RUBY TUESDAY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per-share data)
For the Fiscal Year Ended
June 1, June 3, June 4,
1996 1995 1994
Revenues:
Net sales and operating revenues $ 618,803 $ 514,292 $ 458,451
Other revenues 1,331 1,020 588
620,134 515,312 459,039
Operating costs and expenses:
Cost of merchandise 170,352 138,665 127,862
Payroll and related costs 209,007 169,881 151,270
Other 134,043 106,028 94,330
Selling, general and administrative 39,139 37,521 34,250
Depreciation and amortization 34,131 26,634 23,353
L&N conversion/closing costs 19,727
Interest expense net of interest
income totaling $160 in 1996,
$736 in 1995, and $660 in 199 4,637 744 160
Loss on impairment of assets 25,881
Restructure charges 5,257
622,447 499,200 431,225
Income (loss) from continuing
operations before income taxes (2,313) 16,112 27,814
Provision (benefit) for federal
and state income taxes (1,651) 5,027 9,707
Income (loss) from continuing
operations (662) 11,085 18,107
Income (loss) from discontinued
operations, net of applicable
income taxes (2,222) 51,086 26,577
Net income (loss) $ (2,884) $ 62,171 $ 44,684
Earnings (loss) per common and
common equivalent share:
Continuing operations $ (0.03) $ 0.62 $ 0.97
Discontinued operations (0.13) 2.84 1.42
Earnings (loss) per common and
common equivalent share $ (0.16) $ 3.46 $ 2.39
Weighted average common and
common equivalent shares 17,689 17,961 18,684
The accompanying notes are an integral part of the consolidated financial
statements.
RUBY TUESDAY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 1, June 3,
Assets 1996 1995
Current assets:
Cash and short-term investments................. $ 7,139 $ 5,957
Receivables..................................... 2,040 2,475
Inventories:
Merchandise................................... 5,678 4,989
China, silver and supplies.................... 3,003 2,495
Prepaid expenses................................ 12,410 8,043
Prepaid income taxes............................ 2,988 3,758
Current assets of discontinued operations....... 52,481
Total current assets......................... 33,258 80,198
Property and Equipment - at cost:
Land............................................ 25,663 17,511
Buildings....................................... 55,284 38,728
Improvements.................................... 175,102 149,405
Restaurant equipment............................ 120,144 116,275
Other equipment................................. 28,122 26,206
Construction in progress........................ 39,160 38,945
Less accumulated depreciation and amortization.. 129,937 117,068
313,538 270,002
Costs in excess of net assets acquired............ 21,058 22,298
Non-current assets of discontinued operations..... 102,726
Other assets...................................... 13,262 8,827
Total assets...................................... $ 381,116 $ 484,051
RUBY TUESDAY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(In thousands)
June 1, June 3,
Liabilities and Shareholders' Equity 1996 1995
Current liabilities:
Accounts payable................................. $ 26,386 $ 26,393
Short-term borrowings............................ 6,001 12,638
Accrued liabilities:
Taxes, other than income taxes................. 10,602 9,097
Payroll and related costs...................... 6,917 6,394
Insurance...................................... 7,478 6,396
Rent and other................................. 9,112 11,287
Current portion of long-term debt................ 95 87
Current liabilities of discontinued operations... 52,686
Total Current Liabilities...................... 66,591 124,978
Notes and mortgages payable........................ 76,108 32,003
Deferred income taxes.............................. 8,232 16,864
Other deferred liabilities......................... 32,842 18,672
Non-current liabilities of discontinued operations. 46,041
Shareholders' Equity:
Common stock, $0.01 par value; (authorized:
50,000 shares; issued: 1996 - 17,598 shares,
1995 - 21,822 shares)......................... 176 218
Capital in excess of par value.................. 1,762 84,733
Retained earnings............................... 198,354 298,181
200,292 383,132
Less cost of treasury stock..................... 2,949 137,639
197,343 245,493
Total Liabilities and Shareholders' Equity..... $ 381,116 $ 484,051
The accompanying notes are an integral part of the consolidated financial
statements.
RUBY TUESDAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands except per-share data)
Capital in Total
Common Stock Issued Treasury Stock Excess of Retained Stockholders'
Shares Amount Shares Amount Par Value Earnings Equity
Balance, June 5, 1993........................ 29,097 $ 291 (4,723) $ (71,074) $ 75,181 $215,226 $219,624
Net income................................. 44,684 44,684
3-for-2 stock split........................ 14,547 145 (2,415) (145) 0
Shares issued under stock bonus and stock
option plans.............................. 484 5,844 2,620 8,464
Cash dividends of $0.6598 per common share. (11,866) (11,866)
Purchase of treasury stock
including deferred compensation plan...... (1,681) (39,770) (39,770)
Balance, June 4, 1994........................ 43,644 436 (8,335) (105,000) 77,656 248,044 221,136
Net income................................. 62,171 62,171
Shares issued under stock bonus and stock
option plans.............................. 562 7,792 3,132 10,924
Shares issued pursuant to Tias, Inc.
acquisition.............................. 355 5,273 3,727 9,000
Cash dividends of
$0.6916 per common share.................. (12,034) (12,034)
Purchase of treasury stock including
deferred compensation plan................ (1,701) (45,704) (45,704)
Balance, June 3, 1995........................ 43,644 436 (9,119) (137,639) 84,515 298,181 245,493
Net income (loss)......................... (2,884) (2,884)
Shares issued under stock bonus and stock
option plans............................. 84 1 129 1,926 1,663 251 3,841
Cash dividends of $0.543 per common share. (9,377) (9,377)
Purchase of treasury stock, net of changes
in deferred compensation plan............ 240 (858) (858)
Equity transfers to MFC and MHC........... 5,080 (43,952) (38,872)
Retirement of treasury stock.............. (8,616) (86) 8,616 128,542 (84,416) (44,040) 0
1-for-2 reverse stock split............... (17,514) (175) 175 0
Balance, June 1, 1996........................ 17,598 $ 176 (134) $ (2,949) $ 1,762 $198,354 $197,343
The accompanying notes are an integral part of the consolidated financial
statements.
