performance-Based Vesting:

 

 

 

 

 

 

 

 

Unvested at May 31, 2016

 

 

225

 

 

$

6.51

 

Cancellations and forfeitures

 

 

(84

)

 

 

6.51

 

Unvested at February 28, 2017

 

 

141

 

 

$

6.51

 

 

The fair value of restricted stock and RSU awards is based on the closing price of our common stock on the date prior to the grant date. At February 28, 2017, unrecognized compensation expense related to restricted stock and RSU grants expected to vest totaled $1.2 million and will be recognized over a weighted average vesting period of 1.2 years.

 

During the 39 weeks ended February 28, 2017, we granted 219,000 restricted shares to non-employee directors under the terms of the SIP.  These shares cliff vest over a one year period following the grant date of the award.

 

During the 39 weeks ended February 28, 2017, we granted 319,000 service-based RSUs to certain employees under the terms of the SIP and 1996 SIP. The service-based RSUs will vest in three equal installments over a three-year period following the date of grant.

 

16

 

Phantom Stock Units

We began granting phantom stock units during fiscal year 2017. Each phantom stock unit entitles the recipient to receive a cash payment equal to the value of a single share of our common stock upon vesting. During the second quarter of fiscal year 2017, we granted 81,000 service-based phantom stock units to our Interim Chief Executive Officer. The phantom stock units will cliff vest at the end of fiscal year 2017.

 

Also during the second quarter of fiscal year 2017, we granted 407,000 service-based phantom stock units to our senior executive team. The phantom stock units will cliff vest two years following the grant date of the award.

 

During the first quarter of fiscal year 2017, we granted 571,000 performance-based phantom stock units that will vest approximately three years after the grant date. Vesting of the performance-based phantom stock units is contingent upon the Company’s achievement of a same-restaurant sales performance condition related to the next three fiscal years. During the second quarter of fiscal year 2017, 210,000 of these performance-based phantom stock units were forfeited primarily in connection with the departure of our former President and Chief Executive Officer.

 

Included in our Condensed Consolidated Balance Sheets are amounts within Accrued liabilities: Payroll and related costs of $0.1 million as of February 28, 2017 and amounts within Other deferred liabilities of $0.3 million and $0.2 million as of  February 28, 2017 and May 31, 2016, respectively, relating to all of our long-term incentive awards that will settle in cash.

 

Included within General and administrative expenses in our Consolidated Statements of Operations and Comprehensive Loss is share-based compensation expense of $0.5 million and $3.0 million for the 13 and 39 weeks ended February 28, 2017, respectively, and $0.9 million and $1.7 million for the 13 and 39 weeks ended March 1, 2016.

 

11. 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 condensed consolidated operations, financial position, or cash flows.

 

As also discussed in Note 15 to the Condensed Consolidated Financial Statements, in May 2014, a securities class action case styled Dennis Krystek v. Ruby Tuesday, Inc. et al, was filed in the U.S. District Court for the Middle District of Tennessee, Nashville Division.  The case alleged that the Company and some of its former executives made false and misleading statements about the Company's financial performance and the financial performance of the Lime Fresh concept.  On March 29, 2017, the Company agreed to settle the case for $5.0 million.  We maintain insurance to cover these types of claims with our primary insurance carrier, subject to a self-insured retention which had been met prior to February 28, 2017.  Our insurance policies cover amounts in excess of our self-insured retention. In accordance with ASC Subtopic 405-20-40, Extinguishment of Liabilities, and ASC Subtopic 210-20, Balance Sheet Offsetting, we have recorded both an accrued liability (included within Accrued liabilities: Rent and other) and an asset for insurance recovery (included within Accounts and other receivables), in the amount of $5.0 million, in our Condensed Consolidated Balance Sheet as of February 28, 2017.

 

12. Fair Value Measurements

 

The following table presents the fair values of our financial assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy in which the measurements fall (in thousands):

 

 

 

Level

 

 

February 28, 2017

 

 

May 31, 2016

 

Deferred compensation plan – Assets

 

 

1

 

 

$

5,644

 

 

$

6,660

 

Deferred compensation plan – Liabilities

 

 

1

 

 

 

(5,644

)

 

 

(6,660

)

 

There were no transfers among levels within the fair value hierarchy during the 39 weeks ended February 28, 2017.

 

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 Consolidated Financial Statements. The investments held by these plans are considered trading securities and are reported at fair value based on third-party broker statements.

 

17

 

The realized and unrealized holding gains and losses related to these other investments, as well as the offsetting compensation expense, is recorded in General and administrative expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

 

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

 

The following table presents the fair values on our Condensed Consolidated Balance Sheets as of February 28, 2017 for those assets and liabilities measured on a non-recurring basis (in thousands):

  

 

 

             
   

Fair Value Measurements

   

 

 

Level

 

 

February 28, 2017

 

 

Long-lived assets held for use

 

 

2

 

 

$

4,519

 

 

Long-lived assets held for sale

 

 

2

 

 

 

444

 

 

Total

 

 

 

 

 

$

4,963

 

 

 

The following table presents the losses recognized during the 13 and 39 weeks ended February 28, 2017 and March 1, 2016 resulting from fair value measurements of assets and liabilities measured on a non-recurring basis. The amounts presented are included in Closures and impairments, net in our Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands):

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 
 

February 28, 2017

 

March 1, 2016

 

February 28, 2017

 

March 1, 2016

 

Long-lived assets held for use

$

14,914

 

$

6,764

 

$

29,930

 

$

15,206

 

Long-lived assets held for sale

 

32

   

174

   

2,844

   

524

 

Lime Fresh trademark

 

   

   

   

1,999

 

    Long-lived asset impairments

$

14,946

 

$

6,938

 

$

32,774

 

$

17,729

 

 

Long-lived assets held for sale are valued using Level 2 inputs, primarily from information obtained through broker listings or sales agreements. Costs to market and/or sell are factored into the estimates of fair value for those properties 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 a restaurant may not be recoverable.

 

Long-lived assets held for use presented in the table above includes restaurants or groups of restaurants that we have impaired. From time to time, the table will also include closed restaurants or surplus sites not meeting held for sale criteria that have been offered for sale at a price less than their carrying value.

 

The fair values of our long-lived assets held for use are primarily based on broker estimates of the value of the land, building, leasehold improvements, and other residual assets (Level 2).

 

Our financial instruments at February 28, 2017 and May 31, 2016 consisted of cash and cash equivalents, accounts receivable and payable, and long-term debt. The fair values of cash and cash equivalents and accounts receivable and payable approximated their carrying values because of the short-term nature of these instruments. The carrying amounts and fair values of our long-term debt, which are not measured on a recurring basis using fair value, are as follows (in thousands):

 

 

 

February 28, 2017

 

 

May 31, 2016

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Long-term debt (Level 2)

 

$

213,675

 

 

$

210,586

 

 

$

223,526

 

 

$

223,212

 

 

We estimated the fair value of debt using market quotes and calculations based on market rates.

  

18

 

13. Supplemental Condensed Consolidating Financial Statements

 

As discussed in Note 6 to the Condensed Consolidated Financial Statements, the Senior Notes are a liability of Ruby Tuesday, Inc. (the “Parent”) and 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 SEC, 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.

 

 

19

 

 

Condensed Consolidating Balance Sheet

As of February 28, 2017

(In thousands)

 

 

 

Parent

 

 

Guarantors

 

 

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

32,495

 

 

$

132

 

 

$

 

 

$

32,627

 

Accounts and other receivables

 

 

8,223

 

 

 

5,192

 

 

 

 

 

 

13,415

 

Inventories

 

 

13,068

 

 

 

4,949

 

 

 

 

 

 

18,017

 

Income tax receivable

 

 

173,370

 

 

 

 

 

 

(168,632

)

 

 

4,738

 

Other current assets

 

 

16,906

 

 

 

11,679

 

 

 

 

 

 

28,585

 

Total current assets

 

 

244,062

 

 

 

21,952

 

 

 

(168,632

)

 

 

97,382

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

459,402

 

 

 

142,146

 

 

 

 

 

 

601,548

 

Investment in subsidiaries

 

 

70,596

 

 

 

 

 

 

(70,596

)

 

 

 

Due from/(to) subsidiaries

 

 

93,299

 

 

 

222,799

 

 

 

(316,098

)

 

 

 

Other assets

 

 

39,617

 

 

 

4,263

 

 

 

 

 

 

43,880

 

Total assets

 

$

906,976

 

 

$

391,160

 

 

$

(555,326

)

 

$

742,810

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities & Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

18,834

 

 

$

4,749

 

 

$

 

 

$

23,583

 

Accrued and other current liabilities

 

 

50,686

 

 

 

18,313

 

 

 

 

 

 

68,999

 

Deferred revenue – gift cards 

 

 

(502

) 

 

 

17,974

 

 

 

 

 

 

17,472

 

Current maturities of long-term debt,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   including capital leases

 

 

(1,132

)

 

 

1,481

 

 

 

 

 

 

349

 

Income tax payable

 

 

 

 

 

168,632

 

 

 

(168,632

)

 

 

 

Total current liabilities

 

 

67,886

 

 

 

211,149

 

 

 

(168,632

)

 

 

110,403

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital leases,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   less current maturities

 

 

209,911

 

 

 

3,622

 

 

 

 

 

 

213,533

 

Due to/(from) subsidiaries

 

 

222,799

 

 

 

93,299

 

 

 

(316,098

)

 

 

 

Other deferred liabilities

 

 

91,984

 

 

 

12,494

 

 

 

 

 

 

104,478

 

Total liabilities

 

 

592,580

 

 

 

320,564

 

 

 

(484,730

)

 

 

428,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

605

 

 

 

 

 

 

 

 

 

605

 

Capital in excess of par value

 

