MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Ruby Tuesday, Inc. owns and operates three casual dining restaurant
concepts: Ruby Tuesday, Mozzarella's American Cafe, and Tia's Tex-Mex.
Additionally, the Company franchises its Ruby Tuesday concept. As of June
6, 1998, the Company owned and operated 382 restaurants including 315 Ruby
Tuesday, 46 Mozzarella's American Cafe and 21 Tia's Tex-Mex restaurants,
located in 32 states. Franchise operations included 49 domestic units and
six international units.
During fiscal 1996, the Company distributed the shares of its then
family dining restaurant business (Morrison Fresh Cooking, Inc.) and its
health care food and nutrition services business (Morrison Health Care,
Inc.) to its shareholders in a spin-off transaction. The financial
results of those two businesses are reported as discontinued operations.
For an understanding of the significant factors that influenced the
Company's performance during the past three fiscal years, the following
should be read in conjunction with the Consolidated Financial Statements
and related Notes found on pages 18 to 35.
Results of Operations
The following table sets forth selected restaurant operating data as
a percentage of revenues for the periods indicated. All information is
derived from the Consolidated Financial Statements of the Company included
elsewhere in this Annual Report.
1998 1997 1996
Company restaurant sales 99.7% 100.0% 100.0%
Franchise revenues 0.3 0.0 0.0
Total revenues 100.0 100.0 100.0
Operating costs and expenses:
(As a percentage of Company
restaurant sales):
Cost of merchandise 27.5 27.1 27.5
Payroll and related costs 32.2 32.6 33.7
Other 20.7 21.5 21.6
(As a percentage of Total revenues):
Selling, general and
administrative 7.4 6.5 6.3
Depreciation and amortization 5.6 5.9 5.5
Interest expense, net 0.5 0.6 0.8
Loss on impairment of assets 4.2
Restructure charges 0.8
Total operating costs and expenses 93.7 94.1 100.4
Income (loss) from continuing
operations before income taxes 6.3 5.9 (0.4)
Provision (benefit) for
income taxes 2.2 2.1 (0.3)
Income (loss) from continuing
operations 4.1 3.8 (0.1)
Loss from discontinued
operations, net of applicable
income taxes (0.4)
Net income (loss) 4.1% 3.8% (0.5)%
During fiscal 1996, the Company recorded $31.1 million in charges
related to asset impairment and restructure costs. The effect of these
charges on fiscal 1996 results of operations is discussed below.
Fiscal 1998 compared to Fiscal 1997
Overview
During fiscal 1998, the Company opened 38 Ruby Tuesday, one
Mozzarella's American Cafe, and one Tia's Tex-Mex restaurants while
closing two Ruby Tuesday and three Mozzarella's American Cafe restaurants.
In addition, the Company sold 46 Ruby Tuesday units to several domestic
franchisees for aggregate consideration consisting of $34.8 million in
cash and $12.5 million in the form of promissory notes bearing interest at
rates ranging from 8% to 10%. Concurrent with the sale of the 46 units,
the Company also entered into development agreements with the franchisees
whereby the franchisees will open restaurants in their respective areas
over the next five to nine years. The Company also continued its
development of franchise programs through the opening of four
international franchise units during the year.
Revenues
The Company's revenues increased to $711.4 million in fiscal 1998
from $655.4 million in fiscal 1997. The 8.5% revenue increase was the
result of an additional week in fiscal 1998 coupled with increased same-
store sales and the net addition of 35 units during the year (not taking
into account units sold to franchisees) comprised of net additions to the
Ruby Tuesday concept (36 units) and Tia's Tex-Mex concept (one unit),
offset by a net reduction to the Mozzarella's American Cafe concept (two
units). This increase was somewhat offset by the reduction in revenue
which resulted from the sale of 46 units to franchisees. Same-store sales
in fiscal 1998 increased 2.8% for the Ruby Tuesday concept. Same-store
sales for Mozzarella's American Cafe and Tia's Tex-Mex were also positive
for the fiscal year.
Operating Profits
Pre-tax income increased $6.2 million in fiscal 1998 to $45.0
million. The increase in pre-tax income is the result of increased sales
due to increased same-store sales for all concepts and the addition of new
units coupled with the cost changes discussed below.
Cost of merchandise as a percentage of Company restaurant sales
increased 0.4% due to a change in menu strategy. During the year, various
menu promotions featured high cost, high gross profit food items.
Payroll and related costs decreased 0.4% as a percentage of Company
restaurant sales in fiscal 1998. The decrease resulted from a reduction
in hourly labor as a percentage of Company restaurant sales due to
increased average unit volumes and reduced turnover. In addition, payroll
taxes decreased as a result of a reduction in state unemployment tax
rates. Finally, workers' compensation expense as a percentage of Company
restaurant sales decreased as a result of favorable claims experience.
Other operating expenses decreased 0.8% as a percentage of Company
restaurant sales due to a decrease in supplies expense resulting from the
elimination of paper cocktail napkins and silverware wrappers and a
decrease in glassware breakage. Rent and leasing expense also decreased as
a result of the sale of certain high occupancy cost units to franchisees
and a continuing shift towards lower occupancy cost free standing units as
opposed to mall units.
Selling, general and administrative expenses increased 0.9% as a
percentage of total revenues. The increase resulted from additional local
store marketing in fiscal 1998, including coupon redemptions associated
with the Company's "Neighborhood Introduction Program" which began in the
third quarter of fiscal 1997. Also, during fiscal 1998, the Company
recognized costs associated with the start-up of its domestic and
international franchise programs.
Depreciation and amortization decreased 0.3% as a percentage of total
revenues due to the sale of 46 units to franchisees which had higher unit
depreciation costs and due to higher average unit volumes resulting from
positive same-store sales, and new unit openings which generated higher
sales volumes than in the previous year.
Net interest expense decreased slightly (0.1%) as a percentage of
total revenues due to an increase in interest income resulting from notes
receivable associated with the sale of units to franchisees.
The increase in income from continuing operations compared to the
prior year primarily relates to higher average unit volumes resulting
from positive same-store sales in fiscal 1998, new units that are
generating higher sales and profits than those of the previous year and
the addition of a 53rd week in fiscal 1998.