RUBY TUESDAY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal Year Ended
June 1, June 3, June 4,
1996 1995 1994
Operating activities:
Income (loss) from continuing operations......... $ (662) $ 11,085 $ 18,107
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Loss on impairment of assets................... 25,881
Depreciation................................... 34,131 26,634 23,353
Amortization of intangibles.................... 699 607 485
Other, net..................................... (1,118)
Deferred income taxes.......................... (7,157) 2,501 4,909
Loss on disposition of assets.................. 2,592 4,419 523
Changes in operating assets and liabilities:
(Increase)/decrease in receivables........... (282) (213) 878
Increase in inventories...................... (1,197) (1,059) (862)
(Increase)/decrease in prepaid and
other assets................................ 721 3,355 (2,116)
Increase in accounts payable,
accrued and other liabilities............... 14,989 18,810 6,677
Increase/(decrease) in income taxes payable.. (4,493) 1,205 (1,947)
Cash provided by continuing operations........... 64,104 67,344 50,007
Cash provided (used) by discontinued operations.. 10,030 (11,128) 58,514
Net cash provided by operating activities......... 74,134 56,216 108,521
Investing activities:
Purchases of property and equipment............. (109,164) (108,452) (70,189)
Proceeds from disposal of assets................ 3,444 153 67
Other, net...................................... (4,475) 2,701 (779)
Discontinued operations investing
activities, net................................ (14,448) 71,693 (22,826)
Net cash used by investing activities............. (124,643) (33,905) (93,727)
Financing activities:
Proceeds from long-term debt.................... 44,200 30,800 559
Net change in short-term borrowings............. (6,637) (11,828) 17,416
Principal payments on long-term debt and
capital leases................................. (87) (7,438)
Proceeds from issuance of stock,
including treasury stock....................... 3,841 10,924 8,464
Stock repurchases............................... (858) (45,704) (39,770)
Dividends paid.................................. (9,377) (12,034) (11,866)
Discontinued operations financing
activities, net................................ 20,609 14,506 (147)
Net cash provided (used) by financing activities.. 51,691 (20,774) (25,344)
Increase/(decrease) in cash and short-term
investments...................................... 1,182 1,537 (10,550)
Cash and short-term investments:
Beginning of period.............................. 5,957 4,420 14,970
End of period.................................... $ 7,139 $ 5,957 $ 4,420
Supplemental disclosure of cash flow information-
cash paid for:
Interest (net of amount capitalized)............ $ 4,252 $ 1,547 $ 656
Income taxes, net............................... $ 2,605 $ 5,200 $ 9,678
The accompanying notes are an integral part of the consolidated financial statements.
1. Summary of Significant Accounting Policies
Basis of Presentation
Ruby Tuesday, Inc. (the "Company") operates three separate and distinct
casual dining concepts comprised of Ruby Tuesday, Mozzarella's Cafes and Tia's
Tex-Mex restaurants. At June 1, 1996, the Ruby Tuesday concept consisted of
301 units concentrated primarily in the Northeast, Southeast, Mid-Atlantic and
the Midwest. With 46 company-owned establishments, Mozzarella's units are
primarily located in the Mid-Atlantic and the Southeast with particular
concentration in the Washington, D.C. area, Florida and Atlanta. The Company's
newest concept, Tia's Tex-Mex, operates 18 units located in the Southwest,
Southeast and Mid-Atlantic regions.
Prior to March 9, 1996, the Company was known as Morrison Restaurants Inc.
("Morrison"). Morrison operated three businesses in the foodservice industry.
These businesses were organized into two operating groups, the Ruby Tuesday
Group, consisting of the Company's casual dining concepts, and the Morrison
Group, which was comprised of Morrison's family dining restaurant and health
care food and nutrition services businesses. Effective March 9, 1996, the
shareholders of Morrison approved the spin-off (the "Distribution") of its
family dining restaurant and health care food and nutrition services businesses
to its shareholders. The spin-off resulted in the family dining restaurant and
health care food and nutrition services businesses operating as two separate
stand-alone, publicly-traded companies. In accordance with Accounting
Principles Board Opinion No. 30, the financial results of these two businesses,
together referred to as the Morrison Group, are reported as discontinued
operations. For accounting purposes, the Distribution is reflected as if it
occurred on March 2, 1996, the last day of the Company's third fiscal quarter.
As part of the Distribution, Morrison reincorporated in Georgia and changed
its name to Ruby Tuesday, Inc.
The accompanying consolidated financial statements have been prepared to
reflect the operations of the family dining restaurant and health care food and
nutrition businesses as discontinued operations for all periods presented, as
if the Company's casual dining restaurant operations had operated as a stand-
alone entity, thus all disclosures except for the information relating to
discontinued operations as presented in Note 2 of Notes to the Consolidated
Financial Statements relate to continuing operations only.
Fiscal Year
The Company's fiscal year ends on the first Saturday following May 30. The
fiscal years ended June 1, 1996, June 3, 1995, and June 4, 1994 were comprised
of 52 weeks.
Cash and Short-Term Investments
The Company's cash management program provides for the investment of excess
cash balances in short-term money market instruments. Short-term investments
are stated at cost, which approximates market. The Company considers
marketable securities with a maturity of three months or less when purchased to
be short-term investments.
Inventories
Inventories consist of materials, food supplies, china and silver and are
stated at the lower of cost (first in-first out) or market.
