UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
––––––––––––––––––––––
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the Fiscal Year Ended: June 3, 2014 |
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | For the transition period from __________ to _________ |
Commission file number 1-12454
RUBY TUESDAY, INC.
(Exact name of registrant as specified in charter)
| GEORGIA | | 63-0475239 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
150 West Church Avenue, Maryville, Tennessee 37801
(Address of principal executive offices and zip code)
(865) 379-5700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | |
| Title of each class | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YesoNox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YesoNox
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. YesxNoo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNoo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filero Accelerated filerx
Non-accelerated filero (Do not check if a smaller reporting company) Smaller reporting companyo
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YesoNo x
The aggregate market value of the voting stock (which consists solely of shares of common stock) held by non-affiliates of the registrant as of the last day of the second fiscal quarter ended December 3, 2013 was $419,464,764 based on the closing stock price of $6.83 on December 3, 2013.
The number of shares of common stock outstanding as of July 29, 2014, was 61,461,303.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement for the Registrant’s 2014 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, are incorporated by reference into Part III hereof.
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| PART II | | |
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| PART IV | | |
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Special Note Regarding Forward-Looking Information
This Annual Report on Form 10-K contains various forward-looking statements, which represent our expectations or beliefs concerning future events, including one or more of the following: future financial performance, future capital expenditures, the effect of strategic initiatives (including cost-cutting initiatives), the opening or closing of restaurants by us or our franchisees, sales of our real estate or purchases of new real estate, future borrowings and repayments of debt, availability of financing on terms attractive to the Company, compliance with financial covenants in our debt instruments, payment of dividends, stock and bond repurchases, restaurant acquisitions, and changes in senior management and in the Board of Directors. We caution the reader that a number of important factors and uncertainties could, individually or in the aggregate, cause our actual results to differ materially from those included in the forward-looking statements (such statements include, but are not limited to, statements relating to cost savings that we estimate may result from any programs we implement, our estimates of future capital spending, our targets for annual growth in same-restaurant sales and average annual sales per restaurant, and the benefits of our television marketing), including, without limitation, the following:
| · | general economic conditions; |
| · | changes in promotional, couponing and advertising strategies; |
| · | changes in our customers’ disposable income; |
| · | consumer spending trends and habits; |
| · | increased competition in the restaurant market; |
| · | laws and regulations affecting labor and employee benefit costs, including further potential increases in state and federally mandated minimum wages, and healthcare reform; |
| · | the impact of pending litigation; |
| · | customers’ acceptance of changes in menu items; |
| · | changes in the availability and cost of capital; |
| · | potential limitations imposed by debt covenants under our debt instruments; |
| · | weather conditions in the regions in which Company-owned and franchised restaurants are operated; |
| · | costs and availability of food and beverage inventory; |
| · | significant fluctuations in energy prices; |
| · | security breaches of our customers’ or employees’ confidential information or personal data or the failure of our information technology and computer systems; |
| · | our ability to attract and retain qualified managers, franchisees and team members; |
| · | impact of adoption of new accounting standards; |
| · | impact of food-borne illnesses resulting from an outbreak at either one of our restaurant concepts or other competing restaurant concepts; and |
| · | effects of actual or threatened future terrorist attacks in the United States. |
Item 1. Business
Background
The first Ruby Tuesday® restaurant was opened in 1972 in Knoxville, Tennessee near the campus of the University of Tennessee. The Ruby Tuesday concept, which at the time consisted of 16 restaurants, was acquired by Morrison Restaurants Inc. (“Morrison”) in 1982. During the following years, Morrison grew the concept to over 300 restaurants with concentrations in the Northeast, Southeast, Mid-Atlantic and Midwest regions of the United States. In a spin-off transaction that occurred on March 9, 1996, shareholders of Morrison approved the distribution of two separate businesses of Morrison to its shareholders, Morrison Fresh Cooking, Inc. (“MFC”) and Morrison Health Care, Inc. (“MHC”). In conjunction with the spin-off, Morrison was reincorporated in the State of Georgia and changed its name to Ruby Tuesday, Inc. Ruby Tuesday, Inc. and its wholly-owned subsidiaries are sometimes referred to herein as “RTI,” the “Company,” “we” and/or “our.”
We began our traditional franchise program in 1997 with the opening of one domestic and two international franchised Ruby Tuesday restaurants. We do not own any of the equity of entities that hold franchises under our franchise programs. As of June 3, 2014, we had 27 Ruby Tuesday concept franchisees, comprised of 10 domestic and 17 international franchisees. We have signed agreements for the development of new franchised Ruby Tuesday restaurants with five of these international franchisees. These five international franchisees hold rights as of June 3, 2014 to develop Ruby Tuesday restaurants in 19 countries.
During fiscal 2011, we entered into a licensing agreement which allowed us to operate multiple Lime Fresh Mexican Grill® (“Lime Fresh”) restaurants, a fast casual Mexican concept. We opened four Lime Fresh restaurants during fiscal 2012 under the terms of the licensing agreement. On April 11, 2012, we completed the acquisition of Lime Fresh, including the assets of seven additional Lime Fresh concept restaurants, the royalty stream from five Lime Fresh concept franchised restaurants, and the Lime Fresh brand’s intellectual property. As of June 3, 2014, we had five Lime Fresh concept franchisees, none of which had signed agreements for the development of new franchised Lime Fresh restaurants.
Also in fiscal 2011, we began converting certain underperforming Ruby Tuesday restaurants to other concepts. To that end, we entered into a licensing agreement which allowed us to operate multiple Truffles® restaurants, an upscale café concept offering a diverse menu. Other conversion concepts available to us were Marlin & Ray’s™, an internally-developed seafood concept, and Wok Hay®, our full service Asian concept. We converted certain underperforming Ruby Tuesday restaurants to these concepts during fiscal 2011, 2012, and 2013, with Marlin & Ray’s being our primary conversion concept. However, as discussed further in Note 3 to the Consolidated Financial Statements, in an effort to focus primarily on the successful sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our Lime Fresh concept, in fiscal 2013 we closed all 13 Marlin & Ray’s restaurants, the Company’s one Wok Hay restaurant, and our two Truffles restaurants.
Operations
We own, operate, and franchise the Ruby Tuesday casual dining restaurant chain and operate in the bar and grill segment of the casual dining industry. Ruby Tuesday has strong brand recognition as one of the original bar and grill operators given our 42 year history. As of June 3, 2014, we owned and operated 668, and franchised 79, Ruby Tuesday restaurants. Of the 79 franchised Ruby Tuesday restaurants, 31 were operated by our domestic franchisees and 48 were operated by our international franchisees. Ruby Tuesday restaurants can be found in 45 states, the District of Columbia, 12 foreign countries, and Guam. Our Company-owned and operated restaurants are concentrated primarily in the Southeast, Northeast, Mid-Atlantic and Midwest of the United States, which we consider to be our core markets. A listing of the states and countries in which our franchisees operate is set forth below in Item 2 entitled “Properties.”
We also own, operate, and franchise the Lime Fresh fast casual restaurant concept. As of June 3, 2014, there were 20 Company-owned and operated Lime Fresh restaurants and six Lime Fresh restaurants operated by domestic franchisees.
Our Core Ruby Tuesday Concept
Ruby Tuesday restaurants offer a wide variety of menu options, including handcrafted classic burgers made with fresh 100% USDA choice beef, fresh chicken options, our signature “fall-off-the-bone” baby-back ribs, as well as steaks, seafood, and appetizers. Our iconic Garden Bar has been a significant differentiation point for our brand and an enduring favorite of our customers. With up to 35 fresh, high quality salad ingredients, our Garden Bar exemplifies the key attributes of our brand of freshness and quality. Our Classic Burger choices include beef, turkey, and chicken offerings. Over the past year, we introduced new culinary platforms with the launch of our Pretzel Burgers and Crispy Flatbreads. Entree selections typically range in price from $8.79 to $19.99. Where appropriate, we also offer our RubyTueGo® curbside service and a delivered-meals catering program for businesses, organizations, and group events at both Company-owned and franchised restaurants.
In the mid-2000’s, under prior leadership, we began a shift in strategic direction to a more upscale, polished casual positioning, which resulted in what we believed to be fresher, higher quality food, remodeled restaurant interiors and exteriors, and better service teams. While we maintain that these elements have resulted in an elevated and differentiated Ruby Tuesday brand compared to our bar and grill competitors, we believe the execution of this strategy strayed too far from our brand heritage and core customer base, leading to traffic declines over the last several years. Over the last fiscal year we developed and have been implementing a brand transformation strategy which we believe will result in a more energetic, approachable, and casual brand position that we believe will appeal to a broader customer demographic and will be more appropriate for a wide variety of dining occasions. Our brand transformation strategy is designed to stabilize and grow our customer counts, same-restaurant sales, and profitability, and is focused on four key pillars of menu, service, atmosphere, and communication. While the brand transformation strategy is a multi-year process, we began to gain some traction on the following initiatives in fiscal 2014:
| · | Menu Enhancements. Our menu objective is to offer a broadly-appealing menu which includes new takes on traditional favorites as well as innovative new food platforms with bold flavor profiles. We made significant progress in fiscal 2014 in terms of menu enhancements. Since the first wave of menu introductions in August 2013, we have reengineered our menu through bold innovation and simplification, and introduced a wide range of price points and compelling value throughout the menu. These include our new culinary offerings of Pretzel Burgers and Crispy Flatbreads as well as improved items such as our Southern Style Chicken Tenders. We have also shifted the emphasis of our drink menu away from an extensive wine selection and towards our selection of beers and premium cocktails. We remain focused on reengineering our core menu through both innovation and simplification, and ensuring that we have a wide range of price points and compelling value throughout the menu. We believe these efforts have the potential to drive core customer traffic growth from our current and lapsed customer base, as well as non-users of the brand. |
| · | Service and Atmosphere Enhancements. Over the past year, we have made changes to our dining experience in certain areas including new music soundscapes and lighting improvements which are non-capital intensive in nature and should further enhance the customer dining experience. Additionally, we remain focused on having strong restaurant-level teams at our restaurants through the continued focus on high performance standards, advanced training, and a rigorous selection process in order to focus on high quality food and service. |
| · | Communication Program Enhancements. Our communication or marketing programs are a key component to our brand transformation strategy. Our most recent television commercials better reflect the variety on our menu and project a more casual, energetic, and approachable brand personality and dining experience. Additionally, as we look at opportunities to enhance our existing menu offerings, we will continue to focus on value which we believe our customers perceive as a combination of food quality, service, restaurant atmosphere, menu variety, and price. |
Lime Fresh is a fast casual fresh Mexican concept with restaurant operations in the Eastern United States, including a concentration in the vicinity of Miami, Florida. The Lime Fresh concept menu features diverse menu offerings such as homemade tortilla chips, customizable nachos, salads, soups, fajitas, quesadillas, tacos, burritos, and salsa and guacamole. This concept offers a unique experience by providing the speed of a fast casual restaurant, with the service and food quality of casual dining, in a fun and energetic atmosphere for customers.
On September 13, 2010, we entered into a licensing agreement with LFMG International, LLC, which allowed us to operate multiple restaurants under the Lime Fresh concept. As of April 10, 2012 we had opened four Lime Fresh restaurants under the terms of our licensing agreement. On April 11, 2012, we completed the acquisition of Lime Fresh for $24.1 million, which included the assets of seven additional Lime Fresh concept restaurants, the royalty stream from five Lime Fresh concept franchised restaurants (one of which opened in July 2012), and the Lime Fresh brand’s intellectual property. As of June 3, 2014, we owned and operated 20 Lime Fresh restaurants, and our franchisees operated six domestic Lime Fresh restaurants.
As discussed further in Note 13 to the Consolidated Financial Statements, we consider our Ruby Tuesday concept and Lime Fresh concept to be our reportable operating segments.
Franchising
As previously noted, as of June 3, 2014, we had franchise arrangements with 27 franchise groups which operate Ruby Tuesday restaurants in 14 states, Guam, and 12 foreign countries. We also had franchise arrangements as of June 3, 2014 with five domestic franchise groups which operate six Lime Fresh restaurants in Florida.
As of June 3, 2014, there were 79 Ruby Tuesday franchise restaurants operated by our domestic and international franchisees. Our franchisees opened seven Ruby Tuesday restaurants in fiscal 2014, two Ruby Tuesday restaurants in fiscal 2013, and six Ruby Tuesday restaurants in fiscal 2012.
Generally, Ruby Tuesday concept franchise arrangements consist of a development agreement and a separate franchise agreement for each restaurant. Under a development agreement, a franchisee is granted the exclusive right, and undertakes the obligation, to develop multiple restaurants within a specifically-described geographic territory. The term of a domestic franchise agreement is generally 15 years, with two five-year renewal options.
For each Ruby Tuesday concept restaurant developed under a domestic development agreement, a franchisee is currently obligated to pay a development fee of $10,000 per restaurant (at the time of signing a development agreement), an initial license fee (which typically is $35,000 per restaurant to be developed for domestic franchisees), and a royalty fee equal to 4.0% of the restaurant’s monthly gross sales, as defined in the franchise agreement. Development and operating fees for international franchise restaurants vary.
Additionally, we offer support service agreements for domestic Ruby Tuesday concept franchisees. Under the support services agreements, we have one level of support in which we provide specified services to assist the franchisees with various aspects of the business including, but not limited to, processing of payroll, basic bookkeeping and cash management. Fees for these services are typically contracted to be about 1.5% of revenues, as defined in the franchise agreement. There is also a required level of support services in which we charge a fee to cover certain information technology related support that we provide. All domestic Ruby Tuesday concept franchisees also are required to pay a marketing and purchasing fee of 1.5% of monthly gross sales. At times of economic downturn, we have occasionally chosen to temporarily lower these fees. Under the terms of the franchise agreements, we also require all domestic Ruby Tuesday concept franchisees to contribute a percentage of monthly gross sales, 1.5% as of June 3, 2014, to a national advertising fund formed to cover their pro rata portion of the costs associated with our national advertising campaign. Under these terms, we can charge up to 3.0% of monthly gross sales for this national advertising fund.
As of June 3, 2014, we also had six domestic Lime Fresh franchised restaurants in Florida. The term of a Lime Fresh domestic franchise agreement is generally 10 years, with one 10-year renewal option. For each Lime Fresh concept restaurant developed under a domestic development agreement, a franchisee is currently obligated to pay a development fee of $30,000 per restaurant (at the time of signing a development agreement), an initial license fee (which typically is $15,000 per restaurant to be developed for domestic franchisees), an initial marketing fee of at least $10,000, and a royalty fee equal to 5.25% of the restaurant’s monthly gross sales, as defined in the franchise agreement. Under the terms of the franchise agreements, we also require domestic franchisees to contribute a percentage of monthly gross sales, 1.5% as of June 3, 2014, to a national advertising fund formed to cover their pro rata portion of the costs associated with our national advertising campaign. Under these terms, we can charge up to 3.0% of monthly gross sales for this national advertising fund.
We provide ongoing training and assistance to our franchisees in connection with the operation and management of each restaurant through our training facility, meetings, on-premises visits, computer-based training (“CBT”), and by written or other material.
Training
The Ruby Tuesday Center for Leadership Excellence, located in our Maryville, Tennessee Restaurant Support Services Center, serves as the centralized training center for all of our managers, multi-restaurant operators and other team members. Facilities include classrooms, a test kitchen, and the Ruby Tuesday Culinary Arts Center. The Ruby Tuesday Center for Leadership Excellence provides managers with the opportunity to assemble for intensive, ongoing instruction and hands-on interaction through our training sessions. Programs include classroom instruction and various team building activities and competitions, which are designed to contribute to the skill and enhance the dedication of the Company and franchise teams in addition to strengthening our corporate culture. In addition to the centralized training at the Ruby Tuesday Center for Leadership Excellence, we periodically conduct field training classes. These field training classes have been held for team members, managers, general managers, and operations leadership. The field classes partner the training team along with operational leadership to provide direct training and development in order to reach a large audience faster, and make an immediate impact on our team.
We offer team member training materials for our concepts in several formats to promote better learning. Our materials are produced in a CBT format as well as in written, video and verbal formats. CBT enables us to leverage technology to provide an even higher quality interactive training experience and allows for testing at every level to calibrate our team members’ skill levels and promotes self-paced, ongoing development. All results are captured in a personal transcript for all team members so that we can accurately track their training and development throughout their careers.
Further contributing to the training experience is the Ruby Tuesday LodgeSM, which is located on a wooded campus just minutes from the Restaurant Support Services Center. The Ruby Tuesday Lodge serves as the lodging quarters and dining facility for those attending the Ruby Tuesday Center for Leadership Excellence. After a day of instruction, trainees have the opportunity to dine and socialize with fellow team members in a relaxed and tranquil atmosphere where they are fully immersed in our culture. We believe our emphasis on training and retaining high quality restaurant managers is critical to our long-term success and we are committed to the ongoing development of our team members.
Research and Development
We do not engage in any material research and development activities. However, we do engage in ongoing studies to assist with food and menu development. Additionally, we conduct extensive consumer research to determine our customers’ preferences, trends, and opinions, as well as to better understand other competitive brands.
Raw Materials
We negotiate directly with our suppliers for the purchase of raw and processed materials and maintain contracts with select suppliers for both our Company-owned and franchised restaurants. These contracts may include negotiations for distribution of raw materials under a cost plus delivery fee basis and/or specifications that maintain a term-based contract with a renewal option. If any major supplier or distributor is unable to meet our supply needs, we would negotiate and enter into agreements with alternative providers to supply or distribute products to our restaurants.
We use purchase commitment contracts to stabilize the potentially volatile prices of certain food commodities. Because of the relatively short storage life of inventories, limited storage facilities at the restaurants, our requirement for fresh products and the numerous sources of goods, a minimum amount of inventory is maintained at our restaurants. In the event of a disruption of supply, all essential food, beverage and operational products can be obtained from secondary vendors and alternative suppliers. We believe these alternative suppliers can provide, upon short notice, items of comparable quality.
From time to time, we purchase lobster inventory in advance of our needs and store it in third-party facilities prior to our distributor taking possession of the inventory. Once the lobster is moved to our distributor’s facilities, we transfer ownership to the distributor. We later reacquire the inventory from our distributor upon its subsequent delivery to our restaurants.
Trade and Service Marks of the Company
We and our affiliates have registered certain trade and service marks with the United States Patent and Trademark Office, including the name “Ruby Tuesday.” RTI holds a license to use all such trade and service marks from our affiliates, including the right to sub-license the related trade and service marks. We believe that these and other related marks are of material importance to our business. Registration of the Ruby Tuesday trademark expires in our 2025 fiscal year, unless renewed. We expect to renew this registration at the appropriate time.
Seasonality
Our business is moderately seasonal. Average restaurant sales of our mall-based restaurants, which represent approximately 18% of our total restaurants as of June 3, 2014, are slightly higher during the winter holiday season. Freestanding restaurant sales are generally higher in the spring and summer months.
Competition
Our business is subject to intense competition with respect to prices, services, locations, employees, and the types and quality of food. We are in competition with other food service operations, with locally-owned restaurants, and other national and regional restaurant chains that offer the same or similar types of services and products as we do. In times of economic uncertainty, restaurants also compete with grocery retailers as customers may choose to limit spending and eat at home. Some of our competitors may be more established in the markets where our restaurants are or may be located. Changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the types, numbers and locations of competing restaurants often affect the restaurant business. There is active competition for personnel and for attractive commercial real estate sites suitable for restaurants.
Government Regulation
We and our franchisees are subject to various licensing requirements and regulations at both the state and local levels, related to zoning, land use, sanitation, alcoholic beverage control, and health and fire safety. We have not encountered significant difficulties or failures in obtaining the required licenses or approvals that could delay the opening of a new restaurant or the operation of an existing restaurant nor do we presently anticipate the occurrence of any such difficulties in the future. Our business is subject to various other regulations by federal, state and local governments, such as compliance with various health care, minimum wage, citizenship, and fair labor standards. Compliance with these regulations has not had, and is not expected to immediately have, a material adverse effect on our operations.
We are subject to a variety of federal, state, and international laws governing franchise sales and the franchise relationship. In general, these laws and regulations impose certain disclosure and registration requirements prior to the offer and sale of franchises. Rulings of several state and federal courts and existing or proposed federal and state laws demonstrate a trend toward increased protection of the rights and interests of franchisees against franchisors. Such decisions and laws may limit the ability of franchisors to enforce certain provisions of franchise agreements or to alter or terminate franchise agreements. Due to the scope of our business and the complexity of franchise regulations, we may encounter minor compliance issues from time to time. We do not believe, however, that any of these issues will have a material adverse effect on our business.
Environmental Compliance
Compliance with federal, state and local laws and regulations that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not expected to have a material effect on our capital expenditures, earnings or competitive position.
Personnel
As of June 3, 2014, we employed approximately 7,300 full-time and 25,700 part-time employees, including approximately 270 support center management and staff personnel. We believe that our employee relations are good and that working conditions and employee compensation are comparable with our major competitors. Our employees are not covered by a collective bargaining agreement.
Available Information
We maintain a web site at www.rubytuesday.com. Through the “Investors” section of our web site, we make available free of charge, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, as soon as it is reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We are not including the information contained on or available
through our web site as a part of, or incorporating such information into, this Annual Report on Form 10-K. In addition, copies of our corporate governance materials, including Audit Committee Charter, Executive Compensation Committee Charter, Governance Committee Charter, Code of Business Conduct and Ethics, Code of Ethical Conduct for Financial Professionals, Corporate Governance Guidelines, Whistleblower Policy, and Categorical Standards for Director Independence, are available on the web site, free of charge. We will make available on our web site any waiver of or substantive amendment to our Code of Business Conduct and Ethics or our Code of Ethical Conduct for Financial Professionals within four business days following the date of such waiver or amendment.
A copy of the aforementioned documents will be made available without charge to all shareholders upon written request to the Company. Shareholders are encouraged to direct such requests to our Investor Relations department at the Restaurant Support Services Center, 150 West Church Avenue, Maryville, Tennessee 37801. As an alternative, our Form 10-K can also be printed from the “Investors” section of our web site at www.rubytuesday.com.
Executive Officers
Our executive officers are appointed by and serve at the discretion of our Board of Directors. Information regarding our executive officers as of August 1, 2014*, is provided below.
| Name | Age | Position |
| | | |
| James J. Buettgen | 54 | Chairman of the Board, President, and Chief Executive Officer |
| Todd A. Burrowes | 51 | President Ruby Tuesday Concept and Chief Operations Officer |
| Jill M. Golder | 52 | Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary |
| Michael O. Moore | 64 | Executive Vice President |
| Scarlett A. May | 48 | Senior Vice President, Chief Legal Officer and Secretary |
Mr. Buettgen joined the Company in December 2012 as President and Chief Executive Officer. On October 27, 2013, Mr. Buettgen was appointed by our Board of Directors to serve as Chairman of the Board. Prior to joining the Company, Mr. Buettgen served as Senior Vice President, Chief Marketing Officer of Darden Restaurants, Inc. (“Darden”) from June 2011 to November 2012 and as Senior Vice President, New Business Development of Darden from May 2007 to June 2011. Additionally, Mr. Buettgen served as President of Darden’s former Smokey Bones Barbeque & Grill concept from November 2004 to May 2007. Prior to his tenure at Darden, among other positions, Mr. Buettgen served as Senior Vice President of Marketing and Brand Development for Brinker International, Inc., Senior Vice President of Marketing and Sales for Disneyland Resorts, a division of the Walt Disney Company, Senior Vice President of Marketing for Hollywood Entertainment Group, and held various marketing positions with General Mills, Inc.
Mr. Burrowes joined the Company in June 2013 as President – Ruby Tuesday Concept and Chief Operations Officer. Prior to joining the Company, Mr. Burrowes served the last five years as Executive Vice President of Operations for Darden’s LongHorn Steakhouse concept. Prior to his most recent position at LongHorn Steakhouse, Mr. Burrowes served in the roles of Regional Vice President of Operations, Director of Management Training and Development, and Director of Operations for LongHorn Steakhouse. Prior to his tenure with LongHorn Steakhouse, Mr. Burrowes served as the Regional Director of Operations for Corner Bakery Café and Vice President of Operations for Saltgrass Steak House.
Ms. Golder joined the Company in April 2013 and was named Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary in June 2014. Ms. Golder served as Senior Vice President, Finance, from April 2013 to June 2014. Prior to joining the Company, Ms. Golder served as Chief Financial Officer for Cooper’s Hawk Winery & Restaurants from December 2012 to April 2013. Prior to her tenure at Cooper’s Hawk Winery & Restaurants, Ms. Golder spent 23 years at Darden Restaurants, holding progressively responsible positions in finance. During her last 10 years with Darden, Ms. Golder held the position of Senior Vice President, Finance.
Mr. Moore joined the Company in April 2012 as Executive Vice President and Chief Financial Officer. Mr. Moore stepped down as Chief Financial Officer and will retire from the Company on August 4, 2014. Prior to joining the Company, Mr. Moore was employed with Sun Capital Partners as Executive Vice President and Chief Financial Officer of Pamida Stores from February 2009 to March 2012 and as Interim Chief Financial Officer of Kellwood, Inc. from November 2008 to February 2009. Prior to his tenure with Sun Capital Partners, Mr. Moore served as Executive
Vice President and Chief Financial Officer of Advanced Auto Parts from December 2005 to February 2008. Additionally, prior to December 2005, among other positions, Mr. Moore served as Executive Vice President and Chief Financial Officer of The Cato Corporation and as Senior Vice President and Chief Financial Officer of Bloomingdales.
Ms. May joined the Company in July 2000 and was named Senior Vice President, Chief Legal Officer in June 2012. From August 2004 to June 2012, Ms. May served as Vice President, General Counsel and Secretary and from February 2004 to August 2004 as Vice President and Assistant General Counsel – Relations and Response.
* Jeffrey C. Wood was an executive officer of the Company as of the end of fiscal 2014, but subsequently left the Company on July 24, 2014. Mr. Wood joined the Company in May 2013 as Senior Vice President and Chief Development Officer. Prior to joining the Company, Mr. Wood was Vice President and Chief Development Officer for the Qdoba Restaurant Corp. (“Qdoba”), a wholly-owned subsidiary of Jack in the Box Inc., from January 2013 to May 2013. Before joining Qdoba, Mr. Wood was Senior Vice President and Chief Development Officer of Dave & Buster’s Holdings, Inc. from June 2006 to December 2012. Additionally, prior to June 2006, among other positions, Mr. Wood was Vice President of Restaurant Leasing for Simon Property Group and held various positions at Brinker International, Inc., including Vice President of Development – Emerging Concepts and Vice President of Real Estate & Property Development.
Our business and operations are subject to a number of risks and uncertainties. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of those risks actually occurs, our business, financial condition and results of operations would suffer. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K.
We may be unsuccessful in our brand transformation efforts, which may negatively impact our financial results
Based on our research in addition to feedback from our customers, we have implemented a brand transformation strategy which we believe will position the Ruby Tuesday brand as more casual, lively, and affordable, as well as more appealing to a broader customer demographic and more suitable for a wider range of dining occasions. Our brand transformation strategy is centered around enhancements in the four key areas of menu, service, atmosphere, and communication, and is designed to stabilize and grow our customer counts, same-restaurant sales, and profitability. On the menu front, we remain focused on reengineering our core menu through both innovation and simplification, while also ensuring that we have a wide range of price points and a more compelling value throughout the menu. Over the course of the past fiscal year, we launched our first major menu revision in support of our core menu transformation. Over the next fiscal year, we will continue to introduce new and improved menu platforms which we believe fit within our approachable brand position. We have also shifted the emphasis of our drink menu away from an extensive wine selection and more towards our selection of beers and premium cocktails. Additionally, we remain focused on having strong restaurant-level teams with a disciplined approach to delivering consistently great food. We have made changes and continue to introduce changes to our dining experience in certain areas including a new music soundscape and lighting improvements which are non-capital intensive in nature and should further enhance the customer dining experience. Our marketing communication programs which support our new brand positioning, are a key component to our brand transformation strategy and we believe our most recent television commercials better reflect the variety on our menu and project a more casual, energetic, and approachable brand personality and dining experience.
While we believe that the execution of our brand transformation strategy from a menu, service, atmosphere, and marketing communications perspective will enable us to improve our customer counts, same-restaurant sales, and profits over time, we can make no assurances regarding whether or not we will be successful in these efforts. To the extent that new menu items combined with our marketing initiatives do not drive acceptable increases in customer traffic and same-restaurant sales, this could require us to make additional investments into new product development and promotions which could potentially negatively affect our financial results.
Index
We may be unsuccessful in our marketing efforts, which may negatively impact our continued financial and operational success.
Our marketing strategy historically has primarily focused on print promotions, digital media, and local marketing programs, with a minimal amount spent on television. We have, however, in recent quarters deployed a more balanced marketing program comprised of a mixture of network and national cable television advertising supported with direct mail and other print and electronic promotions. We believe that having a more lively and approachable perception of our restaurants, communicated through television advertising in tandem with a more balanced approach on our promotional strategies will position us for improvements in same-restaurant sales in the future from repeat and new customers.
While we believe that we have a comprehensive marketing program in place to grow our same-restaurant sales, we can make no assurances regarding whether or not we will be successful in these efforts. We are competing against industry peers who have a longer and more established track record of promoting their brands on television, in addition to larger overall marketing budgets, thus potentially putting us at a competitive disadvantage. Additionally, given the current difficult economic environment we are operating in, if our industry peers with much larger overall marketing budgets should increase their spending levels of advertising or promotions in an attempt to drive incremental customer traffic, we could potentially be at a competitive disadvantage given the size and scale of our overall marketing budget.
We may not be successful at operating profitable restaurants.
The success of our core Ruby Tuesday concept and, to a lesser extent, the success of our Lime Fresh concept, is dependent upon operating profitable restaurants. The profitability of our restaurants is dependent on several factors, including the following:
| • | the ability to provide menu items with strong customer preference at attractive prices; |
| • | the ability to create and implement an effective marketing/advertising strategy; |
| • | the ability to adapt our brands in such a way that consumers see us as fresh and relevant; |
| • | the ability to timely and effectively meet customer demands and maintain our customer base; |
| • | the hiring, training, and retention of excellent restaurant managers and staff; |
| • | the ability to manage costs and prudently allocate capital resources; |
| • | the ability to achieve and/or maintain projected cost savings in a number of key areas, including procurement, occupancy, and maintenance costs; and |
| • | the ability to leverage sales following the opening of new restaurants. |
We can provide no assurances that any restaurant we open will be profitable or obtain operating results similar to those of our existing restaurants. In addition, the current performance of our restaurants may not be indicative of their long-term performance, as factors affecting their success may change.
We may be required to recognize additional impairment charges.
We assess our trademarks, other long-lived assets, and, prior to fiscal 2014, our goodwill, as and when required by generally accepted accounting principles in the United States to determine whether they are impaired. Certain of our long-lived assets, including amounts included within the Property and equipment, net, and Other assets, net captions of our Consolidated Balance Sheets, were recorded at estimated fair value on the dates of acquisition. Should future cash flows not support those estimated values, impairment charges will occur.
As discussed further in Note 9 to the Consolidated Financial Statements, we closed 33 Ruby Tuesday concept restaurants during the third and fourth quarters of fiscal 2014 in connection with a plan approved by our Board of Directors. Of these closures, 11 of these restaurants closed upon expiration of their lease. Accordingly, we recorded property impairment charges of $4.8 million in connection with the early restaurant closures. In addition to the impairment charges in connection with the restaurant closures, during fiscal 2014 we recorded $13.5 million of impairments relating to 32 open restaurants with deteriorating operational performance.
Index
In addition to the restaurant impairments and, as also discussed in Note 9 to our Consolidated Financial Statements, following the underperformance of several of our Lime Fresh concept restaurants, two of which we closed during fiscal 2014 and another three of which we impaired, and upon consideration of our planned revised growth models for Lime Fresh, we performed impairment testing of the Lime Fresh trademark and determined that it was partially impaired. We thus recorded a $0.9 million impairment charge during the third quarter of fiscal 2014 for the Lime Fresh trademark, which had previously been impaired by $5.0 million during the fourth quarter of fiscal 2013. Additionally, during fiscal 2013 we tested the Lime Fresh concept goodwill for impairment and concluded that a non-cash charge of $9.0 million ($5.4 million, net of tax) should be taken to write-off the entire balance of goodwill recorded in conjunction with the concept’s April 2012 acquisition.
See Notes 3 and 9 to our Consolidated Financial Statements for further discussion of asset impairments, lease reserves, and other closing costs during fiscal 2014, 2013, and 2012, including costs associated with our discontinued Marlin & Ray’s, Wok Hay, and Truffles concepts.
At June 3, 2014, we had 64 restaurants that had been open more than one year with rolling 12-month negative cash flows of which 41 have been impaired to salvage value. Of the 23 which remained, we reviewed the plans to improve cash flows at each of the restaurants and determined that no impairment was currently necessary. The remaining net book value of these 23 restaurants, seven of which are located on owned properties, was $23.9 million at June 3, 2014.
If market conditions deteriorate at either the restaurant store level or system-wide, or if our operating results decline further, we may be required to record additional impairment charges, including further impairment charges for the remaining Lime Fresh intangible assets, which had a $4.9 million net book value as of June 3, 2014.
Litigation and unfavorable publicity could negatively affect our results of operations as well as our future business.
We are subject to litigation and other customer complaints concerning our food safety, service, and/or other operational factors. Customers may file formal litigation complaints that we are required to defend, whether or not we believe them to be true. Substantial, complex or extended litigation could have an adverse effect on our results of operations if we incur substantial defense costs and our management is distracted. Employees may also, from time to time, bring lawsuits against us regarding injury, discrimination, wage and hour, and other employment issues. Additionally, potential disputes with our franchisees could subject us to litigation alleging non-compliance with franchise, development, support service, or other agreements we have with our domestic and international franchisees. Suppliers, landlords and distributors, particularly those with which we currently maintain purchase commitments/contracts, could also potentially allege non-compliance with their contracts should they consider our actions to be contrary to our commitments. Additionally, we are subject to the risk of litigation by our shareholders as a result of factors including, but not limited to, matters of executive compensation or performance of our stock price.
In certain states we are subject to “dram shop” statutes, which generally allow a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Some dram shop litigation against restaurant companies has resulted in significant judgments, including punitive damages. We carry liquor liability coverage as part of our existing comprehensive general liability insurance, but we cannot provide assurance that this insurance will be adequate in the event we are found liable in a dram shop case.
In recent years there has been an increase in the use of social media platforms and similar devices which allow individuals access to a broad audience of consumers and other interested persons. The availability of information on social media platforms is virtually immediate in its impact. A variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about our Company, exposure of personally identifiable information, fraud, or outdated information. The inappropriate use of social media platforms by our customers, employees, or other individuals could increase our costs, lead to litigation, or result in negative publicity that could damage our reputation. If we are unable to quickly and effectively respond, we may suffer declines in customer traffic which could materially affect our financial condition and results of operations.
Our debt agreements contain restrictions that limit our flexibility in operating our business.
The indenture governing our senior unsecured notes and the agreement governing our December 2013 four-year revolving credit agreement (the “Senior Credit Facility”) contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:
| • | incur or guarantee additional indebtedness; |
| • | declare or pay dividends, redeem stock or make other distributions to stockholders; |
| • | make certain investments; |
| • | create liens or use assets as security in other transactions; |
| • | merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; |
| • | enter into transactions with affiliates; and |
| • | sell or transfer certain assets. |
Additionally, the agreement governing the Senior Credit Facility requires us to maintain certain financial ratios. A breach of any of these covenants could result in a default under the indenture and the Senior Credit Facility. We may also be unable to take advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under our indebtedness.
Our level of indebtedness could adversely affect our financial condition.
As of June 3, 2014, we had $258.7 million of outstanding indebtedness, including $215.0 million of senior unsecured notes. Our substantial indebtedness could have any or all of the following consequences:
| • | there would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed; |
| • | it may limit our ability to borrow money or sell stock to fund our working capital, capital expenditures and debt service requirements; |
| • | a substantial portion of our cash flow from operations could be dedicated to the repayment of our indebtedness and would not be available for other purposes; |
| • | it may limit our flexibility in planning for, or reacting to, changes in our business; |
| • | we may be more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; and |
| • | it may make us more vulnerable to a downturn in our business or the economy. |
In addition, the indenture governing our senior unsecured notes and the Senior Credit Facility contain financial and restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. If we were to violate any of our financial or other covenants in the future and we are not able to reach agreements with our creditors or, if agreements are reached but we do not comply with the revised covenants, our creditors could exercise their rights under the applicable debt instruments, including requiring immediate repayment of all borrowings, which could have a material adverse effect on us. Moreover, if any agreements were reached with our creditors, they might require us to pay incremental fees and/or higher interest rates.
The cost of compliance with various government regulations may negatively affect our business.
We are subject to various forms of governmental regulations. We are required to follow various international, federal, state, and local laws common to the food industry, including regulations relating to food and workplace safety, sanitation, the sale of alcoholic beverages, environmental issues, minimum wage, overtime, health care, increasing complexity in immigration laws and regulations, and other labor issues. Further changes in these types of laws, including additional state or federal government-imposed increases in minimum wages and increases to tipped-minimum wage, overtime pay, paid leaves of absence and mandated health benefits, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements, could harm our operating results. Also,
failure to obtain or maintain the necessary licenses and permits needed to operate our restaurants could result in an inability to open new restaurants or force us to close existing restaurants.
The federal healthcare reform legislation that became law in March 2010 (known as the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (“PPACA”)) mandates menu labeling of certain nutritional aspects of restaurant menu items such as caloric, sugar, sodium, and fat content. Altering our recipes in response to such legislation could increase our costs and/or change the flavor profile of our menu offerings which could have an adverse impact on our results of operations. Additionally, if our customers perceive our menu items to contain unhealthy caloric, sugar, sodium, or fat content, our results of operations could be further adversely affected.
Additionally, minimum employee health care coverage mandated by state or federal legislation, such as the PPACA, could significantly increase our employee health benefit costs or require us to alter the benefits we provide to our employees. While we are assessing the potential impact the PPACA will have on our business, certain of the mandates in the legislation are not yet effective. If our employee health benefit costs increase, we cannot provide assurance that we will be able to offset these costs through increased revenue or reductions in other costs, which could have an adverse effect on our results of operations and financial condition.
We are also subject to regulation by the Federal Trade Commission and to state and foreign laws that govern the offer, sale and termination of franchises and the refusal to renew franchises. The failure to comply with these regulations in any jurisdiction or to obtain required approvals could result in a ban or temporary suspension on future franchise sales or fines or require us to rescind offers to franchisees, any of which could adversely affect our business and operating costs. Further, any future legislation regulating franchise laws and relationships may negatively affect our operations.
Approximately 11% of our revenue for fiscal 2014 is attributable to the sale of alcoholic beverages. We are required to comply with the alcohol-licensing requirements of the federal government, states and municipalities where our restaurants are located. Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, the licenses are renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of customers and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. If we fail to comply with federal, state or local regulations, our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants.
As a publicly traded corporation, we are subject to various rules and regulations as mandated by the Securities and Exchange Commission and the New York Stock Exchange. Failure to timely comply with these guidelines could result in penalties and/or adverse reactions by our shareholders.
We face continually increasing competition in the restaurant industry for customers, staff, locations, supplies, and new products.
Our business is subject to intense competition with respect to prices, services, locations, qualified management personnel and quality of food. We compete with other food service operations, with locally-owned restaurants, and with other national and regional restaurant chains that offer the same or similar types of services and products. Some of our competitors may be better established in the markets where our restaurants are or may be located. Changes in consumer tastes; national, regional, or local economic conditions; demographic trends; traffic patterns and the types, numbers and locations of competing restaurants often affect the restaurant business. There is active competition for management personnel and for attractive commercial real estate sites suitable for restaurants. In addition, factors such as inflation, increased food, labor, equipment, fixture and benefit costs, and difficulty in attracting qualified management and hourly employees may adversely affect the restaurant industry in general and our restaurants in particular.