The effective tax rate remained relatively constant in fiscal 1998
as compared to fiscal 1997. The slight decrease (0.1%) as a percentage
of total revenues is primarily the result of reduced state taxes.
Fiscal 1997 compared to Fiscal 1996
Overview
During fiscal 1997, the Company opened 30 Ruby Tuesday, two
Mozzarella's American Cafe, and three Tia's Tex-Mex restaurants while
closing six Ruby Tuesday and one Tia's Tex-Mex restaurants. Also in 1997,
the Company began its domestic franchise program with the sale of one unit
to a franchisee.
Revenues
The Company's revenues increased to $655.4 million in fiscal 1997
from $620.1 million in fiscal 1996. The 5.7% revenue increase was the
result of the net addition of 28 units during the year, comprised of 24
Ruby Tuesday, two Mozzarella's American Cafe, and two Tia's Tex-Mex
restaurants. For the Ruby Tuesday concept, same-store sales decreased 0.8%
in fiscal 1997. Same-store sales for Tia's Tex-Mex also declined, while
Mozzarella's American Cafe experienced positive same-store sales.
Operating Profits
Pre-tax income from continuing operations increased $41.1 million in
fiscal 1997 to $38.8 million. The increase was due in part to $31.1
million of unusual non-recurring charges recorded in fiscal 1996 for
restructure charges and loss on impairment of assets. The remaining
increase in pre-tax income was the result of the net addition of 28 units
coupled with cost decreases discussed below.
Cost of merchandise as a percentage of Company restaurant sales
decreased 0.4% due to a new menu implemented in October 1996 which lowered
food costs significantly. Also, there was an increased focus regarding
food cost management at the unit level in fiscal 1997 and the Company
experienced an improvement in rebates and volume discounts.
Payroll and related costs decreased 1.2% as a percentage of Company
restaurant sales in fiscal 1997. The decrease was due to a reduction in
management labor resulting from a strategic decision to reduce unit
managers to a level that more accurately matches unit volume. The
remaining portion of the decrease was the result of reduced workers'
compensation expense as a percentage of Company restaurant sales
associated with favorable experience ratings in the fiscal 1997.
Other operating expenses decreased slightly as a percentage of
Company restaurant sales (0.1%) due to a decrease in supplies expense
resulting from tighter controls over such items.
Selling, general and administrative expenses increased 0.2% as a
percentage of total revenues. The increase resulted from additional local
store marketing in fiscal 1997, including coupon redemptions associated
with the Company's "Neighborhood Introduction Program" which began in the
third quarter of fiscal 1997.
Depreciation and amortization increased 0.4% as a percentage of total
revenues due to depreciation expense on information technology projects
completed during the prior year and a higher mix of free-standing units.
Net interest expense decreased 0.2% as a percentage of total revenues
from $4.6 million in fiscal 1996 to $3.9 million in fiscal 1997 due to the
net decrease in average debt outstanding during the year.
The increase in income from continuing operations compared to the
prior year primarily relates to unusual non-recurring charges recorded in
fiscal 1996. In fiscal 1996, the Company recorded charges of $31.1
million for loss on asset impairment and restructure charges (see further
discussion below).
The unusual charges referred to previously also contributed to the
unusual effective tax rate in fiscal 1996. Excluding the effects of
these charges in fiscal 1996, the effective income tax rate decreased
slightly in fiscal 1997 to 35.5% from 35.8% in fiscal 1996.
Asset Impairment/Restructure Charges
The Company adopted Statement of Financial Accounting Standards No.
121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of", during fiscal 1996. As a
result of the adoption of FAS 121, the Company recorded a pre-tax charge
for asset impairment of $3.9 million. This amount was the difference
between fair value and net realizable value of impaired assets. An
additional $22.0 million pre-tax charge for asset impairment was recorded
which did not relate to the adoption of FAS 121. The total charge of
$25.9 million (of which $3.9 million was the result of the adoption of
FAS 121) was comprised of the following: impairment on 16 units to be
closed ($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); and impairment on units
remaining open ($11.3 million).
In addition to the write-down of fixed assets on the 16 units to be
closed, the Company accrued charges of $3.4 million relating to the
settlement of the related lease obligations and other charges of $1.8
million associated with the Distribution. See Note 1 and Note 3 of Notes
to Consolidated Financial Statements for further information regarding
the asset impairment and restructuring charges.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow
Cash provided by operating activities was $68.7 million in fiscal
1998 and exceeded capital expenditures by approximately $2.9 million.
Borrowings under the Company's credit facilities were increased by $3.6
million. Pursuant to the Company's financial strategy approved by the
Board during fiscal 1994, $62.1 million of the Company's stock was
reacquired during fiscal 1998 primarily from cash available from the
sales of certain units to franchisees and from borrowings under the
Company's credit facilities. (See the Consolidated Statements of Cash
Flows for more information.)
Capital Expenditures
The Company requires capital principally for new restaurants,
equipment replacement and remodeling of existing units. Property and
equipment expenditures for fiscal 1998 were $65.8 million for new units,
capital projects on existing units and information technology projects.
An additional $27.6 million was spent by a lessor on new unit
construction under operating lease arrangements with the Company. During
fiscal 1998, 38 Ruby Tuesday, one Mozzarella's American Cafe and one
Tia's Tex-Mex Company-owned restaurants were opened. Capital
expenditures for fiscal 1999 are projected to be $58.8 million.
Expenditures by a lessor for units to be leased by the Company under
operating leases are budgeted to be $39.8 million for fiscal 1999.
Planned Company-owned openings for fiscal 1999 include 41 Ruby Tuesday
and two Tia's Tex-Mex restaurants. There can be no assurance, however,
that the Company will be able to open the projected number of restaurants
in fiscal 1999 or invest the projected amount of money in capital
expenditures and lease commitments. See "Special Note Regarding Forward-
Looking Statements."