Property and Equipment and Depreciation
Depreciation for financial reporting purposes is computed using the
straight-line method over the estimated useful lives of the assets or, for
capital lease property, over the term of the lease, if shorter. Annual rates
of depreciation range from 3% to 5% for buildings and improvements and from 8%
to 34% for restaurant and other equipment.
Accounting Changes
During March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121").
FAS 121 requires that, beginning in fiscal years starting after December 15,
1995, long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
As discussed in Note 3, the Company adopted FAS 121 during the third quarter
of fiscal year 1996.
Income Taxes
Deferred income taxes are determined utilizing a liability approach. This
method gives consideration to the future tax consequences associated with
differences between financial accounting and tax bases of assets and
liabilities.
Pre-Opening Expenses
Salaries, personnel training costs and other expenses of opening new
facilities are charged to expense as incurred.
Intangible Assets
Excess of costs over the fair value of net assets acquired of purchased
businesses generally is amortized on a straight-line basis over 40 years. At
June 1, 1996 and June 3, 1995, accumulated amortization for costs in excess of
net assets acquired was $5.3 million and $4.7 million, respectively.
Fair Value of Financial Instruments
The Company's financial instruments at June 1, 1996 and June 3, 1995
consisted of cash and short-term investments, notes receivable, short-term
borrowings and long-term debt. The fair value of these financial instruments
approximated the carrying amounts reported in the consolidated balance sheets.
Earnings Per Share
Earnings per share are based on the weighted average number of shares
outstanding during each year and are adjusted, when the effect is dilutive, for
the assumed exercise of options, after the assumed repurchase of shares with
the related proceeds, after adjustment for stock splits and stock dividends
through June 1, 1996.
Stock-Based Employee Compensation Plans
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans. FAS 123
defines a fair value-based method of accounting for an employee stock option or
similar equity instrument. FAS 123 allows an entity to continue to measure
compensation cost for those plans using the intrinsic value-based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". The Company intends to continue to measure compensation cost
following the principles of APB Opinion No. 25 and will therefore be required
to present pro forma disclosures of net income and earnings per share as if the
fair value-based method had been applied beginning in fiscal 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Discontinued Operations
As previously mentioned, Morrison distributed the common stock of its family
dining restaurant business (Morrison Fresh Cooking, Inc., or "MFC") and its
health care contract food and nutrition business (Morrison Health Care, Inc.,
or "MHC") to its shareholders. Morrison shareholders received one share of
MFC stock for every four shares of Morrison stock and one share of MHC stock
for every three shares of Morrison stock. In accordance with Accounting
Principles Board Opinion No. 30, the financial results of the two businesses,
together referred to as the Morrison Group, are reported as discontinued
operations in the accompanying consolidated financial statements and the
results of the prior periods have been restated.
The condensed results presented below include an allocation of general
expenses of Morrison, such as legal, data processing and interest on a
specific identification method, where appropriate. Management believes the
allocation methods used are reasonable. Condensed results of the discontinued
operations are as follows:
(In thousands)
Fiscal Year Ended
1996 1995 1994
Revenues......................... $ 370,439 $ 519,777 $ 754,351
Income (loss) before provision
for income taxes............... $ (2,434) $ 88,600 $ 43,344
Provision (benefit) for federal
and state income taxes......... $ (212) $ 37,514 $ 16,767
Net income (loss)................ $ (2,222) $ 51,086 $ 26,577
Included in the June 3, 1995 income before provision for income taxes is
a $46.8 million gain on sale of certain business and industry contracts and
assets of MHC. Included in the June 1, 1996 income before provision for
income taxes is a charge of $23.7 million for costs associated with asset
impairment and restructuring.
As a result of the Distribution, the Company does not have any ownership
interest in either MFC or MHC, except for stock held by the rabbi trust
associated with the Company's Deferred Compensation Plan. (See Note 9 of
Notes to Consolidated Financial Statements for more information.) Prior to
the Distribution, the Company entered into agreements with both MFC and MHC
governing certain operating relationships among the Company, MFC and MHC
subsequent to the Distribution including (i) an agreement providing for
assumptions of liabilities and cross-indemnities to allocate responsibilities
for liabilities arising out of or in connection with business activities prior
to the Distribution; (ii) a tax indemnity agreement which provides that none
of the three companies will take any action that would jeopardize the intended
tax free consequences of the Distribution; (iii) a tax allocation agreement to
the effect that MFC and MHC will pay their respective shares of the Company's
consolidated tax liability for the tax years that MFC and MHC were included in
the Company's consolidated federal income tax return; (iv) intellectual
property license agreements which provided for the licensing of rights
currently owned by the Company to the three companies; and (v) an agreement
providing for the allocation of employee benefit rights and responsibilities
among the three companies.
3. Impairment of Long-Lived Assets/Restructure Charges
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("FAS 121"), in the third quarter of fiscal 1996. A pre-tax
charge of $25.9 million was recorded of which $3.9 million, the difference
between fair value and net realizable value of the impaired assets, resulted
from the adoption of FAS 121. The $25.9 million charge is comprised of the
following: impairment on 16 units approved for closure within one year by the
Board of Directors on January 10, 1996, ($10.0 million); impairment on in-unit
computer equipment ($0.8 million) and write-offs resulting from management's
decision to abandon an information technology plan ($3.8 million) approved on
that same date; and impairment on units remaining open ($11.3 million).
The Board approved the closing of ten Ruby Tuesdays, four Mozzarella's and
two Tia's restaurants based upon management's review of negative cash flow and
operating loss units and other considerations. The expected loss on disposal
of the long-lived assets of these units is $10.0 million (net of an assumed
salvage value of $0.9 million). Included in this amount is $0.6 million which
represents the goodwill associated with two Tia's units to be closed. As of
June 1, 1996, nine of these units have been closed (six Ruby Tuesdays and
three Mozzarella's). Management anticipates closing the remaining seven units
during the first two quarters of fiscal 1997.