 

78,937

 

 

 

 

 

 

 

 

 

78,937

 

Retained earnings

 

 

243,897

 

 

 

70,596

 

 

 

(70,596

)

 

 

243,897

 

Accumulated other comprehensive loss

 

 

(9,043

)

 

 

 

 

 

 

 

 

(9,043

)

Total shareholders’ equity

 

 

314,396

 

 

 

70,596

 

 

 

(70,596

)

 

 

314,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities & shareholders’ equity

 

$

906,976

 

 

$

391,160

 

 

$

(555,326

)

 

$

742,810

 

 

 

20

 

 

Condensed Consolidating Balance Sheet

As of May 31, 2016

(In thousands)

 

 

 

Parent

 

 

Guarantors

 

 

Eliminations

 

 

Consolidated

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

67,208

 

 

$

133

 

 

$

 

 

$

67,341

 

Accounts and other receivables

 

 

8,102

 

 

 

4,725

 

 

 

 

 

 

12,827

 

Inventories

 

 

15,401

 

 

 

6,194

 

 

 

 

 

 

21,595

 

Income tax receivable

 

 

167,065

 

 

 

 

 

 

(164,062

)

 

 

3,003

 

Other current assets

 

 

11,282

 

 

 

4,868

 

 

 

 

 

 

16,150

 

Total current assets

 

 

269,058

 

 

 

15,920

 

 

 

(164,062

)

 

 

120,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

501,482

 

 

 

169,768

 

 

 

 

 

 

671,250

 

Investment in subsidiaries

 

 

98,929

 

 

 

 

 

 

(98,929

)

 

 

 

Due from/(to) subsidiaries

 

 

76,208

 

 

 

213,816

 

 

 

(290,024

)

 

 

 

Other assets

 

 

40,626

 

 

 

5,125

 

 

 

 

 

 

45,751

 

Total assets

 

$

986,303

 

 

$

404,629

 

 

$

(553,015

)

 

$

837,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities & Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

17,405

 

 

$

4,736

 

 

$

 

 

$

22,141

 

Accrued and other current liabilities

 

 

36,155

 

 

 

13,122

 

 

 

 

 

 

49,277

 

Deferred revenue – gift cards 

 

 

(481

) 

 

 

16,835

 

 

 

 

 

 

16,354

 

Current maturities of long-term debt,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   including capital leases

 

 

(1,067

)

 

 

11,001

 

 

 

 

 

 

9,934

 

Income tax payable

 

 

 

 

 

164,062

 

 

 

(164,062

)

 

 

 

Total current liabilities

 

 

52,012

 

 

 

209,756

 

 

 

(164,062

)

 

 

97,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and capital leases,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   less current maturities

 

 

209,058

 

 

 

4,745

 

 

 

 

 

 

213,803

 

Due to/(from) subsidiaries

 

 

213,816

 

 

 

76,208

 

 

 

(290,024

)

 

 

 

Other deferred liabilities

 

 

103,637

 

 

 

14,991

 

 

 

 

 

 

118,628

 

Total liabilities

 

 

578,523

 

 

 

305,700

 

 

 

(454,086

)

 

 

430,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

601

 

 

 

 

 

 

 

 

 

601

 

Capital in excess of par value

 

 

75,938

 

 

 

 

 

 

 

 

 

75,938

 

Retained earnings

 

 

341,350

 

 

 

98,929

 

 

 

(98,929

)

 

 

341,350

 

Accumulated other comprehensive loss

 

 

(10,109

)

 

 

 

 

 

 

 

 

(10,109

)

Total shareholders’ equity

 

 

407,780

 

 

 

98,929

 

 

 

(98,929

)

 

 

407,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities & shareholders’ equity

 

$

986,303

 

 

$

404,629

 

 

$

(553,015

)

 

$

837,917

 

 

 

21

 

 

Condensed Consolidating Statement of Operations and

Comprehensive Loss

For the Thirteen Weeks Ended February 28, 2017

(In thousands)

 

 

 

Parent

 

 

Guarantors

 

 

Eliminations

 

 

Consolidated

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales and operating revenue

 

$

165,005

 

 

$

59,933

 

 

$

 

 

$

224,938

 

Franchise revenue

 

 

 

 

 

794

 

 

 

 

 

 

794

 

       Total revenue

 

 

165,005

 

 

 

60,727

 

 

 

 

 

 

225,732

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

47,164

 

 

 

17,176

 

 

 

 

 

 

64,340

 

Payroll and related costs

 

 

57,485

 

 

 

22,595

 

 

 

 

 

 

80,080

 

Other restaurant operating costs

 

 

33,356

 

 

 

11,730

 

 

 

 

 

 

45,086

 

Depreciation and amortization

 

 

7,509

 

 

 

2,612

 

 

 

 

 

 

10,121

 

General and administrative expenses

 

 

7,295

 

 

 

6,581

 

 

 

 

 

 

13,876

 

Intercompany general and administrative allocations 

 

 

9,167

 

 

 

(9,167

)

 

 

 

 

 

 

Marketing expenses, net

   

10,296

 

 

 

3,511

 

 

 

 

 

 

13,807

 

Closures and impairments, net

 

 

11,253

 

 

 

2,188

 

 

 

 

 

 

13,441

 

Equity in earnings of subsidiaries

 

 

(2,017

)

 

 

 

 

 

2,017

 

 

 

 

Interest expense, net

 

 

4,688

 

 

 

182

 

 

 

 

 

 

4,870

 

Intercompany interest expense/(income)

 

 

3,035

 

 

 

(3,035

)

 

 

 

 

 

 

       Total operating costs and expenses

 

 

189,231

 

 

 

54,373

 

 

 

2,017

 

 

 

245,621

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/income before income taxes

 

 

(24,226

)

 

 

6,354

 

 

 

2,017

 

 

 

(19,889

)

(Benefit)/provision for income taxes

 

 

(4,421

)

 

 

4,337

 

 

 

 

 

 

(84

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss)/income

 

$

(19,805

)

 

$

2,017

 

 

$

(2,017

)

 

$

(19,805

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension liability reclassification

 

 

356

 

 

 

 

 

 

 

 

 

356

 

Total comprehensive (loss)/income

 

$

(19,449

)

 

$

2,017

 

 

$

(2,017

)

 

$

(19,449

)

  

 

22

 

 

Condensed Consolidating Statement of Operations and

Comprehensive Loss

For the Thirty-Nine Weeks Ended February 28, 2017

(In thousands)

 

 

 

Parent

 

 

Guarantors

 

 

Eliminations

 

 

Consolidated

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales and operating revenue

 

$

507,414

 

 

$

187,103

 

 

$

 

 

$

694,517

 

Franchise revenue

 

 

10

 

 

 

2,581

 

 

 

 

 

 

2,591

 

       Total revenue

 

 

507,424

 

 

 

189,684

 

 

 

 

 

 

697,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

145,051

 

 

 

53,621

 

 

 

 

 

 

198,672

 

Payroll and related costs

 

 

179,149

 

 

 

71,956

 

 

 

 

 

 

251,105

 

Other restaurant operating costs

 

 

108,613

 

 

 

40,456

 

 

 

 

 

 

149,069

 

Depreciation and amortization

 

 

23,265

 

 

 

8,573

 

 

 

 

 

 

31,838

 

General and administrative expenses

 

 

26,376

 

 

 

21,983

 

 

 

 

 

 

48,359

 

Intercompany general and administrative allocations 

 

 

28,223

 

 

 

(28,223

)

 

 

 

 

 

 

Marketing expenses, net

   

32,119

 

 

 

11,209

 

 

 

 

 

 

43,328

 

Closures and impairments, net

 

 

38,025

 

 

 

21,316

 

 

 

 

 

 

59,341

 

Equity in losses of subsidiaries

 

 

7,791

 

 

 

 

 

 

(7,791

) 

 

 

 

Interest expense, net

 

 

13,829

 

 

 

762

 

 

 

 

 

 

14,591

 

Intercompany interest expense/(income)

 

 

8,983

 

 

 

(8,983

)

 

 

 

 

 

 

       Total operating costs and expenses

 

 

611,424

 

 

 

192,670

 

 

 

(7,791

) 

 

 

796,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/income before income taxes

 

 

(104,000

)

 

 

(2,986

) 

 

 

7,791

 

 

 

(99,195

)

(Benefit)/provision for income taxes

 

 

(6,547

)

 

 

4,805

 

 

 

 

 

 

(1,742

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(97,453

)

 

$

(7,791

) 

 

$

7,791

 

 

$

(97,453

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension liability reclassification

 

 

1,066

 

 

 

 

 

 

 

 

 

1,066

 

Total comprehensive loss

 

$

(96,387

)

 

$

(7,791

) 

 

$

7,791

 

 

$

(96,387

)

 

 

23

 

 

Condensed Consolidating Statement of Operations and

Comprehensive Loss

For the Thirteen Weeks Ended March 1, 2016

(In thousands)

 

 

 

Parent

 

 

Guarantors

 

 

Eliminations

 

 

Consolidated

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales and operating revenue

 

$

194,527

 

 

$

75,341

 

 

$

 

 

$

269,868

 

Franchise revenue

 

 

90

 

 

 

1,512

 

 

 

 

 

 

1,602

 

       Total revenue

 

 

194,617

 

 

 

76,853

 

 

 

 

 

 

271,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

54,209

 

 

 

20,934

 

 

 

 

 

 

75,143

 

Payroll and related costs

 

 

65,474

 

 

 

27,883

 

 

 

 

 

 

93,357

 

Other restaurant operating costs

 

 

40,008

 

 

 

15,303

 

 

 

 

 

 

55,311

 

Depreciation and amortization

 

 

9,008

 

 

 

3,724

 