We may be unsuccessful in our strategies to grow revenue through new unit openings of our Lime Fresh fast casual brand since the concept has not proven its long-term viability or growth potential.
Given our focus on growing the Company in a low-capital intensive manner in the fast casual sector, in fiscal 2012 we acquired Lime Fresh which represented seven company-owned and four franchised restaurants. During fiscal 2014 and 2013, we opened four and nine, respectively, and our franchisees opened two Lime Fresh restaurants in each fiscal year.
While we believe the Lime Fresh fast casual brand has significant potential given its low capital requirements and high potential cash-on-cash returns, there can be no assurance that we will be able to successfully and profitably grow this concept. To date, the concept has lagged behind our internal targets as we have been unable to attain targeted pro forma sales or, in certain instances, gain economies on the cost side as a result of unsuccessful real estate site selection on several of our initial locations and other operational issues. As discussed further within this Risk Factors section and in Note 9 to the Consolidated Financial Statements, we incurred impairment and lease charges in fiscal 2014 and 2013 relating to restaurant closures, as well as impairment charges for open restaurants, goodwill, and the Lime Fresh trademark, and there remains an enhanced level of risk and uncertainty related to the operation and expansion of this brand as it is less established than our anchor Ruby Tuesday brand.
In addition, there are risks associated with restaurant openings, including but not limited to the following: the identification and availability of suitable and economically-viable locations, the negotiation of acceptable lease or purchase terms for new locations, the selection of sites that will support a profitable level of sales and generate returns on investment that exceed our cost of capital, the acceptance of our concepts in new markets, the ability to obtain all required governmental permits in a timely manner, and our ability to recruit, train, and retain qualified management and operating personnel. If we are unable to successfully manage these risks, we could face increased costs and lower-than-anticipated sales, earnings, and returns on investment in future periods.
We made substantial investments in the Lime Fresh brand during the past three fiscal years, and additional investments may be required in order for us to refine and expand the concept in fiscal 2015 and beyond. We can provide no assurance that these investments will be successful or that additional new restaurant growth will be accepted in the targeted markets. Once opened, we anticipate new restaurants will take four to six months, or longer, to reach planned operational profitability due to the associated start-up costs. This concept is in the early stages of lifecycle development and will continue to be subject to the risks and uncertainties that accompany any emerging restaurant brand or format, in particular one being developed and deployed in the current economic environment.
We could be adversely impacted if our information technology and computer systems do not perform properly or if we fail to protect our customers’ credit card information or our employees’ personal data.
We rely heavily on information technology to conduct our business, and any material failure, interruption of service, or compromised data security could adversely affect our operations. While we expend significant resources to ensure that our information technology operates securely and effectively, any security breaches could result in disruptions to operations or unauthorized disclosure of confidential information. Additionally, if our customers’ credit card or other personal information or our employees’ personal data are compromised our operations could be adversely affected, our reputation could be harmed, and we could be subjected to litigation or the imposition of penalties.
The potential for increases in key food products, labor, energy, and other costs may adversely affect our results of operations.
We continually purchase food products such as beef, chicken, seafood, cheese and other items for use in many of the products we sell. Although we attempt to maintain control of food costs by engaging in volume commitments with third parties for many of our food-related supplies, we cannot assure that the costs of these products will not fluctuate, as we often have no control over such items. In addition, we rely on third-party distribution companies to frequently deliver perishable food and supplies to our restaurants. We cannot make assurances regarding the continued supply of our inventory since we do not have control over the businesses of our suppliers. Should our inventories lack in supply, our business could suffer, as we may be unable to meet customer demands. These disruptions may also force us to purchase food supplies from suppliers at higher costs. The result of this is that our operating costs may increase without our desire and/or ability to pass the price increases on to our customers.
Labor is a primary component in the cost of operating our business. Higher labor costs due to increased minimum wages and tipped-minimum wages, competition, unionization, state unemployment rates, employee benefits, elimination of federal tax credits, or other labor related costs could adversely impact our results of operations. See the risk factor, “The cost of compliance with various governmental regulations may negatively affect our business,” for further discussion on the potential impact of labor-related costs.
We must purchase energy-related products such as electricity, oil and natural gas for use in each of our restaurants. Our suppliers must purchase gasoline in order to transport food and supplies to us. Our customers purchase energy to heat and cool their homes and fuel their automobiles. When energy prices, such as those for gasoline, heating and cooling increase, we incur greater costs to operate our restaurants. Likewise our customers have lower disposable income and thus may reduce the frequency in which they dine out and/or feel compelled to choose more inexpensive restaurants when eating outside the home.
The costs of these energy-related items will fluctuate due to factors that may not be predictable, such as the economy, current political/international relations and weather conditions. Because we cannot control these types of factors, there is a risk that prices of energy items will increase beyond our current projections and adversely affect our operations.
General economic conditions could adversely affect our business, results of operations, liquidity and capital resources.
Our business is dependent to a significant extent on national, regional and local economic conditions, particularly those that affect our customers that frequently patronize our restaurants. In particular, where our customers’ disposable income available for discretionary spending is reduced (such as by job losses, credit constraints and higher housing, taxes, energy, interest or other costs) or where the perceived wealth of customers has decreased (because of circumstances such as lower residential real estate values, increased foreclosure rates, increased tax rates or other economic disruptions), our business could experience lower sales and customer traffic as potential customers choose lower-cost alternatives or other alternatives to dining out. Any resulting decreases in customer traffic or average value per transaction could negatively impact our financial performance, as reduced revenues may result in downward pressure on margins. These factors could reduce our Company-owned restaurants’ gross sales and profitability. These factors could also reduce gross sales of franchised restaurants, resulting in lower royalty payments from franchisees, and reduce profitability of franchise restaurants, potentially impacting the ability of franchisees to make royalty payments as they become due. Reduction in cash flows from either Company-owned or franchised restaurants could have a material adverse effect on our liquidity and capital resources.
Food safety and food-borne and pandemic illness concerns could adversely affect consumer confidence in our restaurants.
We face food safety issues that are common to the food industry. We work to provide a clean, safe environment for both our customers and employees. Otherwise, we risk endangering the health and safety of our customers and employees or losing customers and/or employees due to unfavorable publicity and/or a lack of confidence in our ability to provide a safe dining and/or work experience.
Food-borne illnesses, such as E. coli, hepatitis A, trichinosis, or salmonella, are also a concern for our industry. We attempt to purchase food from reputable suppliers/distributors and have certain procedures in place to ensure safety and quality standards, but we can make no assurances regarding whether these supplies may contain contaminated goods.
In addition, we cannot ensure the continued health of each of our employees. We provide health-related training for each of our staff and strive to keep ill employees away from other employees, customers, and food items. However, we may not be able to detect when our employees are sick until the time that their symptoms occur, which may be too late if they have prepared/served food for our customers. The occurrence of an outbreak of a food-borne illness, whether at one of our restaurants or one of our competitors, could result in temporary store closings or other negative publicity that could adversely affect our sales and profitability.
Economic, demographic and other changes, seasonal fluctuations, natural disasters, and terrorism could adversely impact customer traffic and profitability in our restaurants.
Our business can be negatively impacted by many factors, including those which affect the restaurant only at the local level as well as others which attract national or international attention. Risks that could cause us to suffer losses include, but are not necessarily limited to, the following:
| • | economic factors (including economic slowdowns or other inflation-related issues); |
| • | demographic changes, particularly with regard to dining and discretionary spending habits, in the areas in which our restaurants are located; |
| • | changes in consumer preferences; |
| • | changes in federal or state income tax laws; |
| • | seasonal fluctuations due to the days of the week on which holidays occur, which may impact spending patterns; |
| • | natural disasters such as hurricanes, tornados, blizzards, floods, or other severe weather; |
| • | effects of war or terrorist activities and any governmental responses thereto; and |
| • | increased insurance and/or self-insurance costs. |
Each of the above items could potentially negatively impact our customer traffic and/or our profitability.
Our inability or failure to execute on a comprehensive business continuity plan following a major natural or manmade disaster, including terrorism, at our corporate facility could materially adversely impact our business and our financial performance.
Our corporate systems and processes and corporate support for our restaurant operations are centralized at our data center located at our Restaurant Support Services Center and two other buildings in Maryville, Tennessee. In addition, our data center’s systems are replicated daily at a disaster recovery site located in another state. We have procedures in place for business continuity to address most critical events, including back up and off-site locations for storage and recovery of electronic and other forms of data and information. However, if we are unable to fully execute our disaster recovery procedures, we may experience delays in recovery and losses of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal operating procedures that could have a material adverse effect on our financial performance and exposure to administrative and other legal claims.
Our current insurance may not provide adequate levels of coverage against claims.
We currently maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such damages could have a material adverse effect on our business and results of operations. In addition, we self-insure a significant portion of expected losses under our health, workers compensation, general liability, employment practices liability and property insurance programs. Unanticipated changes in the actuarial assumptions and management estimates underlying our reserves for these losses could result in materially different amounts of expense under these programs, which could have a material adverse effect on our financial condition, results of operations and liquidity.
We are dependent on key personnel.
Our future success is highly dependent upon our ability to attract and retain certain key executive and other employees. These personnel serve to maintain a corporate vision for our Company, execute our business strategy, and maintain consistency in the operating standards of our restaurants. The loss of our key personnel or a significant shortage of high quality restaurant team members could potentially impact our future growth decisions and our future profitability.
Changes in financial accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.
Changes in financial accounting standards can have a significant effect on our reported results and may affect our reporting of transactions completed before the new rules are required to be implemented. Many existing accounting standards require management to make subjective assumptions, such as those required for stock compensation, tax matters, franchise acquisitions, litigation, and asset impairment calculations. Changes in accounting standards or changes in underlying assumptions, estimates and judgments by our management could significantly change our reported or expected financial performance.
Identification of a material weakness in our internal controls over financial reporting could significantly affect our financial results.
We are subject to the internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. These provisions provide for the identification of material weaknesses in internal control over financial reporting. While we routinely assess and test our internal controls over financial reporting, we cannot provide assurance that our internal controls will prevent or detect instances of financial misstatement or fraud, or that we will be able to timely remediate any material weaknesses that may be identified in future periods. Any failure to maintain an effective system of internal control over financial reporting could impact our ability to report accurate and timely financial results which could adversely affect our financial results.
None.
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Information regarding the locations of our restaurants is shown in the list below. Of the 688 Company-owned and operated restaurants as of June 3, 2014, we owned the land and buildings for 306 restaurants, owned the buildings and held non-cancelable long-term land leases for 258 restaurants, and held non-cancelable leases covering land and buildings for 124 restaurants. Our Restaurant Support Services Center in Maryville, Tennessee, which was opened in fiscal 1998, is owned by the Company. Our executives and certain other administrative personnel are located in the Restaurant Support Services Center. Since fiscal 2001, we have expanded the Restaurant Support Services Center by opening second and third locations also in Maryville.
Additional information concerning our properties and leasing arrangements is included in Note 7 to the Consolidated Financial Statements appearing in Part II, Item 8 of this Annual Report on Form 10-K.
Under our franchise agreements, we have certain rights to gain control of a restaurant site in the event of default under the franchise agreements.
Ruby Tuesday Concept
The following table lists the locations of the Company-owned and franchised Ruby Tuesday restaurants as of June 3, 2014.
| | | Number of Ruby Tuesday Restaurants | |
| State | | Company | | | Franchise | | | Total | |
| | | | | | | | | | |
Domestic: | | | | | | | | | |
| Alabama | | | 36 | | | | – | | | | 36 | |
| Arizona | | | 4 | | | | – | | | | 4 | |
| Arkansas | | | 7 | | | | – | | | | 7 | |
| California | | | – | | | | 1 | | | | 1 | |
| Colorado | | | 9 | | | | – | | | | 9 | |
| Connecticut | | | 16 | | | | – | | | | 16 | |
| Delaware | | | 7 | | | | – | | | | 7 | |
| Florida | | | 68 | | | | 1 | | | | 69 | |
| Georgia | | | 46 | | | | – | | | | 46 | |
| Idaho | | | – | | | | 1 | | | | 1 | |
| Illinois | | | 3 | | | | 11 | | | | 14 | |
| Indiana | | | 12 | | | | – | | | | 12 | |
| Iowa | | | 1 | | | | 2 | | | | 3 | |
| Kansas | | | 2 | | | | – | | | | 2 | |
| Kentucky | | | 8 | | | | – | | | | 8 | |
| Louisiana | | | 3 | | | | – | | | | 3 | |
| Maine | | | 10 | | | | – | | | | 10 | |
| Maryland | | | 29 | | | | – | | | | 29 | |
| Massachusetts | | | 9 | | | | – | | | | 9 | |
| Michigan | | | 23 | | | | 1 | | | | 24 | |
| Minnesota | | | 12 | | | | – | | | | 12 | |
| Mississippi | | | 8 | | | | – | | | | 8 | |
| Missouri | | | 26 | | | | – | | | | 26 | |
| Nebraska | | | 6 | | | | – | | | | 6 | |
| Nevada | | | 1 | | | | – | | | | 1 | |
| New Hampshire | | | 3 | | | | – | | | | 3 | |
| New Jersey | | | 26 | | | | 1 | | | | 27 | |
| New Mexico | | | – | | | | 1 | | | | 1 | |
| New York | | | 30 | | | | – | | | | 30 | |
| North Carolina | | | 53 | | | | – | | | | 53 | |
| North Dakota | | | – | | | | 4 | | | | 4 | |
| Ohio | | | 29 | | | | – | | | | 29 | |
| Oklahoma | | | – | | | | 1 | | | | 1 | |
| Oregon | | | 3 | | | | – | | | | 3 | |
| Pennsylvania | | | 41 | | | | – | | | | 41 | |
| Rhode Island | | | 2 | | | | – | | | | 2 | |
| South Carolina | | | 31 | | | | – | | | | 31 | |
| South Dakota | | | – | | | | 4 | | | | 4 | |
| Tennessee | | | 33 | | | | – | | | | 33 | |
| Texas | | | 1 | | | | 2 | | | | 3 | |
| Utah | | | 1 | | | | – | | | | 1 | |
| Virginia | | | 59 | | | | – | | | | 59 | |
| Washington, DC | | | 1 | | | | – | | | | 1 | |
| West Virginia | | | 8 | | | | – | | | | 8 | |
| Wisconsin | | | 1 | | | | 1 | | | | 2 | |
| Total Domestic | | | 668 | | | | 31 | | | | 699 | |
| | | Number of Ruby Tuesday Restaurants |
| Country | | Company | | | Franchise | | | Total |
| | | | | | | | | |
International: | | | | | | | | |
| Canada | | | – | | | | 1 | | | | 1 | |
| Chile | | | – | | | | 9 | | | | 9 | |
| Egypt | | | – | | | | 4 | | | | 4 | |
| Guam* | | | – | | | | 1 | | | | 1 | |
| Hawaii* | | | – | | | | 6 | | | | 6 | |
| Honduras | | | – | | | | 1 | | | | 1 | |
| Hong Kong | | | – | | | | 8 | | | | 8 | |
| Iceland | | | – | | | | 2 | | | | 2 | |
| Kuwait | | | – | | | | 6 | | | | 6 | |
| Panama | | | – | | | | 1 | | | | 1 | |
| Romania | | | – | | | | 2 | | | | 2 | |
| Saudi Arabia | | | – | | | | 2 | | | | 2 | |
| Trinidad | | | – | | | | 3 | | | | 3 | |
| United Kingdom | | | – | | | | 2 | | | | 2 | |
| Total International | | | – | | | | 48 | | | | 48 | |
| | | | 668 | | | | 79 | | | | 747 | |
| | | | | |
| * Guam and Hawaii are treated as international locations for internal purposes. | | |
Lime Fresh
The following table lists the locations of the Company-owned and domestic franchised Lime Fresh concept restaurants as of June 3, 2014.
| | | Number of Lime Fresh Restaurants | |
| State | | Company | | | Franchise | | | Total | |
| | | | | | | | | | |
| Alabama | | | 2 | | | | – | | | | 2 | |
| Florida | | | 11 | | | | 6 | | | | 17 | |
| North Carolina | | | 3 | | | | – | | | | 3 | |
| Ohio | | | 2 | | | | – | | | | 2 | |
| Virginia | | | 1 | | | | – | | | | 1 | |
| Washington, DC | | | 1 | | | | – | | | | 1 | |
| Total | | | 20 | | | | 6 | | | | 26 | |
We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business, including claims relating to injury or wrongful death under “dram shop” laws, workers’ compensation and employment matters, claims relating to lease and contractual obligations, and claims from customers alleging illness or injury. We provide reserves for such claims when payment is probable and estimable in accordance with U.S. generally accepted accounting principles. At this time, in the opinion of management, the ultimate resolution of pending legal proceedings will not have a material adverse effect on our consolidated operations, financial position or cash flows. See Note 14 to the Consolidated Financial Statements appearing in Part II, Item 8 of this Annual Report on Form 10-K, for more information about our legal proceedings as of June 3, 2014.
Not applicable.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Registrant’s Common Equity and Related Stockholder Matters
Ruby Tuesday, Inc. common stock is publicly traded on the New York Stock Exchange under the ticker symbol RT.
The following table sets forth the reported high and low intraday prices of our common stock and cash dividends paid thereon for each quarter during fiscal 2014 and 2013.
| Fiscal Year Ended June 3, 2014 | | Fiscal Year Ended June 4, 2013 |
| | | | Per Share | | | | | Per Share |
| | | | Cash | | | | | Cash |
| Quarter | High | Low | Dividends | | Quarter | High | Low | Dividends |
| First | $9.90 | $7.03 | -- | | First | $7.30 | $4.98 | -- |
| Second | $7.96 | $5.40 | -- | | Second | $7.94 | $6.71 | -- |
| Third | $7.68 | $5.14 | -- | | Third | $8.50 | $7.08 | -- |
| Fourth | $8.22 | $5.17 | -- | | Fourth | $9.84 | $7.08 | -- |
As of July 29, 2014, there were approximately 2,772 holders of record of the Company’s common stock.
Our Board of Directors has approved a dividend policy as an additional means of returning capital to our shareholders. The payment of a dividend in any particular future period and the actual amount thereof remains at the discretion of the Board of Directors and is restricted by the covenants of certain of our debt agreements. Our last dividend was paid on August 7, 2007 and no assurance can be given that dividends will be paid in the future.
Issuer Purchases of Equity Securities
The following table includes information regarding purchases of our common stock made by us during the fourth fiscal quarter ending June 3, 2014:
| | | (a) | | (b) | | (c) | | (d) | |
| | | Total number | | Average | | Total number of shares | | Maximum number of shares | |
| | | of shares | | price paid | | purchased as part of publicly | | that may yet be purchased | |
| Period | | purchased (1) | | per share | | announced plans or programs (1) | | under the plans or programs (2) | |
| | | | | | | | | | |
| Month #1 | | | | | | | | | |
| (March 5 to April 8) | | – | | $ – | | – | | 11,773,371 | |
| Month #2 | | | | | | | | | |
| (April 9 to May 6) | | – | | – | | – | | 11,773,371 | |
| Month #3 | | | | | | | | | |
| (May 7 to June 3) | | – | | – | | – | | 11,773,371 | |
| Total | | – | | $ – | | – | | | |
(1) No shares were repurchased other than through our publicly-announced repurchase programs and authorizations during our fiscal year ending June 3, 2014.
(2) As of June 3, 2014, 11.8 million shares remained available for purchase under existing programs, which consists of 1.8 million shares remaining under a July 11, 2007 authorization by the Board of Directors to repurchase 6.5 million shares and a January 8, 2013 authorization by the Board of Directors, not yet begun, to repurchase 10.0 million shares. The timing, price, quantity, and manner of the purchases to be made are at the discretion of management upon instruction from the Board of Directors, depending upon market conditions. The repurchase of shares in any particular future period and the actual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.
Stock Performance Graph
The following chart and table compare the cumulative total return of the Company’s common stock with the cumulative total return of the NYSE Composite Index and a peer group consisting of companies included in the same standard industrial classification (“SIC”) industry group as the Company’s business (SIC industry group 5812, Eating Places). The graph assumes the values of the investment in our common stock and each index was $100 at June 2, 2009 and that all dividends were reinvested.
| | 06/02/2009 | 06/01/2010 | 05/31/2011 | 06/05/2012 | 06/04/2013 | 06/03/2014 |
| Ruby Tuesday, Inc. | $ 100.00 | $ 144.44 | $ 147.22 | $ 94.44 | $ 131.94 | $ 106.81 |
| NYSE Composite Index | $ 100.00 | $ 110.77 | $ 144.65 | $ 128.86 | $ 168.23 | $ 199.39 |
| Peer Group Index (SIC 5812 – Eating Places) | $ 100.00 | $ 116.35 | $ 154.55 | $ 171.47 | $ 197.19 | $ 219.17 |
Summary of Operations
(In thousands except per-share data)
| | | Fiscal Year | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
| Revenue: | | | | | | | | | | | | | | | |
| Restaurant sales and operating revenue | | $ | 1,162,423 | | | $ | 1,245,226 | | | $ | 1,306,025 | | | $ | 1,254,026 | | | $ | 1,185,914 | |
| Franchise revenue | | | 6,323 | | | | 6,261 | | | | 5,738 | | | | 7,147 | | | | 6,753 | |
| Total revenue | | $ | 1,168,746 | | | $ | 1,251,487 | | | $ | 1,311,763 | | | $ | 1,261,173 | | | $ | 1,192,667 | |
| | | | | | | | | | | | | | | | | | | | | |
| (Loss)/income from continuing operations | | | | | | | | | | | | | | | | | | | | |
| before income taxes (a) | | $ | (69,575 | ) | | $ | (21,934 | ) | | $ | (8,626 | ) | | $ | 57,118 | | | $ | 58,562 | |
| (Benefit)/provision for income taxes from | | | | | | | | | | | | | | | | | | | | |
| continuing operations | | | (4,665 | ) | | | 1,500 | | | | (12,152 | ) | | | 7,563 | | | | 12,733 | |
| (Loss)/income from continuing operations | | | (64,910 | ) | | | (23,434 | ) | | | 3,526 | | | | 49,555 | | | | 45,829 | |
| | | | | | | | | | | | | | | | | | | | | |
| Income/(loss) from discontinued operations, net | | | | | | | | | | | | | | | | | | | | |
| of tax (b) | | | 564 | | | | (15,979 | ) | | | (3,714 | ) | | | (2,677 | ) | | | (485 | ) |
| Net (loss)/income | | $ | (64,346 | ) | | $ | (39,413 | ) | | $ | (188 | ) | | $ | 46,878 | | | $ | 45,344 | |
| | | | | | | | | | | | | | | | | | | | | |
| Basic (loss)/earnings per share: | | | | | | | | | | | | | | | | | | | | |
| (Loss)/income from continuing operations | | $ | (1.08 | ) | | $ | (0.38 | ) | | $ | 0.06 | | | $ | 0.77 | | | $ | 0.75 | |
| Income/(loss) from discontinued operations | | | 0.01 | | | | (0.27 | ) | | | (0.06 | ) | | | (0.04 | ) | | | (0.01 | ) |
| Net (loss)/earnings per share | | $ | (1.07 | ) | | $ | (0.65 | ) | | $ | (0.00 | ) | | $ | 0.73 | | | $ | 0.74 | |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted (loss)/earnings per share: | | | | | | | | | | | | | | | | | | | | |
| (Loss)/income from continuing operations | | $ | (1.08 | ) | | $ | (0.38 | ) | | $ | 0.06 | | | $ | 0.76 | | | $ | 0.74 | |
| Income/(loss) from discontinued operations | | | 0.01 | | | | (0.27 | ) | | | (0.06 | ) | | | (0.04 | ) | | | (0.01 | ) |
| Net (loss)/earnings per share | | $ | (1.07 | ) | | $ | (0.65 | ) | | $ | (0.00 | ) | | $ | 0.72 | | | $ | 0.73 | |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average common and common | | | | | | | | | | | | | | | | | | | | |
| equivalent shares: | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 60,231 | | | | 61,040 | | | | 62,916 | | | | 64,029 | | | | 61,533 | |
| Diluted | | | 60,231 | | | | 61,040 | | | | 63,508 | | | | 64,948 | | | | 61,870 | |
| | | | | | | | | | | |
| Fiscal years 2014, 2013, 2011, and 2010 each include 52 weeks. Fiscal 2012 includes 53 weeks. The extra week in fiscal 2012 added |
| $22.9 million to revenue and $0.03 to diluted earnings per share. |
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| | | | | | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
| Other Data | | | | | | | | | | | | | | | |
| Cash dividends per share of common stock | | $ | -- | | | $ | -- | | | $ | -- | | | $ | -- | | | $ | -- | |
| Number of Company-owned Ruby Tuesday | | | | | | | | | | | | | | | | | | | | |
| restaurants | | | 668 | | | | 706 | | | | 714 | | | | 750 | | | | 656 | |
| Company same-restaurant sales change | | | (5.3 | )% | | | (1.0 | )% | | | (4.5 | )% | | | 0.9 | % | | | (1.3 | )% |
| | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data (at year end): | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 956,427 | | | $ | 1,043,183 | | | $ | 1,173,537 | | | $ | 1,187,026 | | | $ | 1,064,029 | |
| Long-term debt and capital leases, less current | | | | | | | | | | | | | | | | | | | | |
| maturities | | $ | 253,875 | | | $ | 290,515 | | | $ | 314,209 | | | $ | 329,184 | | | $ | 276,490 | |
| Shareholders’ equity | | $ | 461,209 | | | $ | 516,835 | | | $ | 576,224 | | | $ | 591,713 | | | $ | 538,100 | |
| | | | | | | | | | | | | | | | | | | | | |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | |
Closures and impairments (a) | | $ | 32,831 | | | $ | 14,656 | | | $ | 16,751 | | | $ | 4,175 | | | $ | 3,776 | |
| Goodwill and trademark impairments (a) | | $ | 855 | | | $ | 14,058 | | | $ | 16,919 | | | $ | – | | | $ | – | |
| Interest expense, net | | $ | 24,945 | | | $ | 26,576 | | | $ | 23,312 | | | $ | 13,508 | | | $ | 17,074 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash Flow Data: | | | | | | | | | | | | | | | | | | | | |
| Net cash provided/(used) by: | | | | | | | | | | | | | | | | | | | | |
| Operating activities | | $ | 45,375 | | | $ | 35,954 | | | $ | 112,251 | | | $ | 116,292 | | | $ | 140,264 | |
| Investing activities | | $ | (6,203 | ) | | $ | 22,113 | | | $ | (33,755 | ) | | $ | (24,492 | ) | | $ | (9,439 | ) |
| Financing activities | | $ | (40,753 | ) | | $ | (53,344 | ) | | $ | (40,034 | ) | | $ | (91,647 | ) | | $ | (131,016 | ) |
| Purchases of property and equipment | | $ | 28,339 | | | $ | 37,117 | | | $ | 37,966 | | | $ | 26,684 | | | $ | 17,672 | |
(a) See Note 9 to the Consolidated Financial Statements for a description of closures and impairments expenses in fiscal 2014, 2013, and 2012 and discussion of the goodwill and trademark impairments in fiscal 2014, 2013, and 2012. (b) See Note 3 to the Consolidated Financial Statements for a discussion of our discontinued operations.
Indexof Financial Condition and Results of Operations
Introduction
Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” the “Company,” “we” and/or “our”), owns and operates Ruby Tuesday® and Lime Fresh Mexican Grill® (“Lime Fresh”) casual dining restaurants. We also franchise the Ruby Tuesday and Lime Fresh concepts in select domestic and international markets. Our mission is to be the best in the bar-grill segment of casual dining by delivering to our customers a high-quality casual dining experience with compelling value. While we are in the bar-grill sector because of our varied menu, it is our goal to operate at the higher-end of casual dining in terms of the quality of our food and service. As of June 3, 2014, we owned and operated 668 Ruby Tuesday restaurants located in 38 states and the District of Columbia. Our franchisees operated 31 domestic and 48 international Ruby Tuesday restaurants in 14 states, Guam, and 12 foreign countries. The Company-owned and operated restaurants are concentrated primarily in the Southeast, Northeast, Mid-Atlantic, and Midwest regions of the United States. We consider these regions to be our core markets.
As of June 3, 2014, there were 20 Company-owned and operated Lime Fresh restaurants, as well as six domestic Lime Fresh restaurants operated by franchisees.
References to franchise system revenue contained in this section are presented solely for the purposes of enhancing the investor's understanding of the franchise system, which includes our traditional domestic and international franchisees. Franchise system revenue is not included in, and is not, revenue of Ruby Tuesday, Inc. However, we believe that such information does provide the investor with a basis for a better understanding of our revenue from franchising activities, which includes royalties. Franchise system revenue contained in this section is based upon or derived from information that we obtain from our franchisees in our capacity as franchisor.
Overview and Strategies
The bar and grill segment of the casual dining industry in which we operate is intensely competitive with respect to prices, services, convenience, locations, employees, advertising and promotion, and the types and quality of food. We compete with other food service operations, including locally-owned restaurants, and other national and regional restaurant chains that offer similar types of services and products as we do. We continue to believe there are opportunities to grow our business, strengthen our competitive position, enhance our profitability, and create value through the execution of the following strategies:
| Enhance Sales and Margins Through Repositioning of Our Core Brand |
We are in the process of executing a strategic brand transformation of the Ruby Tuesday concept which we believe will result in a more energetic, affordable, and broadly appealing brand. We further believe the execution of this strategy provides opportunities for increased customer counts, same-restaurant sales growth, and increased shareholder value. Our brand transformation is supported by four key pillars: core menu transformation, service and atmosphere enhancements, and communication. Over the past year, we worked aggressively to transform our menu with the introduction of new menu platforms. We introduced more compelling value throughout the menu with a wide-range of price points. Enhancing our service and atmosphere are also critical components of our brand transformation strategy. We took actions during the year to simplify operational processes which we believe resulted in better and more consistent service execution and introduced music soundscape upgrades, lighting improvements, and most recently new team uniforms. We believe these changes have combined to deliver improved customer service and create a more energetic dining atmosphere for our customers. The fourth pillar of our brand transformation strategy is our communication and marketing programs. Historically our marketing strategy has primarily focused on print promotions, digital media and local marketing programs, with a minimal amount spent on television. Over the past year, we have deployed what we believe to be a more balanced marketing program comprised of a mixture of network and national cable television advertising supported with direct mail and other print and electronic promotions. Our television advertising is designed to reshape consumer perceptions of the Ruby Tuesday brand and to more effectively showcase the Ruby Tuesday brand personality in a fresh and energetic way. The four key areas of menu, service, atmosphere, and communication will continue to be foundational drivers of our brand transformation and key to building a stronger business model.
Focus on Low-Capital Intensive Potential Growth in the Fast Casual Sector
We have been focused on growing our Company in a low-capital intensive manner through Lime Fresh, our Mexican fast casual concept. We initially opened Lime Fresh restaurants under a licensing agreement and, after over a year of experience that enabled us to better understand the concept’s positioning and potential in the high-quality fast casual segment, we acquired the business for $24.1 million in the fourth quarter of fiscal 2012 since we believed we could more effectively grow the concept if we owned it. The fast casual segment of our industry is a growing segment where demand has historically exceeded supply, and we believe opening smaller, inline locations under the Lime Fresh brand provides a low-capital intensive potential growth option for us. While the concept is still in its early stages, we believe it has the potential to generate attractive returns for us if we are able to realize our revenue and profitability targets. Over the last year, we have made improvements to the business model which include menu improvements, including better flavor profiles and increased portion size of our proteins, as well as improvements in cost of merchandise, labor productivity, and site selection criteria. We opened four Company-owned Lime Fresh restaurants during the year ended June 3, 2014.
| Strengthen our Balance Sheet to Facilitate Growth and Value Creation |
During the second quarter of fiscal 2014 we closed on a new four-year $50.0 million revolving credit agreement (the “Senior Credit Facility”) which replaced our previous $200.0 million revolving credit facility. Our new Senior Credit Facility, which is secured by substantially all of the shares of capital stock of the Company’s subsidiaries, real property, improvements and fixtures of 49 Ruby Tuesday restaurants, and substantially all of the personal property of the Company and each of its present and future subsidiaries, provides us with more covenant flexibility than our previous revolving credit facility. The Senior Credit Facility has a $35.0 million accordion feature which provides us with additional liquidity if needed. The $50.0 million revolving Senior Credit Facility has remained undrawn.
Our balance sheet is supported by a high-quality portfolio of owned real estate, and during fiscal 2012 we commenced a sale-leaseback program on a portion of our properties for three primary reasons. First, the program enabled us through a series of transactions to corroborate the estimated market value of our entire remaining real estate portfolio. Second, the program enabled us to generate excess cash during fiscal 2013, when our free cash flow was at lower levels, in order to opportunistically pay off debt and repurchase our shares. Third, we were able to complete the sale-leaseback transactions at low capitalization rates with a minimal tax burden.
Our sale-leaseback program, which was completed during the first quarter of fiscal 2014, enabled us to raise approximately $82.5 million of gross proceeds through monetizing 37 restaurants during the entire program tenure, with $5.9 million of these proceeds being realized during fiscal 2014 through the monetization of three restaurants. The $82.5 million of sale-leaseback gross proceeds were utilized for general corporate purposes, including capital expenditures, debt reduction, and the repurchase of shares of our common stock. We have no plans at this time to pursue any additional sale-leaseback transactions. See further discussion of our sale-leaseback transactions in the Investing Activities section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
Our objective over the next several years is to continue to reduce outstanding debt levels in order to lower our leverage and focus on prudent restaurant development. Our success in the key strategic initiatives outlined above should enable us to improve both our return on assets and return on equity, and to create additional shareholder value.
Our fiscal year ends on the first Tuesday following May 30 and, as is the case once every five or six years, we have a 53-week year. Fiscal 2012 was a 53-week year. All other years discussed throughout this MD&A contained 52 weeks. In fiscal 2012, the 53rd week added $22.9 million to restaurant sales and operating revenue and $0.03 to diluted earnings per share in our Consolidated Statement of Operations.
Our same-restaurant sales for Company-owned Ruby Tuesday restaurants decreased 5.3% in fiscal 2014 compared to fiscal 2013, and our diluted loss per share was $1.07 in fiscal 2014 compared to diluted loss per share of $0.65 in fiscal 2013, $0.27 of which was attributable to discontinued operations. Throughout this MD&A, we discuss our fiscal 2014 financial results in detail, provide insight for fiscal years 2013 and 2012, as well as discuss known events, uncertainties, and trends. We believe our commentary provides insight as to the factors which impacted our performance. We remind you, that, in order to best obtain an understanding of our financial performance during the last three fiscal years, this MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes appearing in Part II, Item 8 of this Annual Report on Form 10-K.
Results of Operations
Ruby Tuesday Restaurants
The table below presents the number of Ruby Tuesday concept restaurants at each fiscal year end from fiscal 2010 through fiscal 2014:
Fiscal Year | Company-Owned | Domestic Franchise | International Franchise | Total |
| 2014 | 668 | 31 | 48 | 747 |
| 2013 | 706 | 33 | 44 | 783 |
| 2012 | 714 | 36 | 43 | 793 |
| 2011 | 750 | 43 | 53 | 846 |
| 2010 | 656 | 165 | 58 | 879 |
Other Concept Restaurants
The table below presents the number of other concept restaurants at each fiscal year end from fiscal 2010 through fiscal 2014:
| | Lime Fresh | | |
| Fiscal Year | Company-Owned | Franchise* | Total Lime Fresh | | Discontinued Concepts** |
| 2014 | 20 | 6 | 26 | | – |
| 2013 | 18 | 6 | 24 | | – |
| 2012 | 13 | 4 | 17 | | 14 |
| 2011 | – | – | – | | 4 |
| 2010 | – | – | – | | 2 |
*Fiscal 2013 includes one international Lime Fresh franchise restaurant.
**Discontinued concepts include Marlin & Ray’s, Truffles, and Wok Hay.
During fiscal 2014:
| · | Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 5.3%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 3.0%; |
| · | Incurred severance, payroll tax, share-based compensation, and other charges of $4.3 million in connection with the elimination of management and staff personnel at our Restaurant Support Services Center, including approximately 82 positions since November; |
| · | Four Company-owned Lime Fresh restaurants were opened and two were closed; |
| · | 38 Company-owned Ruby Tuesday restaurants were closed, including two as a result of severe weather in Pensacola, Florida; |
| · | Two franchised Lime Fresh restaurants were opened and two were closed; |
| · | Seven franchised Ruby Tuesday restaurants were opened and five were closed; |
| · | We replaced our $200.0 million credit facility with the $50.0 million Senior Credit Facility; |
| · | We repurchased $20.0 million of our 7.625% senior notes due 2020 (the “Senior Notes”). The repurchases settled for $20.0 million plus $0.2 million of accrued interest. We realized losses of $0.7 million on these transactions; |
| · | We prepaid and retired 18 mortgage loan obligations for $14.9 million plus prepayment penalties of $1.1 million and accrued interest of $0.1 million; |
| · | Our President and Chief Executive Officer, James J. Buettgen, was appointed Chairman of the Board of Directors and Stephen Sadove was appointed Lead Director in connection with the resignation of Matthew Drapkin from the Board; |
| · | We appointed Mark Addicks and Donald Hess to the Board of Directors; |
| · | Our former Executive Vice President, Chief Operations Officer, Kimberly Grant, left the Company on June 7, 2013 and Todd Burrowes was appointed President – Ruby Tuesday Concept and Chief Operations Officer on June 11, 2013; and |
| · | Our former Senior Vice President, Chief People Officer, Robert LeBoeuf, left the Company on October 30, 2013. |
During fiscal 2013:
| · | Our former CEO, Samuel E. Beall, III, stepped down on November 30, 2012 and James J. Buettgen was appointed our new CEO effective December 1, 2012; |
| · | Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 1.0%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 2.1%; |
| · | Eight Company-owned Ruby Tuesday restaurants were closed; |
| · | Two franchised Ruby Tuesday restaurants were opened and four were closed; |
| · | We closed 13 Company-owned Marlin & Ray’s restaurants, one Company-owned Wok Hay restaurant, and two Company-owned Truffles restaurants, resulting in year-to-date charges of $21.7 million for asset impairments, lease reserves, and other closing costs for the three discontinued concepts; |
| · | Nine Company-owned Lime Fresh restaurants were opened and four were closed; |
| · | Two franchised Lime Fresh restaurants were opened; |
| · | We repurchased 4.1 million shares of common stock at an aggregate cost of $30.3 million; and |
| · | We repurchased $15.0 million of our Senior Notes. The repurchases settled for $14.5 million plus $0.2 million of accrued interest. We realized a minimal loss on these transactions. |
* 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.
Restaurant Sales
Restaurant sales in fiscal 2014 decreased 6.6% from fiscal 2013 for Company-owned restaurants and increased 4.0% for domestic and international franchised restaurants as explained below. The tables presented below reflect restaurant sales for the last five years, and other revenue information for the last three years.