Prior to the initiation of the Distribution, Morrison was undertaking an
information technology project intended, among other things, to update or
replace certain accounting and human resource systems for all of Morrison.
Upon initiation of the intended Distribution, management commenced a project
by project review of the information technology plan. Upon completion of its
review, management decided to abandon certain projects in development,
including the project to update or replace certain accounting and human
resource systems. In connection therewith, the Company instituted a plan to
dispose of certain in-unit computer equipment and replace that equipment with
computers more technologically advanced. Accordingly, the Company recorded
the charge of $3.8 million for the write-off of the information technology
projects and $0.8 million for the remaining carrying value of certain in-unit
computer equipment.
Negative cash flow and operating loss units not recommended for closure were
also reviewed for impairment. Management believed these units might have been
impaired based upon poor operating performance. Accordingly, management
estimated the undiscounted future cash flows to be generated by these units
and determined that certain of them would not likely generate net cash flows
in excess of carrying value. Based upon third quarter operating and cash flow
results, two additional units were identified as impaired. Accordingly, the
charge of $11.3 million was recorded to reduce the carrying value of the
impaired assets (including the two units identified during the third quarter)
to their estimated fair value, as determined by using discounted estimated
future cash flows. Future cash flows were estimated based on considerable
management judgment. Thus actual cash flows could vary from such estimates.
As a result of the reduced carrying value of the impaired assets,
depreciation expense for the fourth quarter of fiscal 1996 was reduced by $0.6
million ($0.3 million after-tax or $0.02 per share) and fiscal 1997
depreciation expense is expected to be reduced by approximately $2.3 million
($1.4 million after-tax or $0.08 per share).
In addition to the write-down of fixed assets on the 16 units to be closed,
the Company accrued charges not included above of $3.4 million relating to the
settlement of the related lease obligations. Management estimates it can
negotiate lease settlements within 36 months on a majority of those units
which cannot be sublet. At June 1, 1996, $3.0 million of this reserve remains.
Other charges of $1.8 million were also recorded during the third quarter of
fiscal 1996. These charges consisted of estimated professional and other fees
incurred in accordance with the Distribution ($1.3 million); severance pay for
staff reductions expected during the quarter ($0.2 million) and miscellaneous
other asset write-offs ($0.3 million). Professional fees and severance pay
approximating the amounts accrued were paid prior to the end of the fiscal
year. No additional amounts are anticipated.
4. Acquisition of Tias, Inc.
On January 17, 1995, the Company acquired all of the outstanding common
stock of Tias, Inc., a 12-unit Tex-Mex restaurant concept based in Dallas,
Texas, for $9.0 million in common stock (177,336 shares). The acquisition was
accounted for as a purchase. Accordingly, the purchase price was allocated on
the basis of the estimated fair value of the assets acquired and liabilities
assumed. This treatment resulted in goodwill of $12.2 million which is being
amortized on a straight-line basis over 40 years. As discussed in Note 3 to
the Consolidated Financial Statements, the Company wrote off $0.6 million of
goodwill in accordance with the restructure approved by the Board of Directors
on January 10, 1996. This amount represented the goodwill associated with two
Tia's units to be closed.
5. Phase Out of the L&N Seafood Grill Concept
On June 27, 1994, plans to phase-out the L&N Seafood Grill concept were
announced by the Company. The original plan, as approved by the Board of
Directors, called for the conversion of 30 L&N units into other Company
concepts. All remaining units were to be sold or closed. The Company accrued
$19.7 million for costs to be incurred as a result of the phase-out. This
amount, originally accrued to cover the costs to convert 30 L&N units and
close the remaining eight, consisted primarily of the following: losses on
disposal of fixed assets net of anticipated proceeds and the net cost of
related lease obligations for the units to be closed ($11.6 million), expected
operating losses during the phase-out period ($4.8 million), severance pay
($1.1 million) and other losses on the conversion of units, consisting
primarily of the write-off of fixed assets, inventory, and unamortized cost in
excess of net assets acquired ($2.2 million). The Company originally
estimated that, of the $19.7 million charge, asset write-offs (including
inventory, fixed assets and goodwill) would total $9.2 million. Cash proceeds
from disposal of the properties were anticipated to be $0.7 million. The
remaining $11.2 million represented the estimated cash outlay for lease
settlements, severance pay and other operating expenditures. The original
plan assumed that no units would
be sublet and that buyout of leases could occur. Determination of the number
of months assumed in which buyouts could occur was made on an individual unit
basis.
Subsequent to the June 1994 announcement, the Company reacquired three
additional L&N units as a result of a default on a licensing agreement. These
three units were closed. Based on favorable operating results, in the third
quarter of fiscal 1995, management decided to continue to operate four of the
L&N units as L&N's through the remainder of their lease terms. During fiscal
1995, 21 of the L&N units were converted and are operating as other restaurant
concepts. In fiscal 1996, two additional units were converted and reopened as
Tia's.
The increase from the original plan in the number of units to be closed did
not result in a material increase to the $11.6 million closing cost estimate
as the increases necessary for the six additional units ultimately closed were
offset by decreases in estimates for the other units closed and the decrease
which resulted from the decision to continue to operate the four units
discussed above. Of the original $19.7 million accrued to phase out the
concept, $1.0 million and $6.0 million of reserves remain outstanding as of
June 1, 1996 and June 3, 1995, respectively.