 

 

 

 

 

12,732

 

General and administrative expenses

 

 

7,315

 

 

 

6,833

 

 

 

 

 

 

14,148

 

Intercompany general and administrative allocations 

 

 

10,726

 

 

 

(10,726

)

 

 

 

 

 

 

Marketing expenses, net

 

 

9,685

 

 

 

3,545

 

 

 

 

 

 

13,230

 

Closures and impairments, net

 

 

3,993

 

 

 

2,130

 

 

 

 

 

 

6,123

 

Equity in earnings of subsidiaries

 

 

(5,676

)

 

 

 

 

 

5,676

 

 

 

 

Interest expense, net

 

 

4,556

 

 

 

439

 

 

 

 

 

 

4,995

 

Intercompany interest expense/(income)

 

 

3,058

 

 

 

(3,058

)

 

 

 

 

 

 

       Total operating costs and expenses

 

 

202,356

 

 

 

67,007

 

 

 

5,676

 

 

 

275,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/income before income taxes

 

 

(7,739

)

 

 

9,846

 

 

 

(5,676

)

 

 

(3,569

)

(Benefit)/provision for income taxes

 

 

(4,653

)

 

 

4,170

 

 

 

 

 

 

(483

)

Net (loss)/income

 

$

(3,086

)

 

$

5,676

 

 

$

(5,676

)

 

$

(3,086

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension liability reclassification, net of tax

 

 

885

 

 

 

 

 

 

 

 

 

885

 

Total comprehensive (loss)/income

 

$

(2,201

)

 

$

5,676

 

 

$

(5,676

)

 

$

(2,201

)

 

 

24

 

 

Condensed Consolidating Statement of Operations and

Comprehensive Loss

For the Thirty-Nine Weeks Ended March 1, 2016

(In thousands)

 

 

 

Parent

 

 

Guarantors

 

 

Eliminations

 

 

Consolidated

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurant sales and operating revenue

 

$

583,055

 

 

$

224,050

 

 

$

 

 

$

807,105

 

Franchise revenue

 

 

220

 

 

 

4,581

 

 

 

 

 

 

4,801

 

       Total revenue

 

 

583,275

 

 

 

228,631

 

 

 

 

 

 

811,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

160,212

 

 

 

61,477

 

 

 

 

 

 

221,689

 

Payroll and related costs

 

 

197,732

 

 

 

83,244

 

 

 

 

 

 

280,976

 

Other restaurant operating costs

 

 

126,234

 

 

 

47,669

 

 

 

 

 

 

173,903

 

Depreciation and amortization

 

 

27,305

 

 

 

11,169

 

 

 

 

 

 

38,474

 

General and administrative expenses

 

 

23,797

 

 

 

20,429

 

 

 

 

 

 

44,226

 

Intercompany general and administrative allocations 

 

 

32,188

 

 

 

(32,188

)

 

 

 

 

 

 

Marketing expenses, net

 

 

29,591

 

 

 

10,805

 

 

 

 

 

 

40,396

 

Closures and impairments, net

 

 

16,080

 

 

 

4,827

 

 

 

 

 

 

20,907

 

Equity in earnings of subsidiaries

 

 

(18,907

)

 

 

 

 

 

18,907

 

 

 

 

Interest expense, net

 

 

13,806

 

 

 

2,294

 

 

 

 

 

 

16,100

 

Intercompany interest expense/(income)

 

 

9,049

 

 

 

(9,049

)

 

 

 

 

 

 

       Total operating costs and expenses

 

 

617,087

 

 

 

200,677

 

 

 

18,907

 

 

 

836,671

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss)/income before income taxes

 

 

(33,812

)

 

 

27,954

 

 

 

(18,907

)

 

 

(24,765

)

(Benefit)/provision for income taxes

 

 

(10,733

)

 

 

9,047

 

 

 

 

 

 

(1,686

)

Net (loss)/income

 

$

(23,079

)

 

$

18,907

 

 

$

(18,907

)

 

$

(23,079

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension liability reclassification, net of tax

 

 

1,347

 

 

 

 

 

 

 

 

 

1,347

 

Total comprehensive (loss)/income

 

$

(21,732

)

 

$

18,907

 

 

$

(18,907

)

 

$

(21,732

)

 

 

25

 

 

Condensed Consolidating Statement of Cash Flows

For the Thirty-Nine Weeks Ended February 28, 2017

(In thousands)

 

 

 

Parent

 

 

Guarantors

 

 

Eliminations

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used)/provided by operating activities

 

$

(38,058

) 

 

$

27,897

 

 

$

(11,558

)

 

$

(21,719

) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(21,631

)

 

 

(5,321

)

 

 

 

 

 

(26,952

)

Proceeds from disposal of assets

 

 

13,471

 

 

 

8,573

 

 

 

 

 

 

22,044

 

Insurance proceeds from property claims     358                     358  
Reductions in Deferred Compensation Plan assets     1,702                     1,702  

Other, net

 

 

1,439

 

 

 

 

 

 

 

 

 

1,439

 

Net cash (used)/provided by investing activities

 

 

(4,661

)

 

 

3,252

 

 

 

 

 

 

 

(1,409

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

 

(4

)

 

 

(10,609

)

 

 

 

 

 

(10,613

)

Stock repurchases

 

 

(26

)

 

 

 

 

 

 

 

 

(26

)

Payments for debt issuance costs

 

 

(947

)

 

 

 

 

 

 

 

 

(947

)

Intercompany dividend

   

     

(20,541

)

   

20,541

     

 

Other intercompany transactions

 

 

8,983

 

 

 

 

 

 

 

(8,983

) 

 

 

 

Net cash (used)/provided by financing activities

 

 

8,006

 

 

 

(31,150

)

 

 

11,558

 

 

 

(11,586

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(34,713

)

 

 

(1

)

 

 

 

 

 

(34,714

)

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of fiscal year

 

 

67,208

 

 

 

133

 

 

 

 

 

 

67,341

 

End of quarter

 

$

32,495

 

 

$

132

 

 

$

 

 

$

32,627

 

  

 

26

 

 

Condensed Consolidating Statement of Cash Flows

For the Thirty-Nine Weeks Ended March 1, 2016

(In thousands)

 

 

 

Parent

 

 

Guarantors

 

 

Eliminations

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used)/provided by operating activities

 

$

(8,133

) 

 

$

41,932

 

 

$

(15,260

)

 

$

18,539

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(19,892

)

 

 

(7,454

)

 

 

 

 

 

(27,346

)

Proceeds from disposal of assets

 

 

6,193

 

 

 

 

 

 

 

 

 

6,193

 

Other, net

 

 

2,444

 

 

 

 

 

 

 

 

 

2,444

 

Net cash used by investing activities

 

 

(11,255

)

 

 

(7,454

)

 

 

 

 

 

 

(18,709

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

 

(2,390

)

 

 

(10,274

)

 

 

 

 

 

(12,664

)

Stock repurchases

 

 

(10,009

)

 

 

 

 

 

 

 

 

(10,009

)

Payments for debt issuance costs

 

 

(30

)

 

 

 

 

 

 

 

 

(30

)

Intercompany dividend

   

     

(24,309

)

   

24,309

     

 

Other intercompany transactions

 

 

9,049

 

 

 

 

 

 

(9,049

)

 

 

 

Net cash (used)/provided by financing activities

 

 

(3,380

)

 

 

(34,583

)

 

 

15,260

 

 

 

(22,703

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Decrease in cash and cash equivalents

 

 

(22,768

) 

 

 

(105

)

 

 

 

 

 

(22,873

) 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of fiscal year

 

 

75,034

 

 

 

297

 

 

 

 

 

 

75,331

 

End of quarter

 

$

52,266

 

 

$

192

 

 

$

 

 

$

52,458

 

 

14. Recently Issued Accounting Pronouncements

 

Accounting Pronouncements Not Yet Adopted

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Payments (“ASU 2016-15”), which provides clarification regarding how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The guidance addresses eight specific cash flow issues with the objective to reduce diversity in practice of how certain transactions are classified within the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods therein (our fiscal year 2019). Early application is permitted. We do not believe the adoption of this guidance will have a material impact on our Condensed Consolidated Financial Statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods therein (our fiscal year 2018).  Early application is permitted. We are currently evaluating the impact of this guidance on our Condensed Consolidated Financial Statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods therein (our fiscal year 2020). Early application is permitted. We are currently evaluating the impact of this guidance on our Condensed Consolidated Financial Statements.

 

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 (“ASU 2014-15”). 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 and to provide related footnote

27

 

disclosures in certain circumstances. The guidance is effective for annual periods ending after December 15, 2016, and for interim periods within annual periods beginning thereafter (our fiscal year 2017). We do not believe the adoption of this guidance will have a material impact on our Condensed Consolidated Financial Statements.

 

In May 2014, the FASB and International Accounting Standards Board jointly issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 will replace almost all existing revenue recognition guidance, including industry specific guidance, upon its effective date. The standard's core principle is for a company to recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled.

 

A company may also need to use more judgment and make more estimates when recognizing revenue, which could result in additional disclosures. ASU 2014-09 also provides guidance for transactions that were not addressed comprehensively in previous guidance, such as the recognition of breakage income from the sale of gift cards. 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, 2017 (our fiscal year 2019), with early application permitted in the first quarter of 2017. We do not expect the adoption of this guidance to impact our recognition of Company-owned restaurants sales and operating revenue or our recognition of continuing fees from franchisees, which are based on a percentage of franchise sales. We have not yet selected a transition method and are continuing to evaluate the impact of this guidance on our less significant revenue transactions, such as initial franchise license fees.