Restaurant Sales (in millions):
| | Ruby Tuesday Concept | Lime Fresh Concept |
| Fiscal Year | Company-Owned | Franchise (a) | Company-Owned | Franchise (a) |
| 2014 | $ 1,141.8 | $ 162.2 | $ 20.7 | $ 14.5 |
| 2013 | 1,229.1 | 158.0 | 16.1 | 12.0 |
| 2012 | 1,302.7 | 172.6 | 3.3 | 1.6 |
| 2011 | 1,254.0 | 289.4 | – | – |
| 2010 | 1,185.9 | 368.9 | – | – |
| (a) | Includes sales of all domestic and international franchised Ruby Tuesday and Lime Fresh restaurants. |
Other Revenue Information:
| | 2014 | | 2013 | 2012 |
| Company restaurant sales (in thousands) | | | | |
| Ruby Tuesday concept | $1,141,771 | | $1,229,097 | $1,302,719 |
| Lime Fresh concept | 20,652 | | 16,129 | 3,306 |
| Total restaurant sales | $1,162,423 | | $1,245,226 | $1,306,025 |
| Company restaurant sales growth-percentage | (6.6%) | | (4.7%) | 4.1% |
| | | | | |
| Franchise revenue (in thousands) | | | | |
| Ruby Tuesday concept | $5,577 | | $5,633 | $5,666 |
| Lime Fresh concept | 746 | | 628 | 72 |
| Total franchise revenue (a) | $6,323 | | $6,261 | $5,738 |
| Franchise revenue growth-percentage | 1.0% | | 9.1% | (19.7)% |
| | | | | |
| Total revenue (in thousands) | | | | |
| Ruby Tuesday concept | $1,147,348 | | $1,234,730 | $1,308,385 |
| Lime Fresh concept | 21,398 | | 16,757 | 3,378 |
| Total revenue | $1,168,746 | | $1,251,487 | $1,311,763 |
| Total revenue growth-percentage | (6.6%) | | (4.6%) | 4.0% |
| | | | | |
| Ruby Tuesday concept same-restaurant sales growth | | | | |
| percentage | (5.3)% | | (1.0)% | (4.5)% |
| | | | | |
| Company average restaurant volumes (b) | $1.67 million | | $1.73 million | $1.75 million |
| Company average restaurant volumes growth percentage | (3.8)% | | (0.8)% | (3.8)% |
| (a) | Franchise revenue includes royalty, license, and development fees paid to us by our franchisees, exclusive of support service fees of $1.0 million, $0.9 million, and $1.1 million, in fiscal years 2014, 2013, and 2012, respectively, which are recorded as an offset to selling, general, and administrative expenses. |
Our Company restaurant sales and operating revenue for the year ended June 3, 2014 decreased 6.6% to $1,168.7 million compared to the prior year. This decrease is primarily a result of a 5.3% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants, offset by an increase in Lime Fresh concept revenues of $4.6 million due in part to a net increase of two Lime Fresh restaurants since the prior year. The decrease in Ruby Tuesday concept same-restaurant sales is attributable to lower customer counts coupled with a decrease in average net check during fiscal 2014 compared to the prior year.
Our Company restaurant sales and operating revenue for the year ended June 4, 2013 decreased 4.6% to $1,251.5 million compared to fiscal 2012. This decrease is primarily a result of the impact of a 53rd week in fiscal 2012, which contributed $22.9 million in revenue, restaurant closures since the prior year, and a 1.0% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants, offset by an increase in Lime Fresh concept revenues of $12.8 million due to our acquisition of seven Lime Fresh restaurants on April 11, 2012 and a net increase of seven additional Lime Fresh restaurants since then.
The decrease in same-restaurant sales is attributable to lower customer counts partially offset by an increase in average net check during fiscal 2013 compared to fiscal 2012. The increase in average net check was primarily the result of reduced discounts and price increases since fiscal 2012.
Franchise development and license fees received are recognized when we have substantially performed all material services and the restaurant has opened for business. Franchise royalties (generally 4.0% of monthly sales for franchised Ruby Tuesday concept restaurants and 5.25% of monthly sales for franchised Lime Fresh concept restaurants) are recognized as franchise revenue on the accrual basis. Franchise revenue increased 1.0% to $6.3 million in fiscal 2014 and increased 9.1% to $6.3 million in fiscal 2013. Franchise revenue is predominantly comprised of domestic and international royalties, which totaled $6.1 million in both 2014 and 2013. The increase in franchise royalties in fiscal 2013 is due in part to higher domestic franchise royalties attributable to our Lime Fresh franchise restaurants and higher international franchise royalties due to increased sales at certain international restaurants compared to fiscal 2012.
Total franchise restaurant sales are shown in the table below.
| | | 2014 | | | 2013 | | | 2012 | |
| Franchise restaurant sales (in thousands) | | | | | | | | | |
| Ruby Tuesday concept | | $ | 162,233 | | | $ | 158,001 | | | $ | 172,591 | |
| Lime Fresh concept | | | 14,493 | | | | 12,003 | | | | 1,599 | |
| Total franchise restaurant sales (a) | | $ | 176,726 | | | $ | 170,004 | | | $ | 174,190 | |
| Franchise restaurant sales growth-percentage | | | 4.0 | % | | | (2.4 | )% | | | (39.8 | )% |
| (a) | Includes sales of all domestic and international franchised Ruby Tuesday and Lime Fresh restaurants. |
The 39.8% decrease in franchise restaurant sales for fiscal 2012 is primarily due to the acquisition of 109 restaurants from franchisees during fiscal 2011.
Segment Profit
Our President and Chief Executive Officer, who is our chief operating decision maker, with the assistance of our senior management, reviews discrete financial information for both the Ruby Tuesday and Lime Fresh restaurant concepts to assess performance and allocate resources. We consider the Ruby Tuesday and Lime Fresh concepts to be our reportable segments as we do not believe they have similar economic and other characteristics to be aggregated into a single reportable segment. Segment profit/(loss) by reportable segment for fiscal 2014, 2013, and 2012 are as follows (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| Segment profit/(loss): | | | | | | | | | |
| Ruby Tuesday concept | | $ | 69,543 | | | $ | 111,367 | | | $ | 123,517 | |
| Lime Fresh concept | | | (6,070 | ) | | | (10,204 | ) | | | (1,954 | ) |
| Total segment profit | | $ | 63,473 | | | $ | 101,163 | | | $ | 121,563 | |
Segment profit for the year ended June 3, 2014 for the Ruby Tuesday concept decreased $41.8 million to $69.5 million compared to fiscal 2013 due primarily to the 5.3% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants and a net reduction of 38 Company-owned restaurants since the prior year, higher closures and impairments expense ($21.2 million) as we recorded impairments in connection with the closure of 33 Ruby Tuesday restaurants during the current year and also recorded impairments on 32 open Ruby Tuesday restaurants not planned for closure with deteriorating operational performance, and higher other restaurant operating costs ($2.0 million) primarily due to higher legal fees associated with the litigation discussed in Note 14 to the Consolidated Financial Statements. These were partially offset by lower cost of merchandise ($21.8 million) and payroll and related costs ($16.8 million) compared to the prior year as a result of restaurant closures, declines in customer traffic, reductions in general and administrative expenses, net ($26.9 million) due to lower allocations of support center costs, and a decrease in advertising spending ($3.5 million), primarily due to reduced television advertising.
Segment losses for the year ended June 3, 2014 for the Lime Fresh concept decreased $4.1 million compared to fiscal 2013 to $6.1 million. Excluding the impact of closures and impairments charges of $5.2 million and $8.1 million for fiscal 2014 and 2013, respectively, segment losses would have decreased $1.2 million due primarily to lower advertising fees of $0.8 million, due in part to the termination of a marketing agreement with an agency whose Chief Executive Officer previously sold the Lime Fresh restaurant concept to us. The reduction in closures and impairments charges of $2.9 million is due to lower restaurant impairments charges of $4.0 million offset by increased charges for lease reserves ($1.0 million) due predominantly to four undeveloped sites for which a management decision was reached to forego restaurant development.
Segment profit for the Ruby Tuesday concept decreased $12.2 million from fiscal 2012 to $111.4 million in fiscal 2013 due to increases in advertising spending of $23.4 million, as we increased our television spending, offset by decreases in closures and impairment expenses of $10.6 million due to costs in fiscal 2012 associated with our decision to close 25-27 Ruby Tuesday restaurants.
Segment losses for the Lime Fresh concept increased $8.3 million from fiscal 2012 to $10.2 million in fiscal 2013 due to increased closure and impairment charges of $8.0 million, primarily associated with four underperforming Lime Fresh concept restaurants and the closure of four additional Lime Fresh restaurants during fiscal 2013. Excluding the increased closure and impairment charges of $8.0 million, the segment losses for the Lime Fresh concept would have increased $0.3 million as compared to fiscal 2012 due to lower revenues on a per unit basis, which, given the fixed nature of certain costs, resulted in the loss of leverage. Additionally, during fiscal 2013 we closed four of our internally-developed restaurants which were not meeting our revenue or profitability expectations, and whose operating performance was more dilutive to the fiscal 2013 segment profit than during fiscal 2012.
The following is a reconciliation of segment profit to loss from continuing operations before taxes for fiscal 2014, 2013, and 2012 (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| Segment profit | | $ | 63,473 | | | $ | 101,163 | | | $ | 121,563 | |
| Less: | | | | | | | | | | | | |
| Depreciation and amortization | | | (54,828 | ) | | | (62,398 | ) | | | (66,458 | ) |
| Unallocated selling, general and administrative expenses | | | (47,946 | ) | | | (18,026 | ) | | | (22,069 | ) |
| Preopening expenses | | | (395 | ) | | | (761 | ) | | | (556 | ) |
| Goodwill and trademark impairments | | | (855 | ) | | | (14,058 | ) | | | (16,919 | ) |
| Interest expense, net | | | (24,945 | ) | | | (26,576 | ) | | | (23,312 | ) |
| Other expense, net | | | (4,079 | ) | | | (1,278 | ) | | | (875 | ) |
| Loss from continuing operations before income taxes | | $ | (69,575 | ) | | $ | (21,934 | ) | | $ | (8,626 | ) |
Operating Profits
The following table sets forth selected restaurant operating data as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, for the periods indicated. All information is derived from our Consolidated Financial Statements located in Part II, Item 8 of this Annual Report on Form 10-K.
| | 2014 | | 2013 | | 2012 | |
| Restaurant sales and operating revenue | 99.5 | % | 99.5 | % | 99.6 | % |
| Franchise revenue | 0.5 | | 0.5 | | 0.4 | |
| Total revenue | 100.0 | | 100.0 | | 100.0 | |
| Operating costs and expenses: | | | | | | |
| Cost of merchandise (1) | 27.7 | | 27.4 | | 28.8 | |
| Payroll and related costs (1) | 34.8 | | 33.7 | | 33.7 | |
| Other restaurant operating costs (1) | 22.4 | | 20.8 | | 20.1 | |
| Depreciation (1) | 4.7 | | 4.7 | | 4.9 | |
| Selling, general, and administrative, net | 11.7 | | 11.1 | | 9.2 | |
| Closures and impairments, net | 2.8 | | 1.2 | | 1.3 | |
| Goodwill and trademark impairments | 0.1 | | 1.1 | | 1.3 | |
| Interest expense, net | 2.1 | | 2.1 | | 1.8 | |
| Loss/(gain) on extinguishment of debt | 0.1 | | 0.0 | | 0.0 | |
| Total operating costs and expenses | 106.0 | | 101.8 | | 100.7 | |
| Loss from continuing operations before income taxes | (6.0 | ) | (1.8 | ) | (0.7 | ) |
| (Benefit)/provision for income taxes from continuing operations | (0.4 | ) | 0.1 | | (0.9 | ) |
| (Loss)/income from continuing operations | (5.6 | ) | (1.9 | ) | 0.3 | |
| Income/(loss) from discontinued operations, net of tax | 0.0 | | (1.3 | ) | (0.3 | ) |
| Net loss | (5.5 | )% | (3.1 | )% | (0.0 | )% |
(1) As a percentage of restaurant sales and operating revenue.
Pre-tax (Loss)/Income from Continuing Operations
Pre-tax loss from continuing operations increased $47.6 million from fiscal 2013 to $69.6 million for the year ended June 3, 2014. The higher pre-tax loss is due to a decrease in same-restaurant sales of 5.3% at Company-owned Ruby Tuesday restaurants, higher closures and impairments expense ($18.2 million), a partial impairment of the Lime Fresh trademark during the current year, increased losses on the extinguishment of debt ($1.5 million), and increases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of cost of merchandise, payroll and related costs, other restaurant operating costs, and selling, general, and administrative, net. These higher costs were partially offset by lower interest expense ($1.8 million).
Pre-tax loss from continuing operations increased $13.3 million from fiscal 2012 to $21.9 million for the year ended June 4, 2013. The increase in loss is primarily due to a decline in same-restaurant sales of 1.0% at Company-owned Ruby Tuesday restaurants, higher selling, general, and administrative, net ($18.4 million) and interest expense ($3.8 million), and increases, as a percentage of restaurant sales and operating revenue, of other restaurant operating costs. These higher costs were partially offset by lower goodwill and trademark impairment charges ($2.9 million) and
closures and impairments associated with continuing operations ($2.1 million), and decreases, as a percentage of restaurant sales and operating revenue, of cost of merchandise and depreciation.
In the paragraphs that follow, we discuss in more detail the components of the changes in pre-tax loss from continuing operations for years ended June 3, 2014 and June 4, 2013 as compared to the comparable prior year. Because a significant portion of the costs recorded in the cost of merchandise, 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 year.
Cost of Merchandise
Cost of merchandise decreased $20.0 million (5.9%) from the prior year to $321.5 million for the year ended June 3, 2014. As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 27.4% to 27.7%.
The absolute dollar decrease for the year ended June 3, 2014 was the result of lower sales volumes, restaurant closures, and cost savings on certain products as a result of renegotiated contracts with certain vendors since fiscal 2013. These were partially offset by price increases on beef, poultry, and certain other products since the prior year.
As a percentage of restaurant sales and operating revenue, the increase in cost of merchandise for the year ended June 3, 2014 is primarily the result of a shift in menu mix with the introduction of new menu items during the first half of fiscal 2014 and price increases in the cost of certain products.
Cost of merchandise decreased $34.1 million (9.1%) from fiscal 2012 to $341.5 million for the year ended June 4, 2013. As a percentage of restaurant sales and operating revenue, cost of merchandise decreased from 28.8% to 27.4%.
For the year ended June 4, 2013, the absolute dollar decrease in cost of merchandise was the result of cost savings negotiated with our primary food distributor coupled with renegotiated contracts and product specification changes on several items with certain vendors since fiscal 2012. Restaurant closures further contributed to the reduction in cost of merchandise. Partially offsetting these decreases were cost increases on beef, poultry, and certain other products since fiscal 2012.
As a percentage of restaurant sales and operating revenue, the decrease in cost of merchandise for the year ended June 4, 2013 is due primarily to cost savings negotiated with our primary food distributor and various other vendors and a reduction in coupons since fiscal 2012.
Payroll and Related Costs
Payroll and related costs decreased $15.3 million (3.6%) from the prior year to $404.4 million for the year ended June 3, 2014. As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 33.7% to 34.8%.
The absolute dollar decrease in payroll and related costs for the year ended June 3, 2014 was due to lower hourly restaurant labor in connection with lower sales volumes and restaurant closures since the prior year. Other factors contributing to the declines included lower restaurant management labor due to a reduction in the average number of managers per restaurant in the current year as compared to the prior year and lower bonus expense as fewer restaurants achieved the performance goals. These reductions were partially offset by minimum wage increases in certain states and merit increases since the prior year and higher health insurance during the current year due to unfavorable claims experience.
As a percentage of restaurant sales and operating revenue, the increase in payroll and related costs for the year ended June 3, 2014 is primarily the result of loss of leveraging associated with lower sales volumes.
Payroll and related costs decreased $21.1 million (4.8%) from fiscal 2012 to $419.7 million for the year ended June 4, 2013. As a percentage of restaurant sales and operating revenue, payroll and related costs remained consistent with fiscal 2012 at 33.7%.
For the year ended June 4, 2013, the absolute dollar decrease in payroll and related costs was due to restaurant closures, decreases in hourly labor as a result of lower training costs and new staffing guidelines for certain positions in our restaurants, and favorable workers’ compensation claims experience. These were partially offset by minimum wage increases in certain states, higher field bonus, and higher management labor due to merit increases since fiscal 2012.
Other Restaurant Operating Costs
Other restaurant operating costs increased $1.4 million (0.6%) from the prior year to $260.4 million for the year ended June 3, 2014. As a percentage of restaurant sales and operating revenue, other restaurant operating costs increased from 20.8% to 22.4%.
For the year ended June 3, 2014, the increase in other restaurant operating costs related to the following (in thousands):
| Legal | | $ | 2,485 | |
| Rent and leasing | | | 1,289 | |
| Repairs | | | 677 | |
| Other increases, net | | | 344 | |
| Utilities | | | (2,069 | ) |
| Amortization of intangibles | | | (759 | ) |
| Insurance | | | (534 | ) |
| Net increase | | $ | 1,433 | |
In both absolute dollars and as a percentage of restaurant sales and operating revenue for the year ended June 3, 2014, the increase in other operating costs was primarily a result of higher legal costs related to pending litigation, primarily the matters discussed in Note 14 to the Consolidated Financial Statements, rent and leasing as a result of sale-leaseback transactions, and repairs due to building maintenance. These increased costs were partially offset by restaurant closures since the prior year, reduced utilities as a result of reduced rates with new contracts, a decrease in amortization of intangibles due in part to two partial impairments of the Lime Fresh trademark, the first of which was recorded during the fourth quarter of the prior fiscal year, and lower insurance due to favorable general liability claims experience in the current year.
Other restaurant operating costs decreased $3.6 million (1.4%) from fiscal 2012 to $259.0 million for the year ended June 4, 2013. As a percentage of restaurant sales and operating revenue, other restaurant operating costs increased from 20.1% to 20.8%.
For the year ended June 4, 2013, the decrease in other restaurant operating costs related to the following (in thousands):
| Utilities | | $ | (4,764 | ) |
| Supplies | | | (3,496 | ) |
| Other decreases | | | (2,927 | ) |
| Repairs | | | 4,011 | |
| Rent and leasing | | | 3,618 | |
| Net reductions | | $ | (3,558 | ) |
For the year ended June 4, 2013, the absolute dollar decrease was primarily a result of lower utilities based on reduced rates and lower supplies expense due to negotiated contract savings with certain vendors. These decreases were partially offset by higher repairs expense as we transitioned to a new maintenance agreement with a third-party provider during fiscal 2013 and higher rent and leasing charges as a result of sale-leaseback transactions.
Depreciation
Depreciation expense decreased $4.3 million (7.3%) to $54.8 million for the year ended June 3, 2014, compared to the prior year. As a percentage of restaurant sales and operating revenue, depreciation expense was consistent with the prior year at 4.7%.
In terms of absolute dollars, the decrease for the year ended June 3, 2014 is due primarily to assets that became fully depreciated since the prior year coupled with sale-leaseback transactions and restaurant closures.
Depreciation expense decreased $5.0 million (7.8%) to $59.1 million for the year ended June 4, 2013, compared to fiscal 2012. As a percentage of restaurant sales and operating revenue, depreciation expense decreased from 4.9% to 4.7%.
In terms of both absolute dollars and as a percentage of restaurant sales and operating revenue, the decrease for the year ended June 4, 2013 is primarily due to assets that became fully depreciated since fiscal 2012 coupled with sale-leaseback transactions and restaurant closures.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses, net decreased $1.6 million (1.2%) from fiscal 2013 to $137.2 million for the year ended June 3, 2014.
The decrease for the year ended June 3, 2014 is due to lower advertising costs ($4.3 million) primarily as a result of decreased television advertising and reduced direct mail and other promotional activity as compared to fiscal 2013, which was partially offset by higher cable television advertising in order to promote our newer menu items. The lower advertising costs were partially offset by higher general and administrative costs ($2.6 million) which was due in part to severance, payroll tax, share-based compensation, and other charges in connection with the elimination of management and staff personnel at our Restaurant Support Services Center, including approximately 82 positions since November.
Selling, general, and administrative expenses, net increased $18.4 million (15.3%) from fiscal 2012 to $138.8 million for the year ended June 4, 2013.
The increase for the year ended June 4, 2013 is due to higher advertising costs ($24.2 million), primarily as a result of increased television advertising. At the start of fiscal 2013, we deployed a television marketing program which covered the entire system of restaurants for a portion of each quarter with the remaining portion of the quarter supplemented by high-end direct mail and other promotions. The higher advertising costs were partially offset by lower general and administrative costs ($5.8 million) due primarily to reduced consulting fees from fiscal 2012.
Closures and Impairments, Net
Closures and impairments increased $18.2 million to $32.8 million for the year ended June 3, 2014, as compared to the prior year. The increase is primarily due to higher property impairment charges ($13.0 million), closed restaurant lease reserve expense ($4.5 million), and other closing costs ($1.0 million), which were partially offset by higher gains on the sale of surplus properties ($0.3 million).
The higher property impairment charges were due in part to the closing of 33 Ruby Tuesday concept restaurants in connection with a plan approved by our Board of Directors on January 7, 2014. Of these closures, 11 of these restaurants closed upon expiration of their lease. As a result of the plan, included within Closures and impairments, net for fiscal 2014 are impairment charges of $4.8 million in connection with the early restaurant closures. Additionally, during fiscal 2014 we recorded impairments of $13.5 million relating to 32 open restaurants, with deteriorating operational performance.
Closures and impairments decreased $2.1 million to $14.7 million for the year ended June 4, 2013, as compared to fiscal 2012. The decrease was due to lower restaurant impairment charges and lease reserve expense from continuing operations ($0.9 million and $0.7 million, respectively) and reductions in other closing expense ($0.5 million).
See Note 9 to our Consolidated Financial Statements for further information on our closures and impairment charges recorded during fiscal 2014, 2013, and 2012.
Goodwill and Trademark Impairments
Using entity specific projections for undiscounted cash flows that incorporated only those Lime Fresh assets existing as of the measurement date, we concluded during the third quarter of fiscal 2014 that the Lime Fresh trademark was partially impaired. Accordingly, we recorded a non-cash charge of $0.9 million representing a partial impairment of
the Lime Fresh trademark. A similarly-measured impairment charge of $5.0 million had previously been recorded on the Lime Fresh trademark during the fourth quarter of fiscal 2013. Following these impairments, the net book value of the Lime Fresh trademark remaining as of June 3, 2014 is $3.6 million.
We separately concluded during the fourth quarter of fiscal 2013 that the goodwill associated with our Lime Fresh concept was fully impaired. Accordingly, we recorded a fourth quarter fiscal 2013 non-cash charge of $9.0 million ($5.4 million, net of tax) representing the full value of our Lime Fresh concept goodwill.
We concluded during fiscal 2012 that the goodwill associated with our Ruby Tuesday concept was fully impaired. As a result, we recorded an impairment charge during fiscal 2012 of $16.9 million ($12.0 million, net of tax).
See Note 9 to our Consolidated Financial Statements for further information on our goodwill and trademark impairment charges recorded during fiscal 2014, 2013, and 2012.
Interest Expense, Net
Interest expense, net decreased $1.6 million to $24.9 million for the year ended June 3, 2014, primarily due to lower interest expense on our Senior Notes due to repurchases and the early payoff of certain mortgage loans since fiscal 2013.
Interest expense, net increased $3.3 million to $26.6 million for the year ended June 4, 2013, primarily due to interest expense on our Senior Notes which was partially offset by lower expense on our other debt due to pay downs since fiscal 2012.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $1.4 million for the year ended June 3, 2014. During the current year, we repurchased $20.0 million of the Senior Notes for $20.0 million plus $0.2 million of accrued interest. We realized losses of $0.7 million on these transactions. Additionally, we incurred a $0.7 million charge in the second quarter of fiscal 2014 relating to the write-off of the pro rata portion of unamortized debt issuance costs associated with the previous credit facility.
During the year ended, June 4, 2013, we repurchased $15.0 million of our Senior Notes. The repurchases settled for $14.5 million plus $0.2 million of accrued interest. We realized a minimal loss on these transactions.
(Benefit)/Provision for Income Taxes from Continuing Operations
Under Accounting Standards Codification 740 (“ASC 740”), companies are generally required to apply their estimated annual tax rate on a year-to-date basis in each interim period. However, ASC 740 also provides that 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 benefit for fiscal 2014 based on the actual year-to-date results, in accordance with ASC 740.
We recorded a tax benefit from continuing operations of $4.7 million for the year ended June 3, 2014, compared to tax expense from continuing operations of $1.5 million for the year ended June 4, 2013, to reflect the current benefit of federal and certain state net operating loss carrybacks as well as the recognition of unrecognized tax benefits. The change in income taxes is attributable to increased pre-tax losses for fiscal 2014 as compared to fiscal 2013 offset by an increase in the valuation allowance for deferred tax assets as discussed below.
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 have considered both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction.
Prior to the fourth quarter of fiscal 2013, we concluded that objective and subjective positive evidence outweighed negative evidence, and it was more likely than not we would realize all of our federal and most of our state deferred
tax assets, except for loss carryforwards in certain states that have had cumulative losses due to our state tax planning strategies and/or relatively short carryforward periods and annual limits of loss carryforward available for use to offset future taxable income. During the fourth quarter of the prior year, as is discussed more thoroughly in Note 11 to the Consolidated Financial Statements, we recorded a valuation allowance following the conclusion that the negative evidence outweighed the positive evidence.
Our valuation allowance for deferred tax assets totaled $54.6 million and $24.6 million as of June 3, 2014 and June 4, 2013, respectively. Included within our income tax (benefit)/provision from continuing operations is the expense from the additional valuation allowance of $31.2 million, $20.9 million, and $0.9 million for fiscal 2014, 2013, and 2012, respectively, representing the amount reserved for the increase in net deferred tax assets during the periods (primarily related to general business credit carryforwards and state net operating loss carryforwards). Additionally, a valuation allowance (benefit)/expense of $(0.3) million and $1.3 million was included within the income tax benefit from discontinued operations in fiscal 2014 and 2013, respectively.
For fiscal 2013, we recorded income tax expense from continuing operations of $1.5 million, compared with an income tax benefit from continuing operations of $12.1 million in fiscal 2012. Included in the income tax expense from continuing operations for fiscal 2013 are employment tax credits, primarily the FICA tip credit and the Work Opportunity Tax Credit (“WOTC”), of $9.7 million. Also included in the fiscal 2013 tax expense from continuing operations is a charge of $20.9 million to establish an income tax valuation allowance on certain of our deferred tax assets, including the deferred tax asset established for the fiscal 2013 tax credits.
Under ASC 740, “Income Taxes,” 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 losses from discontinued operations, as well as goodwill and trademark impairment charges, among other charges, 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. Before consideration of the valuation allowance expense, we had an income tax benefit of $35.9 million and $19.4 million, including the tax credits, in fiscal 2014 and 2013, respectively.
The deferred tax valuation allowance may be released in future years when we consider that it is more likely than not that some portion or all of the deferred tax assets will be realized. To form a conclusion that some or all of the deferred tax assets will be realized, we will need to generate a three-year cumulative pre-tax income, and we will need to evaluate whether or not all available evidence, such as future taxable income, reversal of temporary differences, and other tax planning strategies provides sufficient positive evidence to offset any other potential negative evidence that may exist at such time. In the event the deferred tax valuation allowance is released, we would record an income tax benefit for the portion or all of the deferred tax valuation allowance released.
Discontinued Operations
In an effort to focus primarily on the successful sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our Lime Fresh concept, we closed all 13 Marlin & Ray’s restaurants, the Company’s one Wok Hay restaurant, and our two Truffles restaurants during fiscal 2013. We have classified the results of operations of our Company-owned Marlin & Ray’s, Wok Hay, and Truffles concepts as discontinued operations for all periods presented. The results of operations of our discontinued operations are as follows (in thousands):
| | | June 3, 2014 | | | June 4, 2013 | | | June 5, 2012 | |
| | | | | | | | | | |
| Restaurant sales and operating revenue | | $ | – | | | $ | 11,884 | | | $ | 14,015 | |
| Income/(loss) before income taxes | | $ | 458 | | | $ | (24,498 | ) | | $ | (6,312 | ) |
| Benefit for income taxes | | | (106 | ) | | | (8,519 | ) | | | (2,598 | ) |
| Income/(loss) from discontinued operations | | $ | 564 | | | $ | (15,979 | ) | | $ | (3,714 | ) |
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 last three fiscal years (in thousands).
| | 2014 | 2013 | 2012 |
| Net cash provided by operating activities | $ | 45,375 | | $ | 35,954 | | $ | 112,251 | |
| Net cash (used)/provided by investing activities | | (6,203 | ) | | 22,113 | | | (33,755 | ) |
| Net cash used by financing activities | | (40,753 | ) | | (53,344 | ) | | (40,034 | ) |
| Net (decrease)/increase in cash and cash equivalents | $ | (1,581 | ) | $ | 4,723 | | $ | 38,462 | |
Operating Activities
Our cash provided by operations is generally derived from cash receipts generated by our restaurant customers and franchisees. Substantially all of the $1,162.4 million, $1,245.2 million, and $1,306.0 million of restaurant sales and operating revenue disclosed in our Consolidated Statements of Operations and Comprehensive Loss for fiscal 2014, 2013, and 2012, respectively, was received in cash either at the point of sale or within two to four days (when our customers paid with debit or credit cards). Our primary uses of cash for operating activities are food and beverage purchases, payroll and benefit costs, restaurant operating costs, general and administrative expenses, and marketing, a significant portion of which are incurred and paid in the same period.
Cash provided by operating activities for fiscal 2014 increased $9.4 million (26.2%) from the prior year to $45.4 million. The increase is due primarily to increases in accounts payable, accrued, and other liabilities due to the timing of payments (approximately $22.2 million), reductions in amounts spent to acquire inventory (approximately $11.5 million) as we have suspended the advance purchasing of lobster in order to utilize the lobster that is currently on hand, decreases in amounts spent on media advertising (approximately $3.3 million), lower cash paid for income taxes ($3.1 million), and a decrease in cash paid for interest ($2.1 million) which resulted from lower interest payments on our Senior Notes due to note repurchases since the prior year. These were partially offset by lower EBIT as a result of a 5.3% decrease in same-restaurant sales at Company-owned Ruby Tuesday concept restaurants.
Cash provided by operating activities for fiscal 2013 decreased $76.3 million (68.0%) from fiscal 2012 to $36.0 million. The decrease is due primarily to lower EBITDA as a result of a 1.0% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants and increases in amounts spent on media advertising (approximately $23.6 million), coupled with increases in amounts spent to acquire inventory relating primarily to purchases of lobster and crab to ensure adequate supply (approximately $7.4 million), higher cash paid for taxes ($0.8 million), and higher cash paid for interest ($3.3 million) due primarily to interest on the Senior Notes.
Our working capital deficiency and current ratio as of June 3, 2014 were $14.0 million and 0.9:1, respectively. As is common in the restaurant industry, we typically carry current liabilities in excess of current assets because cash (a current asset) generated from operating activities is reinvested in capital expenditures (a long-term asset), debt reduction (a long-term liability), or stock repurchases (thereby reducing equity), and receivable and inventory levels are generally not significant.
Investing Activities
We require capital principally for the maintenance and upkeep of our existing restaurants, limited new restaurant construction, investments in technology, equipment, remodeling of existing restaurants, and on occasion for the acquisition of franchisees or other restaurant concepts. Property and equipment expenditures purchased primarily with internally-generated cash flows and/or proceeds from sale-leaseback transactions for fiscal 2014, 2013, and 2012 were $28.3 million, $37.1 million, and $38.0 million, respectively. In addition, proceeds from the disposal of assets produced $15.5 million, $7.0 million, and $6.0 million of cash in fiscal 2014, 2013, and 2012, respectively, following actions taken to more aggressively market surplus properties in order to pay down debt.
During the years ended June 3, 2014, June 4, 2013, and June 5, 2012, we completed sale-leaseback transactions of the land and building for three, 24, and 10 Company-owned Ruby Tuesday concept restaurants, respectively, for gross cash proceeds of $5.9 million, $54.4 million, and $22.2 million, respectively, exclusive of transaction costs of
approximately $0.3 million, $2.6 million, and $1.1 million, respectively. Equipment was not included. The net proceeds from the sale-leaseback transactions were used for general corporate purposes, including capital expenditures, debt payments, and the repurchase of shares of our common stock. See Note 7 to the Consolidated Financial Statements for further discussion of these transactions.
As discussed further in Note 4 to the Consolidated Financial Statements, during the fourth quarter of fiscal 2012, we completed the acquisition of Lime Fresh, including the assets of seven Lime Fresh concept restaurants, the royalty stream from five Lime Fresh concept franchised restaurants (one of which was not yet open), and the Lime Fresh brand’s intellectual property for $24.1 million.
Capital expenditures for fiscal 2015 are estimated to be in the range of between $28.0 million to $32.0 million. We intend to fund our investing activities with cash currently on hand, cash provided by operations, or borrowings on the Senior Credit Facility.
Financing Activities
Historically our primary sources of cash have been operating activities, coupled with sale-leaseback and refranchising transactions. When these alone have not provided sufficient funds for both our capital and other needs, we have obtained funds through the issuance of indebtedness or through the issuance of additional shares of common stock. Our current borrowings and credit facilities are described below.
On May 14, 2012, we entered into an indenture (the “Indenture”) among the Company, certain subsidiaries of the Company as guarantors and Wells Fargo Bank, National Association as trustee, governing the Company’s $250.0 million aggregate principal amount of 7.625% senior notes due 2020 (the “Senior Notes”). The Senior Notes were issued at a discount of $3.7 million, which is being amortized using the effective interest method over the eight-year term of the notes.
The Senior Notes are guaranteed on a senior unsecured basis by our existing and future domestic restricted subsidiaries, subject to certain exceptions. They rank equal in right of payment with our existing and future senior indebtedness and senior in right of payment to any of our future subordinated indebtedness. The Senior Notes are effectively subordinated to all of our secured debt, including borrowings outstanding under our revolving credit facility, to the extent of the value of the assets securing such debt and structurally subordinated to all of the liabilities of our existing and future subsidiaries that do not guarantee the Senior Notes.
Interest on the Senior Notes is calculated at 7.625% per annum, payable semiannually on each May 15 and November 15 to holders of record on the May 1 or November 1 immediately preceding the interest payment date. Accrued interest on the Senior Notes and our other long-term debt and capital lease obligations is included in Accrued liabilities – Rent and other in our Consolidated Balance Sheets. The Senior Notes mature on May 15, 2020.
At any time prior to May 15, 2016, we may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus an applicable “make-whole” premium and accrued and unpaid interest. At any time on or after May 15, 2016, we may redeem the Senior Notes, in whole or in part, at the redemption prices specified in the Indenture plus accrued and unpaid interest. At any time prior to May 15, 2015, we may redeem up to 35% of the Senior Notes from the proceeds of certain equity offerings. There is no sinking fund for the Senior Notes.
The Indenture contains covenants that limit, among other things, our ability and the ability of certain of our subsidiaries to (i) incur or guarantee additional indebtedness; (ii) declare or pay dividends, redeem stock or make other distributions to stockholders; (iii) make certain investments; (iv) create liens or use assets as security in other transactions; (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of their assets; (vi) enter into transactions with affiliates; and (vii) sell or transfer certain assets. These covenants are subject to a number of important exceptions and qualifications, as described in the Indenture, and certain covenants will not apply at any time when the Senior Notes are rated investment grade by the Rating Agencies, as defined in the Indenture. The Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately.
Under the terms of our Senior Credit Facility we are allowed, under certain circumstances, to repurchase up to $20.0 million of the Senior Notes in any fiscal year. During the year ended June 3, 2014, we repurchased $20.0 million of the Senior Notes for $20.0 million plus $0.2 million of accrued interest. We realized losses of $0.7 million on these transactions. The balance on the Senior Notes was $215.0 million at June 3, 2014 as a result of these repurchases.
On December 3, 2013, we entered into the Senior Credit Facility under which we may borrow up to $50.0 million with the option, subject to certain conditions, to increase the facility by up to $35.0 million. The Senior Credit Facility, which was obtained to provide access to capital for general corporate purposes, replaced a previous five-year $200.0 million credit facility that was set to expire in December 2015. The terms of the Senior Credit Facility provide for a $25.0 million sublimit for the issuance of standby letters of credit. In connection with entering into the Senior Credit Facility, included within Interest expense, net and Loss on extinguishment of debt in our Consolidated Statements of Operations and Comprehensive Loss for the year ended June 3, 2014 are charges of $0.2 million and $0.7 million, respectively, relating to the write-off of the pro rata portion of unamortized debt issuance costs associated with our previous credit facility.
Under the Senior Credit Facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize. Our options for the rate are a Base Rate or LIBOR, plus an applicable margin. The Base Rate is defined as the highest of the issuing bank’s prime rate, the Federal Funds rate plus 0.50%, or the Adjusted LIBO rate (as defined in the Senior Credit Facility) plus 1.0%. The applicable margin for the LIBOR rate-based option is a percentage ranging from 2.50% to 3.50% and for the Base Rate option is a percentage ranging from 1.50% to 2.50%. We pay commitment fees quarterly ranging from 0.40% to 0.75% on the unused portion of the Senior Credit Facility.
As security for the Senior Credit Facility, we granted the lenders liens and security interests in substantially all of the shares of capital stock of the Company and each of our present and future subsidiaries, substantially all of the personal property of the Company and each of our present and future subsidiaries, and the real property, improvements, and fixtures of 49 Ruby Tuesday restaurants. The real property, improvements, and fixtures of the 49 restaurants pledged as collateral appraised at $101.4 million at the time of the transaction and have a June 3, 2014 net book value of $81.3 million.
Under the Senior Credit Facility, we had no borrowings outstanding at June 3, 2014. After consideration of letters of credit outstanding, we had $37.6 million available under the Senior Credit Facility as of June 3, 2014.
The Senior Credit Facility contains a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability to incur liens, engage in mergers or other fundamental changes, make acquisitions, investments, loans and advances, pay dividends or other distributions, sell or otherwise dispose of certain assets, engage in certain transactions with affiliates, enter into burdensome agreements or certain hedging agreements, amend organizational documents, change accounting practices, incur additional indebtedness and prepay other indebtedness. In addition, under the Senior Credit Facility, we are required to comply with financial covenants relating to the maintenance of a maximum leverage ratio and a minimum fixed charge coverage ratio. The terms of the Senior Credit Facility require us to maintain a maximum leverage ratio of no more than 5.00 to 1.0 and a minimum fixed charge coverage ratio of 1.30 to 1.0 for the quarter ending June 3, 2014. The minimum required ratios fluctuate thereafter as provided in the Senior Credit Facility.
The Senior Credit Facility terminates no later than December 3, 2017. Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights under the Senior Credit Facility and any ancillary loan documents.
On December 3, 2013, in connection with our entry into the Senior Credit Facility, the Company and certain of its subsidiaries entered into loan modification agreements (the “Loan Modification Agreements”) with certain mortgage lenders to, among other things, provide waivers and consents under certain of our mortgage loan obligations to enter into the Senior Credit Facility. The Loan Modification Agreements also, among other things, amend certain financial reporting requirements under the specified loans and modify and/or provide for certain financial covenants for the specified loans, including the minimum consolidated fixed charge coverage ratio and the minimum adjusted total debt to EBITDAR ratio. In conjunction with one of the loan modification agreements, on January 2, 2014, we paid approximately $5.0 million to retire a specified portion of certain mortgage loan obligations.
Our $46.0 million in mortgage loan obligations as of June 3, 2014 consists of various loans acquired upon franchise acquisitions. These loans, which mature between January 2015 and November 2022, have balances which range from $0.1 million to $7.7 million and interest rates of 7.60% to 10.92%. Many of the properties acquired from franchisees collateralize the loans outstanding.
During fiscal 2014, 2013, and 2012, we repurchased 0.1 million, 4.1 million, and 2.0 million shares of RTI common stock, respectively, at an aggregate cost of $0.6 million, $30.3 million, and $18.4 million, respectively. As of June 3, 2014, the total number of shares authorized to be repurchased was 11.8 million. Additionally, there were no dividends paid during fiscal 2014, 2013, or 2012.
Covenant Compliance
Under the terms of the Senior Credit Facility, we are required to satisfy and maintain specified financial ratios and other financial condition tests and covenants. The financial ratios include maximum funded debt and minimum fixed charge coverage covenants. While as of June 3, 2014 we were in compliance with the financial ratios, tests and covenants contained in our Senior Credit Facility, our continued ability to meet those financial ratios, tests and covenants can be affected by events beyond our control, and we cannot assure you that we will meet those ratios, tests and covenants.
Maximum Funded Debt Covenant
Our maximum funded debt covenant is an Adjusted Total Debt to Consolidated EBITDAR ratio. Adjusted Total Debt, as defined in our covenants, includes items both on-balance sheet (debt and capital lease obligations) and off-balance sheet (such as the present value of leases, letters of credit and guarantees). In addition to transitionally allowing for the add-back of certain losses from discontinued operations and store closing costs, Consolidated EBITDAR is consolidated net income/(loss) (for the Company and its majority-owned subsidiaries) plus interest charges, income tax, depreciation, amortization, rent and other non-cash charges. Among other charges, we have reflected share-based compensation, asset impairment and bad debt expense, as non-cash.