6. Notes and Mortgages Payable
Notes and mortgages payable consists of the following:
(In thousands)
1996 1995
Revolving credit facility $25,000 $30,800
Term notes payable to banks 50,000
Other notes and mortgages 1,203 1,290
76,203 32,090
Less current maturities 95 87
$76,108 $32,003
Annual maturities of notes and mortgages at June 1, 1996 are as follows (in
thousands):
1997 $ 95
1998 103
1999 112
2000 121
2001 75,132
Subsequent years 640
Total $ 76,203
On March 6, 1996, the Company entered into a five-year credit facility with
several banks which allows the Company to borrow up to $100.0 million under
various interest rate options. The $100.0 million credit facility is comprised
of a $50.0 million five-year term note and a $50.0 million five-year revolving
credit facility. Commitment fees equal to 0.1875% per annum are payable
quarterly on the unused portion of the revolving credit facility. At June 1,
1996, the Company had $25.0 million of borrowings outstanding with various
banks under the revolving credit facility at interest rates ranging from 5.75%
to 5.87% per annum. Such borrowings (with maturities up to 180 days) have been
classified as long-term based on the Company's ability and intent to refinance
such borrowings under the revolving facility.
The credit facility provides for certain restrictions on incurring additional
indebtedness and certain funded debt, net worth, and fixed charge coverage
requirements. At June 1, 1996, retained earnings in the amount of $17.3 million
were available for distribution under the debt restrictions.
In order to control interest costs on the term loan, the Company entered into
an interest rate swap agreement. The notional amount of this agreement is
equal to the $50.0 million term loan. The agreement effectively fixes the
interest rate at 6.25% for the five-year period ended March 4, 2001. In
conjunction with entering into the new swap agreement, Morrison settled the
previous interest swap agreement at a cost of approximately $0.4 million.
Prior to the Distribution, each of the Company, MFC and MHC agreed to pay one-
third of the cost of settling the swap. Accordingly, the portion allocated to
the Company, $0.1 million, was included as part of the restructure costs
recorded in the third quarter of fiscal 1996.
The March 6, 1996 credit facility replaced previous indebtedness which had
been incurred by Morrison under a September 30, 1994 five-year revolving line
of credit with various banks. The 1994 credit facility allowed Morrison to
borrow up to $200.0 million under various interest rate options. Commitment
fees ranging from 0.0625% to 0.15% per annum were payable on the unused portion
of the credit facility. Based on the allocation of debt as of the date of the
Distribution, a pro rata percentage of Morrison's March 2, 1996 outstanding
balance under the revolving line of credit was allocated to MHC. This amount
totaled $27.1 million and was assumed by MHC at that date. The Company
retained the balance of Morrison's obligations under the revolving line of
credit at the time of distribution.
In addition, at June 1, 1996, the Company had committed lines of credit
amounting to $25.0 million (of which $19.0 million remain available at June 1,
1996) and non-committed lines of credit amounting to $10.0 million with various
banks at various interest rates. All of these lines of credit are subject to
periodic review by each bank and may be canceled by the Company at any time.
The Company utilized its lines of credit to meet operational cash needs during
fiscal year 1996. Borrowings on these lines of credit were $6.0 and $12.6
million at June 1, 1996 and June 3, 1995, respectively.
Interest expense capitalized in connection with financing additions to
property and equipment amounted to approximately $1.6 and $1.0 million for the
years ended June 1, 1996 and June 3, 1995, respectively.
7. Leases
Various operations of the Company are conducted in leased premises. Initial
lease terms expire at various dates over the next 23 years and may provide for
escalation of rent during the lease term. Most of these leases provide for
additional contingent rents based upon sales volume and contain options to
renew (at adjusted rentals for some leases). The administrative headquarters
has a lease term ending in 1998 and provides an option to purchase at a nominal
amount at the end of the initial lease term.
Assets recorded under capital leases (included in Property and Equipment in
the accompanying consolidated balance sheets) are as follows:
(In Thousands) 1996 1995
Buildings $4,500 $4,500
Other equipment 50
4,500 4,550
Less accumulated amortization 2,229 2,149
$ 2,271 $ 2,401
The capital lease obligation relating to the administrative headquarters
lease are considered extinguished in accordance with Statement of Financial
Accounting Standards No. 76 concerning in-substance defeasance of corporate
debt. U. S. Treasury Bills and cash have been placed in an irrevocable trust
to satisfy scheduled payments of both interest and principal on this capital
lease obligation.
At June 1, 1996, the future minimum lease payments under operating leases for
the next five years and in the aggregate are as follows:
(In Thousands) _
1997 $ 34,817
1998 35,123
1999 34,412
2000 32,820
2001 31,881
Subsequent years 243,082
Total minimum lease payments $412,135
Rental expense pursuant to operating leases is summarized as follows:
(In Thousands) 1996 1995 1994_
Minimum rent $35,357 $30,337 $24,732
Contingent rent 768 1,416 1,677
$36,125 $31,753 $26,409
8. Income Taxes
The components of income tax expense (benefit) are as follows:
(In thousands)
1996 1995 1994
Current:
Federal $ 4,323 $ 1,959 $ 3,835
State 1,183 567 963
5,506 2,526 4,798
Deferred:
Federal (5,949) 2,313 4,105
State (1,208) 188 804
(7,157) 2,501 4,909
$(1,651) $ 5,027 $ 9,707
Deferred tax assets and liabilities are comprised of the following:
(In thousands)
1996 1995
Deferred tax assets:
Employee benefits $ 7,626 $ 3,609
Insurance reserves 4,005 3,124
Escalating rents 3,451 2,348
Acquired net operating losses 2,551 2,629
Restructuring and FAS 121 reserves 1,264
Unit closing reserve 313 2,626
Other 687 245
Total deferred tax assets 19,897 14,581
Deferred tax liabilities:
Depreciation 20,493 24,534
Prepaid deductions 1,010 1,593
Retirement plans 833 624
Other 2,805 936
Total deferred tax liabilities 25,141 27,687
Net deferred tax (liability) $ (5,244) $(13,106)
At June 1, 1996, the Company had net operating loss carryforwards for tax
purposes of approximately $6.5 million as a result of the acquisition of Tias,
Inc., which expire through 2002. The Company's net operating loss
carryforwards are subject to an annual limitation for tax reporting purposes
due to changes in ownership of the acquired company. Management does not
believe a valuation allowance is necessary.