Borrowings, Credit, and Lease Facilities
At June 6, 1998, the Company had committed lines of credit amounting
to $20.0 million and non-committed lines of credit amounting to $15.0
million with several banks at various interest rates approximating 5.89%
at June 6, 1998. All of these lines 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
1998. Borrowings on these lines of credit were $16.2 million and $0.5
million at June 6, 1998 and May 31, 1997, respectively. In addition to
these lines of credit, the Company has 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. The Company had $65.0 million of
borrowings outstanding under this agreement at June 6, 1998, bearing
interest at approximately 6.1%. The credit facility provides for certain
restrictions on incurring additional indebtedness and certain covenants
regarding funded debt, net worth, and fixed charge coverage requirements.
The Company has entered into three interest rate swap agreements
with notional amounts aggregating $75.0 million. The swap agreements
effectively fix the interest rate on an equivalent amount of the
Company's debt to rates ranging from 5.73% to 6.03% for periods up to
five years.
During fiscal 1998, the Company entered into a $40.0 million master
operating lease agreement for the purpose of leasing new free-standing
units and the new Restaurant Support Center. Under this agreement, an
operating lease agreement will be entered into for each facility
providing for an initial lease term of five years with two five-year
renewal options. The leases also provide for substantial residual value
guarantees and include purchase options at the lessor's original cost of
the properties. During 1998, the Company entered into leases for 20
units (nine of which opened in fiscal 1998) and the new Maryville,
Tennessee Restaurant Support Center at an aggregated cost to the lessor
of approximately $27.6 million. During 1999, the Company intends to
enter into similar lease agreements under the remaining amount of the
$40.0 million master operating lease agreement and to enter into a new
master operating lease agreement for an amount in excess of $27.4
million. See "Special Note Regarding Forward-Looking Information."
During fiscal 1999, the Company expects to fund operations, capital
expansion, and the repurchase of common stock from operating cash flows,
bank lines of credit, the five-year revolving line of credit, the sale of
Ruby Tuesday units to franchisees, and through operating leases. (See
Note 5 of Notes to Consolidated Financial Statements for a detailed
discussion of borrowings and credit facilities.) Long-term debt
decreased a net $12.1 million in 1998 due to lower utilization of the
revolving credit facility while short-term borrowings under bank lines of
credit increased $15.7 million. The Company anticipates a net repayment
of debt in 1999 should cash flows meet current expectations. An increase
in debt could result if actual cash flows from operations are lower than
currently anticipated or if capital expenditures exceed budgeted amounts.
See "Special Note Regarding Forward-Looking Information."
Working Capital
The Company's working capital deficiency and current ratio as of
June 6, 1998 were $37.6 million and 0.6:1, respectively. The Company
typically carries 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).
Dividends
During fiscal 1997, the Board of Directors approved a dividend
policy as an additional means of returning excess capital to its
shareholders. This policy calls for payment of semi-annual dividends of
$.045 per share. The payment of a dividend in any particular future
period and the actual amount thereof remain, however, at the discretion
of the Board of Directors and no assurance can be given that dividends
will be paid in the future as currently anticipated. See "Special Note
Regarding Forward-Looking Information." In addition, the Company's credit
facilities contain certain limitations on the payment of dividends. See
Note 5 of Notes to Consolidated Financial Statements for more
information.
The Company paid its first cash dividend since the spin-off in the
third quarter of fiscal 1998.
KNOWN EVENTS, UNCERTAINTIES AND TRENDS
Financial and Stock Repurchase Plan
The Company employs a financial strategy which utilizes a prudent amount
of debt to minimize the weighted average cost of capital while allowing the
Company to maintain financial flexibility and the equivalent of an
investment-grade (BBB) bond rating. This financial strategy sets a target
debt-to-capital ratio of 60%, including operating leases. The strategy
also provides for repurchasing Company stock whenever cash flow exceeds
funding requirements while maintaining the target capital structure.
During fiscal 1998, the Company purchased 4.6 million shares at a total
purchase price of $62.1 million under its stock repurchase program,
including 1,341,024 shares purchased in a "dutch auction" tender offer
completed on June 2, 1997. On April 6, 1998, the Board of Directors
authorized the repurchase of an additional 4.0 million shares for general
corporate purposes. After these repurchases and the additional
authorization, approximately 3.4 million shares remained available for
repurchase at June 6, 1998.
Franchising and Development Agreements
During May and June 1998, the Company entered into a series of agreements
with three entities (one limited partnership and two limited liability
corporations). These agreements provide for, among other things, the sale of
four Company-owned units in Florida, three in Minnesota and six in New York.
Upon completion of the sales, the 13 units will be operated as Ruby Tuesday
restaurants under separate franchising agreements. The Company also entered
into development agreements with these three entities whereby each of them will
open nine franchised restaurants in its respective area over the next five to
six years.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("FAS 131"), which is effective for fiscal
1999. FAS 131 requires a "management approach" towards identifying and
disclosing segment information. Disclosures include information about various
products and services, geographic areas in which the Company operates and major
customers. Management has not completed its analysis of the effect of FAS
131 on its reportable segments.
Impact of Inflation
Historically, the Company has been able to recover inflationary cost
increases to items such as food and beverages through increased menu prices.
There have been, and there may be in the future, delays in the
implementation of such menu price increases. Competitive pressures may
also limit the Company's ability to recover such cost increases in their
entirety. Historically, the effect of inflation on the Company's net
income has not been materially adverse.
Effects of the Year 2000
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000
date are a known risk. The Company is addressing this risk to the availability
and integrity of financial systems and the reliability of operational systems
through a combination of actions. These include the implementation of a new
financial and human resource software package that is Year 2000 compliant and a
coordinated review of the Year 2000 readiness of key suppliers, financial
institutions and others with which it does business. The Company expects to
spend approximately $1.6 million in fiscal 1999 principally related to its new
financial and human resource software package which will address the Year 2000
issue. See "Special Note Regarding Forward-Looking Information."
Management's Outlook
The Company has made many advances to strategically position itself for
growth utilizing a diversified group of casual dining concepts and growth
vehicles including franchising. Ruby Tuesday, with its menu of burgers, ribs,
fajitas, chicken, soups, salads and sandwiches, will maintain its aggressive
posture. The Mozzarella's American Cafe concept will concentrate primarily on
improved sales and profits at existing units. The concept specializes in
gourmet pizzas, pastas, soups, salads and sandwiches, with a $9 average check.