 

Additionally, in March and April 2016, the FASB issued the following amendments to ASU 2014-09 to clarify the implementation guidance: ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. Under the new guidance, expected gift card breakage income will be required to be recognized proportionately as redemption occurs. Our current accounting policy of recognizing gift card breakage income applying the remote method will no longer be allowed. The timing of transition of this guidance is consistent with the new revenue recognition standard as discussed above. We expect to implement the provisions of ASU 2014-09 and the related amendments in the same period.

 

15. Subsequent Events

 

Appointment of Chief Executive Officer

On April 4, 2017, James F. Hyatt was appointed President and Chief Executive Officer of the Company, replacing F. Lane Cardwell, Jr., who has been serving as our Interim President and Chief Executive Officer.  Mr. Hyatt was also appointed to serve as a member of the Board of Directors of the Company (the "Board").  Mr. Cardwell will continue to serve as a member of the Board.  Also on April 4, 2017, we granted 142,045 service-based restricted stock units to Mr. Hyatt upon his appointment as President and Chief Executive Officer.  The service-based RSUs will vest in three equal installments over a three-year period following the date of grant.

 

Litigation Settlement

As also discussed in Notes 4 and 11 to the Condensed Consolidated Financial Statements, in May 2014, a securities class action case styled Dennis Krystek v. Ruby Tuesday, Inc. et al, was filed in the U.S. District Court for the Middle District of Tennessee, Nashville Division.  The case alleged that the Company and some of its former executives made false and misleading statements about the Company's financial performance and the financial performance of the Lime Fresh concept.  On March 29, 2017, the Company agreed to settle the case for $5.0 million.  We maintain insurance to cover these types of claims with our primary insurance carrier, subject to a self-insured retention which had been met prior to February 28, 2017.  Our insurance policies cover amounts in excess of our self-insured retention. In accordance with ASC Subtopic 405-20-40, Extinguishment of Liabilities, and ASC Subtopic 210-20, Balance Sheet Offsetting, we have recorded both an accrued liability (included within Accrued liabilities: Rent and other) and an asset for insurance recovery (included within Accounts and other receivables), in the amount of $5.0 million, in our Condensed Consolidated Balance Sheet as of February 28, 2017.

 

Lease Settlements

As previously mentioned in Note 7 to the Condensed Consolidated Financial Statements, we had a liability for future lease obligations of $19.1 million as of February 28, 2017. Since then and through the date of this filing, we settled four of these leases for $1.4 million, which approximated the amount of our accrual for those leases at February 28, 2017.

 

 

28

 

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.

 

Introduction

Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” the “Company,” “we” and/or “our”), owns and operates Ruby Tuesday® casual dining restaurants. We also franchise the Ruby Tuesday concept in select domestic and international markets. As of February 28, 2017, we owned and operated 544, and franchised 63 Ruby Tuesday restaurants. Ruby Tuesday restaurants can be found in 41 states, 14 foreign countries, and Guam.

 

On August 11, 2016, following a comprehensive review of the Company’s property portfolio and in conjunction with the launch of a Fresh Start initiative as discussed below, we announced a plan to close 95 Company-owned restaurants with perceived limited upside due to market concentration, challenged trade areas, and other factors. The plan was designed to streamline the organization through asset rationalization, improve financial profitability, and ultimately create long-term value for shareholders. All of the identified restaurants were closed during the first quarter of fiscal year 2017.

 

In an effort to focus on our core Ruby Tuesday concept, during the second quarter of fiscal year 2016 we entered into an agreement to sell our eight remaining Company-owned Lime Fresh Mexican Grill® (“Lime Fresh”) restaurants, six of which we closed and transferred to the buyer during fiscal year 2016. During the first half of fiscal year 2017, we completed the closure and transfer of the two remaining Lime Fresh restaurants.

 

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 same-restaurant sales, strengthen our competitive position, enhance our profitability, and create value through the execution of the following strategies:

 

Review of Strategic Alternatives

On March 13, 2017, we announced that we are exploring strategic alternatives in order to maximize shareholder value and position the business for long-term success. We are considering all strategic alternatives including, but not limited to a potential sale or merger of the Company, and have retained a financial advisor to assist in the process. We do not intend to make any further comment regarding the review until it has been completed.

 

Fresh Start Initiatives

In August 2016, we announced the launch of our Fresh Start initiatives which are intended to streamline our organization, improve financial profitability and ultimately create long-term value for our shareholders. The Fresh Start initiatives were developed to drive more significant top line growth and profitability over time by re-engaging with more women and young families, which we believe represents the largest opportunity for incremental sales growth. The key components of the Fresh Start initiatives include:

 

 

A new menu which is intended to provide culinary innovation and value to our guests while simplifying recipes and procedures for our kitchen. As consumer preference continues to migrate toward healthier food options, we will continue to make meaningful improvements in our core menu that will incorporate hand-crafted American favorites but will contain more lean proteins and fresh vegetables.

 

A new Garden Bar which we restaged and improved to offer over 50 items in order to provide more desirable offering in a cost effective way. The Garden Bar is a key brand differentiator that we believe sets us apart from our competition and is the most important item on our menu. Approximately half our guests utilize the Garden Bar when they dine with us, either as an add-on or as a main course.

 

A Fresh New Experience which is focused on revitalizing our brand through improving our service and overall guest experience. As part of our work in this area, we completed 13 store remodels in two test markets. Additionally, we are working with our teams at the restaurant level with service initiatives to improve the pace of meals and attentiveness, particularly through menu simplification. Pending the results of remodels in the two test markets, we have placed a temporary hold on further remodels while measuring the combined results from our new menu, new Garden Bar, and Fresh New Experience.

 

29

 

 

 

The Asset Rationalization Plan involved a comprehensive restaurant-level review and analysis of the sales, cash flows and other key performance metrics of our corporate-owned restaurant properties, as well as site location, market positioning and lease status. Based upon our findings, we concluded that it was in the Company's and our shareholders' best interest to close 95 underperforming restaurants during the first quarter of fiscal year 2017.

 

Strengthen our Balance Sheet to Facilitate Growth and Value Creation

Our priority for the use of cash is to drive shareholder value. Our objective is to continue to maintain adequate cash levels to support business needs, while investing in key components of our Fresh Start initiatives. In fiscal year 2017, as a result of our Asset Rationalization Plan, we expect fluctuations in cash balances as we hope to generate cash through the sale of surplus properties while using cash to settle leases for closed restaurants. Additionally, from time to time, we have considered other options for cash such as reducing outstanding debt levels and share repurchases within the limitations of our debt covenants. Our success in the key strategic initiatives outlined above should enable us to improve both our returns on assets and equity and create additional shareholder value.

 

This 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- and 39- week periods ended February 28, 2017:

 

Net loss was $19.8 million for the 13 weeks ended February 28, 2017 compared to $3.1 million for the corresponding period of the previous fiscal year. Diluted loss per share for the 13 weeks ended February 28, 2017 was $0.33 compared to $0.05 for the corresponding period of the prior fiscal year as a result of an increase in net loss as discussed later within this MD&A.

 

During the 13 weeks ended February 28, 2017:

 

 

Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 4.0% compared to the corresponding period of the prior fiscal year, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 0.1%;

 

Two Company-owned Ruby Tuesday restaurants were closed; and

 

One franchised Ruby Tuesday restaurant was opened and five were closed.

 

Net loss was $97.5 million for the 39 weeks ended February 28, 2017 compared to $23.1 million for the corresponding period of the previous fiscal year. Diluted loss per share for the 39 weeks ended February 28, 2017 was $1.62 compared to $0.38 for the corresponding period of the prior fiscal year as a result of an increase in net loss as discussed later within this MD&A.

 

During the 39 weeks ended February 28, 2017:

 

 

Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 3.6% compared to the corresponding period of the prior fiscal year, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 2.1%;

 

95 Company-owned Ruby Tuesday restaurants were closed in connection with our Fresh Start initiative, which resulted in additional closed restaurant lease reserves, inventory write-off, severance benefits, and other closing expense of $30.2 million;

 

Seven Company-owned Ruby Tuesday restaurants were closed as expected at, or near, lease expiration;

 

Two franchised Ruby Tuesday restaurant were opened and 17 were closed;

 

Two Company-owned Lime Fresh restaurants were closed; and

 

On September 13, 2016, James J. Buettgen resigned as Chairman of the Board of Directors, President, and Chief Executive Officer of the Company. On the same date, F. Lane Cardwell, Jr., a member of the Company's Board of Directors since October 2012 and an executive with approximately 38 years of leadership experience in the restaurant industry, was appointed Interim President and Chief Executive

 

30

 

 

 

Officer, Stephen I. Sadove, the Company’s then Lead Director, was appointed Chairman of the Board, and Sue Briley, who had been serving as interim Chief Financial Officer since June 2016, was appointed Chief Financial Officer.

 

* 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.