Consolidated EBITDAR and Adjusted Total Debt are not presentations made in accordance with U.S. generally accepted accounting principles (“GAAP”), and, as such, should not be considered a measure of financial performance or condition, liquidity or profitability. They also should not be considered alternatives to GAAP-based net income or balance sheet amounts or operating cash flows or indicators of the amount of free cash flow available for discretionary use by management, as Consolidated EBITDAR does not consider certain cash requirements such as interest payments, tax payments or debt service requirements and Adjusted Total Debt includes certain off-balance sheet items. Further, because not all companies use identical calculations, amounts reflected by RTI as Consolidated EBITDAR or Adjusted Total Debt may not be comparable to similarly titled measures of other companies. We believe the information shown below is relevant as it presents the amounts used to calculate covenants which are provided to our lenders. Non-compliance with our debt covenants could result in the requirement to immediately repay all amounts outstanding under such agreements.
The following is a reconciliation of our total long-term debt and capital leases, which are GAAP-based, to Adjusted Total Debt as defined in our bank covenants (in thousands):
| | | June 3, 2014 | |
| Current portion of long-term debt | | $ | 4,816 | |
| Long-term debt and capital leases, less current maturities | | | 253,875 | |
| Total long-term debt and capital leases | | | 258,691 | |
| Present value of operating leases* | | | 215,630 | |
| Letters of credit* | | | 12,402 | |
| Unrestricted cash in excess of $10.0 million | | | (41,143 | ) |
| Unamortized discount of senior unsecured notes | | | 2,503 | |
| Unamortized premium of mortgage loan obligations | | | (741 | ) |
| Adjusted Total Debt | | $ | 447,342 | |
* 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 | |
| | | June 3, 2014 | |
| Net loss | | $ | (64,346 | ) |
| Rent expense | | | 57,085 | |
| Depreciation | | | 54,828 | |
| Asset impairments | | | 25,368 | |
| Interest expense | | | 25,018 | |
| Share-based compensation expense | | | 7,579 | |
| Income taxes | | | (4,771 | ) |
| Non-cash accruals | | | 2,344 | |
| Amortization of intangibles | | | 2,519 | |
| Restructuring costs | | | 2,585 | |
| Restaurant closing costs | | | 2,008 | |
| Losses from discontinued operations | | | 375 | |
| Other | | | 1,576 | |
| Consolidated EBITDAR | | $ | 112,168 | |
| | | | | |
| Adjusted Total Debt to Consolidated EBITDAR – Actual | | | 3.99 | x |
| Maximum allowed per covenant (1) | | | 5.00 | x |
(1) For fiscal 2015, the Senior Credit Facility requires us to maintain quarterly maximum Adjusted Total Debt to EBITDAR ratios of less than or equal to 5.00x (for our first fiscal quarter), 4.85x (for our second and third fiscal quarters), and 4.75x (for our fourth fiscal quarter). For fiscal 2016 and thereafter, the maximum Adjusted Total Debt to EBITDAR ratio fluctuates as provided in Article VII of the Senior Credit Facility.
Minimum Fixed Charge Coverage
Our fixed charge coverage ratio compares Consolidated EBITDAR (as discussed above) to interest and cash-based rents.
The following shows our computation of our fixed charge coverage ratio (in thousands):
| | Twelve Months | |
| | Ended | |
| | June 3, 2014 | |
| Consolidated EBITDAR | | $ | 112,168 | |
| | | | | |
| Interest* | | $ | 22,189 | |
| Cash rents* | | | 52,045 | |
| Total | | $ | 74,234 | |
* Non-GAAP measure. See below for discussion regarding reconciliation to GAAP-based amounts.
| Fixed Charge Covenant – Actual | | 1.51x | |
| Minimum allowed per covenant (2) | | 1.30x | |
(2) For fiscal 2015, the Senior Credit Facility requires us to maintain quarterly minimum fixed charge coverage ratios of greater than or equal to 1.30x (for our first fiscal quarter), 1.35x (for our second and third fiscal quarters), and 1.40x (for our fourth fiscal quarter). For fiscal 2016 and thereafter, the minimum fixed charge coverage ratio fluctuates as provided in Article VII of the Senior Credit Facility.
Non-GAAP Amounts Used in Debt Covenant Calculations
As previously discussed, we use various non-GAAP amounts in our Adjusted Total Debt, Consolidated EBITDAR, and Fixed Charge covenant calculations. Two of the amounts presented in the Adjusted Total Debt calculation, the present value of operating leases and letters of credit, are off-balance sheet and there is no corresponding amount presented in our 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 ($22.2 million on a rolling 12 month basis) differs from interest expense determined in accordance with GAAP ($25.0 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 Consolidated Statements of Operations, they do not require on-going cash payments for servicing and therefore are not impacted by future Consolidated EBITDAR. The table below reconciles debt covenant interest for the preceding 12 months to GAAP interest for the same time period (amounts in thousands):
| Interest | | $ | 22,189 | |
| Brokerage fees | | | 2,079 | |
| | | 1,101 | |
| Amortization of loan fees and fair market | | | | |
| | | (351 | ) |
| GAAP-based interest expense | | $ | 25,018 | |
Our Minimum Fixed Charge Coverage ratio also allows for recurring cash rents to be included in the denominator. Cash rents ($52.0 million on a rolling 12 month basis) differ from rents determined in accordance with GAAP ($58.0 million) by the following (amounts in thousands):
| Cash rents | | $ | 52,045 | |
| Change in rent accruals | | | 3,325 | |
| Rent settlement payments | | | 2,609 | |
| GAAP-based rent expense | | $ | 57,979 | |
Significant Contractual Obligations and Commercial Commitments
Long-term financial obligations were as follows as of June 3, 2014 (in thousands):
| | Payments Due By Period |
| | | Less than | 1-3 | 3-5 | More than 5 |
| | Total | 1 year | years | years | years |
| Notes payable and other | | | | | | | | | | |
| long-term debt, including | | | | | | | | | | |
| current maturities (a) | $ 45,452 | | $ 4,936 | | $ 19,586 | | $ 11,432 | | $ 9,498 | |
| Senior unsecured notes (a) | 215,000 | | – | | – | | – | | 215,000 | |
| Interest (b) | 112,197 | | 19,865 | | 38,212 | | 35,336 | | 18,784 | |
| Operating leases (c) | 371,230 | | 48,625 | | 84,901 | | 71,280 | | 166,424 | |
| Purchase obligations (d) | 60,563 | | 42,085 | | 18,478 | | – | | – | |
| Pension obligations (e) | 34,171 | | 4,184 | | 4,946 | | 4,790 | | 20,251 | |
| Total (f) | $ 838,613 | | $ 119,695 | | $ 166,123 | | $ 122,838 | | $ 429,957 | |
| (a) | See Note 8 to the Consolidated Financial Statements for more information on our debt. |
| (b) | Amounts represent contractual interest payments on our fixed-rate debt instruments. Interest payments on our variable-rate notes payable with balances of $2.4 million, as of June 3, 2014 have been excluded from the amounts shown above, primarily because the balances outstanding can fluctuate monthly. Additionally, the amounts shown above include interest payments on the Senior Notes at the current interest rate of 7.625%. |
| (c) | This amount includes operating leases totaling $2.4 million for which sublease income from franchisees or others is expected. Certain of these leases obligate us to pay maintenance costs, utilities, real estate taxes, and insurance, which are excluded from the amounts shown above. See Note 7 to the Consolidated Financial Statements for more information. |
| (d) | The amounts for purchase obligations include cash commitments under contract for food items and supplies, advertising, utility contracts, and other miscellaneous commitments. |
| (e) | See Note 10 to the Consolidated Financial Statements for more information. |
| (f) | This amount excludes $7.0 million of unrecognized tax benefits due to the uncertainty regarding the timing of future cash outflows associated with such obligations. |
Commercial commitments were as follows as of June 3, 2014 (in thousands):
| | Payments Due By Period |
| | | Less than | 1-3 | 3-5 | More than 5 |
| | Total | 1 year | years | years | years |
| Letters of credit | $ 12,402 | | $ 12,402 | | $ – | | $ – | | $ – | |
| Divestiture guarantees | 6,207 | | 778 | | 2,001 | | 1,733 | | 1,695 | |
| Lease guarantee | 1,168 | | 168 | | 353 | | 353 | | 294 | |
| Total | $ 19,777 | | $ 13,348 | | $ 2,354 | | $ 2,086 | | $ 1,989 | |
At June 3, 2014, we had divestiture guarantees, which arose in fiscal 1996, when our shareholders approved the distribution of our family dining restaurant business (Morrison Fresh Cooking, Inc., “MFC”) and our health care food and nutrition services business (Morrison Health Care, Inc., “MHC”). Subsequent to that date Piccadilly Cafeterias, Inc. (“Piccadilly”) acquired MFC and Compass Group (“Compass”) acquired MHC. As agreed upon at the time of the distribution, we have been contingently liable for payments to MFC and MHC employees retiring under MFC’s and MHC’s versions of the Management Retirement Plan and the Executive Supplemental Pension Plan (the two non-qualified defined benefit plans) for the accrued benefits earned by those participants as of March 1996.
We estimated our divestiture guarantees at June 3, 2014 to be $5.7 million for employee benefit plans (all of which resides with MHC following Piccadilly’s bankruptcy in fiscal 2004). We believe the likelihood of being required to make payments for MHC’s portion to be remote due to the size and financial strength of MHC and Compass.
As of June 3, 2014, we are the guarantor of a third-party lease associated with a closed Ruby Tuesday concept restaurant in Pennsylvania. Lease guarantee amounts in the table above represent lease payments for which we are contingently liable. While we believe that the likelihood of being required to make these lease payments is remote, we recorded a guarantee liability of $0.1 million in our Consolidated Balance Sheet at June 3, 2014.
Off-Balance Sheet Arrangements
See Note 7 to the Consolidated Financial Statements for information regarding our operating leases.
Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted During Fiscal 2014
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. In addition, ASU 2014-08 requires additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted. We adopted the provisions of ASU 2014-08 on a prospective basis during the fourth quarter of fiscal 2014. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements.
Accounting Pronouncements Not Yet Adopted
In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. The guidance requires an entity to present its unrecognized tax benefits net of its deferred tax assets when settlement in this manner is available under the tax law, which would be based on facts and circumstances as of the balance sheet
reporting date and would not consider future events. Gross presentation in the notes to the financial statements will still be required. ASU 2013-11 will apply on a prospective basis to all unrecognized tax benefits that exist at the effective date, with the option to apply it retrospectively. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (our fiscal 2015 first quarter). We do not believe the adoption of this standard will have a significant impact on our Consolidated Financial Statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU is a jointly converged standard between the FASB and the International Accounting Standards Board, and will replace almost all existing revenue recognition guidance, including industry specific guidance, upon its effective date. The standard’s core principle is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 also enhances disclosures about revenue, provides guidance for transactions that were not addressed comprehensively in previous guidance, and improves guidance for multiple-element arrangements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 (our fiscal 2018 first quarter). We are currently evaluating the impact of this guidance on our Consolidated Financial Statements.
Critical Accounting Policies
Our MD&A is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make subjective or complex judgments that may affect the reported financial condition and results of operations. We base our estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We periodically evaluate the information used to make these estimates as our business and the economic environment changes.
We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity. Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements.
Impairment of Long-Lived Assets
We evaluate the carrying value of any individual restaurant when the cash flows of such restaurant have deteriorated and we believe the probability of continued operating and cash flow losses indicate that the net book value of the restaurant may not be recoverable. In performing the review for recoverability, we consider the future cash flows expected to result from the use of the restaurant and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the restaurant, an impairment loss is recognized for the amount by which the net book value of the asset exceeds its fair value. Otherwise, an impairment loss is not recognized. Fair value is market participant-based upon estimated discounted future cash flows expected to be generated from continuing use through the expected disposal date and the expected salvage value.
If a restaurant that has been open for at least one full year shows negative cash flow results, we prepare a plan to reverse the negative performance. Under our policies, recurring or projected annual negative cash flow signals a potential impairment. Both qualitative and quantitative information are considered when evaluating for potential impairments.
At June 3, 2014, we had 64 restaurants that had been open more than one year with rolling 12-month negative cash flows of which 41 have been impaired to salvage value. Of the 23 which remained, we reviewed the plans to improve cash flows at each of the restaurants and determined that no impairment was currently necessary. The remaining net book value of these 23 restaurants, seven of which are located on owned properties, was $23.9 million at June 3, 2014.
Should sales at these restaurants not improve within a reasonable period of time, further impairment charges are possible. Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs, salvage value, and sublease income. Accordingly, actual results could vary significantly from our estimates.
We perform tests for impairment of intangible assets annually, or more frequently if events or circumstances indicate it might be impaired. Impairment tests for goodwill include comparing the fair value of the respective reporting unit with its carrying value, including goodwill. We use a variety of methodologies in conducting these impairment assessments, including cash flow analyses that are consistent with the assumptions we believe hypothetical marketplace participants would use, estimates of sales proceeds and other measures, such as fair market price of our common stock, as evidenced by closing trading price. Where applicable, we use an appropriate discount rate that is commensurate with the risk inherent in the projected cash flows. If market conditions deteriorate, or if operating results decline unexpectedly, we may be required to record impairment charges.
As further discussed in Note 9 to the Consolidated Financial Statements, we tested the goodwill associated with our Lime Fresh concept during the fourth quarter of fiscal 2013. The results of the first step indicated a potential goodwill impairment as the fair value of the Lime Fresh concept was less than its carrying value. We determined the fair value of the Lime Fresh concept using the discounted cash flow method. The results of the second step indicated that all goodwill recorded in connection with the Lime Fresh acquisition was impaired as the implied fair value of the goodwill was less than the carrying value by more than the amount recorded in our Consolidated Balance Sheet at the time of the testing. Accordingly, during the fourth quarter of fiscal 2013 we recorded a charge of $9.0 million ($5.4 million, net of tax) representing the full value of our Lime Fresh concept goodwill.
As also discussed in Note 9 to the Consolidated Financial Statements, we tested the Lime Fresh trademark for impairment during the fourth quarter of fiscal 2013 and during the third quarter of fiscal 2014 as factors were present which indicated the trademark may be impaired. We determined that the Lime Fresh trademark was partially impaired and recorded charges of $0.9 million and $5.0 million during fiscal 2014 and 2013, respectively.
Our normal timing for the annual testing of goodwill has historically been as of the end of our third fiscal quarter. As further discussed in Note 9 to the Consolidated Financial Statements, given our lowered stock price and the continuation of negative same-restaurant sales in fiscal 2012, we tested our Ruby Tuesday concept goodwill throughout the year and determined it to be fully impaired. As a result, we recorded a charge of $16.9 million ($12.0 million, net of tax) during fiscal 2012, representing the full value of our Ruby Tuesday concept goodwill.
Income Tax Valuation Allowances and Tax Accruals
We record deferred tax assets for various items and a valuation allowance against those deferred tax assets when current available information raises doubt as to their ultimate realization. Despite the existence of long carryforward periods for some of our largest deferred tax assets, such as unused employment tax credits and federal and/or state net operating losses, and a history of realizing our deferred tax assets by utilizing those credits and losses in subsequent or carryback years, a three-year cumulative pre-tax loss is an example of negative evidence that raises doubt as to the realization of the deferred tax assets. To determine the appropriate amount of the valuation allowance, we schedule a year-by-year estimation of the reversal of existing taxable temporary differences in order to determine the availability of future taxable income which would allow for the realization of our existing deferred tax assets. While we are able to incorporate tax planning strategies into our analysis, we do not factor projected future income until such time that the positive evidence supporting realization outweighs the negative evidence (most significantly, the three-year cumulative pre-tax loss).
We recorded a valuation allowance for deferred tax assets of $54.6 million and $24.6 million as of June 3, 2014 and June 4, 2013, respectively. Included in income tax expense from continuing operations is the expense from the additional valuation allowance of $31.2 million, $20.9 million, and $0.9 million for fiscal 2014, 2013, and 2012, respectively. Additionally, a valuation allowance (benefit)/expense of $(0.3) million and $1.3 million was included in income tax expense from discontinued operations in fiscal 2014 and 2013, respectively. Given that we last recorded pre-tax income in fiscal 2011, we will likely not be able to reverse the significant valuation allowance recorded in the near future. Our recorded valuation allowance may be subject to material changes in the future, as our ability to utilize deferred tax assets can significantly change based on future events, including our determinations as to the feasibility of certain tax planning strategies. Upon such time that we are able to reverse the deferred tax asset valuation allowance, income tax expense will be reduced, and net income will correspondingly be increased, by the amount we are able to reverse.
Lease Obligations
We lease a significant number of our restaurant properties. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty. The primary penalty to which we are subject is the economic detriment associated with our investment into leasehold improvements which might become impaired should we choose not to continue the use of the leased property.
Our lease term used for straight-line rent expense is calculated from the date we take possession of the leased premises through the lease termination date. There is potential for variability in our “rent holiday” period which begins on the possession date and ends on the earlier of the restaurant open date or the commencement of rent payments. Factors that may affect the length of the rent holiday period generally relate to construction-related delays. Extension of the rent holiday period due to delays in restaurant opening will result in greater preopening rent expense recognized during the rent holiday period.
For leases that contain predetermined fixed rent escalations, we record the total rent payable during the lease term, as determined above, on the straight-line basis over the term of the lease (including the “rent holiday” period beginning upon possession of the premises), and we record the difference between the minimum rents paid and the straight-line rent as deferred escalating minimum rent.
Certain leases contain provisions that require additional rental payments, called "contingent rents," when the associated restaurants' sales volumes exceed agreed-upon levels. We recognize contingent rental expense (in annual as well as interim periods) prior to the achievement of the specified target that triggers the contingent rental expense, provided that achievement of that target is considered probable.
The judgment regarding the probable term for each restaurant property lease impacts the classification and accounting for a lease as capital or operating, the rent holiday and/or escalation in payments that are taken into consideration when calculating straight-line rent and the term over which leasehold improvements for each restaurant amortized. The material factor we consider when making this judgment is the total amount invested in the restaurant at the inception of the lease and whether management believes that renewal appears reasonably assured. While a different term may produce materially different amounts of depreciation, amortization, and rent expense than reported, our historical lease renewal rates support the judgments made. We have not made any changes to the nature of the assumptions used to account for leases in any of the fiscal years presented in our Consolidated Financial Statements.
We record the estimated future lease obligations on closed leased restaurants for which we have not sublet or settled the lease with the respective landlord as of a quarter end date. Inherent in these estimates is an assumption on the time period we anticipate it will take to reach a settlement with our landlord or to execute on a sublease agreement. We calculate the lease obligation as the present value of future minimum net lease or settlement payments using a discount rate that takes into account the remaining time period prior to the estimated date of resolution. As further discussed in Note 9 to the Consolidated Financial Statements, our estimated lease obligations for closed restaurants as of June 3, 2014 and June 4, 2013 were $10.9 million and $8.7 million, respectively.
Share-Based Employee Compensation
Share-based compensation expense is estimated for equity awards at fair value at the grant date. We determine the fair value of restricted stock awards based on the closing price of our common stock on the date prior to approval of the award by our Board of Directors. The majority of our stock option awards outstanding as of June 3, 2014 were measured at their grant date fair value using the Black-Scholes option pricing model. During fiscal 2014 and 2013, we awarded performance-based stock options to our current CEO and certain other employees and estimated the grant date fair value using the Monte-Carlo simulation method. Both the Black-Scholes option pricing model and the Monte-Carlo simulation method require various highly judgmental assumptions including the expected dividend yield, stock price volatility, and life of the award. If any of the assumptions used in the model change significantly, share-based compensation expense may differ materially in the future from that recorded in the current period. See Note 12 to the Consolidated Financial Statements for further discussion of share-based employee compensation.
Estimated Liability for Self-Insurance
We self-insure a portion of our expected losses under our workers’ compensation, general liability, and property insurance programs. Specifically with our workers’ compensation and general liability coverages, we have stop loss insurance for individual claims in excess of stated loss amounts. Insurance liabilities are recorded based on third-party actuarial estimates of the ultimate incurred losses, net of payments made. The estimates themselves are based on standard actuarial techniques that incorporate both the historical loss experience of the Company and supplemental information as appropriate.
The analysis performed in calculating the estimated liability is subject to various assumptions including, but not limited to, (a) the quality of historical loss and exposure information, (b) the reliability of historical loss experience to serve as a predictor of future experience, (c) the reasonableness of insurance trend factors and governmental indices as applied to the Company, and (d) projected payrolls and revenue. As claims develop, the actual ultimate losses may differ from actuarial estimates. Therefore, an analysis is performed quarterly to determine if modifications to the accrual are required.
Segment Reporting
Operating segments are components of an entity that engage in business activities with discrete financial information available that is regularly reviewed by the chief operating decision maker (“CODM”) in order to assess performance and allocate resources. Our CODM is the Company’s President and Chief Executive Officer. As discussed further in Note 13 to the Consolidated Financial Statements, we consider our Ruby Tuesday concept and Lime Fresh concept to be our reportable operating segments.
Discontinued Operations
As previously discussed in this MD&A, in an effort to focus primarily on the successful sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our Lime Fresh concept, we closed all 13 Marlin & Ray’s restaurants, the Company’s one Wok Hay restaurant, and our two Truffles restaurants during fiscal 2013. As a result of these decisions and in accordance with GAAP, we have included the results of operations of the discontinued Marlin & Ray’s, Wok Hay, and Truffles concepts within discontinued operations for all periods presented in our Consolidated Statements of Operations and Comprehensive Loss.
Revenue Recognition for Franchisees
We charge our franchisees various monthly fees that are calculated as a percentage of the respective franchise’s monthly sales. Our Ruby Tuesday concept franchise agreements allow us to charge up to a 4.0% royalty fee, a 1.5% support service fee, a 1.5% marketing and purchasing fee, and an advertising fee of up to 3.0%. Our Lime Fresh concept franchise agreements allow us to charge up to a 5.25% royalty fee and an advertising fee of up to 3.0%. We defer recognition of franchise fee revenue for any franchise with negative cash flows at times when the negative cash flows are deemed to be anything other than temporary. We also do not recognize additional franchise fee revenue from franchisees with fees in excess of 60 days past due.
Unearned income for franchise fees was $0.3 million and $0.2 million as of June 3, 2014 and June 4, 2013, respectively, which is included in Accrued liabilities – Rent and other in the Consolidated Balance Sheets.
Known Events, Uncertainties, and Trends
Financial Strategy and Stock Repurchase Plan
Our financial strategy is to utilize a prudent amount of debt, including operating leases, letters of credit, and any guarantees, to minimize the weighted average cost of capital while allowing financial flexibility. This strategy has periodically allowed us to repurchase our common stock. During the year ended June 3, 2014, we repurchased 0.1 million shares of our common stock at an aggregate cost of $0.6 million. As of June 3, 2014, the total number of remaining shares authorized to be repurchased was 11.8 million. To the extent not funded with cash on hand or cash from operating activities, additional repurchases, if any, may be funded by available cash on hand or, under certain circumstances, from borrowings on the Senior Credit Facility. The repurchase of shares in any particular future period and the actual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.
Repurchases of Senior Notes
We are allowed under the terms of the Senior Credit Facility to prepay up to $20.0 million of indebtedness in any fiscal year to various holders of the Senior Notes. As discussed in Note 8 to the Consolidated Financial Statements, we repurchased $20.0 million of the Senior Notes during the year ended June 3, 2014 for $20.0 million plus $0.2 million of accrued interest. We realized losses of $0.7 million on these transactions. As of the date of this filing, we may repurchase an additional $20.0 million of the Senior Notes during the remainder of fiscal 2015. Any future repurchases of the Senior Notes, if any, will be funded with available cash on hand or borrowings on the Senior Credit Facility.
Dividends
During fiscal 1997, our Board of Directors approved a dividend policy as an additional means of returning capital to our shareholders. The payment of a dividend in any particular future period and the actual amount thereof remains at the discretion of the Board of Directors and is restricted by the covenants in certain of our debt agreements, and no assurance can be given that dividends will be paid in the future.
Fiscal Year
Our fiscal year 2015 will contain 52 weeks and end on June 2, 2015.
Impact of Inflation
The impact of inflation on the cost of food, labor, supplies, utilities, real estate, and construction costs could adversely impact our operating results. Historically, we have been able to recover certain inflationary cost increases through increased menu prices coupled with more efficient purchasing practices and productivity improvements. Competitive pressures may limit our ability to completely recover such cost increases. Historically, the effect of inflation has not significantly impacted our net income.
Disclosure About Market Risk
We are exposed to market risk from fluctuations in interest rates and changes in commodity prices. The interest rate charged on our Senior Credit Facility can vary based on the interest rate option we choose to utilize. Our options for the rate are LIBOR or a Base Rate plus an applicable margin. The Base Rate is defined as the highest of the issuing bank’s prime rate, the Federal Funds rate plus 0.50%, or the Adjusted LIBO rate (as defined in the Senior Credit Facility) plus 1.0%. The applicable margin for the LIBOR rate-based option is a percentage ranging from 2.50% to 3.50% and for the Base Rate option is a percentage ranging from 1.50% to 2.50%. As of June 3, 2014, the total amount of outstanding debt subject to interest rate fluctuations was $2.4 million. A hypothetical 100 basis point change in short-term interest rates would result in an increase or decrease in interest expense of an insignificant amount per year, assuming a consistent capital structure.
Many of the ingredients used in the products we sell in our restaurants are commodities that are subject to unpredictable price volatility. This volatility may be due to factors outside our control such as weather and seasonality. We attempt to minimize the effect of price volatility by negotiating fixed price contracts for the supply of key ingredients. Historically, and subject to competitive market conditions, we have been able to mitigate the negative impact of price volatility through adjustments to average check or menu mix.
Index
Ruby Tuesday, Inc. and Subsidiaries
Index to Consolidated Financial Statements
Ruby Tuesday, Inc. and Subsidiaries | | | |
| Consolidated Financial Statements | | | |
| Consolidated Statements of Operations and Comprehensive Loss | | | |
| (In thousands, except per-share data) | | | |
| | | | |
| | | For the Fiscal Year Ended | |
| | | June 3, | | | June 4, | | | June 5, | |
| | | 2014 | | | 2013 | | | 2012 | |
| Revenue: | | | | | | | | | |
| Restaurant sales and operating revenue | | $ | 1,162,423 | | | $ | 1,245,226 | | | $ | 1,306,025 | |
| Franchise revenue | | | 6,323 | | | | 6,261 | | | | 5,738 | |
| | | | 1,168,746 | | | | 1,251,487 | | | | 1,311,763 | |
| | | | | | | | | | | | | |
| Operating costs and expenses: | | | | | | | | | | | | |
| Cost of merchandise | | | 321,521 | | | | 341,512 | | | | 375,573 | |
| Payroll and related costs | | | 404,379 | | | | 419,679 | | | | 440,753 | |
| Other restaurant operating costs | | | 260,447 | | | | 259,014 | | | | 262,573 | |
| Depreciation | | | 54,828 | | | | 59,122 | | | | 64,144 | |
| Selling, general, and administrative, net | | | 137,151 | | | | 138,782 | | | | 120,364 | |
| Closures and impairments, net | | | 32,831 | | | | 14,656 | | | | 16,751 | |
| Goodwill and trademark impairments | | | 855 | | | | 14,058 | | | | 16,919 | |
| Interest expense, net | | | 24,945 | | | | 26,576 | | | | 23,312 | |
| Loss on extinguishment of debt | | | 1,364 | | | | 22 | | | | – | |
| | | | 1,238,321 | | | | 1,273,421 | | | | 1,320,389 | |
| | | | | | | | | | | | | |
| Loss from continuing operations before income taxes | | | (69,575 | ) | | | (21,934 | ) | | | (8,626 | ) |
| | | | | | | | | | | | | |
| (Benefit)/provision for income taxes from continuing | | | | | | | | | | | | |
| operations | | | (4,665 | ) | | | 1,500 | | | | (12,152 | ) |
| (Loss)/income from continuing operations | | | (64,910 | ) | | | (23,434 | ) | | | 3,526 | |
| | | | | | | | | | | | | |
| Income/(loss) from discontinued operations, net of tax | | | 564 | | | | (15,979 | ) | | | (3,714 | ) |
| Net loss | | $ | (64,346 | ) | | $ | (39,413 | ) | | $ | (188 | ) |
| | | | | | | | | | | | | |
| Other comprehensive loss: | | | | | | | | | | | | |
| Pension liability reclassification, net of tax | | | 45 | | | | 3,312 | | | | (1,205 | ) |
| Total comprehensive loss | | $ | (64,301 | ) | | $ | (36,101 | ) | | $ | (1,393 | ) |
| | | | | | | | | | | | | |
| Basic loss per share: | | | | | | | | | | | | |
| (Loss)/income from continuing operations | | $ | (1.08 | ) | | $ | (0.38 | ) | | $ | 0.06 | |
| Income/(loss) from discontinued operations | | | 0.01 | | | | (0.27 | ) | | | (0.06 | ) |
| Net loss per share | | $ | (1.07 | ) | | $ | (0.65 | ) | | $ | (0.00 | ) |
| | | | | | | | | | | | | |
| Diluted loss per share: | | | | | | | | | | | | |
| (Loss)/income from continuing operations | | $ | (1.08 | ) | | $ | (0.38 | ) | | $ | 0.06 | |
| Income/(loss) from discontinued operations | | | 0.01 | | | | (0.27 | ) | | | (0.06 | ) |
| Net loss per share | | $ | (1.07 | ) | | $ | (0.65 | ) | | $ | (0.00 | ) |
| | | | | | | | | | | | | |
| Weighted average shares: | | | | | | | | | | | | |
| Basic | | | 60,231 | | | | 61,040 | | | | 62,916 | |
| Diluted | | | 60,231 | | | | 61,040 | | | | 63,508 | |
| The accompanying notes are an integral part of the consolidated financial statements. | |
Consolidated Balance Sheets
(In thousands, except per-share data)
| | | June 3, 2014 | | | June 4, 2013 | |
| Assets: | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 51,326 | | | $ | 52,907 | |
| Accounts receivable | | | 4,861 | | | | 4,834 | |
| Inventories: | | | | | | | | |
| Merchandise | | | 12,924 | | | | 21,779 | |
| China, silver and supplies | | | 8,250 | | | | 9,093 | |
| Income tax receivable | | | 2,133 | | | | 1,900 | |
| Deferred income taxes | | | 3,397 | | | | 7,296 | |
| Prepaid rent and other expenses | | | 12,216 | | | | 14,180 | |
| Assets held for sale | | | 4,683 | | | | 9,175 | |
| Total current assets | | | 99,790 | | | | 121,164 | |
| | | | | | | | | |
| Property and equipment, net | | | 794,846 | | | | 859,830 | |
| Other assets | | | 61,791 | | | | 62,189 | |
| Total assets | | $ | 956,427 | | | $ | 1,043,183 | |
| | | | | | | | | |
| Liabilities and Shareholders' Equity: | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 26,201 | | | $ | 14,964 | |
| Accrued liabilities: | | | | | | | | |
| Taxes, other than income and payroll | | | 11,221 | | | | 11,311 | |
| Payroll and related costs | | | 22,637 | | | | 25,425 | |
| Insurance | | | 5,962 | | | | 9,095 | |
| Deferred revenue – gift cards | | | 16,584 | | | | 13,454 | |
| Rent and other | | | 26,402 | | | | 22,896 | |
| Current maturities of long-term debt, including capital leases | | | 4,816 | | | | 8,487 | |
| Total current liabilities | | | 113,823 | | | | 105,632 | |
| | | | | | | | | |
| Long-term debt and capital leases, less current maturities | | | 253,875 | | | | 290,515 | |
| Deferred income taxes | | | 3,500 | | | | 5,753 | |
| Deferred escalating minimum rent | | | 48,827 | | | | 46,892 | |
| Other deferred liabilities | | | 75,193 | | | | 77,556 | |
| Total liabilities | | | 495,218 | | | | 526,348 | |
| | | | | | | | | |
| Commitments and contingencies (Note 14) | | | | | | | | |
| | | | | | | | | |
| Shareholders’ equity: | | | | | | | | |
| Common stock, $0.01 par value; (authorized: 100,000 shares; | | | | | | | | |
| issued: 2014 – 61,442 shares, 2013 – 61,248 shares) | | | 614 | | | | 612 | |
| Capital in excess of par value | | | 76,269 | | | | 67,596 | |
| Retained earnings | | | 395,226 | | | | 459,572 | |
| Deferred compensation liability payable in Company stock | | | 622 | | | | 1,094 | |
| Company stock held by Deferred Compensation Plan | | | (622 | ) | | | (1,094 | ) |
| Accumulated other comprehensive loss | | | (10,900 | ) | | | (10,945 | ) |
| | | | 461,209 | | | | 516,835 | |
| Total liabilities and shareholders' equity | | $ | 956,427 | | | $ | 1,043,183 | |
The accompanying notes are an integral part of the consolidated financial statements.
Ruby Tuesday, Inc. and Subsidiaries |
| Consolidated Statements of Shareholders’ Equity |
| (In thousands) |
| | | | | | | | | | | | Company Stock | | | | | | |
| | | | | | | | | | Held by the | | Accumulated | | | | |
| | Common Stock | | Capital In | | | | Deferred | | Deferred | | Other | | Total | | |
| | Issued | | Excess of | | Retained | | Compensation | | Compensation | | Comprehensive | | Shareholders’ | | |
| Shares | | Amount | Par Value | Earnings | Liability | Plan | Loss | Equity | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | (188 | ) | | | | | | | (188 | ) | |
Pension and post-retirement | | | | | | | | | | | | | | | | | |
| benefit plans, net of taxes | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Shares issued pursuant to | | | | | | | | | | | | | | | | | |
compensation plans, net of | | | | | | | | | | | | | | | | | |
| cancellations | 940 | | 9 | | 346 | | | | | | | | | | 355 | | |
Share-based compensation, net of | | | | | | | | | | | | | | | | | |
| taxes of $1,924 | | | | | 3,990 | | | | | | | | | | 3,990 | | |
| | | | | | | | | | | | | | | | | |
| Changes in Deferred | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance, June 5, 2012 | 64,038 | | 640 | | 90,856 | | 498,985 | | 1,008 | | (1,008 | ) | (14,257 | ) | 576,224 | | |
| | | | | | | | | | | | | | | | | |
| Pension and post-retirement | | | | | | | | | | | | | | | | | |
benefit plans, net of taxes | | | | | | | | | | | | | | | | | |
| of $2,180 | | | | | | | | | | | | | 3,312 | | 3,312 | | |
Shares issued pursuant to | | | | | | | | | | | | | | | | | |
| compensation plans, net of | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Share-based compensation, net of | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock repurchases | (4,082 | ) | (41 | ) | (30,237 | ) | | | | | | | | | (30,278 | ) | |
| | | | | | | | | | | | | | | | | |
| Compensation Plan | | | | | | | | | 86 | | (86 | ) | | | – | | |
| | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | (64,346 | ) | | | | | | | (64,346 | ) | |
Pension and post-retirement | | | | | | | | | | | | | | | | | |
| benefit plans | | | | | | | | | | | | | 45 | | 45 | | |
Shares issued pursuant to | | | | | | | | | | | | | | | | | |
| compensation plans, net of | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Share-based compensation, net of | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Stock repurchases | (64 | ) | (1 | ) | (578 | ) | | | | | | | | | (579 | ) | |
| | | | | | | | | | | | | | | | | |
| Compensation Plan | | | | | | | | | (472 | ) | 472 | | | | – | | |
| | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
Consolidated Statements of Cash Flows
| (In thousands) | | For the Fiscal Year Ended | |
| | | June 3, 2014 | | | June 4, 2013 | | | June 5, 2012 | |
| Operating activities: | | | | | | | | | |
| Net loss | | $ | (64,346 | ) | | $ | (39,413 | ) | | $ | (188 | ) |
| Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation | | | 54,828 | | | | 60,018 | | | | 65,297 | |
| Amortization of intangibles | | | 2,519 | | | | 3,287 | | | | 2,314 | |
| Deferred income taxes | | | 1,646 | | | | (15,771 | ) | | | (20,207 | ) |
| Loss on impairments, including disposition of assets | | | 24,132 | | | | 30,369 | | | | 13,772 | |
Goodwill and trademark impairments | | | 855 | | | | 14,058 | | | | 16,919 | |
| Loss on extinguishment of debt | | | 1,364 | | | | 22 | | | | – | |
Share-based compensation expense | | | 7,579 | | | | 4,481 | | | | 5,914 | |
| Excess tax benefits from share-based compensation | | | (284 | ) | | | (382 | ) | | | (36 | ) |
Lease reserve adjustments | | | 6,815 | | | | 4,248 | | | | 3,841 | |
| Deferred escalating minimum rent | | | 2,733 | | | | 3,110 | | | | 2,414 | |
Pension curtailment expense | | | – | | | | 2,481 | | | | – | |
| Loss on acquisitions, including settlement losses | | | – | | | | – | | | | 614 | |
| | | 5,032 | | | | 2,242 | | | | 2,895 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| | | (204 | ) | | | (311 | ) | | | 1,296 | |
| Inventories | | | 9,698 | | | | (1,842 | ) | | | 5,524 | |
| | | (233 | ) | | | (1,063 | ) | | | 2,240 | |
| Prepaid and other assets | | | (1,392 | ) | | | (2,036 | ) | | | (690 | ) |
Accounts payable, accrued and other liabilities | | | (5,367 | ) | | | (27,544 | ) | | | 10,332 | |
| Net cash provided by operating activities | | | 45,375 | | | | 35,954 | | | | 112,251 | |
| | | | | | | | | | | | | |
| Investing activities: | | | | | | | | | | | | |
Purchases of property and equipment | | | (28,339 | ) | | | (37,117 | ) | | | (37,966 | ) |
| Acquisition of Lime Fresh Mexican Grill® | | | – | | | | – | | | | (24,084 | ) |
Proceeds from sale-leaseback transactions, net | | | 5,637 | | | | 51,765 | | | | 21,150 | |
| Proceeds from disposal of assets | | | 15,526 | | | | 6,997 | | | | 5,994 | |
Insurance proceeds from property claims | | | 218 | | | | – | | | | 1,548 | |
| Reductions in Deferred Compensation Plan assets | | | 901 | | | | 840 | | | | 244 | |
| | | (146 | ) | | | (372 | ) | | | (641 | ) |
| Net cash (used)/provided by investing activities | | | (6,203 | ) | | | 22,113 | | | | (33,755 | ) |
| | | | | | | | | | | | | |
| Financing activities: | | | | | | | | | | | | |
Proceeds from issuance of senior unsecured notes | | | – | | | | – | | | | 246,340 | |
| Net payments on revolving credit facility | | | – | | | | – | | | | (177,000 | ) |
Principal payments on other long-term debt | | | (40,232 | ) | | | (27,180 | ) | | | (85,557 | ) |
| Stock repurchases | | | (579 | ) | | | (30,278 | ) | | | (18,441 | ) |
Payments for debt issuance costs | | | (1,802 | ) | | | (358 | ) | | | (5,767 | ) |
| Proceeds from exercise of stock options | | | 1,576 | | | | 4,090 | | | | 355 | |
Excess tax benefits from share-based compensation | | | 284 | | | | 382 | | | | 36 | |
| Net cash used by financing activities | | | (40,753 | ) | | | (53,344 | ) | | | (40,034 | ) |
| | | | | | | | | | | | | |
| (Decrease)/increase in cash and cash equivalents | | | (1,581 | ) | | | 4,723 | | | | 38,462 | |
Cash and cash equivalents: | | | | | | | | | | | | |
| Beginning of year | | | 52,907 | | | | 48,184 | | | | 9,722 | |
| | $ | 51,326 | | | $ | 52,907 | | | $ | 48,184 | |
| | | | | | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
| Cash paid for: | | | | | | | | | | | | |
Interest, net of amount capitalized | | $ | 22,638 | | | $ | 24,771 | | | $ | 21,505 | |
| Income taxes, net | | $ | 727 | | | $ | 3,833 | | | $ | 3,053 | |
Significant non-cash investing and financing activities: | | | | | | | | | | | | |
| Retirement of fully depreciated assets | | $ | 44,775 | | | $ | 46,793 | | | $ | 32,137 | |
Reclassification of properties to assets held for sale | | $ | 9,982 | | | $ | 11,257 | | | $ | 8,806 | |
| Changes in property and equipment included in accounts payable | | $ | 1,443 | | | $ | – | | | $ | 592 | |
The accompanying notes are an integral part of the consolidated financial statements. | | | | | | | | | |
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Description of Business and Principles of Consolidation
Ruby Tuesday, Inc. including its wholly-owned subsidiaries (“RTI,” the “Company,” “we” and/or “our”) develops, operates and franchises casual dining restaurants in the United States, Guam, and 12 foreign countries under the Ruby Tuesday® brand. We also own and operate 20 Lime Fresh Mexican Grill® (“Lime Fresh”) fast casual restaurants. At June 3, 2014, we owned and operated 668 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 of our fiscal year end, there were 79 domestic and international franchise Ruby Tuesday restaurants located in 14 states primarily outside of our existing core markets (primarily the Western United States and portions of the Midwest) and in the Asia Pacific Region, Middle East, Guam, Canada, Iceland, Eastern Europe, the United Kingdom, and Central and South America. Also at fiscal year end, there were six domestic franchise Lime Fresh restaurants located in Florida.