A reconciliation from the statutory federal income tax expense (benefit) to
the reported income tax expense is as follows:
(In thousands)
1996 1995 1994
Statutory federal income taxes $ (810) $ 5,639 $ 9,735
State income taxes net of federal
income tax benefit (68) 549 1,128
Tax credits (1,349) (2,964) (1,579)
Other, net 576 1,803 423
$ (1,651) $ 5,027 $ 9,707
The effective income tax rate (benefit) was (71.4)%, 31.2%, and 34.9% in 1996,
1995, and 1994, respectively. The increase in the effective tax benefit for
1996 is attributable to the tax credits which were available to the Company.
9. Employee Benefit Plans
Salary Deferral Plan - Under the Ruby Tuesday, Inc. Salary Deferral Plan each
eligible employee may elect to make pre-tax contributions to a trust fund in
amounts ranging from 2% to 10% of their annual earnings. Employees
contributing a pre-tax contribution of at least 2% may elect to make after-tax
contributions not in excess of 10% of annual earnings. The Company contribu-
tion to the Plan is based on the employee's pre-tax contribution and years of
service. After three years of service the Company contributes 20% of the
employee's pre-tax contribution, 30% after ten years of service and 40% after
20 years of service. Normally, the full amount of each participant's interest
in the trust fund is paid upon termination of employment. However, the Plan
allows participants to make early withdrawals of pre-tax and after-tax
contributions, subject to certain restrictions. The Plan may be terminated by
the Company at any time. The Company's contributions to the trust fund
approximated $0.2 million, $0.1 million, and $0.1 million for 1996, 1995, and
1994, respectively.
Deferred Compensation Plan - The Company maintains the Ruby Tuesday, Inc.
Deferred Compensation Plan for certain selected employees. The provisions of
this Plan are similar to those of the Salary Deferral Plan. The Company's
contributions under the Plan approximated $0.1 million for each of 1996, 1995,
and 1994. Company assets earmarked to pay benefits under the Plan are held by
a rabbi trust. Under current accounting rules, assets of a rabbi trust must be
accounted for as if they are assets of the Company, therefore, all earnings and
expenses are recorded in the Company's financial statements. The Plan's
assets, which approximated $9.5 million and $6.1 million in 1996 and 1995,
respectively, are included in Other Assets in the Consolidated Balance Sheets.
Retirement Plan - The Company, along with MFC and MHC, sponsors the Morrison
Restaurants Inc. Retirement Plan. Effective December 31, 1987, the Plan was
amended so that no additional benefits will accrue and no new participants will
enter the Plan after that date. Participants will receive benefits based upon
salary and length of service. Certain responsibilities involving the
administration of the Plan are jointly shared by each of the three companies.
No contribution was made in 1996, 1995, or 1994. The Company recorded net
pension expense of $44,000 in 1996 and income of $2,000 in each of 1995 and
1994.
Executive Supplemental Pension Plan - Under the Ruby Tuesday, Inc. Executive
Supplemental Pension Plan, employees with an average annual compensation of at
least $120,000 and who have completed five years in a qualifying position
become eligible to earn supplemental retirement income based upon salary and
length of service, reduced by social security benefits and amounts otherwise
receivable under the Retirement Plan. Expenses under the Plan approximated
$0.6 million, $0.5 million, and $0.4 million for 1996, 1995, and 1994,
respectively.
Management Retirement Plan - Under the Ruby Tuesday, Inc. Management
Retirement Plan, individuals actively employed by the Company as of June 1,
1989, or thereafter, who have 15 years of credited service and whose average
annual compensation equals or exceeds $40,000, become participants.
Participants will receive benefits based upon salary and length of service,
reduced by social security benefits and benefits payable under the Retirement
Plan. Expenses recognized approximated $0.3 million, $0.1 million, and $0.1
million in 1996, 1995, and 1994, respectively.
To provide a source for the payments of benefits under the Executive
Supplemental Pension Plan and the Management Retirement Plan, the Company owns
whole-life insurance contracts on some of the participants. The cash value of
these policies net of policy loans is $3.0 million at June 1, 1996. The
Company maintains a rabbi trust to hold the policies and death benefits as they
are received.
The table presented on the following page details the components of pension
expense, the funded status and amounts recognized in the Company's Consolidated
Financial Statements for the Management Retirement Plan, the Executive
Supplemental Pension Plan, and the Retirement Plan. Amounts presented are in
thousands.
Assets Exceed Accumulated Benefits Exceed Assets-
Accumulated Benefits- Executive Supplemental Pension Plan
Retirement Plan and Management Retirement Plan
1996 1995 1994 1996 1995 1994
Components of pension expense (income):
Service cost......................... $ $ $ $ 96 $ 73 $ 71
Interest cost........................ 334 31 31 525 276 247
Actual return on plan assets......... (787) (10) (46)
Amortization and deferral............ 497 (23) 13 294 123 171
Other................................ 89
$ 44 $ (2) $ (2) $ 915 $ 561 $ 489
Plan assets at fair value............ $ 4,502 $ 382 $ 446 $ 0 $ 0 $ 0
Actuarial present value of
projected benefit obligations:
Accumulated benefit obligations:
Vested............................ 4,432 374 435 7,479 3,434 2,088
Nonvested......................... 63 8 598
Provision for future salary
increases......................... 1,960 883 1,515
Total projected benefit obligations... 4,432 374 435 9,502 4,325 4,201
Excess (deficit) of plan assets over
projected benefit obligations........ 70 8 11 (9,502) (4,325) (4,201)
Unrecognized net loss (gain).......... 607 74 67 235 (265) 160
Unrecognized prior service cost....... 840 665 211
Unrecognized net transition obligation 389 41 47 1,510 993 1,291
Additional minimum liability.......... (1,164) (578) (343)
Prepaid (accrued) pension cost........ $ 1,066 $ 123 $ 125 $ (8,081) $ (3,510) $ (2,882)
The Retirement Plan's assets include common stock, fixed income securities,
short-term investments and cash. The weighted-average discount rate for all
three plans is 7.75%, 8.5%, and 7.5% for 1996, 1995, and 1994, respectively.