Tia's the Tex-Mex concept features freshly prepared menu items and offers the
Company an attractive opportunity in a high growth segment of the industry.
The Company's focus for Tia's is to improve same-store sales and profits by
increasing customer visit frequency and continuing to add new and fresh items
to its menu. Management believes that it is positioned to take advantage of
growth opportunities well into the future.
The Company continues to identify potential restaurant owners - internal
and external - to become Ruby Tuesday managing partners and franchisees.
Approximately one-half of the Company's restaurant managers have a financial
stake in the success of their units as internal managing partners. The
franchise partner program - the Company's primary domestic franchising program
- - allows the Company to become a financial partner with regional operators from
the casual-dining industry who are expected to build approximately 10 units
each over the next five years in new and existing markets. See "Special Note
Regarding Forward-Looking Information."
In order to facilitate this development, the Company has established a
$52.5 million credit facility with several banks which will be used by these
franchise partners to help finance their expansion. The Company is a partial
guarantor of this credit facility.
In 1999, the Company will continue to focus on increasing
same-store sales, average-unit volume, customer visit frequency, and check
average. The Company also plans to further its franchise programs in
fiscal 1999 by adding at least six of the top casual dining operators in
the country to the growing list of domestic franchise partners, by
franchising units located in areas outside of the Company's primary growth
markets, and by pursuing further expansion of the international license
and franchise program with large and experienced partners in broad
geographic territories. The Company anticipates a 10% increase in owned
units in existing markets in fiscal 1999, however, there can be no
assurance the Company's anticipated growth will occur in fiscal 1999. See
"Special Note Regarding Forward-Looking Information."
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
The foregoing section contains various "forward-looking statements" which
represent the Company's expectations or beliefs concerning future events,
including the following: statements regarding unit growth (both Company-owned
and franchised), future capital expenditures, future borrowings and repayment
of debt, payment of dividends and the effects of Year 2000 software failures.
The Company cautions that a number of important factors could, individually or
in the aggregate, cause actual results to differ materially from those included
in the forward-looking statements including, without limitation, the following:
consumer spending trends and habits; mall-traffic trends; increased competition
in the casual dining restaurant market; weather conditions in the regions in
which the Company operates restaurants; consumers' acceptance of the Company's
development concepts; laws and regulations affecting labor and employee benefit
costs; the Company's ability to attract qualified managers and franchisees; and
changes in the availability of capital.
RUBY TUESDAY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per-share data)
For the Fiscal Year Ended
June 6, May 31, June 1,
1998 1997 1996
Revenues
Restaurant sales and operating revenues.............. $ 709,184 $ 654,464 $ 618,803
Franchise revenues................................... 1,902 232
Other revenues....................................... 334 711 1,331
711,420 655,407 620,134
Operating costs and expenses:
Cost of merchandise.................................. 194,765 177,835 170,352
Payroll and related costs............................ 228,676 213,323 209,007
Other................................................ 146,655 140,619 134,043
Selling, general and administrative.................. 52,994 42,346 39,139
Depreciation and amortization........................ 39,519 38,560 34,131
Interest expense net of interest income totaling
$900 in 1998, $205 in 1997, and $160 in 1996....... 3,780 3,911 4,637
Loss on impairment of assets......................... 25,881
Restructure charges ................................. 5,257
666,389 616,594 622,447
Income (loss) from continuing operations before
income taxes......................................... 45,031 38,813 (2,313)
Provision (benefit) for federal and state income taxes. 15,951 13,768 (1,651)
Income (loss) from continuing operations............... 29,080 25,045 (662)
Loss from discontinued operations, net of
applicable income taxes.............................. (2,222)
Net income (loss)...................................... $ 29,080 $ 25,045 $ (2,884)
Earnings (loss) per share:
Basic:
Continuing operations.............................. $ 0.88 $ 0.71 $ (0.02)
Discontinued operations............................ (0.06)
$ 0.88 $ 0.71 $ (0.08)
Diluted:
Continuing operations.............................. $ 0.84 $ 0.70 $ (0.02)
Discontinued operations............................ (0.06)
$ 0.84 $ 0.70 $ (0.08)
Weighted average shares:
Basic.............................................. 33,205 35,190 34,626
Diluted............................................ 34,570 35,750 35,377
The accompanying notes are an integral part of the consolidated financial statements.