 

Operating Loss

The following table sets forth selected restaurant operating data as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, for the periods indicated. All information is derived from our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

   

February 28, 2017

   

March 1, 2016

 

February 28, 2017

 

March 1, 2016

Restaurant sales and operating revenue

 

99.6

%

 

 

99.4

%

 

99.6

%

 

99.4

%

Franchise revenue

 

0.4

 

 

 

0.6

 

 

0.4

 

 

0.6

 

Total revenue

 

100.0

 

 

 

100.0

 

 

100.0

 

 

100.0

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold (1)

 

28.6

 

 

 

27.8

 

 

28.6

 

 

27.5

 

Payroll and related costs (1)

 

35.6

 

 

 

34.6

 

 

36.2

 

 

34.8

 

Other restaurant operating costs (1)

 

20.0

 

 

 

20.5

 

 

21.5

 

 

21.5

 

Depreciation and amortization (1)

 

4.5

 

 

 

4.7

 

 

4.6

 

 

4.8

 

General and administrative expenses

 

6.1

 

 

 

5.2

 

 

6.9

 

 

5.4

 

Marketing expenses, net

 

6.1

 

 

 

4.9

 

 

6.2

 

 

5.0

 

Closures and impairments, net

 

6.0

 

 

 

2.3

 

 

8.5

 

 

2.6

 

Interest expense, net

 

2.2

 

 

 

1.8

 

 

2.1

 

 

2.0

 

Total operating costs and expenses

 

108.8

 

 

 

101.3

 

 

114.2

 

 

103.1

 

Loss before income taxes

 

(8.8

)

 

 

(1.3

)

 

(14.2

)

 

(3.1

)

Benefit for income taxes

 

(0.0

)

 

 

(0.2

)

 

(0.2

)

 

(0.2

)

Net loss

 

(8.8

)%

 

 

(1.1

)%

 

(14.0

)%

 

(2.8

)%

 

(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 and 39 weeks ended February 28, 2017 and March 1, 2016:

 

 

Ruby Tuesday

 

Lime Fresh

 

Total

13 weeks ended February 28, 2017

 

       

     Beginning number

546

 

-

 

546

     Closed

(2)

 

-

 

(2)

     Ending number

544

 

 

544

           

39 weeks ended February 28, 2017

 

       

     Beginning number

646

 

2

 

648

     Closed

(102)

 

(2)

 

(104)

     Ending number

544

 

 

544

           

13 weeks ended March 1, 2016

 

       

     Beginning number

655

 

8

 

663

     Closed

(6)

 

 

(6)

     Ending number

649

 

8

 

657

           

39 weeks ended March 1, 2016

 

       

     Beginning number

658

 

19

 

677

     Closed

(9)

 

(11)

 

(20)

     Ending number

649

 

8

 

657

 

31

 

The following table shows franchised Ruby Tuesday concept restaurant activity for the 13 and 39 weeks ended February 28, 2017 and March 1, 2016:

 

 

Thirteen weeks ended

 

Thirty-nine weeks ended

 
 

February 28, 2017

 

March 1, 2016

 

February 28, 2017

 

March 1, 2016

 

       Beginning number

67

 

78

 

78

 

78

          Opened

1

 

2

 

2

 

4

          Closed

(5)

 

 

(17)

 

(2)

       Ending number

63

 

80

 

63

 

80

 

Revenue 

Restaurant sales and operating revenue for the 13 weeks ended February 28, 2017 decreased 16.6% to $224.9 million compared to the corresponding period of the prior fiscal year. This decrease is primarily a result of restaurant closings since the corresponding period of the prior fiscal year, 95 of which closed during the first quarter of fiscal year 2017 in connection with our Asset Rationalization Plan as discussed previously within this MD&A, coupled with a 4.0% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants. The decrease in Ruby Tuesday concept same-restaurant sales is attributable to a 3.8% decrease in customer traffic coupled with a 0.2% decrease in net check. The 95 restaurants that closed during the first quarter of fiscal year 2017 produced revenues of $29.0 million during the 13 weeks ended March 1, 2016.

 

Franchise revenue for the 13 weeks ended February 28, 2017 decreased 50.4% to $0.8 million compared to the corresponding period of the prior fiscal year. Franchise revenue is predominantly comprised of domestic and international royalties, which totaled $0.8 million and $1.6 million for the 13 weeks ended February 28, 2017 and March 1, 2016, respectively. The decrease compared to the corresponding period of the prior fiscal year is primarily the result of the closure of ten restaurants by one of our domestic franchisees, the sale of our Lime Fresh franchising rights, and the royalty fee payment default of one of our international franchisees since the corresponding period of the prior fiscal year.     

 

Restaurant sales and operating revenue for the 39 weeks ended February 28, 2017 decreased 13.9% to $694.5 million compared to the corresponding period of the prior fiscal year. This decrease is primarily a result of restaurant closings since the corresponding period of the prior fiscal year, 95 of which closed during the first quarter of fiscal year 2017, coupled with a 3.6% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants. The decrease in Ruby Tuesday concept same-restaurant sales is attributable to a 3.2% decrease in customer traffic coupled with a 0.4% decrease in net check. The 95 restaurants that closed during the first quarter of fiscal year 2017 produced revenues of $22.8 million and $86.7 million during the 39 weeks ended February 28, 2017 and March 1, 2016, respectively.

 

Franchise revenue for the 39 weeks ended February 28, 2017 decreased 46.0% to $2.6 million compared to the corresponding period of the prior fiscal year. Franchise revenue is predominantly comprised of domestic and international royalties, which totaled $2.6 million and $4.8 million for the 39 weeks ended February 28, 2017 and March 1, 2016, respectively. The decrease compared to the corresponding period of the prior fiscal year is primarily for the same reasons as discussed above for the 13-week period ended February 28, 2017.

 

Pre-tax Loss

Pre-tax loss increased from $3.6 million to $19.9 million for the 13 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year. The increase in pre-tax loss is due primarily to higher closures and impairments expense ($7.3 million), a decrease in same-restaurant sales of 4.0% at Company-owned Ruby Tuesday restaurants, and an increase, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of costs of goods sold, payroll and related costs, general and administrative expenses, and marketing expenses, net. These were partially offset by a decrease in interest expense, net ($0.1 million) and a decrease, as a percentage of restaurant sales and operating revenue, of other restaurant operating costs and depreciation and amortization.

 

Pre-tax loss increased from $24.8 million to $99.2 million for the 39 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year. The increase in pre-tax loss is due primarily to higher closures and impairments expense ($40.4 million), a decrease in same-restaurant sales of 3.6% at Company-owned Ruby Tuesday restaurants, and an increase, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of costs of goods sold, payroll and related costs, general and administrative expenses, and marketing expenses, net. These were partially offset by a decrease in interest expense, net ($1.5 million) and a decrease, as a percentage of restaurant sales and operating revenue, of depreciation and amortization.

32

 

In the paragraphs that follow, we discuss in more detail the components of the changes in pre-tax loss for the 13 and 39 weeks ended February 28, 2017 compared to the corresponding periods of the prior fiscal 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 correlate 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 fiscal year period.

 

Cost of Goods Sold
Cost of goods sold decreased $10.8 million (14.4%) to $64.3 million for the 13 weeks ended February 28, 2017, compared to the corresponding period of the prior fiscal year. As a percentage of restaurant sales and operating revenue, cost of goods sold increased from 27.8% to 28.6%. Excluding the $8.4 million decrease from the elimination of the 95 restaurants closed during the first quarter of fiscal year 2017 as part of our Asset Rationalization Plan as discussed previously within this MD&A, cost of merchandise decreased $2.4 million.

 

Cost of goods sold decreased $23.0 million (10.4%) to $198.7 million for the 39 weeks ended February 28, 2017, compared to the corresponding period of the prior fiscal year. As a percentage of restaurant sales and operating revenue, cost of goods sold increased from 27.5% to 28.6%. Excluding the $18.3 million decrease from the elimination of the 95 restaurants closed during the first quarter of fiscal year 2017, cost of merchandise decreased $4.7 million.

 

The absolute dollar decrease in cost of goods sold for the 13 and 39 weeks ended February 28, 2017 not attributable to the closing of 95 restaurants was primarily the result of a decline in same-restaurant sales.  These were partially offset by price increases on certain commodity items since the corresponding periods of the prior year, a shift in menu mix associated with core menu changes and promotional activity, and, for the 39-week period, settlement proceeds received during the corresponding periods of the prior fiscal year from a class-action lawsuit against a former vendor.

 

As a percentage of restaurant sales and operating revenue, the increase in cost of goods sold for the 13 and 39 weeks ended February 28, 2017 is primarily the result of price increases on certain commodity items and a shift in menu mix associated with menu changes and promotional activity since the corresponding periods of the prior fiscal year as discussed above.

 

Payroll and Related Costs
Payroll and related costs decreased $13.3 million (14.2%) to $80.1 million for the 13 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 34.6% to 35.6%. Excluding the $12.2 million decrease from the elimination of the 95 restaurants closed during the first quarter of fiscal year 2017, payroll and related costs decreased $1.1 million.

 

Payroll and related costs decreased $29.9 million (10.6%) to $251.1 million for the 39 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 34.8% to 36.2%.  Excluding the $25.9 million decrease from the elimination of the 95 restaurants closed during the first quarter of fiscal year 2017, payroll and related costs decreased $4.0 million.

 

The absolute dollar decrease in payroll and related costs for the 13 and 39 weeks ended February 28, 2017 not attributable to the closing of 95 restaurants was primarily the result of lower health insurance and workers®€™ compensation costs due to favorable claims experience which was partially offset by wage inflation.

 

As a percentage of restaurant sales and operating revenue, the increase in payroll and related costs for the 13 and 39 weeks ended February 28, 2017 is primarily the result of wage inflation and loss of leveraging associated with lower sales volumes.

 

Other Restaurant Operating Costs
Other restaurant operating costs decreased $10.2 million (18.5%) to $45.1 million for the 13 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year. As a percentage of restaurant sales and operating revenue, other restaurant operating costs decreased from 20.5% to 20.0%. Excluding the $8.2 million decrease from the elimination of the 95 restaurants closed during the first quarter of fiscal year 2017, other restaurant operating costs decreased $2.0 million.

 

For the 13 weeks ended February 28, 2017, the decrease in other restaurant operating costs not attributable to the 95 restaurant closings related to the following (in thousands):

33

 

Rent and leasing

 

$

1,299

 

Insurance

   

909

 

Other increases, net

 

 

(154

) 

Net decrease

 

$

2,054

 

 

The absolute dollar decrease in other restaurant operating costs for the 13 weeks ended February 28, 2017 was a result of lower rent and leasing due in part to restaurant closures other than the 95 that closed as part of the Asset Rationalization Project coupled with lower insurance costs due primarily to proceeds from a fire damage claim and favorable general liability experience since the corresponding period of the prior fiscal year.