The rate of increase in compensation levels for the Executive Supplemental
Pension Plan and Management Retirement Plan is 4% for 1996 and 1995 and 5% for
1994. The expected long-term rate of return on plan assets for the Retirement
Plan is 10% for all three years.
10. Preferred Stock
Under its Certificate of Incorporation the Company is authorized to issue
preferred stock with a par value of $0.01 in an amount not to exceed 250,000
shares which may be divided into and issued in designated series, with
dividend rates, rights of conversion, redemption, liquidation prices and other
terms or conditions as determined by the Board of Directors. No preferred
shares have been issued as of June 1, 1996. The Board of Directors has
designated 50,000 of such shares as Series A Junior Participating Preferred
Stock and has issued rights to acquire such shares, upon certain events, with
an exercise price of $75.00 per one one-thousandth of a share, subject to
adjustment. The rights expire on April 9, 1997, and may be redeemed prior to
ten days after the acquisition of 20% or more of the Company's common stock.
11. Capital Stock, Options, And Bonus Plans
The Ruby Tuesday, Inc. 1996 Stock Incentive Plan - In March 1996, the
shareholders approved the Ruby Tuesday, Inc. 1996 Stock Incentive Plan which is
an amendment and restatement of the Morrison Restaurants Inc. 1992 Stock
Incentive Plan. A Committee, appointed by the Board, administers the Plan on
behalf of the Company and has complete discretion to determine participants and
the terms and provisions of Stock Incentives, subject to the Plan. The Plan
permits the Committee to make awards of shares of common stock, awards of
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 pursuant to a program approved by the Committee for the
benefit of a group of eligible persons. All options awarded under this plan
have been at the prevailing market value at the time of issue or grant. During
1996, 22,000 shares were issued under the Plan. At June 1, 1996, the Company
had reserved a total of 819,000 shares of common stock for this Plan.
The Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan for
Directors - In March 1996, the shareholders approved the Ruby Tuesday, Inc.
Stock Incentive and Deferred Compensation Plan for Directors, which is a
continuation of the similarly titled 1994 Morrison plan. To defer the receipt
of their retainer fees or to allocate their retainer fees to the purchase of
shares of the Company, the Plan provides that the directors must use 60% of
their retainer to purchase shares of the Company if they have not attained a
specified level of ownership of shares of Company common stock. Each director
purchasing stock receives additional shares equal to 15% of the shares
purchased and three times the total shares in options which after six months
are exercisable for five years from the grant date. During 1996, 3,000 shares
were issued under the Plan. Pursuant to this Plan, a one-time restricted stock
award totaling 5,000 shares was made in fiscal 1995 to each non-management
director who was elected after September 1993. All options awarded under this
plan have been at the prevailing market value at the time of issue or grant. A
Committee, appointed by the Board, administers the Plan on behalf of the
Company. At June 1, 1996, the Company had reserved 95,000 shares of common
stock for the Plan.
The Ruby Tuesday, Inc. 1996 Non-Executive Stock Incentive Plan - In March
1996, the Board of Directors approved the Ruby Tuesday, Inc. 1996 Non-Executive
Stock Incentive Plan, which is an amendment and restatement of the similarly
titled 1993 Morrison plan. A Committee, appointed by the Board, administers
the Plan on behalf of the Company and has full authority in its discretion to
determine the officers and key employees to whom Stock Incentives are granted
and the terms and provisions of Stock Incentives, subject to the Plan. The
Plan permits the Committee to make awards of shares of common stock, awards of
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 pursuant to a program approved by the Committee for the
benefit of a group of eligible persons. All options awarded under this plan
have been at the prevailing market value at the time of issue or grant. During
1996, 91,000 shares were issued under the Plan. At June 1, 1996, the Company
had reserved a total of 1,320,000 shares of common stock for this Plan.
In March 1996, the number and exercise price of all outstanding options were
adjusted for the spin-off of MFC and MHC and the concurrent reverse one-for-two
split of the Company shares. This adjustment decreased the number of options
outstanding by 1,368,000 and increased each outstanding option's exercise
price.
In addition to the above plans, stock options remain outstanding under two
terminated plans, the Ruby Tuesday, Inc. Long-Term Incentive Plan, which was
effective from 1984 to 1989, and the Ruby Tuesday, Inc. Stock Bonus and Non-
Qualified Stock Option Plan, which was effective from 1986 to 1992. Options to
purchase 8,000 and 472,000 shares, respectively, remain outstanding under the
terms of these two plans at June 1, 1996.
The following table summarizes the activity in options under these stock
option plans (option amounts and prices for 1994 and 1995 are derived from the
historical financial statements of Morrison Restaurants Inc. and do not reflect
the March 1996 reverse stock split):
Number of Shares Under Options
(In thousands except per-share data)
1996 1995 1994
Beginning of year 2,695 2,717 2,386
Adjustment due to MFC
and MHC spin-off and
reverse stock split (1,368)
Granted 1,340 343 755
Exercised (87) (258) (313)
Forfeited (115) (107) (111)
End of year 2,465 2,695 2,717
Exercisable 808 971 958
Outstanding options' prices $ 8.09-$30.57 $ 7.61-$28.75 $ 5.40-$25.38
Exercised options' prices $ 7.61-$14.09 $ 5.40-$25.38 $ 5.40-$11.36
Granted options' prices $13.62-$23.50 $14.01-$28.75 $11.88-$25.38
12. Contingencies
At June 1, 1996, the Company was contingently liable for approximately $15.5
million in letters of credit, issued primarily in connection with its workers'
compensation and casualty insurance programs.