RUBY TUESDAY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 6, May 31,
Assets 1998 1997
Current assets:
Cash and short-term investments................................ $ 8,291 $ 7,608
Accounts and notes receivables................................. 7,600 4,621
Inventories:
Merchandise...................................................... 5,620 6,088
China, silver and supplies....................................... 3,902 3,562
Income tax receivable............................................ 1,713 2,178
Prepaid rent..................................................... 2,880 2,736
Other Prepaid expenses........................................... 4,477 3,036
Assets held for disposal......................................... 9,894 1,275
Prepaid income taxes............................................. 2,506 4,388
Total current assets........................................ 46,883 35,492
Property and equipment - at cost:
Land............................................................. 34,665 35,643
Buildings........................................................ 62,404 70,163
Improvements..................................................... 188,867 195,034
Restaurant equipment............................................. 128,776 137,830
Other equipment.................................................. 39,518 38,284
Construction in progress......................................... 26,245 35,450
480,475 512,404
Less accumulated depreciation and amortization................... 170,083 165,640
310,392 346,764
Costs in excess of net assets acquired........................... 19,714 20,396
Other assets..................................................... 32,639 16,219
Total assets..................................................... $ 409,628 $ 418,871
Liabilities and shareholders' equity
Current liabilities:
Accounts payable............................................... $ 22,570 $ 28,828
Short-term borrowings.......................................... 16,220 534
Accrued liabilities:
Taxes, other than income taxes............................... 12,748 11,425
Payroll and related costs.................................... 12,731 8,982
Insurance.................................................... 8,928 8,800
Rent and other............................................... 11,136 10,393
Current portion of long-term debt.............................. 110 102
Total current liabilities........................................ 84,443 69,064
Long-term debt................................................... 65,895 78,006
Deferred income taxes............................................ 9,728 13,552
Other deferred liabilities....................................... 37,412 34,609
Shareholders' equity:
Common stock, $0.01 par value; (authorized: 100,000 shares;
issued: 1998 - 32,787 shares, 1997 - 17,720 shares)......... 328 177
Capital in excess of par value................................ 5,250 2,729
Retained earnings............................................. 207,034 223,399
212,612 226,305
Deferred compensation liability payable in Company stock...... 3,155
Company stock held by deferred compensation plan.............. (3,155) (2,665)
Other......................................................... (462)
212,150 223,640
Total liabilities and shareholders' equity................... $ 409,628 $ 418,871
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)
Common Capital in Deferred Total
Stock Issued Treasury Stock Excess of Retained Compensation Shareholders'
Shares Amount Shares Amount Par Value Earnings Liability Other Equity
Balance, June 3, 1995.............. 43,644 $436 (9,119) $(137,639) $84,515 $298,181 $ 0 $ 0 $245,493
Net 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 $0.272 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 (84,591) (43,865) 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 0 0 197,343
Net income...................... 25,045 25,045
Shares issued under stock bonus and stock
options plans.................. 310 3 4,249 4,252
Purchase of treasury stock, net
of changes in the Deferred
Compensation Plan.............. (188) (2) 7 284 (3,282) (3,000)
Balance, May 31, 1997.............. 17,720 177 (127) (2,665) 2,729 223,399 0 0 223,640
Net income...................... 29,080 29,080
Shares issued under stock bonus
and stock option plans......... 3,172 32 20,810 20,842
Cash dividends of $0.045 per
common share................... (1,468) (1,468)
Purchase of treasury stock, net
of changes in Deferred
Compensation Plan.............. (4,602) (46) (7) (490) (18,124) (43,977) (62,637)
Deferred Compensation Plan liability
payable in Company stock....... 3,155 3,155
Other........................... (462) (462)
2-for-1 stock split............. 16,497 165 (135) (165) 0
Balance, June 6, 1998.............. 32,787 $328 (269) $(3,155) $5,250 $207,034 $3,155 $(462) $212,150
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Fiscal Year Ended
June 6, May 31, June 1,
1998 1997 1996
Operating activities:
Income (loss) from continuing operations............ $ 29,080 $ 25,045 $ (662)
Adjustments to reconcile net income (loss) to net...
cash provided by operating activities:.............
Loss on impairment of assets...................... 25,881
Depreciation and amortization..................... 39,519 38,560 34,131
Amortization of intangibles....................... 729 734 699
Other, net........................................ (1,118)
Deferred income taxes............................. (1,080) 3,712 (7,157)
Loss on disposition of assets..................... 2,552 331 2,592
Changes in operating assets and liabilities:
Increase in receivables......................... (2,631) (2,581) (282)
Increase in inventories......................... (1,040) (969) (1,197)
(Increase)/decrease in prepaid and
other assets................................... (3,017) 2,610 721
Increase in accounts payable,
accrued and other liabilities.................. 4,977 9,456 14,989
Increase/(decrease) in income taxes payable..... (397) 2,273 (4,493)
Cash provided by continuing operations.............. 68,692 79,171 64,104
Cash provided by discontinued operations............ 10,030
Net cash provided by operating activities............ 68,692 79,171 74,134
Investing activities:
Purchases of property and equipment................ (65,750) (74,049) (109,164)
Proceeds from disposal of assets................... 650 818 3,444
Proceeds from sale of restaurant properties
to franchisees.................................... 34,782
Proceeds from sale of home office building......... 5,450
Other, net......................................... (3,461) (3,161) (4,475)
Discontinued operations investing
activities, net................................. (14,448)
Net cash used by investing activities................ (28,329) (76,392) (124,643)
Financing activities:
Proceeds from long-term debt....................... 2,000 44,200
Net change in short-term borrowings................ 15,686 (5,467) (6,637)
Principal payments on long-term debt and
capital leases.................................... (12,103) (95) (87)
Proceeds from issuance of stock,
including treasury stock.......................... 20,842 4,252 3,841
Stock repurchases, net of changes in the
Deferred Compensation Plan....................... (62,637) (3,000) (858)
Dividends paid..................................... (1,468) (9,377)
Discontinued operations financing
activities, net................................. 20,609
Net cash provided (used) by financing activities..... (39,680) (2,310) 51,691
Increase in cash and short-term
investments......................................... 683 469 1,182
Cash and short-term investments:
Beginning of period................................. 7,608 7,139 5,957
End of period....................................... $ 8,291 $ 7,608 $ 7,139
Supplemental disclosure of cash flow information-
Cash paid for:
Interest (net of amount capitalized)............... $ 5,885 $ 3,599 $ 4,252
Income taxes, net.................................. $ 12,224 $ 7,783 $ 2,605
The accompanying notes are an integral part of the consolidated financial statements.
RUBY TUESDAY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 6, 1998
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
American Cafe and Tia's Tex-Mex restaurants. The Company also offers
franchises for the Ruby Tuesday concept in domestic and international
markets. At June 6, 1998, the Ruby Tuesday concept consisted of 315 units
concentrated primarily in the Northeast, Southeast, Mid-Atlantic and the
Midwest. With 46 establishments, Mozzarella's American Cafe units are
primarily located in the Mid-Atlantic, Southeast regions. The Company's
newest concept, Tia's Tex-Mex, operates 21 units located in the Southwest,
Southeast and Mid-Atlantic regions. Also, as of year-end, there were 49
domestic franchise Ruby Tuesday franchised units concentrated primarily in
Florida, Colorado, Arizona, and Kentucky and six Ruby Tuesday restaurants
in the Asia Pacific Region.
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 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 businesses to its shareholders. The Distribution resulted in
the family dining restaurant and health care food and nutrition 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 are reported as discontinued operations.