 

Other restaurant operating costs decreased $24.8 million (14.3%) to $149.1 million for the 39 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year. As a percentage of restaurant sales and operating revenue, other restaurant operating costs were consistent with the corresponding period of the prior fiscal year at 21.5% as lower costs as discussed below were offset by a loss of leveraging associated with lower sales volumes. Excluding the $17.8 million decrease from the elimination of the 95 restaurants closed during the first quarter of fiscal year 2017, other restaurant operating costs decreased $7.0 million.

 

For the 39 weeks ended February 28, 2017, the decrease in other restaurant operating costs not attributable to the 95 restaurant closings related to the following (in thousands):

 

Rent and leasing

 

$

4,031

 

Repairs

   

1,001

 

Utilities

 

 

882

 

Insurance     403  

Other decreases, net

 

 

714

 

Net decrease

 

$

7,031

 

 

The absolute dollar decrease in other restaurant operating costs for the 39 weeks ended February 28, 2017 was a result of lower rent and leasing, restaurant repairs, and utilities due in part to restaurant closures other than the 95 that closed as part of the Asset Rationalization Project coupled with lower insurance costs since the corresponding period of the prior fiscal year for similar reasons as discussed above for the 13-week period.

 

Depreciation and Amortization
Depreciation and amortization expense decreased $2.6 million (20.5%) to $10.1 million for the 13 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year. As a percentage of restaurant sales and operating revenue, depreciation expense decreased from 4.7% to 4.5%. Excluding the $1.2 million decrease from the elimination of the 95 restaurants closed during the first quarter of fiscal year 2017, depreciation and amortization decreased $1.4 million.

 

Depreciation and amortization expense decreased $6.6 million (17.2%) to $31.8 million for the 39 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year.  As a percentage of restaurant sales and operating revenue, depreciation expense decreased from 4.8% to 4.6%.  Excluding the $3.5 million decrease from the elimination of the 95 restaurant closed during the first quarter of fiscal 2017, depreciation and amortization decreased $3.1 million.

 

The absolute dollar decrease in depreciation and amortization for the 13 and 39 weeks ended February 28, 2017 is the result of assets that became fully depreciated or were impaired since the corresponding periods of the prior fiscal year coupled with restaurant closures not related to the Asset Rationalization Plan.

 

General and Administrative Expenses
General and administrative expenses decreased $0.3 million (1.9%) to $13.9 million for the 13 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year.

 

General and administrative expenses increased $4.1 million (9.3%) to $48.4 million for the 39 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year.

34

 

The decrease in general and administrative expenses for the 13 weeks ended February 28, 2017 is primarily due to lower management labor, employee pension-related costs, and share-based compensation expense, which was partially offset by higher expense for executive bonus due to an adjustment in the corresponding period of the prior fiscal year.

 

The increase in general and administrative expenses for the 39 weeks ended February 28, 2017 is primarily due to higher severance as a result of the departure of our former Chief Executive Officer, an increase in share-based compensation expense as a result of the accelerated vesting during the second quarter of fiscal year 2017 of certain of our former Chief Executive Officer’s share-based awards upon his departure coupled with a forfeiture credit in the corresponding period of the prior fiscal year, and higher legal fees. These were partially offset by lower management labor, employee pension-related costs, and a reduction in the accrual for executive bonus.

 

Marketing Expenses, Net
Marketing expenses, net increased $0.6 million (4.4%) to $13.8 million for the 13 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year.

 

Marketing expenses, net increased $2.9 million (7.3%) to $43.3 million for the 39 weeks ended February 28, 2017 compared to the corresponding period of the prior fiscal year.

 

The increase in marketing expenses, net for the 13 weeks ended February 28, 2017 is primarily a result of higher television advertising due primarily to advertising associated with our new Garden Bar, which was partially offset by lower internet, direct mail, newspaper, and other promotional advertising costs since the corresponding period of the prior fiscal year.

 

The increase in marketing expenses, net for 39 weeks ended February 28, 2017 is primarily a result of higher television advertising for reasons as discussed above, and higher direct mail and other promotional advertising costs, which were partially offset by decreases in internet, magazine, and newspaper advertising since the corresponding period of the prior fiscal year.

 

Closures and Impairments, Net

Closures and impairments, net, increased $7.3 million to $13.4 million for the 13 weeks ended February 28, 2017, as compared to the corresponding period of the prior fiscal year. The increase is primarily due to higher property impairment charges ($8.0 million), closed restaurant lease reserves ($1.1 million), and other closing costs ($0.8 million). These increases were partially offset by higher gains on the sale of surplus properties ($2.3 million), and a decrease in severance benefits ($0.3 million).

 

Closures and impairments, net increased $38.4 million to $59.3 million for the 39 weeks ended February 28, 2017, as compared to the corresponding period of the prior fiscal year. The increase is primarily due to higher property impairment charges ($17.0 million), closed restaurant lease reserve expense ($14.3 million), and inventory write-off, severance benefits, and other closing costs ($8.1 million), coupled with lower gains on the sale of surplus properties ($1.0 million). These were partially offset by a partial impairment of the Lime Fresh trademark ($2.0 million) during the corresponding period of the prior fiscal year.

 

As previously discussed in Note 7 to the Condensed Consolidated Financial Statements, during the first quarter of fiscal year 2017, we closed 102 Company-owned restaurants, 95 of which were closed in connection with an asset rationalization plan announced on August 11, 2016. The plan was formulated in response to a comprehensive review of our property portfolio which included the planned closure of restaurants with perceived limited upside due to market concentration, challenged trade areas, or other factors. Included within Closures and impairments, net for the 39 weeks ended February 28, 2017 are closed restaurant lease reserves, inventory write-off, severance benefits, and other closing expense of $30.2 million related to these closures in connection with the Asset Rationalization Plan.

 

See Note 7 to the Condensed Consolidated Financial Statements for further information on our closures and impairment charges recorded during the 13 and 39 weeks ended February 28, 2017 and March 1, 2016.

 

Within our impairment analysis for the 13-week period ended February 28, 2017, we had 65 restaurants that had either been open for more than six full quarters with rolling 12-month negative cash flows or had suppressed levels of positive cash flows. Of these restaurants, 42 have been impaired to salvage value. The remaining net book value of the 23 restaurants, one of which is located on an owned property, was $4.9 million at February 28, 2017.

 

Should cash flows at these cash flow negative restaurants not improve within a reasonable period of time, further impairment charges may occur. Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs, salvage value, and sublease income. Accordingly, actual results could vary significantly from quarter to quarter and from our estimates.

35

 

Interest Expense, Net
Interest expense, net decreased $0.1 million to $4.9 million for the 13 weeks ended February 28, 2017, as compared to the corresponding period of the prior fiscal year.

 

Interest expense, net decreased $1.5 million to $14.6 million for the 39 weeks ended February 28, 2017, as compared to the corresponding period of the prior fiscal year, primarily due to the early payoff of certain mortgage loans and repurchases of our Senior Notes during the prior fiscal year.

 

Benefit for Income Taxes

We recorded a tax benefit of $0.1 million and $1.7 million for the 13 and 39 weeks ended February 28, 2017, respectively, compared to a tax benefit of $0.5 million and $1.7 million for the 13 and 39 weeks ended March 1, 2016, respectively. Netted against our tax benefit for the 13 and 39 weeks ended February 28, 2017 were charges of $10.3 million and $44.1 million, respectively, representing increases in the valuation allowance for deferred tax assets recorded primarily against general business credit carryforwards and federal and state net operating loss carryforwards.

 

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.

 

We are required to assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. As a result of, among other charges, closures and impairments, we currently reflect a three-year cumulative pre-tax loss. A cumulative pre-tax loss is given more weight than projections of future income, and a recent historical cumulative loss is considered a significant factor that is difficult to overcome. Our valuation allowance for deferred tax assets totaled $131.3 and $89.9 million as of February 28, 2017 and May 31, 2016, respectively. Before consideration of the valuation allowance expense and including tax credits, we had an income tax benefit of $10.4 million and $45.8 million for the 13 and 39 weeks ended February 28, 2017, respectively, and $5.4 million and $17.0 million for the 13 and 39 weeks ended March 1, 2016, respectively.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash 

Our primary source of liquidity is cash provided by operations. The following table presents a summary of our cash flows from operating, investing, and financing activities for the first 39 weeks of fiscal years 2017 and 2016 (in thousands).

 

 

Thirty-nine weeks ended

   

February 28, 2017

 

March 1, 2016

Net cash (used)/provided by operating activities

 

$

(21,719

) 

 

$

18,539

 

 

Net cash used by investing activities

 

 

(1,409

)

 

 

(18,709

)

 

Net cash used by financing activities

 

 

(11,586

)

 

 

(22,703

)

 

Net decrease in cash and cash equivalents

 

$

(34,714

)

 

$

(22,873

) 

 

 

Operating Activities

Our cash provided by operations is generally derived from cash receipts generated by our restaurant customers and franchisees.  Substantially all of the $694.5 million and $807.1 million of restaurant sales and operating revenue disclosed in our Condensed Consolidated Statements of Operations and Comprehensive Loss for the 39 weeks ended February 28, 2017 and March 1, 2016, 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 expenses, a significant portion of which are incurred and paid in the same period.

 

Cash used by operating activities for the 39 weeks ended February 28, 2017 was $21.7 million as compared to cash provided of $18.5 million for the corresponding period of the prior fiscal year. The change is primarily the result of lower Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA") for reasons previously discussed within this MD&A, which was partially offset by decreases in amounts spent to acquire

36

 

inventory (approximately $3.2 million), lower cash paid for taxes ($2.4 million), and lower cash paid for interest ($1.7 million) due to the prepayment of certain of our mortgage obligations and other principal payments on our debt since the corresponding period of the prior fiscal year.  These were partially offset by decreases in accounts payable, accrued, and other liabilities due to the timing of payments.