The Company is presently, and from time to time, subject to pending claims
and lawsuits arising in the ordinary course of its business. In the opinion of
management, the ultimate resolution of these pending legal proceedings will not
have a material adverse effect on the Company's operations or consolidated
financial position.
13. Supplemental Quarterly Financial Data (Unaudited)
Quarterly financial results for the years ended June 1, 1996 and June 3,
1995, are summarized below. All quarters are composed of 13 weeks.
FIRST SECOND THIRD FOURTH
In thousands except per-share data) QUARTER QUARTER QUARTER QUARTER TOTAL
For The Year Ended June 1, 1996:
Revenues $145,964 $152,001 $163,957 $158,212 $620,134
Gross profit* $ 25,448 $ 23,068 $ 30,435 $ 27,781 $106,732
Income (loss) before income taxes $ 6,211 $ 3,125 $(20,981)** $ 9,332 $ (2,313)
Provision (benefit) for federal and
state income taxes 2,000 1,038 (8,142) 3,453 (1,651)
Income (loss) from continuing
operations 4,211 2,087 (12,839) 5,879 (662)
Income (loss) from discontinued
operations 5,245 4,647 (12,114)** - (2,222)
Net income (loss) $ 9,456 $ 6,734 $(24,953) $ 5,879 $ (2,884)
Earnings (loss) per common and
common equivalent share:
Continuing operations $ 0.24 $ 0.13 $ (0.73) $ 0.33 $ (0.03)
Discontinued operations 0.29 0.26 (0.68) - (0.13)
$ 0.53 $ 0.39 $ (1.41) $ 0.33 $ (0.16)
FIRST SECOND THIRD FOURTH
(In thousands except per-share data) QUARTER QUARTER QUARTER QUARTER TOTAL
For The Year Ended June 3, 1995:
Revenues $113,284 $120,778 $142,094 $139,156 $515,312
Gross profit* $ 24,026 $ 24,232 $ 28,626 $ 23,854 $100,738
Income (loss) before income taxes $(11,229)***$ 8,267 $ 12,293 $ 6,781 $ 16,112
Provision (benefit) for federal and
state income taxes (4,784) 2,945 4,425 2,441 5,027
Income (loss) from continuing
operations (6,445) 5,322 7,868 4,340 11,085
Income from discontinued operations 30,955**** 6,809 5,274 8,048 51,086
Net income $ 24,510 $ 12,131 $ 13,142 $ 12,388 $ 62,171
Earnings (loss) per common and
common equivalent share:
Continuing operations $ (0.35) $ 0.28 $ 0.44 $ 0.25 $ 0.62
Discontinued operations 1.70 0.39 0.30 0.45 2.84
$ 1.35 $ 0.67 $ 0.74 $ 0.70 $ 3.46
* The Company defines gross profit as revenue less cost of merchandise,
payroll and related costs, and other operating costs and expenses.
** Continuing operations includes a pre-tax loss of $25.9 million recognized as a
result of the implementation of FAS 121, other asset impairment charges and a $5.3
million restructure charge. Discontinued operations includes a pre-tax loss of
$23.7 million recognized for costs associated with asset impairment and
restructurings.
*** Includes a pre-tax loss of $19.7 million recognized upon the decision to phase
out the L&N Seafood Grill concept.
**** Includes a pre-tax gain of $46.8 million ($25.8 million net of tax) realized
upon the sale of certain business and industry contracts and assets of MHC.
Morrison Restaurants Inc. common stock was traded on the New York Stock
Exchange under the ticker symbol RI. In connection with the Distribution,
Morrison effected a one-for-two reverse stock split and changed its name to
Ruby Tuesday, Inc. The common stock for Ruby Tuesday, Inc. is traded under
the same ticker symbol, RI. The following table sets forth the reported high
and low prices for each quarter during fiscal 1996 and 1995 for (i) the common
stock of Morrison Restaurants Inc. prior to the Distribution, not adjusted for
either the Distribution or the reverse stock split; and (ii) the common stock
of Ruby Tuesday, Inc. after the Distribution.
Fiscal Year Ended June 1, 1996 Fiscal Year Ended June 3, 1995
As Morrison Restaurants Inc. As Morrison Restaurants Inc.
Per Share Per Share
Cash Cash
Quarter High Low Dividends Quarter High Low Dividends
First $25.75 $19.13 $0.1750 First $25.88 $20.88 $0.1666
Second $20.63 $15.50 $0.1840 Second $29.75 $24.88 $0.1750
Third $17.38 $12.50 $0.1840 Third $27.88 $22.88 $0.1750
Fourth $26.88 $20.88 $0.1750
As Ruby Tuesday, Inc.
Per Share
Cash
Quarter High Low Dividends
Fourth $23.00 $17.25 $0.0000
Report of Independent Auditors
Shareholders and Board of Directors
Ruby Tuesday, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Ruby Tuesday, Inc. as of June 1, 1996 and June 3, 1995, and the related
consolidated statements of income, shareholders' equity and cash flows
for each of the three fiscal years in the period ended June 1, 1996.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Ruby Tuesday, Inc. and Subsidiaries at June 1, 1996 and June 3, 1995,
and the consolidated results of their operations and their cash flows
for each of the three fiscal years in the period ended June 1, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in
fiscal 1996 the Company changed its method of accounting for the
impairment of long-lived assets and for long-lived assets to be disposed
of.
ERNST & YOUNG LLP
Birmingham, Alabama
June 19, 1996