For accounting purposes, the Distribution was reflected as if it occurred
on March 2, 1996, the last day of the Company's third quarter of fiscal
1996. 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 1996 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 year ended June 6, 1998, was comprised of 53 weeks, and
the fiscal years ended May 31, 1997 and June 1, 1996 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 value. 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.
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 6, 1998 and May 31, 1997, accumulated amortization for
costs in excess of net assets acquired was $6.7 million and $6.0 million,
respectively.
Advertising Costs
The Company generally expenses advertising costs as incurred.
Advertising expense as a percentage of revenues ranged from 1.5% to 1.8%
for fiscal years 1998, 1997, and 1996.
Fair Value of Financial Instruments
The Company's financial instruments at June 6, 1998 and May 31, 1997
consisted of cash and short-term investments, Deferred Compensation Plan
investments, notes receivable, short-term borrowings, long-term debt, and
interest rate swap agreements. The fair value of these financial
instruments approximated the carrying amounts reported in the Consolidated
Balance Sheets.
Franchise Revenues
Franchise development and license fees received are recognized when
all material services have been substantially performed by the Company and
the restaurant has opened for business. Franchise royalties (based on a
percentage of monthly sales), support service fees, and marketing fees are
recognized as income on the accrual basis. Costs associated with
franchise operations are expensed as incurred.
Earnings Per Share
In the third quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128").
This statement requires the Company to disclose diluted earnings per
share, which includes the dilutive effect of stock options, in addition to
basic earnings per share. Basic earnings per share have been computed by
dividing net earnings (loss) by the weighted average number of common
shares outstanding during each year presented. Diluted earnings per share
have been computed by dividing net earnings (loss) by the weighted average
number of common shares outstanding plus the dilutive effect of options
outstanding during the applicable periods. The dilutive effect of the
Company's stock options increased the diluted weighted average shares
outstanding by 1,365,000, 560,000, and 751,000 for fiscal years 1998,
1997, and 1996 respectively. All earnings per share amounts have been
presented, and where appropriate, restated to conform to FAS 128
requirements.
The Company effected a two-for-one stock split in the form of a stock
dividend paid on May 8, 1998 to shareholders of record on April 17, 1998.
All shares and share-related data have been restated from their original
presentation to give effect to the stock split.
Stock-Based Employee Compensation Plans
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options and adopted
the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123").
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date
of grant and, accordingly, recognizes no compensation expense for the
stock option grants.
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, in fiscal 1996, 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. The
financial results of the two businesses are reported as discontinued
operations in the accompanying consolidated financial statements.
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
Revenues......................... $ 370,439
Loss before benefit for
income taxes................... $ (2,434)
Benefit for income taxes......... (212)
Net loss......................... $ (2,222)
Included in the 1996 loss before benefit 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. 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) a shared services agreement pursuant to
which each of the three companies agreed to provide to the other parties
certain services, subject to certain conditions, on an "as needed" basis;
(v) intellectual property license agreements which provided for the
licensing of rights currently owned by the Company to the three
companies; and (vi) an agreement providing for the allocation of employee
benefit rights and responsibilities among the three companies.
3.Impairment of Long-Lived Assets/Restructure Charges
In fiscal 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("FAS 121"), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." 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
was 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 by the Board of
Directors on the same date; and impairment on units remaining open ($11.3
million).
The Board approved the closing of ten Ruby Tuesday, four
Mozzarella's American Cafe and two Tia's Tex-Mex restaurants based on
management's review of negative cash flow and operating loss units and
other considerations. The expected loss on the disposal of the long-
lived assets of these units was $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.
Subsequently, a decision was made to keep two of the units open because
of operational improvements at those units. During fiscal 1997, the
remaining 14 units were closed.
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, in fiscal 1996 the Company
recorded a 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 fiscal 1996 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 management
judgment. Thus, actual cash flows could vary from such estimates.
In addition to the write-down of fixed assets on the units to be
closed, the Company accrued charges not included above of $3.4 million
relating to the settlement of the related lease obligations. The
remaining cost accrued for lease settlements was $2.3 million and $1.8
million at June 6, 1998 and May 31, 1997 respectively.
Other charges of $1.8 million were also recorded during fiscal
1996. These charges consisted of estimated professional and other fees
incurred in connection 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 fiscal 1996.
4. Franchising
During fiscal 1998, the Company entered into a series of agreements
with five franchise partners which provided, among other things, for the
sale of 46 units in Florida (29 units), Colorado (ten units) and Arizona
(seven units). These units are currently operating as Ruby Tuesday
restaurants under separate franchising agreements. In connection with the
sale of these units, the Company received an aggregate sales price of
$47.3 million of which $34.8 million was paid in cash. The remaining
$12.5 million was paid in the form of notes bearing interest at rates
ranging from 8-10% and due through 2013. The Company has recorded a
valuation allowance of $2.2 million for these notes. The sale of these
units, after consideration of the allowance, resulted in a minimal pre-
tax gain.
Concurrently with the sale of the 46 Ruby Tuesday units, the Company
also entered into development agreements with the franchise partners
whereby the franchise partners will open Ruby Tuesday restaurants in
their respective areas over the next five to nine years. Deferred
development fees associated with all franchisees including those referred
to above totaled $0.8 million as of June 6, 1998.
5. Long-Term Debt
Long-term debt consists of the following:
(In Thousands)
Fiscal Year
1998 1997
Revolving credit facility $ 15,000 $ 27,000
Term notes payable to banks 50,000 50,000
Other long-term debt 1,005 1,108
66,005 78,108
Less current maturities 110 102
$ 65,895 $ 78,006
Annual maturities of long-term debt at June 6, 1998 are as follows
(In Thousands):
1999 $ 110
2000 121
2001 65,132
2002 143
2003 155
Subsequent years 344
Total $ 66,005
The Company has a five-year credit facility with several banks which
allows the Company to borrow up to $100.0 million under various short-term
interest rate options. The $100.0 million credit facility is comprised of
a $50.0 million five-year interest only 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 6, 1998, the Company had $15.0 million of borrowings
outstanding with various banks under the revolving credit facility at
interest rates approximating 6.11% per annum. Such borrowings (with
maturities up to 90 days) have been classified as long-term based on the
Company's ability and intent to refinance such borrowings on a long-term
basis under the revolving facility.