 

Our working capital deficiency and current ratio as of February 28, 2017 were $13.0 million and 0.9:1, respectively. As is typical 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.

 

Investing Activities

We require capital principally for the maintenance, upkeep, and remodeling of our existing restaurants, limited new restaurant construction, investments in technology, equipment, and on occasion for the acquisition of franchisees or other restaurant concepts. Property and equipment expenditures purchased primarily with cash on hand and/or internally-generated cash flows for the 39 weeks ended February 28, 2017 and March 1, 2016 were $27.0 million and $27.3 million, respectively. In addition, proceeds from the disposal of assets produced $22.0 million and $6.2 million of cash during the 39 weeks ended February 28,  2017 and March 1, 2016, respectively.

 

We intend to fund our future investing activities with cash on hand, cash provided by operations, proceeds from the sale of surplus properties, or borrowings on the Senior Credit Facility.

 

Financing Activities

Historically our primary sources of cash have been operating activities, coupled with sales of surplus properties. When these alone have not provided sufficient funds for both our capital and other needs, we have obtained funds through the incurrence of indebtedness, sale-leaseback transactions, or through the issuance of additional shares of common stock.

 

Our current borrowings and credit facilities include $212.5 million outstanding principal of 7.625% senior notes due 2020 (the “Senior Notes”), a revolving credit agreement (the “Senior Credit Facility”) under which we may borrow up to $30.0 million, and $5.1 million of mortgage loan obligations assumed upon franchise acquisitions. Principal payments of long-term debt and capital leases for the 39 weeks ended February 28, 2017 and March 1, 2016 were $10.6 million and $12.7 million, respectively. See Note 6 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for key terms and further information on our Senior Notes, Senior Credit Facility, and mortgage loan obligations. In addition, we repurchased our common stock at an aggregate cost of $10.0 million during the 39 weeks ended March 1, 2016. 

 

Covenant Compliance

Under the terms of the Senior Credit Facility and our mortgage loan obligations, we are required to comply with financial covenants relating to the maintenance of a maximum leverage ratio and a minimum fixed charge coverage ratio. As of November 29, 2016, we did not attain the minimum fixed charge coverage ratio as required under the terms of the Senior Credit Facility and mortgage loan obligations.  While we obtained waivers of this covenant violation through January 31, 2017 from our lenders, we believed, without certain modifications, that it was possible at some point during the next twelve months that we would again be in violation of the minimum fixed charge coverage ratio covenant.  Accordingly, on January 31, 2017, we entered into a seventh amendment and waiver to the Senior Credit Facility (the "Seventh Amendment and Waiver") and a loan modification and waiver (the "Mortgage Loan Modification and Waiver"). Among other things, the Seventh Amendment and Waiver reduces the amount the Company may borrow pursuant to the revolving loan commitment under the Senior Credit Facility from $50.0 million (including a $25.0 million sublimit for standby letters of credit), to $30.0 million (including a $15.0 million sublimit for standby letters of credit), amends the termination date of the Senior Credit Facility from December 3, 2017 to June 2, 2017, and increases the flexibility of the financial covenants under the Senior Credit Facility.

 

We were required under the Seventh Amendment and Waiver and the Mortgage Loan Modification and Waiver to maintain a maximum leverage ratio of no more than 4.65 to 1.0 and a minimum fixed charge coverage ratio of no less than 1.25 to 1.0 for the quarter ended February 28, 2017. We were in compliance with our maximum leverage ratio and minimum fixed charge coverage ratio as of February 28, 2017.

 

Additionally, the Senior Credit Facility and the Seventh Amendment and Waiver contain 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, guarantee indebtedness, and prepay other indebtedness.

37

 

Maximum  Leverage Ratio

Our maximum leverage ratio 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 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):

 

 

February 28, 2017

 

Current portion of long-term debt

$

349

 

Long-term debt and capital leases, less current maturities

 

213,533

 

Total long-term debt and capital leases

 

213,882

 

Present value of operating leases*

 

152,901

 

Letters of credit*

 

11,091

 

Unrestricted cash in excess of $10.0 million

 

(22,465

)

Unamortized debt issuance costs

 

2,528

 

Unamortized discount of senior unsecured notes

 

1,478

 

Unamortized premium of mortgage loan obligations

 

 

Trade payables overdue by more than 120 days

 

6

 

Adjusted Total Debt

$

359,421

 

 

* Non-GAAP measure. See below for discussion regarding reconciliation to GAAP-based amounts.

 

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

 
 

February 28, 2017

 

Net loss

$

(125,056

)

Asset impairments

 

75,197

 

Rent expense

 

56,085

 

Depreciation and amortization

 

44,722

 

Interest expense

 

20,280

 

Restaurant closing costs*

 

15,608

 

Share-based compensation expense

 

3,443

 

Other, net

 

1,191

 

Gain on sales of Lime Fresh Mexican Grill assets

 

(5,988

)

Income taxes

 

(2,236

)

Consolidated EBITDAR

$

83,246

 

 

*Amount is comprised of restaurant closing and restructuring costs, closed-restaurant lease reserves, and impairment and asset write-off charges incurred in connection with the closure of 95 restaurants during the first quarter of fiscal year 2017.

38

 

Adjusted Total Debt to Consolidated EBITDAR – Actual

 

4.32

 

Maximum allowed per covenant

 

4.65

 

 

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

 
 

February 28, 2017

 

Consolidated EBITDAR

$

83,246

 
       

Interest*

$

17,691

 

Cash rents*

 

44,097

 

Total

$

61,788

 

 

* Non-GAAP measure. See below for discussion regarding reconciliation to GAAP-based amounts.

 

Fixed Charge Covenant – Actual

 

1.35

 

Minimum allowed per covenant

 

1.25

 

 

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.

 

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 ($17.7 million on a rolling 12 month basis) differs from interest expense determined in accordance with GAAP ($20.3 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 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):

 

GAAP-based interest expense

$

20,280

 

Brokerage fees

 

(1,654

)

Prepayment penalties

 

(707

)

Amortization of loan fees and fair market

     

   value adjustments

 

(228

)

Interest

$

17,691

 

 

Our Minimum Fixed Charge Coverage ratio also allows for recurring cash rents to be included in the denominator. Cash rents ($44.1 million on a rolling 12 month basis) differ from rents determined in accordance with GAAP ($56.1 million) by the following (amounts in thousands):

 

GAAP –based rent expense

$

56,085

 
Rent settlement payments   (8,029 )

Change in rent accruals

 

(3,959

)

Cash rents

$

44,097

 

 

 

39

 

Significant Contractual Obligations and Commercial Commitments
Long-term financial obligations were as follows as of February 28, 2017 (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) 

$     5,342

 

$         1,493

 

$       2,814

 

         828

 

$         207

 

Senior unsecured notes (a)

212,546

 

 

 

212,546

 

 

Interest (b)

59,170

 

16,642

 

32,903

 

8,259

 

1,366

 

Operating leases (c)

518,102

 

41,875

 

75,293

 

65,301

 

335,633

 

Purchase obligations (d)

46,051

 

29,314

 

12,112

 

4,625

 

 

Pension obligations (e)

35,793

 

3,455

 

4,519

 

8,391

 

19,428

 

   Total (f)

$   877,004

 

$      92,779

 

$  127,641

 

$   299,950

 

$  356,634

 

 

(a)

Amounts included in the table above reflect the contractual due dates of our notes payable and long-term debt. See Note 6 to the Condensed Consolidated Financial Statements for more information on our debt.

(b)

Amounts represent contractual interest payments on our fixed-rate debt instruments. Additionally, the amounts shown above include interest payments on the Senior Notes at the current interest rate of 7.625%.

(c)

This amount includes lease payments for certain optional renewal periods for which exercise is considered reasonably assured as well as operating leases totaling $3.2 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.

(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 8 to the Condensed Consolidated Financial Statements for more information.

(f)

This amount excludes $3.8 million of unrecognized tax benefits due to the uncertainty regarding the timing of future cash outflows associated with such obligations.

 

Recently Issued Accounting Pronouncements

Information regarding accounting pronouncements not yet adopted is incorporated by reference from Note 13 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Known Events, Uncertainties, and Trends

 

Review of Strategic Alternatives

On March 13, 2017, we announced that we are exploring strategic alternatives in order to maximize shareholder value and position the business for long-term success. We are considering all strategic alternatives including, but not limited to a potential sale or merger of the Company, and have retained a financial advisor to assist in the process. We do not intend to make any further comment regarding the review until it has been completed.

 

Covenant Compliance

As previously mentioned within this MD&A, under the terms of the Senior Credit Facility and our mortgage loan obligations, we are required to comply with financial covenants relating to the maintenance of a maximum leverage ratio and a minimum fixed charge coverage ratio. As of November 29, 2016, we did not attain the minimum fixed charge coverage ratio as required under the terms of the Senior Credit Facility and mortgage loan obligations.  While we obtained waivers of this covenant violation through January 31, 2017 from our lenders, we believed, without certain modifications, that it was possible at some point during the next twelve months that we would again be in violation of the minimum fixed charge coverage ratio covenant.  Accordingly, on January 31, 2017, we entered into a seventh amendment and waiver to the Senior Credit Facility (the "Seventh Amendment and Waiver") and a loan modification and waiver (the "Mortgage Loan Modification and Waiver"). 