RTI consolidates its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Fiscal Year
Our fiscal year ends on the first Tuesday following May 30 and, as a result, a 53rd week is added every five or six years. The fiscal years ended June 3, 2014 and June 4, 2013 each contained 52 weeks. Fiscal 2012 contained 53 weeks. The first three quarters of fiscal 2012 each contained 13 weeks and the fourth quarter contained 14 weeks. In fiscal 2012, the 53rd week added $22.9 million to restaurant sales and operating revenue and $0.03 to diluted earnings per share in our Consolidated Statement of Operations and Comprehensive Loss.
Cash and Cash Equivalents
Our cash management program provides for the investment of excess cash balances in short-term money market instruments. These money market instruments are stated at cost, which approximates market value. We consider amounts receivable from credit card companies and marketable securities with a maturity of three months or less when purchased to be cash equivalents. Book overdrafts are recorded in accounts payable and are included within operating cash flows.
Inventories
Inventories consist of food, supplies, china and silver and are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment and Depreciation
Property and equipment is valued at cost. Expenditures for major renewals and betterments are capitalized while expenditures for repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of depreciable assets generally range from three to 35 years for buildings and improvements and from three to 15 years for restaurant and other equipment.
Other Intangible Assets
Other intangible assets which are included in Other assets, net in the Consolidated Balance Sheets consist of the following (in thousands):
| | | 2014 | | | 2013 | |
| | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
| | | | | | | | | | | | | |
| Reacquired franchise rights | | $ | 14,460 | | | $ | 8,371 | | | $ | 14,723 | | | $ | 6,847 | |
| Trademarks | | | 4,194 | | | | 390 | | | | 6,025 | | | | 854 | |
| Favorable leases * | | | 2,059 | | | | 322 | | | | 2,205 | | | | 255 | |
| Acquired franchise agreements | | | 1,500 | | | | 463 | | | | 1,500 | | | | 248 | |
| Other | | | 100 | | | | 41 | | | | 100 | | | | 22 | |
| | | $ | 22,313 | | | $ | 9,587 | | | $ | 24,553 | | | $ | 8,226 | |
* As of June 3, 2014 and June 4, 2013, we also had $0.9 million and $1.0 million, respectively, of unfavorable lease liabilities which resulted from the terms of acquired franchise operating lease contracts being unfavorable relative to market terms of comparable leases on the acquisition date. In addition, as of June 3, 2014 and June 4, 2013, we had a liability of $0.1 million and $0.2 million, respectively, which resulted from the terms of a Lime Fresh license agreement being unfavorable relative to market terms of a comparable license agreement. The majority of these liabilities are included within Other deferred liabilities in our Consolidated Balance Sheets. See Note 4 to the Consolidated Financial Statements for more information on the favorable and unfavorable leases acquired and assumed from our acquisition of Lime Fresh in fiscal 2012.
The reacquired franchise rights reflected in the table above were acquired as part of certain franchise acquisitions. Trademarks consist primarily of the Lime Fresh trademark that was acquired as part of the Lime Fresh acquisition in fiscal 2012. The favorable leases resulted from the terms of acquired franchise operating lease contracts being favorable relative to market terms of comparable leases on the acquisition date. See Note 4 to the Consolidated Financial Statements for more information on the purchase price allocation applied to the Lime Fresh acquisition in fiscal 2012.
Amortization expense of other intangible assets for fiscal 2014, 2013, and 2012 totaled $2.5 million, $3.3 million, and $2.3 million, respectively. We amortize acquired and reacquired franchise rights on a straight-line basis over the remaining term of the franchise operating agreements. The weighted average amortization period of acquired and reacquired franchise rights is 7.3 and 8.4 years, respectively. We amortize favorable leases as a component of rent expense on a straight-line basis over the remaining lives of the leases. The weighted average amortization period of the favorable leases is 25.6 years. We amortize trademarks on a straight-line basis over the life of the trademarks, typically 10 years. Amortization expense for intangible assets for each of the next five years is expected to be $2.3 million in fiscal 2015, $2.0 million in fiscal 2016, $1.6 million in fiscal 2017, $1.3 million in fiscal 2018, and $1.3 million in fiscal 2019. Rent expense resulting from amortization of favorable leases, net of the amortization of unfavorable leases, is expected to be insignificant for each of the next five years.
Deferred Escalating Minimum Rent
Certain of our operating leases contain predetermined fixed escalations of the minimum rentals during the term of the lease, which includes option periods where failure to exercise such options would result in an economic penalty. For these leases, we recognize the related rental expense on a straight-line basis over the life of the lease, beginning with the point at which we obtain control and possession of the leased properties, and record the difference between the amounts charged to operations and amounts paid as deferred escalating minimum rent. Any lease incentives received are deferred and subsequently amortized on a straight-line basis over the life of the lease as a reduction to rent expense.
Pensions and Post-Retirement Medical Benefits
We measure and recognize the funded status of our defined benefit and postretirement plans in our Consolidated Balance Sheets as of our fiscal year end. The funded status represents the difference between the projected benefit obligation and the fair value of plan assets. The projected benefit obligation is the present value of benefits earned to date by plan participants, including the effect of future salary increases, as applicable. The difference between the
projected benefit obligation and the fair value of assets that has not previously been recognized as expense is recorded as a component of other comprehensive loss.
Revenue Recognition
Revenue from restaurant sales is recognized when food and beverage products are sold. We present sales net of sales tax and other sales-related taxes. Deferred revenue-gift cards primarily represents our liability for gift cards that have been sold, but not yet redeemed, and is recorded at the expected redemption value. When the gift cards are redeemed, we recognize restaurant sales and reduce the deferred revenue.
Using gift card redemption history, we have determined that substantially all of our customers utilize their gift cards within two years from the date of purchase. Accordingly, we recognize gift card breakage for non-escheatable amounts beginning 24 months after the date of activation.
We recognized gift card breakage income of $0.6 million, $1.9 million, and $1.8 million during fiscal 2014, 2013, and 2012, respectively. This income is included as an offset to Other Restaurant Operating Costs in the Consolidated Statements of Operations and Comprehensive Loss.
Franchise development and license fees received are recognized when we have substantially performed all material services and the restaurant has opened for business. Franchise royalties are recognized as franchise revenue on the accrual basis. Advertising amounts received from domestic franchisees are considered by us to be reimbursements, recorded on an accrual basis when earned, and have been netted against selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss.
We charge our franchisees various monthly fees that are calculated as a percentage of the respective franchise’s monthly sales. Our Ruby Tuesday concept franchise agreements allow us to charge up to a 4.0% royalty fee, a 1.5% support service fee, a 1.5% marketing and purchasing fee, and an advertising fee of up to 3.0%. Our Lime Fresh concept franchise agreements allow us to charge up to a 5.25% royalty fee and an advertising fee of up to 3.0%. We defer recognition of franchise fee revenue for any franchise with negative cash flows at times when the negative cash flows are deemed to be anything other than temporary and the franchise has borrowed directly from us.
A further description of our franchise programs is provided in Note 2 to the Consolidated Financial Statements.
Pre-Opening Expenses
Salaries, personnel training costs, pre-opening rent, and other expenses of opening new facilities are charged to expense as incurred.
Share-Based Employee Compensation Plans
We recognize share-based payment transactions, including grants of employee stock options and restricted stock, as compensation expense based on the fair value of the equity award on the grant date. This compensation expense is recognized over the service period on a straight-line basis for all awards except those awarded to retirement-eligible individuals, which are recognized on the grant date at their estimated fair value. We classify share-based compensation expense consistent with the other compensation expense for the recipient in Selling, general, and administrative, net in our Consolidated Statements of Operations and Comprehensive Loss. See Note 12 to the Consolidated Financial Statements for further discussion regarding our share-based employee compensation plans.
Marketing Costs
Except for television and radio advertising production costs which we expense when the advertisement is first shown, we expense marketing costs as incurred. Marketing expenses, net of franchise reimbursements, which are included in Selling, general, and administrative expense in the Consolidated Statements of Operations and Comprehensive Loss, totaled $67.2 million, $71.4 million, and $47.2 million for fiscal 2014, 2013, and 2012, respectively.
Impairment or Disposal of Long-Lived Assets
We review our long-lived assets related to each restaurant to be held and used in the business, including any allocated intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. We evaluate restaurants based upon cash flows as our primary indicator of impairment. Based on the best information available, we write down an impaired restaurant to its fair
value based upon estimated future discounted cash flows and salvage value, if any. In addition, when we decide to close a restaurant it is reviewed for impairment and depreciable lives are adjusted. The impairment evaluation is based on the estimated cash flows from continuing use through the expected disposal date and the expected terminal value.
See Note 9 to the Consolidated Financial Statements for a further discussion regarding our closures and impairments, including the impairments of goodwill and other long-lived assets.
Income Taxes
Our deferred income taxes are determined utilizing the asset and liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If, after consideration of all available positive and negative evidence, current available information raises doubt as to the realization of the deferred tax assets, the need for a valuation allowance is addressed. A valuation allowance for deferred tax assets may be required if the amount of taxes recoverable through loss carry-back declines, if we project lower levels of future taxable income, or if we have recently experienced pretax losses. Such a valuation allowance is established through a charge to income tax expense which adversely affects our reported operating results. The judgments and estimates utilized when establishing, and subsequently adjusting, a deferred tax asset valuation allowance are reviewed on a periodic basis as regulatory and business factors change.
The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize interest and penalties accrued related to unrecognized tax benefits as components of our income tax expense.
We recognize in our consolidated financial statements the benefit of a position taken or expected to be taken in a tax return when it is more likely than not (i.e. a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Changes in judgment that result in subsequent recognition, derecognition or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) are recognized as a discrete item in the interim period in which the change occurs.
See Note 11 to the Consolidated Financial Statements for a further discussion of our income taxes.
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 loss per share gives effect to stock options and restricted stock outstanding during the applicable periods. The following table reflects the calculation of weighted-average common and dilutive potential common shares outstanding as presented in the accompanying Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per-share data):
| | | 2014 | | 2013 | | 2012 |
| (Loss)/income from continuing operations | $ | (64,910) | $ | (23,434) | $ | 3,526 |
| Income/(loss) from discontinued operations | | 564 | | (15,979) | | (3,714) |
| | | | | | |
| | | | | | | |
Weighted-average common shares outstanding | | | | | | |
| Dilutive effect of stock options and restricted stock | | – | | – | | 592 |
Weighted average common and dilutive potential | | | | | | |
| common shares outstanding | | 60,231 | | 61,040 | | 63,508 |
| | | | | | | |
| Loss per share – Basic | | | | | | |
(Loss)/income from continuing operations | | | | | | |
| Income/(loss) from discontinued operations | | 0.01 | | (0.27) | | (0.06) |
| | | | | | |
| | | | | | | |
| | | | | | |
| (Loss)/income from continuing operations | $ | (1.08) | $ | (0.38) | $ | 0.06 |
Income/(loss) from discontinued operations | | | | | | |
| Net loss per share | $ | (1.07) | $ | (0.65) | $ | (0.00) |
Stock options with an exercise price greater than the average market price of our common stock and certain options with unrecognized compensation expense do not impact the computation of diluted loss per share because the effect would be anti-dilutive. The following table summarizes stock options and restricted shares that did not impact the computation of diluted loss per share because their inclusion would have had an anti-dilutive effect (in thousands):
| | | 2014 | | 2013 | | 2012 |
| Stock options | | 2,833* | | 2,161* | | 2,229 |
| Restricted shares | | 1,121* | | 1,492* | | 819 |
| Total | | 3,954* | | 3,653* | | 3,048 |
*Due to a loss from continuing operations for the years ended June 3, 2014 and June 4, 2013, all then outstanding share-based awards were excluded from the computation of diluted loss per share.
Comprehensive Loss
Comprehensive loss includes net loss adjusted for certain revenue, expenses, gains and losses that are excluded from net loss in accordance with U.S. GAAP, such as pension adjustments. Comprehensive loss is shown as a separate component in the Consolidated Statements of Operations and Comprehensive Loss.
Fair Value of Financial Instruments
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The fair values are assigned a level within the fair value hierarchy to prioritize the inputs used to measure the fair value of assets or liabilities. These levels are:
| · | Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities; |
| · | Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
| · | Level 3 – Unobservable inputs which require the reporting entity to develop its own assumptions. |
See Note 15 to the Consolidated Financial Statements for a further discussion of our financial instruments.
Segment Reporting
Operating segments are components of an entity that engage in business activities with discrete financial information available that is regularly reviewed by the chief operating decision maker (“CODM”) in order to assess performance and allocate resources. Our CODM is the Company’s President and Chief Executive Officer. As discussed further in Note 13 to the Consolidated Financial Statements, we consider our Ruby Tuesday concept and Lime Fresh concept to be our reportable operating segments.
Immaterial Reclassifications of Prior Period Consolidated Statements of Operations and Comprehensive Loss and Consolidated Statements of Cash Flows
We reclassified $0.5 million from Interest expense, net to Loss on extinguishment of debt in our Consolidated Statements of Operations and Comprehensive Loss for the year ended June 4, 2013. We also made certain reclassifications to prior year amounts in our Consolidated Statements of Cash Flows to conform to current year presentation (all reclassifications were within Operating activities).
Accounting Pronouncements Adopted During Fiscal 2014
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. ASU 2014-08 changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. In addition, ASU 2014-08 requires additional disclosures about both discontinued operations and the disposal of an
individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014, with early adoption permitted. We adopted the provisions of ASU 2014-08 on a prospective basis during the fourth quarter of fiscal 2014. The adoption of this ASU did not have a material impact on our Consolidated Financial Statements.
Accounting Pronouncements Not Yet Adopted
In July 2013, the FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. The guidance requires an entity to present its unrecognized tax benefits net of its deferred tax assets when settlement in this manner is available under the tax law, which would be based on facts and circumstances as of the balance sheet reporting date and would not consider future events. Gross presentation in the notes to the financial statements will still be required. ASU 2013-11 will apply on a prospective basis to all unrecognized tax benefits that exist at the effective date, with the option to apply it retrospectively. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (our fiscal 2015 first quarter). We do not believe the adoption of this standard will have a significant impact on our Consolidated Financial Statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU is a jointly converged standard between the FASB and the International Accounting Standards Board, and will replace almost all existing revenue recognition guidance, including industry specific guidance, upon its effective date. The standard’s core principle is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. ASU 2014-09 also enhances disclosures about revenue, provides guidance for transactions that were not addressed comprehensively in previous guidance, and improves guidance for multiple-element arrangements. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 (our fiscal 2018 first quarter). We are currently evaluating the impact of this guidance on our Consolidated Financial Statements.
2. Franchise Programs
As of June 3, 2014, our franchise programs included arrangements with 27 domestic and international Ruby Tuesday concept franchisees and five domestic Lime Fresh franchisees. At the end of fiscal 2014, our franchisees collectively operated 79 Ruby Tuesday and six Lime Fresh restaurants. We do not own any equity interest in our existing franchisees.
We enter into development agreements with our franchisees that require them to open varying numbers of Ruby Tuesday or Lime Fresh restaurants. As of June 3, 2014, five of our 27 Ruby Tuesday concept franchisees had agreements to develop new franchised Ruby Tuesday restaurants. None of our five Lime Fresh concept domestic franchisees had an agreement to develop new Lime Fresh restaurants as of June 3, 2014. During fiscal 2014, 2013, and 2012, our Ruby Tuesday franchisees opened seven, two, and six restaurants, respectively, pursuant to development agreements, as follows:
| | | | Ruby Tuesday | | Lime Fresh |
| Fiscal Year | | | Domestic | | International | | Total | | |
| 2014 | | | 1 | | 6 | | 7 | | 2* |
| 2013 | | | – | | 2 | | 2 | | 2* |
| 2012 | | | 2 | | 4 | | 6 | | 4* |
*As discussed further in Note 4 to the Consolidated Financial Statements, on April 11, 2012 we acquired the royalty stream from four open, and one not yet open, Lime Fresh franchise restaurants. This restaurant opened in fiscal 2013. Additionally, one of the Lime Fresh franchise restaurant openings in each of fiscal 2014 and 2013 was opened in Chile by an international franchisee. Both of these restaurants closed during the fourth quarter of fiscal 2014.
In conjunction with these openings, we recognized development and licensing fee income totaling $0.2 million in each of fiscal 2014, 2013, and 2012.
Deferred development and licensing fees associated with all franchisees totaled $0.8 million as of both June 3, 2014 and June 4, 2013. We will recognize these fees as income when we have substantially performed all material services and the restaurant has opened for business.
3. Discontinued Operations
In an effort to focus primarily on the successful sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our Lime Fresh concept, we closed all 13 Marlin & Ray’s restaurants, the Company’s one Wok Hay restaurant, and our two Truffles restaurants during fiscal 2013. We have classified the results of operations of our Company-owned Marlin & Ray’s, Wok Hay, and Truffles concepts as discontinued operations for all periods presented. The results of operations of our discontinued operations are as follows (in thousands):
| | | June 3, 2014 | | | June 4, 2013 | | | June 5, 2012 | |
| | | | | | | | | | |
| Restaurant sales and operating revenue | | $ | – | | | $ | 11,884 | | | $ | 14,015 | |
| Income/(loss) before income taxes | | $ | 458 | | | $ | (24,498 | ) | | $ | (6,312 | ) |
| Benefit for income taxes | | | (106 | ) | | | (8,519 | ) | | | (2,598 | ) |
| Income/(loss) from discontinued operations | | $ | 564 | | | $ | (15,979 | ) | | $ | (3,714 | ) |
We had $4.2 million and $2.8 million of assets associated with the closed concept restaurants, which are included within Assets held for sale and Property and equipment, net, respectively, in our June 4, 2013 Consolidated Balance Sheet. There were no assets associated with the closed concept restaurants included within either Assets Held for sale or Property and equipment, net in our June 3, 2014 Consolidated Balance Sheet. See Note 9 to the Consolidated Financial Statements for a discussion of closed restaurant lease reserves as of June 3, 2014 and June 4, 2013 associated with the closed concept restaurants.
4. Business and License Acquisitions
Fiscal 2012 transactions
On April 11, 2012, we completed the acquisition of Lime Fresh, including the assets of seven Lime Fresh concept restaurants, the royalty stream from five Lime Fresh concept franchised restaurants (one of which was not yet open), and the Lime Fresh brand’s intellectual property for $24.1 million. Lime Fresh is a fast casual Mexican concept that then operated several restaurants primarily in the vicinity of Miami, Florida. The Lime Fresh concept menu features diverse menu offerings such as homemade tortilla chips, customizable nachos, salads, soups, fajitas, quesadillas, tacos, burritos, and salsa and guacamole.
Our Consolidated Financial Statements reflect the results of operations of these acquired restaurants subsequent to the date of acquisition.
The purchase price of the Lime Fresh acquisition during fiscal 2012 was allocated based on fair value estimates as follows (in thousands):
| Trademarks | | $ | 11,100 | |
| Goodwill | | | 9,022 | |
| Acquired franchise rights | | | 1,500 | |
| Property and equipment | | | 2,405 | |
| Deferred income taxes | | | 6 | |
| Other, net | | | (983 | ) |
| Net impact on Consolidated Balance Sheet | | | 23,050 | |
| | | | | |
| Write-off of previous license agreement | | | 1,034 | |
| Net impact on Consolidated Statements of | | | | |
| Operations and Comprehensive Loss | | | 1,034 | |
| Aggregate cash purchase price | | $ | 24,084 | |
For the year ended June 5, 2012, a $1.0 million loss on the write-off of a previous license agreement, representing the balance remaining from the September 13, 2010 licensing agreement with LMFG International, LLC, was included in Other restaurant operating costs in our Consolidated Statements of Operations and Comprehensive Loss. Further discussion regarding this agreement is presented later within this footnote.
We recorded $9.0 million of goodwill due to the purchase price exceeding the estimated fair value of the net assets acquired. As further discussed in Note 9 to the Consolidated Financial Statements, we determined during fiscal 2013 that the goodwill associated with our acquisition of Lime Fresh was fully impaired and recorded a charge of $9.0 million ($5.4 million, net of tax).
We amortize the acquired trademarks over a ten year period. As further discussed in Note 9 to the Consolidated Financial Statements, we determined during the third quarter of fiscal 2014 and the fourth quarter of fiscal 2013 that the Lime Fresh trademark was partially impaired and recorded charges of $0.9 million and $5.0 million, respectively. We amortize the acquired franchise rights associated with this acquisition on a straight-line basis over the remaining term of the franchise operating agreements, which are approximately five to nine years from the date of acquisition.
The revenues and operating results from April 11, 2012, the date of acquisition, through June 5, 2012 for the seven Lime Fresh restaurants acquired in fiscal 2012 were not material to our consolidated financial statements.
License Acquisitions and Related Party Transactions
On September 13, 2010, we entered into a licensing agreement with LFMG International, LLC which allowed us to operate multiple restaurants under the Lime Fresh concept. Under the terms of the agreement, we paid an initial development fee of $1.0 million and paid a license agreement fee of $5,000 for each Lime Fresh restaurant we opened. In addition, we paid a royalty fee of 2.0%, and an advertising fee of 1.0%, of gross sales of any Lime Fresh restaurant that we opened. The license agreement terminated when we acquired certain assets of LFMG International, LLC as discussed above. We opened four Lime Fresh restaurants during fiscal 2012 under the terms of the license agreement prior to the acquisition on April 11, 2012. As previously discussed, we wrote off the $1.0 million balance remaining on this license agreement upon completion of the acquisition in fiscal 2012.
On June 7, 2012 we entered into two marketing agreements with 50 Eggs Branding Company, LLC (“50 Eggs”). John Kunkel, the Chief Executive Officer of 50 Eggs, previously was the Chief Executive Officer of LFMG International, LLC, and is a current Lime Fresh franchisee. Under the terms of the first agreement, 50 Eggs provided marketing services for our Lime Fresh concept for a monthly fee of $52,500 plus out of pocket expenses. Under the terms of the second agreement, 50 Eggs provided marketing services for our Marlin & Ray’s concept for a monthly fee of $26,250 plus out of pocket expenses. We cancelled both agreements during fiscal 2013. Included within Selling, general, and administrative, net in our Consolidated Statements of Operations and Comprehensive Loss for the year ended June 4, 2013, are payments we made to 50 Eggs in connection with these agreements of $0.8 million. Additionally, during the year ended June 5, 2012, we made payments to 50 Eggs including $30,000 for marketing services and $26,139 for training consulting for our Lime Fresh concept.
On July 22, 2010, following the approval of the Audit Committee of our Board of Directors, we entered into a licensing agreement with Gourmet Market, Inc. which is owned by our former Chief Executive Officer’s brother, Price Beall. The licensing agreement allowed us to operate multiple restaurants under the Truffles name. Under the terms of the agreement, we paid a licensing fee to Gourmet Market, Inc. of 2.0% of gross sales of the Truffles we opened. Additionally, we paid Gourmet Market, Inc. a monthly fee two years for consulting services to be provided by Price Beall to assist us in developing and opening Truffles restaurants under the terms of the licensing agreement. During the first 12 months of the agreement we paid $20,833 per month for such services. During the second 12 months of the agreement we paid $10,417 per month. The consulting services agreement expired during the first quarter of fiscal 2013. As discussed further in Notes 3 and 9 to the Consolidated Financial Statements, we closed our two Truffles restaurants during the fourth quarter of fiscal 2013. During fiscal 2013 and 2012, we paid Gourmet Market, Inc. $80,361 and $197,623, respectively, under the terms of the agreement.
5. Accounts Receivable
Accounts receivable – current consist of the following (in thousands):
| | | 2014 | | | 2013 | |
| | | | | | | |
| Rebates receivable | | $ | 930 | | | $ | 874 | |
| Amounts due from franchisees | | | 1,281 | | | | 917 | |
| Other receivables | | | 2,650 | | | | 3,043 | |
| | | $ | 4,861 | | | $ | 4,834 | |
We negotiate purchase arrangements, including price terms, with designated and approved suppliers on behalf of us and our franchise system. We receive various volume discounts and rebates based on purchases for our Company-owned restaurants from numerous suppliers.
Amounts due from franchisees consist of royalties, license, and other miscellaneous fees, a substantial portion of which represents current and recently-invoiced billings.
As of June 3, 2014 and June 4, 2013, Other receivables consisted primarily of amounts due for third-party gift card sales ($1.6 million and $1.8 million, respectively), amounts due from our distributor ($0.4 million for both periods), sales and other miscellaneous tax refunds ($0.2 million and $0.1 million, respectively), and amounts due from landlords (negligible and $0.5 million, respectively).
6. Inventories
Our merchandise inventory was $12.9 million and $21.8 million as of June 3, 2014 and June 4, 2013, respectively. In order to ensure adequate supply and competitive pricing, we sometimes purchase lobster in advance of our needs and store it in third-party facilities prior to our distributor taking possession of the inventory. The decrease in merchandise inventory from the end of the prior fiscal year is due primarily to a reduction in lobster inventory as we temporarily suspended the advance purchasing of lobster during the current fiscal year to utilize the lobster that is in our inventory.
7. Property, Equipment, Assets Held for Sale, Operating Leases, and Sale-Leaseback Transactions
Property and equipment, net, is comprised of the following (in thousands):
| | | 2014 | | | 2013 | |
| Land | | $ | 214,277 | | | $ | 222,385 | |
| Buildings | | | 430,988 | | | | 448,681 | |
| Improvements | | | 365,599 | | | | 402,371 | |
| Restaurant equipment | | | 248,852 | | | | 260,576 | |
| Other equipment | | | 84,876 | | | | 91,351 | |
| Construction in progress and other* | | | 22,246 | | | | 23,080 | |
| | | | 1,366,838 | | | | 1,448,444 | |
| Less accumulated depreciation | | | 571,992 | | | | 588,614 | |
| | | $ | 794,846 | | | $ | 859,830 | |
* Included in Construction in progress and other as of June 3, 2014 and June 4, 2013 are $18.4 million and $14.8 million, respectively, of assets held for sale that are not classified as such in the Consolidated Balance Sheets as we do not expect to sell these assets within the next 12 months. These assets primarily consist of parcels of land upon which we have no intention to build restaurants and closed properties which include a building.
Included within the current assets section of our Consolidated Balance Sheets at June 3, 2014 and June 4, 2013 are amounts classified as assets held for sale totaling $4.7 million and $9.2 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. In addition to operating restaurants sold and leased back, as discussed below, during fiscal 2014, 2013, and 2012 we sold surplus properties with carrying values of $14.0 million, $6.4 million, and $5.3 million, respectively, at net gains of $1.5 million, $0.6 million, and $0.8 million, respectively. Cash proceeds, net of broker fees, from these sales totaled $15.4 million, $7.0 million, and $6.0 million, respectively.
Approximately 56% of our 688 Company-owned restaurants are located on leased properties. Of these, approximately 68% are land leases only; the other 32% are for both land and building. The initial terms of these leases expire at various dates over the next 22 years. These leases may also contain required increases in minimum rent at varying times during the lease term and have options to extend the terms of the leases at a rate that is included in the original lease agreement. Most of our leases require the payment of additional (contingent) rent that is based upon a percentage of restaurant sales above agreed upon sales levels for the year. These sales levels vary for each restaurant and are established in the lease agreements. We recognize contingent rental expense (in annual as well as interim periods) prior to the achievement of the specified target that triggers the contingent rental expense, provided that achievement of that target is considered probable.
During the years ended June 3, 2014, June 4, 2013, and June 5, 2012, we completed sale-leaseback transactions of the land and building for three, 24, and 10 Company-owned Ruby Tuesday concept restaurants, respectively, for gross cash proceeds of $5.9 million, $54.4 million, and $22.2 million, respectively, exclusive of transaction costs of approximately $0.3 million, $2.6 million, and $1.1 million, respectively. Equipment was not included. The carrying value of the properties sold was $4.8 million, $41.4 million, and $16.5 million, respectively. The leases have been classified as operating leases and have initial terms of 15 years, with renewal options of up to 20 years. Net proceeds from the sale-leaseback transactions were used for general corporate purposes, including capital expenditures, debt payments, and the repurchase of shares of our common stock.
We realized gains during fiscal 2014, 2013, and 2012 on these transactions of $0.8 million, $10.4 million, and $4.6 million, respectively, which have been deferred and are being recognized on a straight-line basis over the initial terms of the leases. The current portion of the deferred gains on all sale-leaseback transactions to date was $1.1 million and $1.0 million as of June 3, 2014 and June 4, 2013, respectively, and is included in Accrued liabilities – Rent and other in our Consolidated Balance Sheets. The long-term portion of the deferred gains on all sale-leaseback transactions to date was $13.0 million and $13.2 million as of June 3, 2014 and June 4, 2013, respectively, and is included in Other deferred liabilities in our Consolidated Balance Sheets. Amortization of the deferred gains of $1.1 million, $0.8 million, and $0.1 million is included within Other restaurant operating costs in our Consolidated Statements of Operations and Comprehensive Loss for the fiscal years ended June 3, 2014, June 4, 2013, and June 5, 2012, respectively.
The following is a schedule by year of future minimum lease payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of June 3, 2014 (in thousands):
| | | | |
| 2015 | | $ | 48,625 | |
| 2016 | | | 44,381 | |
| 2017 | | | 40,520 | |
| 2018 | | | 37,266 | |
| 2019 | | | 34,014 | |
| Subsequent years | | | 166,424 | |
| Total minimum lease payments | | $ | 371,230 | |
The following schedule shows the future minimum sub-lease payments contractually due from franchisees and others for the next five years and thereafter under noncancelable sub-lease agreements (in thousands):
| | | Franchisees | | | Others | | | Total | |
| 2015 | | $ | 243 | | | $ | 233 | | | $ | 476 | |
| 2016 | | | 247 | | | | 215 | | | | 462 | |
| 2017 | | | 247 | | | | 75 | | | | 322 | |
| 2018 | | | 247 | | | | 74 | | | | 321 | |
| 2019 | | | 208 | | | | 74 | | | | 282 | |
| Subsequent years | | | 27 | | | | 478 | | | | 505 | |
| Total minimum sub-lease payments | | $ | 1,219 | | | $ | 1,149 | | | $ | 2,368 | |
The following table summarizes our minimum and contingent rent expense and our sublease rental income under our operating leases (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| Included within continuing operations | | | | | | | | | |
| Minimum rent | | $ | 52,774 | | | $ | 51,398 | | | $ | 47,808 | |
| Contingent rent | | | 430 | | | | 472 | | | | 467 | |
| | | | 53,204 | | | | 51,870 | | | | 48,275 | |
| Sublease rental income | | | (409 | ) | | | (357 | ) | | | (416 | ) |
| | | $ | 52,795 | | | $ | 51,513 | | | $ | 47,859 | |
| | | | | | | | | | | | | |
| Included within discontinued operations | | $ | – | | | $ | 546 | | | $ | 967 | |
The amounts shown for fiscal 2014, 2013, and 2012 above exclude rent expense of $5.7 million, $2.0 million, and $3.4 million, respectively, relating to lease reserves established for closed restaurants or dead sites, which is included within Closures and impairments expense in our Consolidated Statements of Operations and Comprehensive Loss.
8. Long-Term Debt and Capital Leases
Long-term debt and capital lease obligations consist of the following (in thousands):
| | | 2014 | | | 2013 | |
| Senior unsecured notes | | $ | 215,000 | | | $ | 235,000 | |
| Unamortized discount | | | (2,503 | ) | | | (3,083 | ) |
| Senior unsecured notes less unamortized discount | | | 212,497 | | | | 231,917 | |
| Revolving credit facility | | | – | | | | – | |
| Mortgage loan obligations | | | 45,993 | | | | 66,883 | |
| Capital lease obligations | | | 201 | | | | 202 | |
| | | | 258,691 | | | | 299,002 | |
| Less current maturities | | | 4,816 | | | | 8,487 | |
| | | $ | 253,875 | | | $ | 290,515 | |
Estimated annual maturities of long-term debt and capital lease obligations at June 3, 2014 are as follows (in thousands):
| 2015 | | $ | 4,816 | |
| 2016 | | | 5,047 | |
| 2017 | | | 14,125 | |
| 2018 | | | 5,558 | |
| 2019 | | | 5,091 | |
| Subsequent years | | | 224,054 | |
| | | $ | 258,691 | |
On May 14, 2012, we entered into an indenture (the “Indenture”) among the Company, certain subsidiaries of the Company as guarantors and Wells Fargo Bank, National Association as trustee, governing the Company’s $250.0 million aggregate principal amount of 7.625% senior notes due 2020 (the “Senior Notes”). The Senior Notes were issued at a discount of $3.7 million, which is being amortized using the effective interest method over the eight-year term of the notes.
The Senior Notes are guaranteed on a senior unsecured basis by our existing and future domestic restricted subsidiaries, subject to certain exceptions. They rank equal in right of payment with our existing and future senior indebtedness and senior in right of payment to any of our future subordinated indebtedness. The Senior Notes are effectively subordinated to all of our secured debt, including borrowings outstanding under our revolving credit facility, to the extent of the value of the assets securing such debt and structurally subordinated to all of the liabilities of our existing and future subsidiaries that do not guarantee the Senior Notes.
Interest on the Senior Notes is calculated at 7.625% per annum, payable semiannually on each May 15 and November 15 to holders of record on the May 1 or November 1 immediately preceding the interest payment date. Accrued interest on the Senior Notes and our other long-term debt and capital lease obligations is included in Accrued liabilities – Rent and other in our Consolidated Balance Sheets. The Senior Notes mature on May 15, 2020.
At any time prior to May 15, 2016, we may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus an applicable “make-whole” premium and accrued and unpaid interest. At any time on or after May 15, 2016, we may redeem the Senior Notes, in whole or in part, at the redemption prices specified in the Indenture plus accrued and unpaid interest. At any time prior to May 15, 2015, we may redeem up to 35% of the Senior Notes from the proceeds of certain equity offerings. There is no sinking fund for the Senior Notes.
The Indenture contains covenants that limit, among other things, our ability and the ability of certain of our subsidiaries to (i) incur or guarantee additional indebtedness; (ii) declare or pay dividends, redeem stock or make other distributions to stockholders; (iii) make certain investments; (iv) create liens or use assets as security in other transactions; (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of their assets; (vi) enter into transactions with affiliates; and (vii) sell or transfer certain assets. These covenants are subject to a number of important exceptions and qualifications, as described in the Indenture, and certain covenants will not apply at any time when the Senior Notes are rated investment grade by the Rating Agencies, as defined in the Indenture. The Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately.
Under the terms of our December 2013 four-year revolving credit agreement (the “Senior Credit Facility” discussed below) we are allowed, under certain circumstances, to repurchase up to $20.0 million of the Senior Notes in any fiscal year. During the year ended June 3, 2014, we repurchased $20.0 million of the Senior Notes for $20.0 million plus $0.2 million of accrued interest. We realized losses of $0.7 million on these transactions. The balance on the Senior Notes was $215.0 million at June 3, 2014 as a result of these repurchases.
On December 3, 2013, we entered into the Senior Credit Facility under which we may borrow up to $50.0 million with the option, subject to certain conditions, to increase the facility by up to $35.0 million. The Senior Credit Facility, which was obtained to provide access to capital for general corporate purposes, replaced a previous five-year $200.0 million credit facility that was set to expire in December 2015. The terms of the Senior Credit Facility provide for a
$25.0 million sublimit for the issuance of standby letters of credit. In connection with entering into the Senior Credit Facility, included within Interest expense, net and Loss on extinguishment of debt in our Consolidated Statements of Operations and Comprehensive Loss for the year ended June 3, 2014 are charges of $0.2 million and $0.7 million, respectively, relating to the write-off of the pro rata portion of unamortized debt issuance costs associated with our previous credit facility.
Under the Senior Credit Facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize. Our options for the rate are a Base Rate or LIBOR, plus an applicable margin. The Base Rate is defined as the highest of the issuing bank’s prime rate, the Federal Funds rate plus 0.50%, or the Adjusted LIBO rate (as defined in the Senior Credit Facility) plus 1.0%. The applicable margin for the LIBOR rate-based option is a percentage ranging from 2.50% to 3.50% and for the Base Rate option is a percentage ranging from 1.50% to 2.50%. We pay commitment fees quarterly ranging from 0.40% to 0.75% on the unused portion of the Senior Credit Facility.
As security for the Senior Credit Facility, we granted the lenders liens and security interests in substantially all of the shares of capital stock of the Company and each of our present and future subsidiaries, substantially all of the personal property of the Company and each of our present and future subsidiaries, and the real property, improvements, and fixtures of 49 Ruby Tuesday restaurants. The real property, improvements, and fixtures of the 49 restaurants pledged as collateral appraised at $101.4 million at the time of the transaction and have a June 3, 2014 net book value of $81.3 million.
Under the Senior Credit Facility, we had no borrowings outstanding at June 3, 2014. After consideration of letters of credit outstanding, we had $37.6 million available under the Senior Credit Facility as of June 3, 2014.
The Senior Credit Facility contains a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability to incur liens, engage in mergers or other fundamental changes, make acquisitions, investments, loans and advances, pay dividends or other distributions, sell or otherwise dispose of certain assets, engage in certain transactions with affiliates, enter into burdensome agreements or certain hedging agreements, amend organizational documents, change accounting practices, incur additional indebtedness and prepay other indebtedness. In addition, under the Senior Credit Facility, we are required to comply with financial covenants relating to the maintenance of a maximum leverage ratio and a minimum fixed charge coverage ratio. The terms of the Senior Credit Facility require us to maintain a maximum leverage ratio of no more than 5.00 to 1.0 and a minimum fixed charge coverage ratio of 1.30 to 1.0 for the quarter ending June 3, 2014. The minimum required ratios fluctuate thereafter as provided in the Senior Credit Facility.
The Senior Credit Facility terminates no later than December 3, 2017. Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights under the Senior Credit Facility and any ancillary loan documents.
On December 3, 2013, in connection with our entry into the Senior Credit Facility, the Company and certain of its subsidiaries entered into loan modification agreements (the “Loan Modification Agreements”) with certain mortgage lenders to, among other things, provide waivers and consents under certain of our mortgage loan obligations to enter into the Senior Credit Facility. The Loan Modification Agreements also, among other things, amend certain financial reporting requirements under the specified loans and modify and/or provide for certain financial covenants for the specified loans, including the minimum consolidated fixed charge coverage ratio and the minimum adjusted total debt to EBITDAR ratio. In conjunction with one of the loan modification agreements, on January 2, 2014, we paid approximately $5.0 million to retire a specified portion of certain mortgage loan obligations.