The credit facility contains certain restrictions on incurring
additional indebtedness and certain funded debt, net worth, and fixed
charge coverage requirements. At June 6, 1998, retained earnings in the
amount of $32.1 million were available for distribution under the debt
restrictions.
The Company has entered into three interest rate swap agreements with
notional amounts aggregating $75.0 million. The swap agreements fix the
interest rate on an equivalent amount of the Company's debt to rates
ranging from 5.73% to 6.03% for periods up to five years. The Company
terminated a previous interest rate swap agreement during fiscal 1996 and
received approximately $1.7 million in cash. The gain on that interest
rate swap agreement is being amortized to interest expense over the
previously remaining life of the swap agreement. The balance of the
unamortized interest was approximately $1.0 million and $1.4 million at
June 6, 1998 and May 31, 1997, respectively.
In addition, at June 6, 1998, the Company had committed lines of
credit amounting to $20.0 million and non-committed lines of credit
amounting to $15.0 million with several banks at various interest rates
approximating 5.89% and 6.14% at June 6, 1998 and May 31, 1997. All of
these lines 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 1998.
Borrowings on these lines of credit were $16.2 and $0.5 million at June 6,
1998 and May 31, 1997, respectively.
Interest expense capitalized in connection with financing additions
to property and equipment amounted to approximately $0.9 and $1.2 million
for the years ended June 6, 1998 and May 31, 1997, respectively.
6. Leases
Various operations of the Company are conducted in leased premises.
Initial lease terms expire at various dates over the next 21 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).
At June 6, 1998, the future minimum lease payments, including
guaranteed residual values, under operating leases for the next five years
and in the aggregate are as follows:
(In Thousands)
1999 $ 37,934
2000 36,304
2001 34,173
2002 52,165
2003 31,799
Subsequent years 192,813
Total minimum lease payments $ 385,188
Future minimum sub-lease payments to be received for the next five
years and in the aggregate under noncancelable sub-lease agreements are as
follows:
(In Thousands)
1999 $ 3,598
2000 3,339
2001 3,092
2002 2,847
2003 2,785
Subsequent years 19,695
Total minimum sub-lease payments $ 35,356
Rental expense pursuant to operating leases is summarized as follows:
(In Thousands)
1998 1997 1996
Minimum rent $36,288 $36,813 $33,930
Contingent rent 3,490 2,421 2,195
$39,778 $39,234 $36,125
During fiscal 1998, the Company entered into a $40.0 million master
operating lease agreement for the purpose of leasing new free-standing
units and a new Restaurant Support Center. An operating lease agreement
will be entered into for each facility providing for an initial lease term
of five years with two five-year renewal options. The lease will also
provide for substantial residual value guarantees and include purchase
options at the lessor's original cost of the properties. During 1998, the
Company entered into leases for 20 units (nine of which opened in 1998)
and the new Maryville, Tennessee Restaurant Support Center at an
aggregated original cost to the lessor of approximately $27.6 million.
Lease commitments applicable for such leases entered into are included in
the commitment amounts presented above.
7. Income Taxes
The components of income tax expense (benefit) are as follows:
(In Thousands)
1998 1997 1996
Current:
Federal $ 13,898 $ 7,953 $ 4,323
State 3,133 2,103 1,183
7,031 10,056 5,506
Deferred:
Federal (953) 3,167 (5,949)
State (127) 545 (1,208)
(1,080) 3,712 (7,157)
$ 15,951 $ 13,768 $ (1,651)
Deferred tax assets and liabilities are comprised of the following:
(In Thousands)
1998 1997
Deferred tax assets:
Employee benefits $ 8,336 $ 8,022
Insurance reserves 3,935 4,107
Escalating rents 4,601 4,398
Acquired net operating losses 2,193 2,202
Bad debt reserve 848
Restructuring and FAS 121 reserves 1,270 699
Deferred development fees 432
Deferred gain on sale leaseback of
Mobile, Alabama office building 305
Unit closing reserve 106 755
Other 1,453 834
Total deferred tax assets 23,479 21,017
Deferred tax liabilities:
Depreciation 26,686 27,569
Assets held for disposal 975
Prepaid deductions 998 741
Retirement plans 765 422
Other 1,277 1,449
Total deferred tax liabilities 30,701 30,181
Net deferred tax liability $ (7,222) $ (9,164)
At June 6, 1998, the Company had net operating loss carryforwards for
tax purposes of approximately $5.6 million as a result of the
acquisition of Tias, Inc., which expire through 2005. The Company's net
operating loss carryforwards are subject to an annual limitation due to
the change 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)
1998 1997 1996
Statutory federal income taxes $ 15,761 $ 13,585 $ (810)
State income taxes, net of
federal income tax benefit 1,954 1,721 (68)
Tax credits (1,146) (1,220) (1,349)
Other, net (618) (318) 576
$ 15,951 $ 13,768 $ (1,651)
The effective income tax rate (benefit) was 35.4%, 35.5%, and
(71.4)% in 1998, 1997, and 1996, respectively. The high effective tax
benefit rate for 1996 is attributable to the tax credits which were
available to the Company.
8. 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
contribution to the Plan is based on the employee's pre-tax contribution and
years of service. The Company contributes 20% of the employee's pre-tax
contribution after three years of service, 30% after ten years of service and
40% after 20 years of service. The Company's contributions to the trust fund
approximated $0.2 million for each of 1998, 1997, and 1996.
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 except that, in
1998, the Plan was amended to allow for 100% deferral of annual earnings
including bonus. The Company does not provide a matching contribution on
pre-tax contributions in excess of the dollar limit under Section 402(g) of the
Internal Revenue Code. The Company's contributions under the Plan
approximated $0.1 million for each of 1998, 1997, and 1996. Company assets
earmarked to pay benefits under the Plan are held by a rabbi trust. Assets and
liabilities of a rabbi trust must be accounted for as if they are assets or
liabilities of the Company, therefore, all earnings and expenses are recorded
in the Company's financial statements. The Plan's assets and liabilities,
which approximated $13.6 million and $10.8 million in 1998 and 1997,
respectively, are included in Other Assets and Other Liabilities in the
Consolidated Balance Sheets, except for the investment in Ruby Tuesday common
stock and the related liability payable in Ruby Tuesday common stock which
are reflected in Shareholders' Equity 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 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 1998, 1997, or 1996.