40

 

Among other things, the Seventh Amendment and Waiver reduces the amount the Company may borrow pursuant to the revolving loan commitment under the Senior Credit Facility from $50.0 million (including a $25.0 million sublimit for standby letters of credit), to $30.0 million (including a $15.0 million sublimit for standby letters of credit), amends the termination date of the Senior Credit Facility from December 3, 2017 to June 2, 2017, and increases the flexibility of the financial covenants under the Senior Credit Facility.

 

The Seventh Amendment and Waiver and the Mortgage Loan Modification and Waiver require us to maintain a maximum leverage ratio of no more than 4.65 to 1.0 and a minimum fixed charge coverage ratio of no less than 1.25 to 1.0 for the quarter ended February 28, 2017. While we were in compliance with our maximum leverage ratio and minimum fixed charge coverage ratio as of February 28, 2017, there are no assurances that our lenders will provide any future waivers of covenant violations or agree to any future amendments of our Senior Credit Facility or mortgage loan obligations.  As of the date of this filing, we are evaluating options to replace the Senior Credit Facility. 

 

Impact on Cash from Sale of Surplus Properties and Lease Settlements

As further discussed in Note 5 to the Condensed Consolidated Financial Statements, as of February 28, 2017 we had surplus properties classified as assets held for sale of $20.5 million and surplus properties of $17.9 million not classified as held for sale as we had yet to conclude for accounting purposes that we can sell these assets within 12 months of the balance sheet date. Additionally, as discussed in Note 7 to the Condensed Consolidated Financial Statements, as of February 28, 2017 we had a liability for future lease obligations of $19.1 million. While we settled four of these leases for $1.4 million since February 28, 2017, the amounts of future settlements could be higher or lower than the amounts recorded, and 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 properties. During the remainder of fiscal year 2017, we expect fluctuations in our cash balances as we hope to generate cash through the sale of surplus properties while using cash to settle closed restaurant lease obligations.

 

Financial Strategy and Stock Repurchase Plan

Cash and cash equivalents as of February 28, 2017 were $32.6 million. Our overall goal is to invest in our brand and to strengthen our balance sheet to improve credit metrics. As such, our first priority is to ensure that we have adequate cash levels to run the business and internally fund our capital expenditures. Our second priority is to reduce our outstanding debt to help improve our credit metrics with the goal of improved flexibility and access to capital at reasonable rates. Lastly, we would consider share repurchases within the limitations of our debt covenants to return capital to shareholders. As of February 28, 2017, the total number of remaining shares authorized to be repurchased was 9.9 million. Any of these actions, in any particular period and the actual amount thereof, remain at the discretion of the Board of Directors and are subject to debt covenant restrictions, and as such no assurance can be given that any such actions will be taken in the future.

 

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 39 weeks ended February 28, 2017 or March 1, 2016. The payment of a dividend in any particular period and the actual amount thereof remain at the discretion of the Board of Directors and are subject to covenant restrictions, and as such no assurance can be given that dividends will be paid in the future.

 

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

 

Ability to Issue Preferred Stock

The Board of Directors, pursuant to the Company’s Certificate of Incorporation, has the authority to issue 250,000 shares of preferred stock in one or more series. The Board of Directors has the power to establish the dividend rates, rights of conversion and redemption, liquidation prices, and other terms or conditions of such preferred stock. This preferred stock may be issued at the discretion of the Board of Directors with preferences over shares of our common stock in a manner that is materially dilutive to shareholders. In addition, blank check preferred stock can be used to create a shareholder rights plan, or “poison pill”, which is designed to deter a hostile bidder from buying a controlling interest in our stock. While we have not adopted such a “poison pill” or issued any preferred stock as of the date of this filing, the Board of Directors has the ability to do so in the future, very rapidly and without stockholder approval.

 

 

41

 

Item 3. Quantitative and Qualitative

Disclosure About Market Risk

 

There were no material changes during the 39 weeks ended February 28, 2017 to the disclosures made in Item 7A of our Form 10-K for the fiscal year ended May 31, 2016.

  

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 February 28, 2017.

 

Changes in Internal Control

During the fiscal quarter ended February 28, 2017, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is 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 accruals 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, including the matter referred to below, will not have a material adverse effect on our condensed consolidated results of operations, financial position, or cash flows.

 

In May 2014, a securities class action case styled Dennis Krystek v. Ruby Tuesday, Inc. et al, was filed in the U.S. District Court for the Middle District of Tennessee, Nashville Division.  The case alleged that the Company and some of its former executives made false and misleading statements about the Company's financial performance and the financial performance of the Lime Fresh concept.  On March 29, 2017, the Company agreed to settle the case for $5.0 million.  We maintain insurance to cover these types of claims with our primary insurance carrier, subject to a self-insured retention which had been met prior to February 28, 2017.  Our insurance policies cover amounts in excess of our self-insured retention. In accordance with ASC Subtopic 405-20-40, Extinguishment of Liabilities, and ASC Subtopic 210-20, Balance Sheet Offsetting, we have recorded both an accrued liability (included within Accrued liabilities: Rent and other) and an asset for insurance recovery (included within Accounts and other receivables), in the amount of $5.0 million, in our Condensed Consolidated Balance Sheet as of February 28, 2017.

 

Item 1A. Risk Factors

 

Information regarding risk factors appears in our Annual Report on Form 10-K for the year ended May 31, 2016 in Part I, Item 1A. Risk Factors. Except as set forth elsewhere in this Form 10-Q, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

 

42

 

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 fiscal quarter ended February 28, 2017:

 

   

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

 

per share

 

announced plans or programs

 

under the plans or programs (1)

 
                   

November 30 to January 3

 

 

 

 –

 

 –

 

9,884,829

 

January 4 to January 31

 

– 

 

    –

 

 –

 

9,884,829

 

February 1 to February 28

 

– 

 

    –

 

 –

 

9,884,829

 

Total

 

 

 –

 

 

     

 

(1) As of February 28, 2017, 9.9 million shares remained available for purchase under an existing January 8, 2013 authorization by the Board of Directors 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 and debt covenant requirements.  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.

 

 Item 3. Defaults Upon Senior Securities

 

None.

  Item 4. Mine Safety Disclosures

 

Not Applicable.

 Item 5. Other Information

 

On April 4, 2017, James F. Hyatt was appointed President and Chief Executive Officer of the Company, replacing F. Lane Cardwell, Jr., who has been serving as our Interim President and Chief Executive Officer.  Mr. Hyatt was also appointed to serve as a member of the Board of Directors of the Company (the "Board").  Mr. Cardwell will continue to serve as a member of the Board.  Prior to joining the Company, Mr. Hyatt (age 60) served as the President and Chief Executive Officer of Church's Chicken from 2011 until 2016.  

 

Mr. Hyatt will receive an annual base salary of $850,000 and will be eligible for an annual bonus with a target amount of 100% of base salary.  For fiscal year 2017, Mr. Hyatt's annual bonus will be dependent upon determination of the Compensation Committee of the Ruby Tuesday, Inc. Board of Directors that he has achieved specific performance goals, and the amount earned will be prorated based on the portion of the fiscal year that he is employed with the Company.  Thereafter, he will be eligible for an annual bonus under the Company's Executive Incentive Compensation Plan with a target amount of 100% of base salary.  On April 4, 2017, and on each of the three-month, six-month, nine-month and twelve-month anniversaries of such date, Mr. Hyatt will receive a restricted stock award with a target grant date value of $375,000. Each such award will vest in three equal installments over a three-year period following the date of grant. Accordingly, we granted 142,045 service-based restricted shares to Mr. Hyatt on April 4, 2017 upon his appointment as President and Chief Executive Officer. Thereafter, he will be eligible to receive an annual long-term incentive award, with respect to the beginning of our fiscal year 2019, with a target grant date value of $1.5 million to be granted under the Ruby Tuesday, Inc. Stock Incentive Plan.

 

Mr. Hyatt will be eligible for severance equal to his base salary if his employment is terminated during the first year following his appointment.  Thereafter, Mr. Hyatt will be eligible for severance in accordance with the terms of his offer letter and (i) the Ruby Tuesday, Inc. Executive Severance Plan, with severance equal to two times his base salary, or (ii) the Ruby Tuesday, Inc. Change in Control Severance Plan, with severance equal to two times the sum of his base salary and target bonus, as applicable.  Mr. Hyatt's receipt of severance will be subject to his compliance with certain restrictive covenants, including with regard to confidentiality and non-solicitation of employees.

 

43

 

 

Item 6. Exhibit Index

 

The following exhibits are filed as part of this report:

 

Exhibit
Number
 


                                                  Description of Exhibit

 

 

   
10.1 Seventh Amendment to Revolving Credit Agreement and Waiver, dated January 31, 2017.
   
10.2 Loan Modification Agreement and Waiver, dated January 31, 2017.
   
10.3 Amendment to the Ruby Tuesday, Inc. Change in Control Severance Plan, dated April 4, 2017.
   
10.4 Amendment to the Ruby Tuesday, Inc. Executive Severance Plan, dated April 4, 2017.
   

12.1

Ratio of Consolidated Earnings to Fixed Charges.

 

 

31.1

Certification of President and 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 President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101.INS

XBRL Instance Document.

 

 

101.SCH

XBRL Schema Document.

 

 

101.CAL

XBRL Calculation Linkbase Document.

 

 

101.DEF

XBRL Definition Linkbase Document.

 

 

101.LAB

XBRL Labels Linkbase Document.

 

 

101.PRE

XBRL Presentation Linkbase Document.

 

 

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SIGNATURES

 

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

 

 Name

Position

Date

     

/s/ Sue Briley

Sue Briley

Chief Financial Officer

(Principal Financial Officer)

Date: April 7, 2017

 

/s/ Wayne Kalish

Wayne Kalish

Vice President, Corporate Controller

(Principal Accounting Officer)

Date: April 7, 2017

 

 

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