Our $46.0 million in mortgage loan obligations as of June 3, 2014 consists of various loans acquired upon franchise acquisitions. These loans, which mature between January 2015 and November 2022, have balances which range from $0.1 million to $7.7 million and interest rates of 7.60% to 10.92%. Many of the properties acquired from franchisees collateralize the loans outstanding.
We capitalized interest expense related to new restaurant openings of our Lime Fresh concept restaurants and restaurant conversions of certain of our Ruby Tuesday concept restaurants totaling $0.1 million in each of fiscal 2014, 2013, and 2012.
9. Closures and Impairments Expense, Including Goodwill and Trademark Impairments
Closures and impairments, net include the following (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| Closures and impairments from continuing operations: | | | | | | | | | |
| Property impairments | | $ | 24,335 | | | $ | 11,325 | | | $ | 12,240 | |
| Closed restaurant lease reserves | | | 7,302 | | | | 2,844 | | | | 3,516 | |
| Other closing expense | | | 2,181 | | | | 1,152 | | | | 1,673 | |
| (Gain)/loss on sale of surplus properties | | | (987 | ) | | | (665 | ) | | | (678 | ) |
| Closures and impairments, net | | $ | 32,831 | | | $ | 14,656 | | | $ | 16,751 | |
| | | | | | | | | | | | | |
| Closures and impairments from discontinued operations | | $ | (468 | ) | | $ | 21,674 | | | $ | 1,914 | |
During the last two quarters of fiscal 2014, we closed 33 Ruby Tuesday concept restaurants in connection with a plan approved by the Board of Directors of Ruby Tuesday, Inc.. Of these closures, 11 of the restaurants closed upon expiration of their lease. Included within Closures and impairments, net for the year ended June 3, 2014 are impairment charges of $4.8 million in connection with early restaurant closures.
In addition to impairment charges recorded in connection with the planned closures discussed above, during fiscal 2014, we recorded $13.5 million of impairments relating to 32 open restaurants with deteriorating operational performance and a $0.9 million impairment charge for the Lime Fresh trademark. The Lime Fresh trademark, which previously had been impaired by $5.0 million in the fourth quarter of fiscal 2013, has a net book value of $3.6 million remaining at June 3, 2014.
Included in Closures and impairments, net from continuing operations for fiscal 2013 are $4.3 million of impairment and lease charges relating to the closing of four Lime Fresh concept restaurants and $3.6 million of impairment charges for four underperforming Lime Fresh open restaurants, two of which closed during fiscal 2014.
As discussed further in Note 3 to the Consolidated Financial Statements, in an effort to focus primarily on the successful sales turnaround of our core Ruby Tuesday concept and secondly, to improve the financial performance of our Lime Fresh concept, we closed all 13 Marlin & Ray’s restaurants, the Company’s one Wok Hay restaurant, and our two Truffles restaurants during fiscal 2013. As a result of these decisions, pre-tax charges of $21.7 million were recognized for asset impairments, lease reserves, and other closing costs within Loss from discontinued operations, net of tax for the fiscal year ended June 4, 2013.
Included in Closures and impairments, net from continuing operations for fiscal 2012 are property impairments of $9.7 million resulting from management’s decision to close approximately 25 to 27 Ruby Tuesday concept restaurants.
A rollforward of our future lease obligations associated with closed properties is as follows (in thousands):
| | | Lease Obligations | |
| | | Continuing Operations | | | Discontinued Concepts | | | Total | |
| Balance at June 5, 2012 | | $ | 6,227 | | | $ | 586 | | | $ | 6,813 | |
| Closing expense including rent and other lease charges | | | 2,844 | | | | 1,404 | | | | 4,248 | |
| Payments | | | (3,818 | ) | | | (808 | ) | | | (4,626 | ) |
| Other adjustments | | | 1,164 | | | | 1,128 | | | | 2,292 | |
| Balance at June 4, 2013 | | | 6,417 | | | | 2,310 | | | | 8,727 | |
| Closing expense including rent and other lease charges | | | 7,302 | | | | (487 | ) | | | 6,815 | |
| Payments | | | (4,620 | ) | | | (1,185 | ) | | | (5,805 | ) |
| Other adjustments | | | 1,138 | | | | (2 | ) | | | 1,136 | |
| Balance at June 3, 2014 | | $ | 10,237 | | | $ | 636 | | | $ | 10,873 | |
The amounts comprising future lease obligations in the table above are estimated using certain assumptions, including the period of time it will take to settle the lease with the landlord or find a suitable sublease tenant, and the amount of
actual future cash payments could differ from our recorded lease obligations. Of the total future lease obligations included in the table above, $10.5 million and $8.7 million are included within the Accrued liabilities – Rent and other caption in our Consolidated Balance Sheets as of June 3, 2014 and June 4, 2013, respectively. For fiscal 2015 and beyond, our focus will be on obtaining settlements, or subleases as necessary, on as many of these leases as possible and these settlements could be higher or lower than the amounts recorded. The actual amount of any cash payments made by the Company for lease contract termination costs will be dependent upon ongoing negotiations with the landlords of the leased restaurant properties.
Included within closing expense in the table above are $0.2 million in charges we recorded during fiscal 2013 associated with lease obligations on a restaurant subleased to RT Midwest that has closed. As of June 4, 2013, we continue to remain a sublease guarantor for three of RT Midwest’s operating restaurants, which have remaining lease terms extending through September 2019. As of June 3, 2014, cash rents of $1.2 million are required under the terms of the subleases. Should RT Midwest decide to close any of these restaurants we may incur further lease obligations associated with these subleases.
Goodwill
Goodwill represents the excess of costs over the fair market value of assets of businesses acquired. We recorded goodwill with the acquisition of Lime Fresh during fiscal 2012 and the acquisition of certain franchise partnerships during fiscal 2011. We perform tests for impairments annually, or more frequently when events or circumstances indicate it might be impaired.
Impairment tests for goodwill require a two-step process and are performed after testing of all other assets is complete. Under the first step, the estimation of fair value of the reporting unit is compared with its carrying value, including goodwill. If the first step indicates a potential impairment, the second step is performed to measure the amount of impairment, if any. Goodwill impairment exists when the implied fair value of goodwill is less than its carrying value. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation.
As we acquired Lime Fresh during the fourth quarter of fiscal 2012, we tested the goodwill associated with our Lime Fresh concept during the fourth quarter of fiscal 2013 using the two-step method as discussed above. The results of the first step indicated a potential goodwill impairment as the fair value of the Lime Fresh concept was less than its carrying value. We determined the fair value of the Lime Fresh concept using the discounted cash flow method. The results of the second step indicated that all of the goodwill recorded in connection with the Lime Fresh acquisition was impaired. Accordingly, during the fourth quarter of fiscal 2013 we recorded a charge of $9.0 million ($5.4 million, net of tax) representing the full value of our Lime Fresh concept goodwill.
In fiscal 2012, given our suppressed stock price and continued negative same-restaurant sales, we tested our Ruby Tuesday concept goodwill throughout the year and determined, in the fourth fiscal quarter, it to be fully impaired. As a result, we recorded a charge of $16.9 million ($12.0 million, net of tax) in fiscal 2012, representing the full value of our Ruby Tuesday concept goodwill.
The changes in the carrying amount of goodwill are as follows (in thousands):
| Balance at May 31, 2011 | | $ | 15,571 | |
| Adjustments to fiscal year 2011 | | | | |
| purchase price allocations | | | 1,348 | |
| Acquisition | | | 7,989 | |
| Impairment | | | (16,919 | ) |
| Balance at June 5, 2012 | | $ | 7,989 | |
| Adjustments to fiscal year 2012 | | | | |
| purchase price allocation | | | 1,033 | |
| Impairment | | | (9,022 | ) |
| Balance at June 4, 2013 and thereafter | | $ | – | |
10. Employee Post-Employment Benefits
Pension and Postretirement Medical and Life Benefits
We sponsor three defined benefit pension plans for active employees and offer certain postretirement benefits for retirees. A summary of each of these is presented below.
Retirement Plan
RTI sponsors the Morrison Restaurants Inc. Retirement Plan (the "Retirement Plan"). Effective December 31, 1987, the Retirement Plan was amended so that no additional benefits would accrue and no new participants could enter the Retirement Plan after that date. Participants receive benefits based upon salary and length of service.
Minimum funding for the Retirement Plan is determined in accordance with the guidelines set forth in employee benefit and tax laws. From time to time we may contribute additional amounts as we deem appropriate. We estimate that we will be required to make contributions totaling $0.5 million to the Retirement Plan in fiscal 2015.
The Retirement Plan’s assets are held in a trust and were allocated as follows on June 3, 2014 and June 4, 2013, the measurement dates:
| | Target Allocation | 2014 Allocation | 2013 Allocation |
| Equity securities | 60-80% | 71% | 71% |
| Fixed income securities | 20-40% | 22% | 27% |
| Public real estate investment trusts | 0-10% | 4% | 0% |
| Cash and cash equivalents | 0% | 2% | 2% |
| Other | 0-10% | 1% | 0% |
| | | | |
| Total | 100% | 100% | 100% |
Retirement Plan fiduciaries set investment policies and strategies for the Retirement Plan’s trust. The primary investment objectives are to maximize total return within a prudent level of risk, focus on a 3-5 year time horizon, fully diversify investment holdings, and meet the long-term return target selected as an actuarial assumption (currently 7.0%). The Retirement Plan’s fiduciaries oversee the investment allocation process, which includes selecting investment managers, commissioning periodic asset-liability studies, setting long-term strategic targets, and monitoring asset allocations. Target allocation ranges are guidelines, not limitations, and occasionally the Retirement Plan’s fiduciaries will approve allocations above or below a target range.
Under the terms of the investment policy statement, plan assets are comprised of two major classes: equity and fixed income securities. The goal of the equity portfolio is to produce a total return that will provide a hedge against inflation. Equity securities can include both domestic and international securities with a long-term goal to maintain an equity allocation of approximately 60-80% of the total market value of plan assets. To be fully invested, the trust’s equity portfolio should not contain any domestic stock with value in excess of 10% of the total and the aggregate amount of the international equities should not exceed 30% of the total. The trust may also invest the equity portfolio in alternative investments, such as real estate and commodities, which are not to exceed 10% of the total.
The goal of the fixed income portfolio is to reduce the overall volatility of the Plan, provide a stable stream of income, and provide a hedge against deflation over an investment horizon spanning 5-10 years without exposure to excessive interest rate or credit rate risk. Fixed income securities should be primarily U.S. Treasury or Government Agency securities and investment-grade corporate bonds at the time of purchase with a long-term goal to maintain a fixed income allocation of approximately 20-40% of the total market value of plan assets. Investment grade bonds will include securities rated at least BBB by Standard & Poor’s or the equivalent Moody’s index. Any single non-government issue is limited to 10% of the portfolio.
The fair values of assets held by the Retirement Plan by asset category are as follows (in thousands):
| | | Fair Value Measurements | |
| | | Total Fair Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| Cash and cash equivalents | | $ | 108 | | | $ | – | | | $ | 108 | | | $ | – | |
| Equity securities | | | | | | | | | | | | | | | | |
| U.S.-based companies | | | 3,798 | | | | 3,798 | | | | – | | | | – | |
| International-based companies | | | 1,161 | | | | 1,161 | | | | – | | | | – | |
| Fixed income securities | | | 1,546 | | | | 1,546 | | | | – | | | | – | |
| Public real estate investment trusts | | | 303 | | | | 303 | | | | – | | | | – | |
| Other | | | 104 | | | | 104 | | | | – | | | | – | |
| Total | | $ | 7,020 | | | $ | 6,912 | | | $ | 108 | | | $ | – | |
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.
On November 30, 2012, Samuel E. Beall, III, our former Chief Executive Officer (“CEO”), stepped down from management and the Board of Directors. Mr. Beall was paid a lump-sum pension payment of $8.1 million on June 4, 2013. Additionally, during the fourth quarter of fiscal 2013, we recorded a pre-tax curtailment expense of $2.5 million representing the recognition of a pro rata portion (calculated as the percentage reduction in the projected benefit obligation due to Mr. Beall’s lump-sum pension payment on June 4, 2013) of the unrecognized loss recorded within accumulated other comprehensive loss.
Although considered to be unfunded, we own whole-life insurance contracts in order to provide a source of funding for benefits due under the terms of the Executive Supplemental Pension Plan and the Management Retirement Plan. Benefits payable under these two plans are paid from a rabbi trust which holds the insurance contracts. We will on occasion contribute additional amounts into the rabbi trust in the event of a liquidity shortfall. We currently project that benefit payments from the rabbi trust for these two plans will approximate $3.3 million in fiscal 2015.
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.
The following tables detail the components of net periodic benefit cost and the amounts recognized in our Consolidated Financial Statements for the Retirement Plan, Management Retirement Plan, and the Executive Supplemental Pension Plan (collectively, the "Pension Plans") and the Postretirement Medical and Life Benefits plans (in thousands):
| | | Pension Benefits | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | |
| Service cost | | $ | 356 | | | $ | 460 | | | $ | 545 | |
| Interest cost | | | 1,737 | | | | 2,100 | | | | 2,346 | |
| Expected return on plan assets | | | (444 | ) | | | (409 | ) | | | (514 | ) |
| Amortization of prior service cost (a) | | | 1 | | | | 106 | | | | 262 | |
| Recognized actuarial loss | | | 1,711 | | | | 2,259 | | | | 1,738 | |
| Curtailment expense | | | – | | | | 2,481 | | | | – | |
Net periodic benefit cost | | $ | 3,361 | | | $ | 6,997 | | | $ | 4,377 | |
| | | Postretirement Medical and Life Benefits | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | |
| Service cost | | $ | 13 | | | $ | 11 | | | $ | 10 | |
| Interest cost | | | 67 | | | | 60 | | | | 71 | |
| Amortization of prior service cost (a) | | | (46 | ) | | | (56 | ) | | | (55 | ) |
| Recognized actuarial loss | | | 244 | | | | 214 | | | | 136 | |
| Net periodic benefit cost | | $ | 278 | | | $ | 229 | | | $ | 162 | |
(a) Prior service costs are amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits.
The following table details changes in the amounts recognized in accumulated other comprehensive loss in our 2014 and 2013 Consolidated Financial Statements for the Pension Plans and the Postretirement Medical and Life Benefits plans (in thousands):
| | | Pension Benefits | | | Postretirement Medical and Life Benefits | |
| | | | | | | | | | | | | |
| | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
| Prior service cost | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Net actuarial loss/(gain) | | | 2,379 | | | | (915 | ) | | | (514 | ) | | | 426 | |
| Amortization of prior service cost | | | (1 | ) | | | (106 | ) | | | 46 | | | | 56 | |
| Amortization of actuarial gain | | | (1,711 | ) | | | (4,740 | ) | | | (244 | ) | | | (214 | ) |
| Total recognized in accumulated | | | | | | | | | | | | | | | | |
other comprehensive income | | $ | 667 | | | $ | (5,761 | ) | | $ | (712 | ) | | $ | 268 | |
| | | | | | | | | | | | | | | | | |
| Total recognized in net periodic | | | | | | | | | | | | | | | | |
| benefit cost and accumulated | | | | | | | | | | | | | | | | |
other comprehensive income | | $ | 4,028 | | | $ | 1,236 | | | $ | (434 | ) | | $ | 497 | |
The change in benefit obligation and plan assets and reconciliation of funded status is as follows (in thousands):
| | | Pension Benefits | | | Postretirement Medical and Life Benefits | |
| | | | | | | |
| | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
| Change in benefit obligation: | | | | | | | | | | | | |
| Beginning projected benefit obligation | | $ | 40,308 | | | $ | 48,592 | | | $ | 1,896 | | | $ | 1,614 | |
| Service cost | | | 356 | | | | 460 | | | | 13 | | | | 11 | |
| Interest cost | | | 1,737 | | | | 2,100 | | | | 67 | | | | 60 | |
| Plan participant contributions | | | – | | | | – | | | | 91 | | | | 90 | |
| Actuarial loss/(gain) | | | 2,736 | | | | (358 | ) | | | (514 | ) | | | 426 | |
| Benefits paid | | | (2,363 | ) | | | (10,486 | ) | | | (177 | ) | | | (305 | ) |
| Benefit obligation at end of year | | $ | 42,774 | | | $ | 40,308 | | | $ | 1,376 | | | $ | 1,896 | |
| | | | | | | | | | | | | | | | | |
| Change in plan assets: | | | | | | | | | | | | | | | | |
| Beginning fair value of plan assets | | $ | 6,506 | | | $ | 5,758 | | | $ | – | | | $ | – | |
| Actual return on plan assets | | | 800 | | | | 966 | | | | –– | | | | – | |
| Employer contributions | | | 2,077 | | | | 10,268 | | | | 86 | | | | 215 | |
| Plan participant contributions | | | – | | | | – | | | | 91 | | | | 90 | |
| Benefits paid | | | (2,363 | ) | | | (10,486 | ) | | | (177 | ) | | | (305 | ) |
| Fair value of plan assets at | | | | | | | | | | | | | | | | |
end of year | | $ | 7,020 | | | $ | 6,506 | | | $ | – | | | $ | – | |
| | |
| Funded status at end of year | | $ | (35,754 | )* | | $ | (33,802 | )* | | $ | (1,376 | ) | | $ | (1,896 | ) |
| | | | | | | | | | | | | | | | | |
Amounts recognized in the Consolidated Balance Sheets: | | | | | | | | | | | | |
| Accrued liabilities – payroll and related | | | | | | | | | | | | |
| costs | | $ | (3,277 | ) | | $ | (3,206 | ) | | $ | (128 | ) | | $ | (163 | ) |
| Other deferred liabilities | | | (32,477 | ) | | | (30,596 | ) | | | (1,248 | ) | | | (1,733 | ) |
| Net amount recognized at year-end | | $ | (35,754 | ) | | $ | (33,802 | ) | | $ | (1,376 | ) | | $ | (1,896 | ) |
| | | | | | | | | | | | | | | | | |
| Amounts recognized in accumulated other comprehensive loss: | | | | | | | | | | | | | | | | |
| Prior service (cost) credit | | $ | (2 | ) | | $ | (2 | ) | | $ | – | | | $ | 46 | |
| Net actuarial loss | | | (17,084 | ) | | | (16,416 | ) | | | (1,017 | ) | | | (1,776 | ) |
| Total amount recognized | | $ | (17,086 | ) | | $ | (16,418 | ) | | $ | (1,017 | ) | | $ | (1,730 | ) |
| | | | | | | | | | | | | | | | | |
| * | The funded status reflected above includes the liabilities attributable to all of the Pension Plans but only the assets of the Retirement Plan as the other plans are not considered funded for ERISA purposes. To provide a source for the payment of benefits under the Executive Supplemental Pension Plan and the Management Retirement Plan, we own whole-life insurance contracts on some of the participants. The cash value of these policies, which are included within the Other Assets caption in our Consolidated Balance Sheets, was $29.7 million and $29.2 million at June 3, 2014 and June 4, 2013, respectively. In addition, we held in trust $0.2 million and $0.4 million of cash and cash equivalents as of June 3, 2014 and June 4, 2013, respectively, relating to these policies. We maintain a rabbi trust to hold the policies and death benefits as they are received. |
During fiscal 2014, 2013, and 2012, we reclassified the following items out of accumulated other comprehensive loss and into pension expense, which is included in Selling, general and administrative, net within our Consolidated Statements of Operations and Comprehensive Loss, as follows (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| Recognized actuarial loss | | $ | 1,955 | | | $ | 2,473 | | | $ | 1,874 | |
| Amortization of prior service cost | | | (46 | ) | | | 50 | | | | 207 | |
| Curtailment expense | | | – | | | | 2,481 | | | | – | |
| | | | 1,909 | | | | 5,004 | | | | 2,081 | |
| Income taxes | | | – | | | | (1,986 | ) | | | (826 | ) |
| Pension reclassification, net of tax | | $ | 1,909 | | | $ | 3,018 | | | $ | 1,255 | |
The estimated prior service cost for the Pension Plans and the Postretirement Medical and Life Benefits plans that will be amortized from accumulated other comprehensive income into net periodic pension cost in fiscal 2015 is insignificant. The estimated net loss for the Pension Plans and the Postretirement Medical and Life Benefits plans that will be amortized from accumulated other comprehensive income into net periodic pension cost in fiscal 2015 is $1.7 million and $0.1 million, respectively.
Additional measurement date information for the pension plans which have benefit obligations in excess of plan assets (in thousands):
| | | Pension Benefits | | | Postretirement Medical and Life Benefits | |
| | | June 3, 2014 | | | June 4, 2013 | | | June 3, 2014 | | | June 4, 2013 | |
| Projected benefit obligation | | $ | 42,774 | | | $ | 40,308 | | | $ | 1,376 | | | $ | 1,896 | |
| Accumulated benefit | | | | | | | | | | | | | | | | |
| obligation | | | 42,002 | | | | 39,515 | | | | 1,376 | | | | 1,896 | |
| Fair value of plan assets | | | 7,020 | | | | 6,506 | | | | – | | | | – | |
The weighted-average assumptions used to determine the net periodic benefit cost for fiscal years are set forth below:
| | Pension Benefits |
| | 2014 | 2013 | 2012 |
| Discount rate | 4.5% | 4.5% | 5.3% |
| Expected return on plan assets | 7.0% | 7.3% | 8.0% |
| Rate of compensation increase | 2.0% | 2.0% | 2.0% |
| | | | |
| | Postretirement Medical and Life Benefits |
| | 2014 | 2013 | 2012 |
| Discount rate | 3.7% | 3.9% | 5.3% |
| Rate of compensation increase | 2.0% | 2.0% | 2.0% |
Our estimated long-term rate of return on plan assets represents the weighted-average of expected future returns on the asset categories included in our target investment allocation based primarily on the historical returns for each asset category, adjusted for an assessment of current market conditions.
The weighted average assumptions used to determine benefit obligations at the measurement dates are set forth below:
| | Pension Benefits |
| | 2014 | 2013 |
| Discount rate | 4.4% | 4.5% |
| Rate of compensation increase | 2.0% | 2.0% |
| | Postretirement Medical and Life Benefits |
| | 2014 | 2013 |
| Discount rate | 3.5% | 3.7% |
| Rate of compensation increase | 2.0% | 2.0% |
We currently are assuming a gross medical trend rate of 7.25% for fiscal 2015. We expect this rate to decrease approximately 0.25% per year for an ultimate trend rate of 5.0% in fiscal 2024. A change in this rate of 1.0% would have no significant impact on our net periodic postretirement benefit expense or our accrued postretirement benefits liability.
The benefits expected to be paid in each of the next five years and in the aggregate for the five years thereafter are set forth below (in thousands):
| | | Pension Benefits | | | Postretirement Medical and Life Benefits | |
| 2015 | | $ | 4,055 | | | $ | 129 | |
| 2016 | | | 2,315 | | | | 138 | |
| 2017 | | | 2,360 | | | | 133 | |
| 2018 | | | 2,296 | | | | 148 | |
| 2019 | | | 2,243 | | | | 103 | |
| 2020-2024 | | | 19,728 | | | | 523 | |
Expected benefits are estimated based on the same assumptions used to measure our benefit obligation on our measurement date of June 3, 2014 and, where applicable, include benefits attributable to estimated further employee service.
Defined Contribution Plans
We sponsor two defined contribution plans for active employees, as summarized below.
Salary Deferral Plan
RTI offers certain employees a 401(k) plan called the Ruby Tuesday, Inc. Salary Deferral Plan (“401(k) Plan”). We make matching contributions to the 401(k) Plan based on each eligible employee's pre-tax contribution and years of service. We match in cash each fiscal quarter a specified percentage of the participating employee's first 6% of pre-tax contribution based on achievement of a same-restaurant sales performance factor. Company matches do not vest until
the employees have worked for us three years. Given that the Company did not achieve the 2014, 2013, or 2012 same-restaurant sales performance factor in order for there to be an employer match, we had no expense related to the 401(k) Plan for fiscal 2014, 2013, or 2012.
Deferred Compensation Plan
On January 5, 2005, our Board of Directors approved the adoption of the Ruby Tuesday, Inc. 2005 Deferred Compensation Plan (the “Deferred Compensation Plan”), effective as of January 1, 2005, and froze the existing deferred compensation plan, the Ruby Tuesday, Inc. Restated Deferred Compensation Plan (the “Predecessor Plan”), effective as of December 31, 2004, in order to satisfy the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, enacted as part of the American Jobs Creation Act of 2004.
Like the Predecessor Plan, the Deferred Compensation Plan is an unfunded, non-qualified deferred compensation plan for eligible employees. The provisions of the Deferred Compensation Plan are similar to those of the 401(k) Plan. We had no expenses for company match under the Deferred Compensation Plan for fiscal 2014, 2013, or 2012. Assets earmarked to pay benefits under the Deferred Compensation Plan are held by a rabbi trust. Assets and liabilities of a rabbi trust must be accounted for as if they are Company assets or liabilities, therefore, all earnings and expenses are recorded in our consolidated financial statements. The Deferred Compensation Plan’s assets and liabilities approximated $9.6 million and $9.8 million as of June 3, 2014 and June 4, 2013, respectively. Of these amounts, $0.5 million and $0.7 million was included in Prepaid and other expenses and Accrued liabilities – Payroll and related costs, and $8.4 million and $8.0 million was included in Other assets, net and Other deferred liabilities in the June 3, 2014 and June 4, 2013 Consolidated Balance Sheets, respectively. The investment in RTI common stock and the related liability payable in RTI common stock, which totaled $0.6 million and $1.1 million as of June 3, 2014 and June 4, 2013, respectively, is reflected in Shareholders’ Equity in the Consolidated Balance Sheets.
Executive Separations and Corporate Support Services Restructuring
Fiscal 2014
On June 7, 2013, our then Executive Vice President, Chief Operations Officer left the Company. During fiscal 2014, we recorded severance expense of $0.9 million in connection with the separation agreement for the former executive, which represents obligations pursuant to the Ruby Tuesday, Inc. Severance Pay Plan (the “Severance Plan”) of two times base salary. The Severance Plan was subsequently terminated on October 7, 2013.
On October 30, 2013, our then Senior Vice President, Chief People Officer left the Company. During the second quarter of fiscal 2014, we recorded severance expense of $0.4 million in connection with his separation agreement, an amount representing one year of his annual base salary plus his remaining vacation for fiscal 2014. Of this amount, $0.3 million was paid during fiscal 2014 and the remaining amounts will be paid over two equal future installments.
Between November 20, 2013 and June 3, 2014, we eliminated approximately 82 management and staff personnel, respectively, at our Restaurant Support Services Center in Maryville, Tennessee. These reductions occurred in connection with an ongoing comprehensive review of our cost structure. These executive and other employee separations resulted in transition-related costs during the year ended June 3, 2014 of $4.3 million for employee severance and unused vacation.
Fiscal 2013 and 2012
On November 30, 2012, Sandy E. Beall, III, our founder and former President, Chief Executive Officer, and Chairman of the Board of Directors stepped down from management and the Board of Directors. In connection with a transition agreement between the Company and Mr. Beall, the material terms of which were finalized as of June 5, 2012, we accrued $2.2 million of severance during the fourth quarter of fiscal 2012. Mr. Beall’s severance was paid during the third quarter of fiscal 2013. As previously mentioned, on June 4, 2013, Mr. Beall received a lump sum payment of $8.1 million, representing the full amount due to him under the Executive Supplemental Pension Plan, six-months following his retirement.
During the fourth quarter of fiscal 2012, each of our then Chief Financial Officer and Chief Technology Officer left the Company. During fiscal 2012, we recorded severance expense of $1.7 million in connection with separation agreements for these executives, which represents obligations pursuant to the Ruby Tuesday, Inc. Severance Pay Plan of two times base salary for both executives. In addition, we also recorded during fiscal 2012 additional share-based
compensation of $0.4 million for these executives due to the accelerated vesting or modification of certain share-based awards in connection with their separation from the Company.
As of June 3, 2014, liabilities of $1.0 million and $0.1 million, representing unpaid obligations in connection with the restructurings, were included within Accrued liabilities: Payroll and related costs and Other deferred liabilities, respectively, in our Consolidated Balance Sheet. A roll forward of our obligations in connection with employee separations is as follows (in thousands):
| Balance at June 4, 2013 | | $ | 310 | |
| Employee severance and unused vacation accruals | | | 4,294 | |
| Cash payments | | | (3,549 | ) |
| Balance at June 3, 2014 | | $ | 1,055 | |
See Note 12 to the Consolidated Financial Statements for discussion of the impact of executive separations to our share-based employee compensation costs.
11. Income Taxes
Income tax benefit for fiscal 2014, 2013, and 2012 was allocated as follows (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| (Benefit)/provision for income taxes from | | | | | | | | | |
| continuing operations | | $ | (4,665 | ) | | $ | 1,500 | | | $ | (12,152 | ) |
| Benefit for income taxes from | | | | | | | | | | | | |
| discontinued operations | | | (106 | ) | | | (8,519 | ) | | | (2,598 | ) |
| Total benefit for income taxes | | $ | (4,771 | ) | | $ | (7,019 | ) | | $ | (14,750 | ) |
Income tax (benefit)/expense from continuing operations includes the following components (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| Current: | | | | | | | | | |
| Federal | | $ | (5,047 | ) | | $ | 8,966 | | | $ | 3,169 | |
| State | | | (1,586 | ) | | | 1,200 | | | | 3,321 | |
| Foreign | | | 322 | | | | 163 | | | | 155 | |
| | | | (6,311 | ) | | | 10,329 | | | | 6,645 | |
| Deferred: | | | | | | | | | | | | |
| Federal | | | 2,346 | | | | (8,397 | ) | | | (17,402 | ) |
| State | | | (700 | ) | | | (432 | ) | | | (1,395 | ) |
| | | | 1,646 | | | | (8,829 | ) | | | (18,797 | ) |
| | | $ | (4,665 | ) | | $ | 1,500 | | | $ | (12,152 | ) |
Deferred tax assets and liabilities are comprised of the following (in thousands):
| | | | | | | |
| | | 2014 | | | 2013 | |
| Deferred tax assets: | | | | | | |
| General business credits carryforward | | $ | 48,007 | | | $ | 31,063 | |
| Employee benefits | | | 22,748 | | | | 22,485 | |
| Deferred escalating minimum rents | | | 19,832 | | | | 19,055 | |
| Goodwill | | | 11,691 | | | | 12,004 | |
| State net operating losses | | | 10,260 | | | | 8,394 | |
| Insurance reserves | | | 6,267 | | | | 5,777 | |
| Deferred gain on sale-leaseback transactions | | | 5,148 | | | | 5,232 | |
| Closed restaurant lease reserves | | | 4,316 | | | | 3,464 | |
| Other | | | 13,202 | | | | 16,705 | |
| Gross deferred tax assets | | | 141,471 | | | | 124,179 | |
| Deferred tax asset valuation allowances | | | (54,582 | ) | | | (24,566 | ) |
| Net deferred tax assets | | | 86,889 | | | | 99,613 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Depreciable property and equipment | | | (73,954 | ) | | | (87,542 | ) |
| Other | | | (13,038 | ) | | | (10,528 | ) |
| Total deferred tax liabilities | | | (86,992 | ) | | | (98,070 | ) |
| | | | | | | | | |
| Net deferred tax (liability)/asset | | $ | (103 | ) | | $ | 1,543 | |
| | | | | | | |
| Reported in Consolidated Balance Sheets as: | | | | | | |
| Deferred income taxes – current asset | | $ | 3,397 | | | $ | 7,296 | |
| Deferred income taxes – noncurrent liability | | | (3,500 | ) | | | (5,753 | ) |
| | | $ | (103 | ) | | $ | 1,543 | |
The above deferred tax assets and liabilities include the income tax effect of temporary differences between financial reporting and tax reporting. Temporary differences represent the cumulative taxable or deductible amounts recorded in the consolidated financial statements in different years than recognized in the tax returns. General business credits carryforward and state net operating losses may be used to offset future taxable income, and their benefit is reflected in the deferred tax assets. Other deferred tax assets, such as employee benefits, escalating minimum rents, and certain others listed, become deductible in the tax return upon payment or funding in qualified trusts. The depreciable property and equipment temporary difference represents generally tax depreciation in excess of financial statement depreciation.
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.
Through the third quarter of fiscal 2013, we concluded that objective and subjective positive evidence outweighed negative evidence, and it was more likely than not we would realize all of our federal and most of our state deferred tax assets, except for loss carryforwards in certain states that have had cumulative losses and/or relatively short carryforward periods and annual limits of loss carryforward available for use to offset future taxable income. As of June 4, 2013, we recorded a valuation allowance following the conclusion that the negative evidence outweighed the positive evidence. This conclusion was reached primarily as a result of changes in our rolling three-year historical operating losses, as recent decisions by our new senior management team to discontinue certain concepts and slow down the growth of our Lime Fresh concept led to impairment and other losses and caused our three-year cumulative pre-tax income as of the third quarter end to swing to a three-year cumulative pre-tax loss as of the fourth quarter end.
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.
We increased our valuation allowance to $54.6 million as of June 3, 2014. Included within the $30.9 million expensed in fiscal 2014 was $31.2 million attributable to our loss from continuing operations and a benefit of $(0.3) million attributable to our income from discontinued operations. Fiscal 2013 and 2012 included expenses for increases in deferred tax asset valuation allowances of $22.2 million and $0.9 million, respectively, of which $20.9 million and $0.9 million, respectively, was attributable to continuing operations.
A rollforward of our valuation allowance is as follows (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | |
| Beginning of year | | $ | (24,566 | ) | | $ | (2,392 | ) | | $ | (1,501 | ) |
| Changes in estimated realization of deferred tax assets: | | | | | | | | | | | | |
| Continuing operations | | | (31,187 | ) | | | (20,885 | ) | | | (866 | ) |
| Discontinued operations | | | 288 | | | | (1,289 | ) | | | (25 | ) |
| Other reductions | | | 883 | | | | – | | | | – | |
| End of year | | $ | (54,582 | ) | | $ | (24,566 | ) | | $ | (2,392 | ) |
As of June 4, 2013, we had state net operating loss carryforwards of approximately $218.1 million which expire at varying times between fiscal 2015 and 2034. The above accounting has no effect on our ability to use our state operating loss carryforwards or general business carryforward credits, which don’t begin to expire for eighteen years, in the future to reduce cash tax payments.
A reconciliation from the statutory federal income tax benefit to the reported income tax (benefit)/expense from continuing operations is as follows (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | |
| Statutory federal income taxes | | $ | (24,351 | ) | | $ | (7,677 | ) | | $ | (3,019 | ) |
| State income taxes, net of federal income tax benefit | | | (3,564 | ) | | | (1,484 | ) | | | (1,639 | ) |
| FICA tip credit | | | (7,533 | ) | | | (8,189 | ) | | | (8,192 | ) |
| Work opportunity tax credit | | | (1,233 | ) | | | (1,366 | ) | | | (2,150 | ) |
| Other federal tax credits | | | (103 | ) | | | (155 | ) | | | (384 | ) |
| Increase in valuation allowance | | | 31,187 | | | | 20,885 | | | | 866 | |
| Permanent differences | | | 2,243 | | | | 339 | | | | 1,293 | |
| Other, net | | | (1,311 | ) | | | (853 | ) | | | 1,073 | |
| | | $ | (4,665 | ) | | $ | 1,500 | | | $ | (12,152 | ) |
We had a liability for unrecognized tax benefits, exclusive of accrued interest and penalties, of $7.0 million at June 3, 2014, $2.6 million of which, if recognized, would impact our effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for fiscal 2014 and 2013 follows (in thousands):
| | | 2014 | | | 2013 | |
| Beginning of year | | $ | 13,016 | | | $ | 6,424 | |
| Additions for tax positions related to the current year | | | 532 | | | | 4,594 | |
| Additions for tax positions of prior years | | | 321 | | | | 4,468 | |
| Reductions for tax positions of prior years | | | (5,186 | ) | | | (1,856 | ) |
| Reductions for settlements with taxing authorities | | | (619 | ) | | | (408 | ) |
| Reductions due to statute settlements | | | (1,099 | ) | | | (206 | ) |
| End of year | | $ | 6,965 | | | $ | 13,016 | |
The liability for unrecognized tax benefits as of June 3, 2014 includes $3.2 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations and negotiations with tax authorities, along with the pending approval of accounting method changes.
As discussed in Note 1 to the Consolidated Financial Statements, our policy is to accrue interest related to potential underpayment of income taxes within the provision for income taxes. Interest is computed on the difference between our uncertain tax benefit positions and the amount deducted or expected to be deducted in our tax returns. At June 3, 2014, we had $0.5 million of accrued interest and penalties related to unrecognized tax benefits.
During 2014, accrued interest and penalties decreased by $0.4 million, of which $0.2 million affected the 2014 effective tax rate. If we were to prevail on all uncertain tax positions, the reversal of this accrual would also be a benefit to our effective tax rate. At June 3, 2014, total liabilities of $7.4 million, including the above-mentioned $0.5 million for the payment of accrued interest and penalties, are included in Accrued liabilities – Rent and other and Other deferred liabilities as reported on the Consolidated Balance Sheets.
At June 3, 2014, we are no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2011, and with few exceptions, state and local examinations by tax authorities prior to fiscal year 2011.
12. 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 June 3, 2014 and June 4, 2013.
The Ruby Tuesday, Inc. Stock Incentive Plan and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan
A committee, appointed by the Board of Directors, administers the Ruby Tuesday, Inc. Stock Incentive Plan (“SIP”) and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan (“1996 SIP”), and has full authority in its discretion to determine the key employees, officers, and non-employee directors to whom share-based incentives are granted and the terms and provisions of share-based incentives. Option grants under the SIP and 1996 SIP can have varying vesting provisions and exercise periods as determined by such committee. A majority of currently outstanding options granted under the SIP and 1996 SIP vest within three years following the date of grant and expire seven years after the date of grant. The SIP and 1996 SIP permit the committee to make awards of shares of common stock, awards of stock options or other derivative securities related to the value of the common stock, and certain cash awards to eligible persons. These discretionary awards may be made on an individual basis or for the benefit of a group of eligible persons. All options awarded under the SIP and 1996 SIP have been awarded with an exercise price equal to the fair market value at the time of grant.
At June 3, 2014, we had reserved a total of 4,849,000 and 143,000 shares of common stock for the SIP and 1996 SIP, respectively. Of the reserved shares at June 3, 2014, 1,857,000 and 77,000 were subject to options outstanding for the SIP and 1996 SIP, respectively. Stock option exercises are settled with the issuance of new shares. Net shares of common stock available for issuance at June 3, 2014 under the SIP and 1996 SIP were 2,992,000 and 66,000, respectively. As discussed below, during the second quarter of fiscal 2014 our shareholders approved an amendment to the SIP allowing non-employee directors to participate in the SIP.
The Ruby Tuesday, Inc. Deferred Compensation Plan for Directors
In addition to providing for the awards of share-based incentives, the Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan for directors (the “Directors’ Plan”) has historically provided our non-employee directors the opportunity to defer certain of their compensation. On October 9, 2013, our shareholders approved an amendment to the SIP allowing non-employee directors to participate in the SIP instead of requiring that such awards be made from the Directors’ Plan. The amendment did not increase the number of shares of common stock available for issuance under the SIP. On April 9, 2014, our Board of Directors adopted a resolution amending and restating the Directors’ Plan to terminate those portions of the plan providing for the award of share-based compensation to non-employee directors but preserving the deferred compensation component of the plan. The amendment and restatement also changed the name of the Directors’ Plan to the Ruby Tuesday, Inc. Deferred Compensation Plan for Directors. All
remaining shares of common stock available for issuance under the Directors’ Plan, which were insignificant as of the date of the resolution, were released and will not be reserved for any future purpose. All future share-based compensation granted to non-employee directors will be awarded from shares of common stock available for issuance under the SIP.
Chief Executive Officer Awards
On December 1, 2012, James J. Buettgen became President and CEO of the Company. In connection with Mr. Buettgen’s appointment as CEO, on December 3, 2012 he received an initial award of approximately 68,000 service-based restricted shares and 102,000 performance-based restricted shares, both of which cliff vest 2.5 years following the grant date. Pursuant to the terms of Mr. Buettgen’s employment agreement, the Company has guaranteed the earning of the performance-based restricted shares as the greater of the target value of the award or based on the Company’s achievement of certain performance conditions related to fiscal 2013, which were measured in the first quarter of fiscal 2014.
The Executive Compensation Committee of the Board of Directors determined during the first quarter of fiscal 2014 that the performance conditions were not achieved for 34,000 shares of restricted stock awarded to our President and CEO during fiscal 2013, and these shares were cancelled and retired accordingly.
In addition to the above, on December 3, 2012, Mr. Buettgen received a one-time make-whole equity award which was comprised of approximately 179,000 service-based restricted shares and 253,000 service-based stock options. The restricted shares cliff vest 2.5 years following the grant date and the stock options vest in three equal annual installments following the date of grant.
Finally, on that same date, Mr. Buettgen received a one-time high-performance and inducement award which was comprised of approximately 250,000 service-based restricted shares, 250,000 service-based stock options, and 250,000 market-based stock options. The restricted shares cliff vest 2.5 years following the grant date and the service-based stock options vest in three equal annual installments following the date of grant. The market-based stock options will cliff vest if and when the Company’s stock price appreciates to $14 per share for a period of 20 consecutive days within Mr. Buettgen’s first three years of employment.
Stock Options
The following table summarizes our stock option activity under these stock option plans (Options and Aggregate Intrinsic Value are in thousands):
| | | Stock Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (years) | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | |
| Balance at May 31, 2011 | | | 3,239 | | | $ | 13.10 | | | | | | | |
| | | 253 | | | | 7.87 | | | | | | | |
| Exercised | | | (61 | ) | | | 5.82 | | | | | | | |
| | | (715 | ) | | | 28.24 | | | | | | | |
| | | | | | | | | | | | | | | |
| | | 2,716 | | | $ | 8.79 | | | | | | | |
| Granted | | | 503 | | | | 7.81 | | | | | | | |
| | | (591 | ) | | | 6.93 | | | | | | | |
| Forfeited | | | (717 | ) | | | 11.03 | | | | | | | |
| | | | | | | | | | | | | | | |
| Balance at June 4, 2013 | | | 1,911 | | | $ | 8.27 | | | | | | | |
| Granted | | | 601 | | | | 9.34 | | | | | | | |
| Exercised | | | (244 | ) | | | 6.45 | | | | | | | |
| Forfeited | | | (315 | ) | | | 9.29 | | | | | | | |
| Balance at June 3, 2014 | | | 1,953 | | | $ | 8.66 | | | | 4.60 | | | $ | 89 | |
| Exercisable | | | 1,110 | | | $ | 8.61 | | | | 3.62 | | | $ | 89 | |
| | | | | | | | | | | | | | | | | |
| Market-based vesting: | | | | | | | | | | | | | | | | |
| Balance at June 5, 2012 | | | – | | | $ | – | | | | | | | | | |
| Granted | | | 250 | | | | 7.81 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance at June 4, 2013 | | | 250 | | | $ | 7.81 | | | | | | | | | |
| Granted | | | 570 | | | | 9.34 | | | | | | | | | |
| Forfeited | | | (85 | ) | | | 9.34 | | | | | | | | | |
| Balance at June 3, 2014 | | | 735 | | | $ | 8.82 | | | | 5.93 | | | $ | – | |
| Exercisable | | | – | | | $ | – | | | | – | | | $ | – | |
The aggregate intrinsic value represents the closing stock price as of June 3, 2014 less the strike price, multiplied by the number of stock options that have a strike price that is less than that closing stock price. The total intrinsic value of stock options exercised during fiscal 2014, 2013, and 2012 was $0.7 million, $1.0 million, and $0.1 million, respectively.
At June 3, 2014, there was approximately $2.5 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. The total fair value at grant date of awards vested during fiscal 2014, 2013, and 2012 totaled $1.0 million, $2.2 million, and $5.5 million, respectively.
During fiscal 2014 and 2012, we granted 601,000 and 253,000 stock options, respectively, to certain employees under the terms of the SIP and 1996 SIP. The stock options awarded in those fiscal years vest in equal annual installments over a three-year period following grant of the award, and have a maximum life of seven years. There are no performance-based vesting requirements associated with these stock options. These stock options do provide for immediate vesting if the optionee retires during the option period. For employees meeting this criterion at the time of grant, the accelerated vesting provision renders the requisite service condition non-substantive and we therefore fully expense the fair value of stock options awarded to retirement-eligible employees on the date of grant. As a result, we recorded expense during the first quarter of fiscal 2012 of $1.2 million related to stock options awarded to our former CEO.
Also during fiscal 2014, we granted 570,000 market-based stock options to certain employees under the terms of the SIP. The stock options vest if a share of our common stock appreciates to $14 per share or more for a period of 20 consecutive trading days on or before December 3, 2015. The stock options have a maximum life of seven years.
The weighted average Black-Scholes grant date fair value for options awarded during fiscal 2014, 2013, and 2012 was $4.43, $4.37, and $4.60 per share, respectively. The grant date fair values of unvested stock options are amortized over the respective vesting period of the awards unless a recipient becomes retirement eligible during the vesting period. For retirement eligible individuals, the grant date fair value of the award is amortized from the period of the date of grant through the date upon which the individual becomes retirement eligible. Our former CEO was the only recipient of stock option awards during fiscal 2012. The weighted average assumptions used in our Black-Scholes option-pricing model are as follows:
| | 2014 | 2013 | 2012 |
| Risk-free interest rate | 1.17% | 0.62% | 0.80% |
| Expected dividend yield | 0% | 0% | 0% |
| Expected stock price volatility | 58.03% | 71.84% | 75.63% |
| Expected life (in years) | 4.50 | 4.50 | 4.50 |
As previously mentioned, we awarded 570,000 market-based stock options to certain employees during fiscal 2014 and 250,000 market-based stock options to our CEO during fiscal 2013. We estimated the grant date fair value of these awards at $2.42 and $2.14 per share, respectively, using the Monte-Carlo simulation model. The primary assumptions used in our Monte-Carlo simulation model are as follows:
| | 2014 | 2013 |
| Risk-free interest rate | 0.45% | 0.34% |
| Expected dividend yield | 0% | 0% |
| Expected stock price volatility | 42.86% | 46.71% |
| Expected life (in years) | 2.40 | 1.52 |
Restricted Stock
The following table summarizes the status of our restricted stock activity (in thousands, except per-share data):
| | | 2014 | | 2013 | 2012 | |
| | Shares | Weighted Average Fair Value | Shares | Weighted Average Fair Value | Shares | Weighted Average Fair Value | |
| Performance-Based Vesting: | | | | | | | | | | | | | |
| Unvested at beginning of year | 356 | | $ | 7.06 | 423 | | $ | 7.75 | 299 | | $ | 7.24 | |
| Granted | – | | | – | 344 | | | 6.99 | 384 | | | 7.87 | |
| Vested | (18 | ) | | 7.87 | (89) | | | 7.31 | (260) | | | 7.33 | |
| Forfeited | (270 | ) | | 6.81 | (322) | | | 7.82 | – | | | – | |
| Unvested at end of year | 68 | | $ | 7.81 | 356 | | $ | 7.06 | 423 | | $ | 7.75 | |
| | | | | | | | | | | | | | |
| Service-Based Vesting: | | | | | | | | | | | | | |
| Unvested at beginning of year | 1,136 | | $ | 7.92 | 797 | | $ | 8.37 | 551 | | $ | 8.22 | |
| Granted | 423 | | | 8.83 | 795 | | | 7.47 | 495 | | | 8.30 | |
| Vested | (411 | ) | | 8.10 | (340) | | | 7.56 | (248) | | | 7.89 | |
| Forfeited | (140 | ) | | 8.76 | (116) | | | 8.92 | (1) | | | 9.39 | |
| Unvested at end of year | 1,008 | | $ | 8.11 | 1,136 | | $ | 7.92 | 797 | | $ | 8.37 | |
The fair value of restricted share awards is based on the closing price of our common stock at the time of grant. At June 3, 2014, unrecognized compensation expense related to restricted stock grants expected to vest totaled $3.8 million and will be recognized over a weighted-average vesting period of 1.2 years.
During the first quarter of fiscal 2014, we granted 344,000 shares of service-based restricted stock to certain employees under the terms of the SIP and 1996 SIP, 186,000 of which will cliff vest 2.5 years following the grant date and 158,000 of which will vest in three equal installments over a three-year period following the date of grant.
During fiscal 2013 and 2012, we granted 213,000 and 186,000 service-based restricted shares, respectively, and 242,000 and 384,000 performance-based restricted shares, respectively, of our common stock to certain employees under the terms of the SIP and 1996 SIP. The service-based restricted shares cliff vest approximately 2.5 years following the grant date. Vesting of the performance-based restricted shares was also contingent upon the Company’s achievement of certain performance conditions related to fiscal 2013 and 2012, which was measured in the first quarters of fiscal 2014 and 2013, respectively. In addition to satisfaction of the performance conditions, recipients must satisfy the same service condition as is required for the service-based restricted shares.
The Executive Compensation Committee of the Board of Directors determined during the first quarters of fiscal 2014 and 2013 that the performance conditions were not achieved for 269,000 and 314,000 shares of performance-based restricted stock granted in fiscal 2013 and 2012, respectively. As a result, the restricted shares were cancelled and returned to the pool of shares available for grant under the SIP and 1996 SIP.
During the fourth quarter of fiscal 2012, we granted 221,000 service-based restricted shares of our common stock to certain employees under the terms of the SIP. The shares vest in three equal installments over periods ranging from the grant date through October 2017.
During fiscal 2014, 2013, and 2012, we granted 60,000, 63,000, and 88,000 restricted shares, respectively, to non-employee directors. The shares cliff vest over a one year period following the grant of the award.
As discussed further in Note 10 to the Consolidated Financial Statements, our former Executive Vice President, Chief Operations Officer, Senior Vice President, Chief People Officer, and other management personnel left the Company during the first three quarters of fiscal 2014. Several of these individuals held share-based compensation awards at the times of their separations, and these awards were either vested or forfeited in accordance with the terms of the original awards.
Included within share-based compensation expense for fiscal 2014 were charges of $0.3 million representing the incremental costs resulting from accelerated vesting, net of forfeitures.
13. Segment Reporting
Our President and Chief Executive Officer, who is our CODM, with the assistance of our senior management, reviews discrete financial information for both the Ruby Tuesday and Lime Fresh restaurant concepts to assess performance and allocate resources. We consider the Ruby Tuesday and Lime Fresh concepts to be our reportable segments as we do not believe they have similar economic and other characteristics to be aggregated into a single reportable segment. Financial results by reportable segment for fiscal 2014, 2013, and 2012 are as follows (in thousands):
| | | Fiscal Year | |
| | | 2014 | | | 2013 | | | 2012 | |
| Revenues: | | | | | | | | | |
| Ruby Tuesday concept | | $ | 1,147,348 | | | $ | 1,234,730 | | | $ | 1,308,385 | |
| Lime Fresh concept | | | 21,398 | | | | 16,757 | | | | 3,378 | |
| Total revenues | | $ | 1,168,746 | | | $ | 1,251,487 | | | $ | 1,311,763 | |
| | | | | | | | | | | | | |
| Segment profit: | | | | | | | | | | | | |
| Ruby Tuesday concept | | $ | 69,543 | | | $ | 111,367 | | | $ | 123,517 | |
| Lime Fresh concept | | | (6,070 | ) | | | (10,204 | ) | | | (1,954 | ) |
| Total segment profit | | $ | 63,473 | | | $ | 101,163 | | | $ | 121,563 | |
| | | | | | | | | | | | | |
| Depreciation and amortization: | | | | | | | | | | | | |
| Ruby Tuesday concept | | $ | 51,219 | | | $ | 57,900 | | | $ | 63,798 | |
| Lime Fresh concept | | | 1,259 | | | | 2,196 | | | | 366 | |
| Support center and other | | | 2,350 | | | | 2,302 | | | | 2,294 | |
| Total depreciation and amortization | | $ | 54,828 | | | $ | 62,398 | | | $ | 66,458 | |
| | | | | | | | | | | | | |
| Capital expenditures: | | | | | | | | | | | | |
| Ruby Tuesday concept | | $ | 24,553 | | | $ | 22,609 | | | $ | 23,421 | |
| Lime Fresh concept | | | 2,742 | | | | 10,036 | | | | 6,675 | |
| Support center and other | | | 1,044 | | | | 4,472 | | | | 7,870 | |
| Total capital expenditures | | $ | 28,339 | | | $ | 37,117 | | | $ | 37,966 | |
| | | | | | | | | | | | | |
| Total assets: | | | | | | | | | | | | |
| Ruby Tuesday concept | | $ | 824,293 | | | $ | 893,750 | | | $ | 978,473 | |
| Lime Fresh concept | | | 15,203 | | | | 18,943 | | | | 31,491 | |
| Support center and other | | | 116,931 | | | | 130,490 | | | | 163,573 | |
| Total assets | | $ | 956,427 | | | $ | 1,043,183 | | | $ | 1,173,537 | |
The following is a reconciliation of segment profit to loss from continuing operations before taxes for fiscal 2014, 2013, and 2012 (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| Segment profit | | $ | 63,473 | | | $ | 101,163 | | | $ | 121,563 | |
| Less: | | | | | | | | | | | | |
| Depreciation and amortization | | | (54,828 | ) | | | (62,398 | ) | | | (66,458 | ) |
| Unallocated general and administrative expenses | | | (47,946 | ) | | | (18,026 | ) | | | (22,069 | ) |
| Preopening expenses | | | (395 | ) | | | (761 | ) | | | (556 | ) |
| Goodwill and trademark impairments | | | (855 | ) | | | (14,058 | ) | | | (16,919 | ) |
| Interest expense, net | | | (24,945 | ) | | | (26,576 | ) | | | (23,312 | ) |
| Other expense, net | | | (4,079 | ) | | | (1,278 | ) | | | (875 | ) |
| Loss from continuing operations before income taxes | | $ | (69,575 | ) | | $ | (21,934 | ) | | $ | (8,626 | ) |
14. Commitments and Contingencies
Litigation
We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business. We provide reserves for such claims when payment is probable and estimable in accordance with GAAP. At this time, in the opinion of management, the ultimate resolution of pending legal proceedings, including the matter referred to below, will not have a material adverse effect on our operations, financial position, or cash flows.
On April 17, 2012, a wage and hour case styled Guttentag, et al vs. Ruby Tuesday, Inc. was filed in the United States District Court, Southern District of New York. The named plaintiffs, and five additional former employees who have joined the suit as opt-in plaintiffs, alleged that the Company violated the Fair Labor Standards Act and state wage and hour laws in New York and Florida. Plaintiffs filed their motion for conditional certification on March 8, 2013, which sought a nationwide putative class of all current and former servers, bartenders, and food runners who worked for the Company for the three-year period prior to the filing of the lawsuit. On June 11, 2013, the court entered an order granting conditional certification of the nationwide class requested by plaintiffs, but for the time frame of June 11, 2010 to the present. Notice of the lawsuit and the right to opt-in was mailed to the putative class members in November 2013, and approximately 5%, or about 4,166 of the putative class members, filed consents to opt-in. The parties have been engaged in mediation and recently reached a preliminary settlement agreement that, if approved by the court, will resolve the lawsuit and result in its dismissal with prejudice. The total settlement sum is $3.0 million, and would cover the claims of all plaintiffs, including plaintiffs’ claims for costs and attorneys’ fees. Accordingly, included within Accrued liabilities – Rent and other in our June 3, 2014 Consolidated Balance Sheet is a $3.0 million accrual in connection with this case. While the settlement agreement is final, the approval process requires that all plaintiffs be notified and be given the opportunity to opt-out of the case. Once that process is completed, the parties will then ask the court to approve the settlement. The process will likely take several more months.
Insurance Programs
We are currently self-insured for a portion of our expected workers’ compensation, employment practices liability, general liability, and automobile liability losses (collectively, “casualty losses”) as well as property losses and certain other insurable risks. To mitigate the cost of our exposures for certain property and casualty losses, we make annual decisions to either retain the risks of loss up to a certain maximum per occurrence, aggregate loss limits negotiated with our insurance carriers, or fully insure those risks. We are also self-insured for healthcare claims for eligible participating employees subject to certain deductibles and limitations. We have accounted for our retained liabilities for casualty losses and healthcare claims, including reported and incurred but not reported claims, based on information provided by third-party actuaries. At June 3, 2014, we were committed under letters of credit totaling $12.4 million issued primarily in connection with our workers’ compensation and casualty insurance programs.
Purchase Commitments
We have minimum purchase commitments with various vendors. Outstanding commitments as of June 3, 2014 were approximately $60.6 million. These obligations consist of supplies, advertising, utility contracts, and various types of meat, beverages, and other food products, which are an integral part of our business operations.
15. 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 | | June 3, 2014 | | June 4, 2013 | |
| Deferred compensation plan: other investments – Assets | 1 | | $ | 8,930 | | $ | 8,721 | |
| Deferred compensation plan: other investments – Liabilities | 1 | | | (8,930 | ) | | (8,721 | ) |
| Deferred compensation plan: RTI common stock – Equity | 1 | | | 622 | | | 1,094 | |
| Deferred compensation plan: RTI common stock – Equity | 1 | | | (622 | ) | | (1,094 | ) |
| Total | | | | $ | – | | $ | – | |
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. The realized and unrealized holding gains and losses related to these other investments, as well as the offsetting compensation expense, is recorded in Selling, general, and administrative expense, net in the Consolidated Financial Statements.
The following table presents the fair values for those assets and liabilities measured on a non-recurring basis and remaining on our Consolidated Balance Sheets as of June 3, 2014 and June 4, 2013 (in thousands):
| | Fair Value Measurements | |
| | Level | | June 3, 2014 | | June 4, 2013 | |
| Long-lived assets held for sale * | 2 | | $ | 23,035 | | $ | 24,006 | |
| Long-lived assets held for use | 2 | | | 8,882 | | | 5,802 | |
| Total | | | | $ | 31,917 | | $ | 29,808 | |
* Included in the carrying value of long-lived assets held for sale as of June 3, 2014 and June 4, 2013 are $18.4 million and $14.8 million, respectively, of assets included in Construction in progress and other in the Consolidated Balance Sheets as we do not expect to sell these assets within the next 12 months.
The following table presents the losses recognized during the fiscal years ended June 3, 2014, June 4, 2013, and June 5, 2012 resulting from fair value measurements of assets and liabilities measured on a non-recurring basis. The losses associated with continuing operations are included in Closures and impairments, net and Goodwill and trademark impairments, and the losses associated with discontinued operations are included in Loss from discontinued operations in our Consolidated Statements of Operations and Comprehensive Loss (in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| Included within continuing operations | | | | | | | | | |
| Long-lived assets held for sale | | $ | 872 | | | $ | 3,556 | | | $ | 891 | |
| Long-lived assets held for use | | | 24,319 | | | | 12,804 | | | | 11,349 | |
| | | $ | 25,191 | | | $ | 16,360 | | | $ | 12,240 | |
| | | | | | | | | | | | | |
| Included within discontinued operations | | $ | 177 | | | $ | 18,842 | | | $ | 1,393 | |
Long-lived assets held for sale are valued using Level 2 inputs, primarily from information obtained through broker listings and 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 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. Included within discontinued operations in the table above are charges related to restaurants that were impaired as a result of the closing of 13 Marlin & Ray’s restaurants, two Truffles restaurants, and one Wok Hay restaurant during fiscal 2013.
The Level 2 fair values of our long-lived assets held for use are based on broker estimates of the value of the land, building, leasehold improvements, and other residual assets.
Our financial instruments at June 3, 2014 and June 4, 2013 consisted of cash and cash equivalents, accounts receivable and payable, long-term debt, and letters of credit. 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 other financial instruments not measured on a recurring basis using fair value, that are subject to fair value disclosures are as follows (in thousands):
| | | June 3, 2014 | | | June 4, 2013 | |
| | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | |
| Long-term debt and capital leases | | $ | 258,691 | | | $ | 263,526 | | | $ | 299,002 | | | $ | 310,441 | |
| Letters of credit | | | – | | | | 405 | | | | – | | | | 270 | |
We estimated the fair value of debt and letters of credit using market quotes and present value calculations based on market rates.
16. Supplemental Condensed Consolidating Financial Statements
As discussed in Note 8 to the 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 Securities and Exchange Commission, presents the condensed consolidating financial information separately for the Parent, the Guarantors, and elimination entries necessary to consolidate the Parent and Guarantors. Investments in wholly-owned subsidiaries are accounted for using the equity method for purposes of the consolidated presentation. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
Index
Condensed Consolidating Balance Sheet
As of June 3, 2014
(In thousands)
| | | Parent | | Guarantors | | Eliminations | | Consolidated | |
| Assets | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 51,012 | | | $ | 314 | | | $ | – | | | $ | 51,326 | |
| | | 1,725 | | | | 3,136 | | | | – | | | | 4,861 | |
| Inventories | | | 15,114 | | | | 6,060 | | | | – | | | | 21,174 | |
| | | 138,524 | | | | – | | | | (136,391 | ) | | | 2,133 | |
| Deferred income taxes | | | (548 | ) | | | 3,945 | | | | – | | | | 3,397 | |
| | | 14,610 | | | | 2,289 | | | | – | | | | 16,899 | |
| Total current assets | | | 220,437 | | | | 15,744 | | | | (136,391 | ) | | | 99,790 | |
| | | | | | | | | | | | | | | | |
| Property and equipment, net | | | 587,783 | | | | 207,063 | | | | – | | | | 794,846 | |
Investment in subsidiaries | | | 158,266 | | | | – | | | | (158,266 | ) | | | – | |
| Due from/(to) subsidiaries | | | 78,612 | | | | 243,665 | | | | (322,277 | ) | | | – | |
| | | 48,780 | | | | 13,011 | | | | – | | | | 61,791 | |
| Total assets | | $ | 1,093,878 | | | $ | 479,483 | | | $ | (616,934 | ) | | $ | 956,427 | |
| | | | | | | | | | | | | | | | | |
| Liabilities & Shareholders’ Equity | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 20,545 | | | $ | 5,656 | | | $ | – | | | $ | 26,201 | |
Accrued and other current liabilities | | | 46,450 | | | | 36,356 | | | | – | | | | 82,806 | |
| Current maturities of long-term debt, | | | | | | | | | | | | | | | | |
| | | (341 | ) | | | 5,157 | | | | | | | | 4,816 | |
| Income tax payable | | | – | | | | 136,391 | | | | (136,391 | ) | | | – | |
Total current liabilities | | | 66,654 | | | | 183,560 | | | | (136,391 | ) | | | 113,823 | |
| | | | | | | | | | | | | | | | | |
Long-term debt and capital leases, | | | | | | | | | | | | | | | | |
| less current maturities | | | 213,039 | | | | 40,836 | | | | – | | | | 253,875 | |
| | | (445 | ) | | | 3,945 | | | | – | | | | 3,500 | |
| Due to/(from) subsidiaries | | | 243,665 | | | | 78,612 | | | | (322,277 | ) | | | – | |
Other deferred liabilities | | | 109,756 | | | | 14,264 | | | | – | | | | 124,020 | |
| Total liabilities | | | 632,669 | | | | 321,217 | | | | (458,668 | ) | | | 495,218 | |
| | | | | | | | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | | | | | | | | |
| | | 614 | | | | – | | | | – | | | | 614 | |
| Capital in excess of par value | | | 76,269 | | | | – | | | | – | | | | 76,269 | |
| | | 395,226 | | | | 158,266 | | | | (158,266 | ) | | | 395,226 | |
| Accumulated other comprehensive loss | | | (10,900 | ) | | | – | | | | – | | | | (10,900 | ) |
Total shareholders’ equity | | | 461,209 | | | | 158,266 | | | | (158,266 | ) | | | 461,209 | |
| | | | | | | | | | | | | | | | | |
Total liabilities & shareholders’ equity | | $ | 1,093,878 | | | $ | 479,483 | | | $ | (616,934 | ) | | $ | 956,427 | |
Condensed Consolidating Balance Sheet
As of June 4, 2013
(In thousands)
| | | Parent | | Guarantors | | Eliminations | | Consolidated | |
| Assets | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 52,635 | | | $ | 272 | | | $ | – | | | $ | 52,907 | |
| | | 1,854 | | | | 2,980 | | | | – | | | | 4,834 | |
| Inventories | | | 21,961 | | | | 8,911 | | | | – | | | | 30,872 | |
| | | 118,329 | | | | – | | | | (116,429 | ) | | | 1,900 | |
| Deferred income taxes | | | 5,372 | | | | 1,924 | | | | – | | | | 7,296 | |
| | | 19,519 | | | | 3,836 | | | | – | | | | 23,355 | |
| Total current assets | | | 219,670 | | | | 17,923 | | | | (116,429 | ) | | | 121,164 | |
| | | | | | | | | | | | | | | | |
| Property and equipment, net | | | 635,478 | | | | 224,352 | | | | – | | | | 859,830 | |
Investment in subsidiaries | | | 167,887 | | | | – | | | | (167,887 | ) | | | – | |
| Due from/(to) subsidiaries | | | 76,485 | | | | 230,583 | | | | (307,068 | ) | | | – | |
| | | 46,812 | | | | 15,377 | | | | – | | | | 62,189 | |
| Total assets | | $ | 1,146,332 | | | $ | 488,235 | | | $ | (591,384 | ) | | $ | 1,043,183 | |
| | | | | | | | | | | | | | | | | |
| Liabilities & Shareholders’ Equity | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Accounts payable | | $ | 11,725 | | | $ | 3,239 | | | $ | – | | | $ | 14,964 | |
Accrued and other current liabilities | | | 47,775 | | | | 34,406 | | | | – | | | | 82,181 | |
| Current maturities of long-term debt, | | | | | | | | | | | | | | | | |
| | | (347 | ) | | | 8,834 | | | | | | | | 8,487 | |
| Income tax payable | | | – | | | | 116,429 | | | | (116,429 | ) | | | – | |
Total current liabilities | | | 59,153 | | | | 162,908 | | | | (116,429 | ) | | | 105,632 | |
| | | | | | | | | | | | | | | | | |
Long-term debt and capital leases, | | | | | | | | | | | | | | | | |
| less current maturities | | | 232,462 | | | | 58,053 | | | | – | | | | 290,515 | |
| | | (1,070 | ) | | | 6,823 | | | | – | | | | 5,753 | |
| Due to/(from) subsidiaries | | | 230,583 | | | | 76,485 | | | | (307,068 | ) | | | – | |
Other deferred liabilities | | | 108,369 | | | | 16,079 | | | | – | | | | 124,448 | |
| Total liabilities | | | 629,497 | | | | 320,348 | | | | (423,497 | ) | | | 526,348 | |
| | | | | | | | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | | | | | | | | |
| | | 612 | | | | – | | | | – | | | | 612 | |
| Capital in excess of par value | | | 67,596 | | | | – | | | | – | | | | 67,596 | |
| | | 459,572 | | | | 167,887 | | | | (167,887 | ) | | | 459,572 | |
| Accumulated other comprehensive loss | | | (10,945 | ) | | | – | | | | – | | | | (10,945 | ) |
Total shareholders’ equity | | | 516,835 | | | | 167,887 | | | | (167,887 | ) | | | 516,835 | |
| | | | | | | | | | | | | | | | | |
Total liabilities & shareholders’ equity | | $ | 1,146,332 | | | $ | 488,235 | | | $ | (591,384 | ) | | $ | 1,043,183 | |
Condensed Consolidating Statement of Operations and
Comprehensive (Loss)/Income
For the Fiscal Year Ended June 3, 2014
(In thousands)
| | | Parent | | | Guarantors | | | Eliminations | | | Consolidated | |
| Revenue: | | | | | | | | | | | | |
Restaurant sales and operating revenue | | $ | 842,842 | | | $ | 319,581 | | | $ | – | | | $ | 1,162,423 | |
| Franchise revenue | | | 223 | | | | 6,100 | | | | – | | | | 6,323 | |
| | | 843,065 | | | | 325,681 | | | | – | | | | 1,168,746 | |
| | | | | | | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | | | | | |
| Cost of merchandise | | | 233,562 | | | | 87,959 | | | | – | | | | 321,521 | |
Payroll and related costs | | | 287,358 | | | | 117,021 | | | | – | | | | 404,379 | |
| Other restaurant operating costs | | | 187,055 | | | | 73,392 | | | | – | | | | 260,447 | |
| | | 40,188 | | | | 14,640 | | | | – | | | | 54,828 | |
| Selling, general, and administrative | | | 87,248 | | | | 49,903 | | | | – | | | | 137,151 | |
Intercompany selling, general, and | | | | | | | | | | | | | | | | |
| administrative allocations | | | 59,257 | | | | (59,257 | ) | | | – | | | | – | |
| | | 18,904 | | | | 13,927 | | | | – | | | | 32,831 | |
| Trademark impairment | | | – | | | | 855 | | | | – | | | | 855 | |
Equity in earnings of subsidiaries | | | (21,005 | ) | | | – | | | | 21,005 | | | | – | |
| Interest expense, net | | | 19,978 | | | | 4,967 | | | | – | | | | 24,945 | |
Intercompany interest expense/(income) | | | 13,081 | | | | (13,081 | ) | | | – | | | | – | |
| Loss on extinguishment of debt | | | 1,364 | | | | – | | | | – | | | | 1,364 | |
| | | 926,990 | | | | 290,326 | | | | 21,005 | | | | 1,238,321 | |
| | | | | | | | | | | | | | | | | |
(Loss)/income from continuing operations | | | | | | | | | | | | | | | | |
| before income taxes | | | (83,925 | ) | | | 35,355 | | | | (21,005 | ) | | | (69,575 | ) |
(Benefit)/provision for income taxes from | | | | | | | | | | | | | | | | |
| continuing operations | | | (19,015 | ) | | | 14,350 | | | | – | | | | (4,665 | ) |
(Loss)/income from continuing operations | | | (64,910 | ) | | | 21,005 | | | | (21,005 | ) | | | (64,910 | ) |
| | | | | | | | | | | | | | | | | |
Income from discontinued operations, net of tax | | | 564 | | | | – | | | | – | | | | 564 | |
| Net (loss)/income | | $ | (64,346 | ) | | $ | 21,005 | | | $ | (21,005 | ) | | $ | (64,346 | ) |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income: | | | | | | | | | | | | | | | | |
Pension liability reclassification, net of tax | | | 45 | | | | – | | | | – | | | | 45 | |
| Total comprehensive (loss)/income | | $ | (64,301 | ) | | $ | 21,005 | | | $ | (21,005 | ) | | $ | (64,301 | ) |
Condensed Consolidating Statement of Operations and
Comprehensive (Loss)/Income
For the Fiscal Year Ended June 4, 2013
(In thousands)
| | | Parent | | | Guarantors | | | Eliminations | | | Consolidated | |
| Revenue: | | | | | | | | | | | | |
Restaurant sales and operating revenue | | $ | 904,761 | | | $ | 340,465 | | | $ | – | | | $ | 1,245,226 | |
| Franchise revenue | | | 188 | | | | 6,073 | | | | – | | | | 6,261 | |
| | | 904,949 | | | | 346,538 | | | | – | | | | 1,251,487 | |
| | | | | | | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | | | | | |
| Cost of merchandise | | | 248,378 | | | | 93,134 | | | | – | | | | 341,512 | |
Payroll and related costs | | | 298,194 | | | | 121,485 | | | | – | | | | 419,679 | |
| Other restaurant operating costs | | | 185,224 | | | | 73,790 | | | | – | | | | 259,014 | |
| | | 43,541 | | | | 15,581 | | | | – | | | | 59,122 | |
| Selling, general, and administrative | | | 91,587 | | | | 47,195 | | | | – | | | | 138,782 | |
Intercompany selling, general, and | | | | | | | | | | | | | | | | |
| administrative allocations | | | 68,466 | | | | (68,466 | ) | | | – | | | | – | |
| | | 13,181 | | | | 1,475 | | | | – | | | | 14,656 | |
| Goodwill and trademark impairments | | | 9,023 | | | | 5,035 | | | | – | | | | 14,058 | |
Equity in earnings of subsidiaries | | | (38,485 | ) | | | – | | | | 38,485 | | | | – | |
| Interest expense, net | | | 20,920 | | | | 5,656 | | | | – | | | | 26,576 | |
Intercompany interest expense/(income) | | | 13,826 | | | | (13,826 | ) | | | – | | | | – | |
| Loss on extinguishment of debt | | | 22 | | | | – | | | | – | | | | 22 | |
| | | 953,877 | | | | 281,059 | | | | 38,485 | | | | 1,273,421 | |
| | | | | | | | | | | | | | | | | |
(Loss)/income from continuing operations | | | | | | | | | | | | | | | | |
| before income taxes | | | (48,928 | ) | | | 65,479 | | | | (38,485 | ) | | | (21,934 | ) |
Provision/(benefit) for income taxes from | | | | | | | | | | | | | | | | |
| continuing operations | | | (25,494 | ) | | | 26,994 | | | | – | | | | 1,500 | |
(Loss)/income from continuing operations | | | (23,434 | ) | | | 38,485 | | | | (38,485 | ) | | | (23,434 | ) |
| | | | | | | | | | | | | | | | | |
Loss from discontinued operations, net of tax | | | (15,979 | ) | | | (810 | ) | | | 810 | | | | (15,979 | ) |
| Net (loss)/income | | $ | (39,413 | ) | | $ | 37,675 | | | $ | (37,675 | ) | | $ | (39,413 | ) |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income: | | | | | | | | | | | | | | | | |
Pension liability reclassification, net of tax | | | 3,312 | | | | – | | | | – | | | | 3,312 | |
| Total comprehensive (loss)/income | | $ | (36,101 | ) | | $ | 37,675 | | | $ | (37,675 | ) | | $ | (36,101 | ) |
Condensed Consolidating Statement of Operations and
Comprehensive (Loss)/Income
For the Fiscal Year Ended June 5, 2012
(In thousands)
| | | Parent | | | Guarantors | | | Eliminations | | | Consolidated | |
| Revenue: | | | | | | | | | | | | |
Restaurant sales and operating revenue | | $ | 944,501 | | | $ | 361,524 | | | $ | – | | | $ | 1,306,025 | |
| Franchise revenue | | | 216 | | | | 5,522 | | | | – | | | | 5,738 | |
| | | 944,717 | | | | 367,046 | | | | – | | | | 1,311,763 | |
| | | | | | | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | | | | | |
| Cost of merchandise | | | 271,559 | | | | 104,014 | | | | – | | | | 375,573 | |
Payroll and related costs | | | 309,854 | | | | 130,899 | | | | – | | | | 440,753 | |
| Other restaurant operating costs | | | 186,754 | | | | 75,819 | | | | – | | | | 262,573 | |
| | | 47,475 | | | | 16,669 | | | | – | | | | 64,144 | |
| Selling, general, and administrative | | | 79,594 | | | | 40,770 | | | | – | | | | 120,364 | |
Intercompany selling, general, and | | | | | | | | | | | | | | | | |
| administrative allocations | | | 71,670 | | | | (71,670 | ) | | | – | | | | – | |
| | | 12,282 | | | | 4,469 | | | | – | | | | 16,751 | |
| Goodwill impairment | | | 1,440 | | | | 15,479 | | | | – | | | | 16,919 | |
Equity in earnings of subsidiaries | | | (35,905 | ) | | | – | | | | 35,905 | | | | – | |
| Interest expense, net | | | 13,295 | | | | 10,017 | | | | – | | | | 23,312 | |
Intercompany interest expense/(income) | | | 13,096 | | | | (13,096 | ) | | | – | | | | – | |
| | | | 971,114 | | | | 313,370 | | | | 35,905 | | | | 1,320,389 | |
| | | | | | | | | | | | | | | | | |
| (Loss)/income from continuing operations | | | | | | | | | | | | | | | | |
| | | (26,397 | ) | | | 53,676 | | | | (35,905 | ) | | | (8,626 | ) |
| (Benefit)/provision for income taxes from | | | | | | | | | | | | | | | | |
| | | (29,923 | ) | | | 17,771 | | | | – | | | | (12,152 | ) |
| Income from continuing operations | | | 3,526 | | | | 35,905 | | | | (35,905 | ) | | | 3,526 | |
| | | | | | | | | | | | | | | | |
| Loss from discontinued operations, net of tax | | | (3,714 | ) | | | (1,392 | ) | | | 1,392 | | | | (3,714 | ) |
| | $ | (188 | ) | | $ | 34,513 | | | $ | (34,513 | ) | | $ | (188 | ) |
| | | | | | | | | | | | | | | | | |
Other comprehensive (loss)/income: | | | | | | | | | | | | | | | | |
| Pension liability reclassification, net of tax | | | (1,205 | ) | | | – | | | | – | | | | (1,205 | ) |
Total comprehensive (loss)/income | | $ | (1,393 | ) | | $ | 34,513 | | | $ | (34,513 | ) | | $ | (1,393 | ) |
Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended June 3, 2014
(In thousands)
| | | | Parent | | | | Guarantors | | | | Eliminations | | | | Consolidated | |
| | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 5,854 | | | $ | 57,064 | | | $ | (17,543 | ) | | $ | 45,375 | |
| | | | | | | | | | | | | | | | |
| Investing activities: | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (21,132 | ) | | | (7,207 | ) | | | – | | | | (28,339 | ) |
| Proceeds from sale-leaseback transactions, net | | | 5,637 | | | | – | | | | – | | | | 5,637 | |
Proceeds from disposal of assets | | | 14,503 | | | | 1,023 | | | | – | | | | 15,526 | |
| Other, net | | | 973 | | | | – | | | | – | | | | 973 | |
Net cash used by investing activities | | | (19 | ) | | | (6,184 | ) | | | – | | | | (6,203 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Principal payments on long-term debt | | | (20,019 | ) | | | (20,213 | ) | | | – | | | | (40,232 | ) |
| | | (579 | ) | | | – | | | | – | | | | (579 | ) |
| Proceeds from exercise of stock options | | | 1,576 | | | | – | | | | – | | | | 1,576 | |
Payments for debt issuance costs | | | (1,802 | ) | | | – | | | | – | | | | (1,802 | ) |
| Excess tax benefits from share-based | | | | | | | | | | | | | | | | |
| | | 284 | | | | – | | | | – | | | | 284 | |
| Intercompany transactions | | | 13,082 | | | | (30,625 | ) | | | 17,543 | | | | – | |
Net cash used by financing activities | | | (7,458 | ) | | | (50,838 | ) | | | 17,543 | | | | (40,753 | ) |
| | | | | | | | | | | | | | | | | |
(Decrease)/increase in cash and cash equivalents | | | (1,623 | ) | | | 42 | | | | – | | | | (1,581 | ) |
| Cash and cash equivalents: | | | | | | | | | | | | | | | | |
| | | 52,635 | | | | 272 | | | | – | | | | 52,907 | |
| End of year | | $ | 51,012 | | | $ | 314 | | | $ | – | | | $ | 51,326 | |
IndexCondensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended June 4, 2013
(In thousands)
| | | | Parent | | | | Guarantors | | | | Eliminations | | | | Consolidated | |
| | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 34,877 | | | $ | 89,925 | | | $ | (88,848 | ) | | $ | 35,954 | |
| | | | | | | | | | | | | | | | |
| Investing activities: | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (31,531 | ) | | | (5,586 | ) | | | – | | | | (37,117 | ) |
| Proceeds from sale-leaseback transactions, net | | | 51,765 | | | | – | | | | – | | | | 51,765 | |
Proceeds from disposal of assets | | | 4,421 | | | | 2,576 | | | | – | | | | 6,997 | |
| Other, net | | | 468 | | | | – | | | | – | | | | 468 | |
Net cash used by investing activities | | | 25,123 | | | | (3,010 | ) | | | – | | | | 22,113 | |
| | | | | | | | | | | | | �� | | | | |
| | | | | | | | | | | | | | | | |
| Principal payments on long-term debt | | | (14,514 | ) | | | (12,666 | ) | | | – | | | | (27,180 | ) |
| | | (30,278 | ) | | | – | | | | – | | | | (30,278 | ) |
| Proceeds from exercise of stock options | | | 4,090 | | | | – | | | | – | | | | 4,090 | |
Payments for debt issuance costs | | | (358 | ) | | | – | | | | – | | | | (358 | ) |
| Excess tax benefits from share-based | | | | | | | | | | | | | | | | |
| | | 382 | | | | – | | | | – | | | | 382 | |
| Intercompany transactions | | | (14,673 | ) | | | (74,175 | ) | | | 88,848 | | | | – | |
Net cash used by financing activities | | | (55,351 | ) | | | (86,841 | ) | | | 88,848 | | | | (53,344 | ) |
| | | | | | | | | | | | | | | | | |
Increase in cash and cash equivalents | | | 4,649 | | | | 74 | | | | – | | | | 4,723 | |
| Cash and cash equivalents: | | | | | | | | | | | | | | | | |
| | | 47,986 | | | | 198 | | | | – | | | | 48,184 | |
| End of year | | $ | 52,635 | | | $ | 272 | | | $ | – | | | $ | 52,907 | |
Index Condensed Consolidating Statement of Cash Flows
For the Fiscal Year Ended June 5, 2012
(In thousands)
| | | Parent | | | Guarantors | | | Eliminations | | | Consolidated | |
| | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 48,516 | | | $ | 105,820 | | | $ | (42,085 | ) | | $ | 112,251 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Purchases of property and equipment | | | (28,253 | ) | | | (9,713 | ) | | | – | | | | (37,966 | ) |
Acquisition of franchise and other entities, net | | | (24,084 | ) | | | – | | | | – | | | | (24,084 | ) |
| Proceeds from sale-leaseback transactions | | | 21,150 | | | | – | | | | – | | | | 21,150 | |
Proceeds from disposal of assets | | | 5,834 | | | | 160 | | | | – | | | | 5,994 | |
| Other, net | | | 1,151 | | | | – | | | | – | | | | 1,151 | |
Net cash used by investing activities | | | (24,202 | ) | | | (9,553 | ) | | | – | | | | (33,755 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Proceeds from issuance of senior unsecured | | | | | | | | | | | | | | | | |
| | | 246,340 | | | | – | | | | | | | | 246,340 | |
| Net payments on revolving credit facility | | | (177,000 | ) | | | – | | | | – | | | | (177,000 | ) |
Principal payments on long-term debt | | | (44,437 | ) | | | (41,120 | ) | | | – | | | | (85,557 | ) |
| Stock repurchases | | | (18,441 | ) | | | – | | | | – | | | | (18,441 | ) |
Payment for debt issuance costs | | | (5,767 | ) | | | – | | | | – | | | | (5,767 | ) |
| Proceeds from exercise of stock options | | | 355 | | | | – | | | | – | | | | 355 | |
Excess tax benefits from share-based | | | | | | | | | | | | | | | | |
| compensation | | | 36 | | | | – | | | | – | | | | 36 | |
Intercompany transactions | | | 13,096 | | | | (55,181 | ) | | | 42,085 | | | | – | |
| Net cash provided/(used) by financing activities | | | 14,182 | | | | (96,301 | ) | | | 42,085 | | | | (40,034 | ) |
| | | | | | | | | | | | | | | | | |
| Increase/(decrease) in cash and cash equivalents | | | 38,496 | | | | (34 | ) | | | – | | | | 38,462 | |
Cash and cash equivalents: | | | | | | | | | | | | | | | | |
| Beginning of year | | | 9,490 | | | | 232 | | | | – | | | | 9,722 | |
| | $ | 47,986 | | | $ | 198 | | | $ | – | | | $ | 48,184 | |
17. Supplemental Quarterly Financial Data (Unaudited)
Quarterly financial results for the years ended June 3, 2014 and June 4, 2013, are summarized below.
(In thousands, except per-share data)
| | | For the Year Ended June 3, 2014 | |
| | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Total | |
| | | | | | | | | | | | | | | | |
| Revenues | | $ | 289,674 | | | $ | 276,209 | | | $ | 295,552 | | | $ | 307,311 | | | $ | 1,168,746 | |
| Gross profit* | | $ | 39,469 | | | $ | 35,734 | | | $ | 49,060 | | | $ | 58,136 | | | $ | 182,399 | |
| (Loss)/income from continuing | | | | | | | | | | | | | | | | | | | | |
| operations before income taxes | | $ | (27,052 | ) | | $ | (36,647 | ) | | $ | (8,200 | ) | | $ | 2,324 | | | $ | (69,575 | ) |
| (Benefit)/provision for income taxes | | | | | | | | | | | | | | | | | | | | |
| from continuing operations | | | (5,153 | ) | | | (1,910 | ) | | | (807 | ) | | | 3,205 | | | | (4,665 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | $ | (21,899 | ) | | $ | (34,737 | ) | | $ | (7,393 | ) | | $ | (881 | ) | | $ | (64,910 | ) |
| (Loss)/income from discontinued | | | | | | | | | | | | | | | | | | | | |
| operations, net of tax | | | (343 | ) | | | 354 | | | | 86 | | | | 467 | | | | 564 | |
| Net loss | | $ | (22,242 | ) | | $ | (34,383 | ) | | $ | (7,307 | ) | | $ | (414 | ) | | $ | (64,346 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Basic loss per share: | | | | | | | | | | | | | | | | | | | | |
| Loss from continuing operations ** | | $ | (0.36 | ) | | $ | (0.58 | ) | | $ | (0.12 | ) | | $ | (0.01 | ) | | $ | (1.08 | ) |
| (Loss)/income from discontinued | | | | | | | | | | | | | | | | | | | | |
| operations ** | | | (0.01 | ) | | | 0.01 | | | | 0.00 | | | | 0.00 | | | | 0.01 | |
| Net loss per share | | $ | (0.37 | ) | | $ | (0.57 | ) | | $ | (0.12 | ) | | $ | (0.01 | ) | | $ | (1.07 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted loss per share: | | | | | | | | | | | | | | | | | | | | |
| Loss from continuing operations ** | | $ | (0.36 | ) | | $ | (0.58 | ) | | $ | (0.12 | ) | | $ | (0.01 | ) | | $ | (1.08 | ) |
| (Loss)/income from discontinued | | | | | | | | | | | | | | | | | | | | |
| operations ** | | | (0.01 | ) | | | 0.01 | | | | 0.00 | | | | 0.00 | | | | 0.01 | |
| Net loss per share | | $ | (0.37 | ) | | $ | (0.57 | ) | | $ | (0.12 | ) | | $ | (0.01 | ) | | $ | (1.07 | ) |
| | | For the Year Ended June 4, 2013 | |
| | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | Total | |
| | | | | | | | | | | | | | | | |
| Revenues | | $ | 327,923 | | | $ | 300,077 | | | $ | 307,383 | | | $ | 316,104 | | | $ | 1,251,487 | |
| Gross profit* | | $ | 67,014 | | | $ | 50,851 | | | $ | 56,278 | | | $ | 57,139 | | | $ | 231,282 | |
| Income/(loss) from continuing | | | | | | | | | | | | | | | | | | | | |
| operations before income taxes | | $ | 1,119 | | | $ | (10,868 | ) | | $ | 2,701 | | | $ | (14,886 | ) | | $ | (21,934 | ) |
| Provision/(benefit) for income taxes | | | | | | | | | | | | | | | | | | | | |
| from continuing operations | | | (1,955 | ) | | | (6,664 | ) | | | (2,015 | ) | | | 12,134 | | | | 1,500 | |
| Income/(loss) from continuing | | | | | | | | | | | | | | | | | | | | |
| operations | | $ | 3,074 | | | $ | (4,204 | ) | | $ | 4,716 | | | $ | (27,020 | ) | | $ | (23,434 | ) |
| Loss from discontinued operations, | | | | | | | | | | | | | | | | | | | | |
| net of tax | | | (475 | ) | | | (10,864 | ) | | | (2,520 | ) | | | (2,120 | ) | | | (15,979 | ) |
| Net income/(loss) | | $ | 2,599 | | | $ | (15,068 | ) | | $ | 2,196 | | | $ | (29,140 | ) | | $ | (39,413 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Basic earnings/(loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Income/(loss) from continuing | | | | | | | | | | | | | | | | | | | | |
| operations | | $ | 0.05 | | | $ | (0.07 | ) | | $ | 0.08 | | | $ | (0.44 | ) | | $ | (0.38 | ) |
| Loss from discontinued operations | | | (0.01 | ) | | | (0.17 | ) | | | (0.04 | ) | | | (0.05 | ) | | | (0.27 | ) |
| Net earnings/(loss) per share | | $ | 0.04 | | | $ | (0.24 | ) | | $ | 0.04 | | | $ | (0.49 | ) | | $ | (0.65 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Diluted earnings/(loss) per share: | | | | | | | | | | | | | | | | | | | | |
| Income/(loss) from continuing | | | | | | | | | | | | | | | | | | | | |
| operations | | $ | 0.05 | | | $ | (0.07 | ) | | $ | 0.08 | | | $ | (0.44 | ) | | $ | (0.38 | ) |
| Loss from discontinued operations | | | (0.01 | ) | | | (0.17 | ) | | | (0.04 | ) | | | (0.05 | ) | | | (0.27 | ) |
| Net earnings/(loss) per share | | $ | 0.04 | | | $ | (0.24 | ) | | $ | 0.04 | | | $ | (0.49 | ) | | $ | (0.65 | ) |
* We define gross profit as revenue less cost of merchandise, payroll and related costs, and other restaurant operating costs.
** The sum of the quarterly amounts do not equal the reported annual amount as each is computed independently based upon the weighted-average number of shares outstanding for the period.
18. Subsequent Events
Change in Chief Financial Officer
On June 26, 2014, Michael O. Moore stepped down as our Chief Financial Officer. On the same date, our then Senior Vice President, Finance, Jill M. Golder, was appointed Executive Vice President, Chief Financial Officer.
Share-based compensation awards
On August 4, 2014, the Executive Compensation and Human Resources Committee of the Board of Directors approved the grant of approximately 810,000 service-based stock options and 382,000 service-based restricted shares under the terms of the SIP and 1996 SIP. The service-based stock options vest in three equal annual installments following the date of grant and the restricted shares cliff vest 2.5 years following the grant date.
Index
The Board of Directors and Shareholders
Ruby Tuesday, Inc.:
We have audited the accompanying consolidated balance sheets of Ruby Tuesday, Inc. and subsidiaries (the Company) as of June 3, 2014 and June 4, 2013, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years in the three-year period ended June 3, 2014. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ruby Tuesday, Inc. as of June 3, 2014 and June 4, 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended June 3, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 3, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated August 6, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Knoxville, Tennessee
August 6, 2014
IndexReport of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Ruby Tuesday, Inc.:
We have audited Ruby Tuesday, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of June 3, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 3, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ruby Tuesday, Inc. and subsidiaries as of June 3, 2014 and June 4, 2013, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of the years in the three-year period ended June 3, 2014, and our report dated August 6, 2014 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Knoxville, Tennessee
August 6, 2014
IndexAccounting and Financial Disclosure
None.
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are operating effectively and are properly designed to ensure that information required to be disclosed is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosure in the reports filed or submitted under the Securities Exchange Act of 1934, as amended.
Management’s Report on Internal Control over Financial Reporting
Under Section 404 of The Sarbanes-Oxley Act of 2002, our management is required to assess the effectiveness of the Company's internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company's internal control over financial reporting is effective.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rule 13a-15(f) of the Securities Exchange Act of 1934, internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of the Company’s internal control over financial reporting as of the end of the period covered by this report. In this assessment, the Company applied criteria based on the “Internal Control - Integrated Framework (1992)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). These criteria are in the areas of control environment, risk assessment, control activities, information and communication, and monitoring. The Company's assessment included documenting, evaluating and testing the design and operating effectiveness of its internal control over financial reporting. Based upon this evaluation, our management concluded that our internal control over financial reporting was effective as of June 3, 2014.
KPMG LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of our internal control over financial reporting as of June 3, 2014 as stated in their report filed within Item 8 – Financial Statements and Supplementary Data.
Changes in Internal Controls
During the fiscal quarter ended June 3, 2014, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On August 5, 2014, the Company entered into an amendment of its Senior Credit Facility which modified the definition of Consolidated EBITDAR and Consolidated Lease Expense to allow the add-back and exclusion, respectively, of certain cash charges related to fiscal 2014 store closings and reductions in force for debt covenant purposes, where applicable.
PART III
We expect to file a definitive proxy statement (the “2014 Proxy Statement”) relating to our 2014 Annual Meeting of shareholders (the “Annual Meeting”) with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of our most recent fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2014 Proxy Statement that specifically address disclosure requirements of Items 10-14 below are incorporated by reference.
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 regarding the directors of the Company is incorporated herein by reference to the information set forth in the table entitled “Director and Director Nominee Information” in the 2014 Proxy Statement.
Information regarding executive officers of the Company has been included in Part I of this Annual Report on Form 10-K under the caption “Executive Officers.”
Information regarding corporate governance of the Company and other information required by this item is incorporated herein by reference to the information set forth under the captions, “Corporate Governance,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Committees of the Board of Directors” in the 2014 Proxy Statement.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated herein by reference to the information set forth under the captions “Compensation Discussion and Analysis,” “Compensation Committee Report,” “2014 Summary Compensation Table,” “Grants of Plan-Based Awards in Fiscal Year 2014,” “Outstanding Equity Awards at Fiscal Year-End for 2014,” “Option Exercises and Stock Vested in Fiscal Year 2014,” “2014 Nonqualified Deferred Compensation,” “Pension Benefits for Fiscal Year 2014,” “Potential Payments Upon Termination or Change in Control,” “Directors’ Fees and Attendance,” “2014 Director Compensation,” and “Committees of the Board of Directors” in the 2014 Proxy Statement relating to the Annual Meeting.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The information required by this Item 12 is incorporated herein by reference to the information set forth in the tables captioned “Beneficial Ownership of Common Stock” and “Securities Authorized for Issuance Under Equity Compensation Plans” in the 2014 Proxy Statement relating to the Annual Meeting.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item 13 is incorporated herein by reference to the information set forth under the captions “Related Person Transactions” and “Directors’ Independence” in the 2014 Proxy Statement relating to the Annual Meeting.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated herein by reference to the information set forth under the caption “Accountants’ Fees and Expenses” in the 2014 Proxy Statement relating to the Annual Meeting.
Item 14. Principal Accounting Fees and Services
The information required by this Item 14 is incorporated herein by reference to the information set forth under the caption “Accountants’ Fees and Expenses” in the 2014 Proxy Statement relating to the Annual Meeting.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Financial Statements:
The financial statements of the Company and its subsidiaries are listed in the accompanying “Index to
Consolidated Financial Statements” on page 50.
2. Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts for the Years Ended June 3, 2014, June 4, 2013, and June 5, 2012 (in thousands):
| | | | Charged/ | | Charged/ | | | | | |
| | Balance at | | (Credited) | | (Credited) | | | | | |
| | Beginning | | to Costs | | to other | | | | Balance at | |
| Description | of Period | | and Expenses | | Accounts | | Write-offs | | End of Period | |
| Allowance for Doubtful Notes | | | | | | | | | | |
| | | | | | | | | | | |
| Fiscal Year Ended June 3, 2014 | $ 259 | | $ 307 | | $ – | | $ (566 | ) | $ – | |
| | | | | | | | | | | |
| Fiscal Year Ended June 4, 2013 | 41 | | 259 | | (20) | | (21 | ) | 259 | |
| | | | | | | | | | | |
| Fiscal Year Ended June 5, 2012 | 41 | | 19 | | – | | (19 | ) | 41 | |
All other financial statement schedules have been omitted, as the required information is inapplicable or the information is presented in the financial statements or related notes.
3. Exhibits:
The exhibits filed with or incorporated by reference in this report are listed on the Exhibit Index beginning on page 103.
Index
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RUBY TUESDAY, INC.
| Date: August 6, 2014 | By: /s/ James J. Buettgen |
| | James J. Buettgen |
| | Chairman of the Board, President, and |
| | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
| Name | Position | Date |
/s/ James J. Buettgen James J. Buettgen | Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer) | Date: August 6, 2014 |
| | | |
/s/ Jill M. Golder Jill M. Golder | Executive Vice President, Chief Financial Officer (Principal Financial Officer) | Date: August 6, 2014 |
| | | |
/s/ Franklin E. Southall, Jr. Franklin E. Southall, Jr. | Vice President, Corporate Controller (Principal Accounting Officer) | Date: August 6, 2014 |
| | | |
/s/ Mark W. Addicks Mark W. Addicks | Director | Date: August 6, 2014 |
| | | |
/s/ F. Lane Cardwell, Jr. F. Lane Cardwell, Jr. | Director | Date: August 6, 2014 |
| | | |
/s/ Kevin T. Clayton Kevin T. Clayton | Director | Date: August 6, 2014 |
| | | |
/s/ Donald E. Hess Donald E. Hess | Director | Date: August 6, 2014 |
| | | |
/s/ Bernard Lanigan Jr. Bernard Lanigan Jr. | Director | Date: August 6, 2014 |
| | | |
/s/ Jeffrey J. O’Neill Jeffrey J. O’Neill | Director | Date: August 6, 2014 |
| | | |
/s/ Stephen I. Sadove Stephen I. Sadove | Director | Date: August 6, 2014 |
| | | |
RUBY TUESDAY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Number | | Description of Exhibit |
| | | |
| * | | Management contract or compensatory plan or arrangement. |
| + | | Filed herewith. |
| | | |
| 3.1 | | Articles of Incorporation, as amended, of Ruby Tuesday, Inc. (incorporated by reference from Exhibit 3.1 to Form 8-B filed on March 15, 1996 (File No. 1-12454)). |
| | | |
| 3.2 | | Bylaws, as amended and restated, of Ruby Tuesday, Inc. (incorporated by reference from Exhibit 3.1 to Form 8-K filed on October 8, 2009 (File No. 1-12454)). |
| | | |
| 4.1 | | Specimen Common Stock Certificate. (incorporated by reference from Exhibit 4.1 to Form 8-B filed on March 15, 1996 (File No. 1-12454)). |
| | | |
| 10.1 | | Ruby Tuesday, Inc. Executive Supplemental Pension Plan, amended and restated as of January 1, 2007. (incorporated by reference from Exhibit 10.1 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the fiscal year ended June 5, 2007 (File No. 1-12454)).* |
| | | |
10.2 | | First Amendment, dated as of April 2, 2008, to the Ruby Tuesday, Inc. Executive Supplemental Pension Plan (Amended and Restated as of January 1, 2007) (incorporated by reference from Exhibit 10.6 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended March 4, 2008 (File No. 1-12454)).* |
| | | |
| 10.3 | | Second Amendment, dated as of December 31, 2008, to the Ruby Tuesday, Inc. Executive Supplemental Pension Plan (Amended and Restated as of January 1, 2007) (incorporated by reference from Exhibit 10.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 2, 2008 (File No. 1-12454)).* |
| | | |
| 10.4 | | Third Amendment, dated as of January 6, 2010, to the Ruby Tuesday, Inc. Executive Supplemental Pension Plan (Amended and Restated as of January 1, 2007) (incorporated by reference from Exhibit 10.3 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 1, 2009 (File No. 1-12454)).* |
| | | |
| 10.5 | | Fourth Amendment, dated as of November 30, 2012, to the Ruby Tuesday, Inc. Executive Supplemental Pension Plan (Amended and Restated as of January 1, 2007) (incorporated by reference from Exhibit 10.4 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 4, 2012 (File No. 1-12454)).* |
| | | |
| 10.6 | | Ruby Tuesday, Inc. Deferred Compensation Plan for Directors (Amended and Restated as of April 9, 2014) (incorporated by reference from Exhibit 10.3 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended March 4, 2014 (File No. 1-12454)).* |
| | | |
| 10.7 | | Ruby Tuesday, Inc. Stock Incentive Plan (Amended and Restated October 9, 2013) (incorporated by reference from Exhibit 10.1 to Form 8-K filed on October 10, 2013 (File No. 1-12454)).* |
| | | |
| 10.8 | | First Amendment to the Ruby Tuesday, Inc. Stock Incentive Plan (incorporated by reference from Exhibit 10.2 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended March 4, 2014 (File No. 1-12454)).* |
| | | |
| 10.9 | | Form of Service-Based Restricted Stock Award (incorporated by reference from Exhibit 10.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended September 4, 2012 (File No. |
| | | 1-12454)).* |
| | | |
| 10.10 | | Form of Performance-Based Restricted Stock Award (incorporated by reference from Exhibit 10.2 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended September 4, 2012 (File No. 1-12454)).* |
| | | |
| 10.11 | | Form of Performance-Based Cash Incentive Award (incorporated by reference from Exhibit 10.3 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended September 4, 2012 (File No. 1-12454)).* |
| | | |
| 10.12 | | Form of Restricted Stock Award for Directors (incorporated by reference from Exhibit 10.4 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended September 4, 2012 (File No. 1-12454)).* |
| | | |
| 10.13 | | Form of Service-Based Restricted Stock Award (incorporated by reference from Exhibit 10.1 to Form 8-K filed on June 25, 2013 (File No. 1-12454)).* |
| | | |
| 10.14 | | Form of Non-Qualified Stock Option Award (incorporated by reference from Exhibit 10.1 to Form 8-K filed on August 28, 2013 (File No. 1-12454)).* |
| | | |
| 10.15 | | Form of High-Performance Non-Qualified Stock Option Award (incorporated by reference from Exhibit 10.2 to Form 8-K filed on August 28, 2013 (File No. 1-12454)).* |
| | | |
| 10.16 | | Form of Performance-Based Cash Incentive Award (incorporated by reference from Exhibit 10.3 to Form 8-K filed on August 28, 2013 (File No. 1-12454)).* |
| | | |
| 10.17 | | Initial Award, dated as of December 3, 2012, by and between Ruby Tuesday, Inc. and James J. Buettgen (incorporated by reference from Exhibit 10.24 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the year ended June 4, 2013 (File No. 1-12454)).* |
| | | |
| 10.18 | | Inducement and High-Performance Award, dated as of December 3, 2012, by and between Ruby Tuesday, Inc. and James J. Buettgen (incorporated by reference from Exhibit 10.25 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the year ended June 4, 2013 (File No. 1-12454)).* |
| | | |
| 10.19 | | Make-Whole Award, dated as of December 3, 2012, by and between Ruby Tuesday, Inc. and James J. Buettgen (incorporated by reference from Exhibit 10.26 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the year ended June 4, 2013 (File No. 1-12454)).* |
| | | |
| 10.20 | | Performance-Based Cash Incentive Award, dated as of December 3, 2012, by and between Ruby Tuesday, Inc. and James J. Buettgen (incorporated by reference from Exhibit 10.27 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the year ended June 4, 2013 (File No. 1-12454)).* |
| | | |
| 10.21 | | Morrison Restaurants Inc. Deferred Compensation Plan, as restated effective January 1, 1994, together with amended and restated Trust Agreement, dated as of December 1, 1992, to Deferred Compensation Plan (incorporated by reference from Exhibit 10(i) to the Morrison Restaurants Inc. Annual Report on Form 10-K for the fiscal year ended June 5, 1993 (File No. 0-1750)).* |
| | | |
| 10.22 | | Morrison Restaurants Inc. Management Retirement Plan together with First Amendment, dated as of June 30, 1994 and Second Amendment, dated as of July 31, 1995 (incorporated by reference from Exhibit 10(n) to the Morrison Restaurants Inc. Annual Report on Form 10-K for the fiscal year ended June 3, 1995 (File No. 1-12454)).* |
| | | |
| 10.23 | | Form of Third Amendment to Management Retirement Plan (incorporated by reference from Exhibit 10.32 to Form 8-B filed on March 15, 1996 (File No. 1-12454)).* |
| | | |
| 10.24 | | Form of Fourth Amendment to Management Retirement Plan (incorporated by reference from Exhibit 10.14 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the fiscal year ended June 3, 2003 (File No. 1-12454)).* |
| | | |
| 10.25 | | Form of Fifth Amendment to Management Retirement Plan (incorporated by reference from Exhibit 10.15 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the fiscal year ended June 3, 2003 (File No. 1-12454)).* |
| 10.26 | | Sixth Amendment, dated as of April 9, 2001, to the Ruby Tuesday, Inc. Management Retirement Plan (incorporated by reference from Exhibit 10.41 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the fiscal year ended June 5, 2001 (File No. 1-12454)).* |
| | | |
| 10.27 | | Seventh Amendment (dated as of October 5, 2004) to the Ruby Tuesday, Inc. Management Retirement Plan (incorporated by reference from Exhibit 99.5 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended November 30, 2004 (File No. 1-12454)).* |
| | | |
| 10.28 | | Morrison Retirement Plan, amended and restated as of October 7, 2009 (incorporated by reference from Exhibit 10.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 1, 2009 (File No. 1-12454)).* |
| | | |
| 10.29 | | Executive Group Life and Executive Accidental Death and Dismemberment Plan (incorporated by reference from Exhibit 10(q) to the Morrison Restaurants Inc. Annual Report on Form 10-K for the fiscal year ended June 3, 1989 (File No. 0-1750)).* |
| | | |
| 10.30 | | Morrison Restaurants Inc. Executive Life Insurance Plan (incorporated by reference from Exhibit 10(a)(a) to the Morrison Restaurants Inc. Annual Report on Form 10-K for the fiscal year ended June 4, 1994 (File No. 1-12454)).* |
| | | |
| 10.31 | | Form of First Amendment to the Morrison Restaurants Inc. Executive Life Insurance Plan (incorporated by reference from Exhibit 10.25 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the fiscal year ended June 3, 2003 (File No. 1-12454)).* |
| | | |
| 10.32 | | Second Amendment (dated as of January 1, 2004) to the Ruby Tuesday Inc. Executive Life Insurance Plan (formerly the Morrison Restaurants Inc. Executive Life Insurance Plan) (incorporated by reference from Exhibit 99.2 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended November 30, 2004 (File No. 1-12454)).* |
| | | |
| 10.33 | | Ruby Tuesday Inc. Executive Life Insurance Premium Plan dated as of January 1, 2004 (incorporated by reference from Exhibit 99.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended November 30, 2004 (File No. 1-12454)).* |
| | | |
| 10.34 | | First Amendment, dated November 30, 2012, to the Ruby Tuesday Inc. Executive Life Insurance Premium Plan (incorporated by reference from Exhibit 10.6 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 4, 2012 (File No. 1-12454)).* |
| | | |
| 10.35 | | Ruby Tuesday, Inc. 1996 Stock Incentive Plan, restated as of September 30, 1999 (incorporated by reference from Exhibit 99.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended September 3, 2000 (File No. 1-12454)).* |
| | | |
| 10.36 | | First Amendment, dated as of July 10, 2000, to the restated Ruby Tuesday, Inc. 1996 Stock Incentive Plan (incorporated by reference from Exhibit 99.2 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended September 3, 2000 (File No. 1-12454)).* |
| | | |
| 10.37 | | Ruby Tuesday, Inc. Salary Deferral Plan, amended and restated as of October 7, 2009 (incorporated by reference from Exhibit 10.2 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter |
| | | |
| | | ended December 1, 2009 (File No. 1-12454)).* |
| | | |
| 10.38 | | First Amendment, dated as of April 6, 2011, to the Ruby Tuesday, Inc. Salary Deferral Plan (incorporated by reference from Exhibit 10.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended March 1, 2011 (File No. 1-12454)).* |
| | | |
| 10.39 | | Ruby Tuesday, Inc. Deferred Compensation Plan Trust Agreement restated as of June 1, 2001 (incorporated by reference from Exhibit 10.44 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the fiscal year ended June 5, 2001 (File No. 1-12454)).* |
| | | |
| 10.40 | | First Amendment, dated as of June 10, 2002, to the Ruby Tuesday, Inc. Deferred Compensation Plan Trust Agreement (incorporated by reference from Exhibit 10.58 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the fiscal year ended June 4, 2002 (File No. 1-12454)).* |
| | | |
| 10.41 | | Ruby Tuesday, Inc. Restated Deferred Compensation Plan, dated as of November 26, 2002 (incorporated by reference from Exhibit 99.2 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 3, 2002 (File No. 1-12454)).* |
| | | |
| 10.42 | | Ruby Tuesday, Inc. 2005 Deferred Compensation Plan (incorporated by reference from Exhibit 10.1 to Form 8-K filed on January 18, 2005 (File No. 1-12454)).* |
| | | |
| 10.43 | | First Amendment, dated as of December 14, 2006, to the Ruby Tuesday, Inc. 2005 Deferred Compensation Plan (incorporated by reference from Exhibit 10.6 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 5, 2006 (File No. 1-12454)).* |
| | | |
| 10.44 | | Second Amendment, dated as of July 11, 2007, to the Ruby Tuesday, Inc. 2005 Deferred Compensation Plan (incorporated by reference from Exhibit 10.40 to the Ruby Tuesday, Inc. Annual Report on Form 10-K for the fiscal year ended June 5, 2007 (File No. 1-12454)).* |
| | | |
| 10.45 | | Third Amendment, dated as of December 30, 2008, to the Ruby Tuesday, Inc. 2005 Deferred Compensation Plan (incorporated by reference from Exhibit 10.3 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 2, 2008 (File No. 1-12454)).* |
| | | |
| 10.46 | | Fourth Amendment, dated as of December 31, 2008, to the Ruby Tuesday, Inc. 2005 Deferred Compensation Plan (incorporated by reference from Exhibit 10.4 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 2, 2008 (File No. 1-12454)).* |
| | | |
| 10.47 | | Fifth Amendment, dated as April 6, 2011, to the Ruby Tuesday, Inc. 2005 Deferred Compensation Plan (incorporated by reference from Exhibit 10.2 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended March 1, 2011 (File No. 1-12454)).* |
| | | |
| 10.48 | | Sixth Amendment, dated as October 31, 2012, to the Ruby Tuesday, Inc. 2005 Deferred Compensation Plan (incorporated by reference from Exhibit 10.5 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 4, 2012 (File No. 1-12454)).* |
| | | |
| 10.49 | | Description of Cash Bonus Plan (incorporated by reference to Form 8-K filed on July 14, 2006 (File No. 1-12454)).* |
| | | |
| 10.50 | | Distribution Agreement, dated as of March 2, 1996, by and among Morrison Restaurants Inc., Morrison Fresh Cooking, Inc. and Morrison Health Care, Inc. (incorporated by reference from Exhibit 10.23 to Form 8-B filed on March 15, 1996 (File No. 1-12454)). |
| | | |
| 10.51 | | Amended and Restated Tax Allocation and Indemnification Agreement, dated as of March 2, 1996, by and among Morrison Restaurants Inc., Custom Management Corporation of Pennsylvania, Custom Management Corporation, John C. Metz & Associates, Inc., Morrison International, Inc., Morrison Custom Management Corporation of Pennsylvania, Morrison Fresh Cooking, Inc., Ruby Tuesday, Inc., a |
| | | |
| | | Delaware corporation, Ruby Tuesday (Georgia), Inc., a Georgia corporation, Tias, Inc. and Morrison Health Care, Inc. (incorporated by reference from Exhibit 10.24 to Form 8-B filed on March 15, 1996 (File No. 1-12454)). |
| | | |
| 10.52 | | Agreement Respecting Employee Benefit Matters, dated as of March 2, 1996, by and among Morrison Restaurants Inc., Morrison Fresh Cooking, Inc. and Morrison Health Care, Inc. (incorporated by reference from Exhibit 10.25 to Form 8-B filed on March 15, 1996 (File No. 1-12454)). |
| | | |
| 10.53 | | Trust Agreement (dated as of July 23, 2004) between Ruby Tuesday Inc. and U.S. Trust Company, N.A. (incorporated by reference from Exhibit 99.3 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended November 30, 2004 (File No. 1-12454)).* |
| | | |
| 10.54 | | Master Distribution Agreement, dated as of December 8, 2006 and effective as of November 15, 2006, by and between Ruby Tuesday, Inc. and PFG Customized Distribution (portions of which have been redacted pursuant to a confidential treatment request filed with the SEC) (incorporated by reference from Exhibit 10.4 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 5, 2006 (File No. 1-12454)). |
| | | |
| 10.55 | | Revolving Credit Agreement, dated as of December 3, 2013, among Ruby Tuesday, Inc., the Guarantors, the Lenders from time to time party hereto, Bank of America, N.A., as Administrative Agent and Issuing Bank, and Wells Fargo, National Association and Regions Bank, as Co-Syndication Agents (incorporated by reference from Exhibit 10.1 to Form 8-K filed on December 9, 2013 (File No. 1-12454)). |
| | | |
| 10.56 | | Waiver and Consent in Connection with Revolving Credit Facility (incorporated by reference from Exhibit 10.3 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 3, 2013 (File No. 1-12454)). |
| | | |
| 10.57 | | First Amendment to Revolving Credit Agreement and Waiver, dated as of January 10, 2014, by and among Ruby Tuesday, Inc., the Guarantors party hereto, the Lenders party hereto and Bank of America, N.A., as administrative agent for the Lenders (incorporated by reference from Exhibit 10.4 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 3, 2013 (File No. 1-12454)). |
| | | |
| 10.58 | | Second Amendment to Revolving Credit Agreement and Waiver, dated as of February 7, 2014, by and among Ruby Tuesday, Inc., the Guarantors, the Lenders party hereto and Bank of America, N.A., as administrative agent for the Lenders (incorporated by reference from Exhibit 10.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended March 4, 2014 (File No. 1-12454)). |
| | | |
| 10.59 | | Third Amendment to Revolving Credit Agreement and Waiver, dated as of August 5, 2014, by and among Ruby Tuesday, Inc., the Guarantors, the Lenders party hereto and Bank of America, N.A., as administrative agent for the Lenders (File No. 1-12454).+ |
| | | |
| 10.60 | | Loan Modification Agreement, dated as of December 2, 2013, by and among Ruby Tuesday, Inc. and the Borrowers and Lenders party hereto (incorporated by reference from Exhibit 10.2 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 3, 2013 (File No. 1-12454)). |
| | | |
| 10.61 | | Master Amendment to Loan Documents, dated as of May 2, 2014, for the Secured Promissory Notes by and among certain subsidiaries of Ruby Tuesday, Inc. and First Franchise Capital Corporation (File No. 1-12454).+ |
| | | |
| 10.62 | | Revolving Credit Agreement, dated as of December 1, 2010, by and among Ruby Tuesday, Inc., the Lenders party hereto, Bank of America, N.A., as Administrative Agent, Issuing Bank, Servicer and Swingline Lender, and Regions Bank, as Syndication Agent (incorporated by reference from Exhibit |
| | | |
| | | 10.1 to Form 8-K filed on December 7, 2010 (File No. 1-12454)). |
| | | |
| 10.63 | | First Amendment to Revolving Credit Agreement, dated as of July 19, 2011, by and among Ruby Tuesday, Inc., the Lenders party hereto, and Bank of America, N.A., as Administrative Agent, Issuing Bank, Servicer and Swingline Lender (incorporated by reference from Exhibit 10.1 to Form 8-K filed on July 21, 2011 (File No. 1-12454)). |
| | | |
| 10.64 | | Second Amendment to Revolving Credit Agreement and Waiver, dated as of May 14, 2012, by and among Ruby Tuesday, Inc., the Lenders party hereto, and Bank of America, N.A., as Administrative Agent for the Lenders (incorporated by reference from Exhibit 10.3 to Form 8-K filed on May 17, 2012 (File No. 1-12454)). |
| | | |
| 10.65 | | Third Amendment to Revolving Credit Agreement, dated as of August 10, 2012, by and among Ruby Tuesday, Inc., the Lenders party hereto, and Bank of America, N.A., as Administrative Agent for the Lenders (incorporated by reference from Exhibit 10.1 to Form 8-K filed on August 13, 2012 (File No. 1-12454)). |
| 10.66 | | Purchase Agreement, dated as of May 7, 2012 (incorporated by reference from Exhibit 10.1 to Form 8-K filed on May 9, 2012 (File No. 1-12454)). |
| | | |
| 10.67 | | Indenture, dated as of May 14, 2012, by and among Ruby Tuesday, Inc., the Guarantors party hereto, and Wells Fargo, National Association, as Trustee (incorporated by reference from Exhibit 10.1 to Form 8-K filed on May 17, 2012 (File No. 1-12454)). |
| | | |
| 10.68 | | Registration Rights Agreement, dated as of May 14, 2012 (incorporated by reference from Exhibit 10.2 to Form 8-K filed on May 17, 2012 (File No. 1-12454)). |
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| 10.69 | | Pledge Agreement, dated as of May 14, 2012 (incorporated by reference from Exhibit 10.4 to Form 8-K filed on May 17, 2012 (File No. 1-12454)). |
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| 10.70 | | Indenture, dated January 9, 2013, to the Ruby Tuesday, Inc. Cafeteria Plan (incorporated by reference from Exhibit 10.3 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 4, 2012 (File No. 1-12454)).* |
| | | |
| 10.71 | | Form of Indemnification Agreement, dated April 7, 2010 (incorporated by reference from Exhibit 10.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended March 2, 2010 (File No. 1-12454)). |
| | | |
| 10.72 | | Ruby Tuesday, Inc. Severance Pay Plan, amended and restated as of January 5, 2011 (incorporated by reference from Exhibit 10.3 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended November 30, 2010 (File No. 1-12454)).* |
| | | |
| 10.73 | | First Amendment, dated as of August 23, 2011, to the Ruby Tuesday, Inc. Severance Pay Plan (incorporated by reference from Exhibit 10.5 to Form 8-K filed on August 29, 2011 (File No. 1-12454)).* |
| | | |
| 10.74 | | Second Amendment, dated as of January 9, 2013, to the Ruby Tuesday, Inc. Severance Pay Plan (incorporated by reference from Exhibit 10.2 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 4, 2012 (File No. 1-12454)).* |
| | | |
| 10.75 | | Employment Agreement, dated as of November 16, 2012, by and between Ruby Tuesday, Inc. and James J. Buettgen (incorporated by reference from Exhibit 10.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 4, 2012 (File No. 1-12454)).* |
| | | |
| 10.76 | | Amendment No. 1, dated as of September 20, 2013, to Employment Agreement by and between Ruby |
| | | Tuesday, Inc. and James J. Buettgen (incorporated by reference from Exhibit 99.1 to Form 8-K filed on September 23, 2013 (File No. 1-12454)).* |
| | | |
| 10.77 | | Separation Agreement, dated as of April 30, 2012, by and between Ruby Tuesday, Inc. and Michael O. Moore (incorporated by reference from Exhibit 10.1 to Form 8-K filed on April 26, 2012 (File No. 1-12454)).* |
| | | |
| 10.78 | | First Amendment to Separation Agreement, dated as of June 26, 2014, by and between Ruby Tuesday, Inc. and Michael O. Moore (incorporated by reference from Exhibit 99.2 to Form 8-K filed on June 26, 2014 (File No. 1-12454)).* |
| | | |
| 10.79 | | Agreement for Separation of Employment, by and between Robert LeBoeuf and Ruby Tuesday, Inc. (incorporated by reference from Exhibit 10.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended December 3, 2013 (File No. 1-12454)).* |
| 10.80 | | Ruby Tuesday, Inc. Executive Compensation Clawback Policy, dated as of July 22, 2010 (incorporated by reference from Exhibit 10.1 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended August 31, 2010 (File No, 1-12454)).* |
| | | |
| 10.81 | | Ruby Tuesday, Inc. 2010 Executive Incentive Compensation Plan (incorporated by reference from Exhibit 10.2 to the Ruby Tuesday, Inc. Quarterly Report on Form 10-Q for the quarter ended August 31, 2011 (File No, 1-12454)).* |
| | | |
| 12.1 | | Statement regarding computation of Consolidated Ratio of Earnings to Fixed Charges.+ |
| | | |
| 21.1 | | Subsidiaries of Ruby Tuesday, Inc.+ |
| | | |
| 23.1 | | Consent of KPMG LLP, Independent Registered Public Accounting Firm.+ |
| | | |
| 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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