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 $0.9 million, $1.0 million, and $0.6 million for 1998,
1997, and 1996, 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 under the Plan approximated $0.2 million, $(0.7) million, and
$0.3 million in 1998, 1997, and 1996, respectively.
To provide a source for the payment 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 $4.9 million at June 6, 1998. The
Company maintains a rabbi trust to hold the policies and death benefits as
they are received.
The following table 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
Retirement Plan Plan and Management Retirement Plan
1998 1997 1996 1998 1997 1996
Components of pension expense (income):
Service cost......................... $ $ $ $ 123 $ 43 $ 96
Interest cost........................ 337 329 334 740 207 525
Actual return on plan assets......... (1,018) (661) (787)
Amortization and deferral............ 630 313 497 287 90 294
$ (51) $ (19) $ 44 $ 1,150 $ 340 $ 915
Plan assets at fair value............ $ 7,883 $ 4,730 $ 4,502 $ 0 $ 0 $ 0
Actuarial present value of
projected benefit obligations:
Accumulated benefit obligations:
Vested............................ 6,929 4,286 4,432 8,241 7,315 7,479
Nonvested......................... 1,017 109 63
Provision for future salary
increases........................ 1,638 1,964 1,960
Total projected benefit obligations... 6,929 4,286 4,432 10,896 9,388 9,502
Excess (deficit) of plan assets over
projected benefit obligations........ 954 444 70 (10,896) (9,388) (9,502)
Unrecognized net (gain) loss.......... (76) 318 607 1,843 703 235
Unrecognized prior service cost....... 502 671 840
Unrecognized net transition obligation 259 324 389 836 939 1,510
Additional minimum liability.......... (1,543) (643) (1,164)
Prepaid (accrued) pension cost........ $ 1,137 $ 1,086 $ 1,066 $(9,258) $(7,718) $ (8,081)
Amounts recorded to recognize the minimum liability required for defined
benefit pension plans whose accumulated benefits exceed assets amounted to
$1.5 million in 1998 and $0.6 million in 1997. A corresponding amount was
recognized as an intangible asset to the extent of unrecognized prior service
cost and unrecognized transition obligation. At June 6, 1998, $0.8 million of
excess minimum liability resulted in a reduction of shareholders' equity, net
of income taxes, of $0.5 million. There was no corresponding reduction of
shareholders' equity in 1997.
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 was 7.50%, 8.25%, and 7.75% for 1998, 1997, and
1996, respectively. The rate of increase in compensation levels for the
Executive Supplemental Pension Plan and Management Retirement Plan was 4%
for all three years. The expected long-term rate of return on plan assets
for the Retirement Plan was 10% for all three years.
9. Capital Stock, Options and Bonus Plans
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 6, 1998.
The Ruby Tuesday, Inc. 1996 Stock Incentive Plan - The Ruby Tuesday,
Inc. 1996 Stock Incentive Plan 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 the
Plan have been at the prevailing market value at the time of grant. At
June 6, 1998, the Company had reserved a total of 2,201,000 shares of
common stock for this Plan.
The Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan
for Directors - The Ruby Tuesday, Inc. Stock Incentive and Deferred
Compensation Plan for Directors is a continuation of the similarly titled
1994 Morrison plan. Under this plan, non-employee directors have the
opportunity 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. All options awarded under
the Plan have been at the prevailing market value at the time of grant. A
Committee, appointed by the Board, administers the Plan on behalf of the
Company. At June 6, 1998, the Company had reserved 180,000 shares of
common stock for the Plan.
The Ruby Tuesday, Inc. 1996 Non-Executive Stock Incentive Plan - The
Ruby Tuesday, Inc. 1996 Non-Executive Stock Incentive Plan 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 the
Plan have been at the prevailing market value at the time of grant. At
June 6, 1998, the Company had reserved a total of 2,981,000 shares of
common stock for this Plan.
In March 1996, the number and exercise price of all outstanding
options were adjusted for the Distribution and the concurrent reverse one-
for-two split of the Company shares. In May 1998, the number and exercise
price of all outstanding options were adjusted for the stock dividend
declared by the Company to recordholders of Company common stock on May 8,
1998, pursuant to which one additional share was issued for every share
held.
In addition to the above plans, stock options are outstanding under a
terminated plan, the Ruby Tuesday, Inc. Stock Bonus and Non-Qualified
Stock Option Plan, which was effective from 1986 to 1992. Options to
purchase 411,000 shares remain outstanding under the terms of the Plan at
June 6, 1998.
The Company applies APB Opinion No. 25 and related interpretations
in accounting for its employee stock options. In contrast to the
intrinsic value based method employed by APB 25, Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
("FAS 123") utilizes a fair value based method. FAS 123 requires the use
of option valuation models developed for estimating the fair value of
traded options which are fully transferable and have no vesting
restrictions. Option valuation models also utilize highly subjective
assumptions such as expected stock price volatility. Changes in the
assumptions can materially impact the fair value estimate and, in
management's opinion, do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Since the
Company has elected to account for its employee stock options in
accordance with APB 25, the required pro forma disclosures as if the
option valuation models were used are presented below in accordance with
FAS 123.
All stock options are awarded at the prevailing market rate on the
date of grant; therefore, under the intrinsic value method employed by
APB 25, no compensation expense is recognized. For purposes of FAS 123
disclosure, the estimated fair value of the options is expensed over the
vesting period of the options. Fair value was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions for 1998, 1997, and 1996:
1998 1997 1996
Risk-free interest rate 5.75% 6.00% 6.00%
Expected dividend yield .00-.69% .00% .00%
Stock price volatility factor 0.412 0.373 0.373
Expected life of options (in years) 3-7 3-7 3-7
If the Company had adopted FAS 123 in accounting for its stock
options granted in fiscal years 1998, 1997 and 1996, its net income and
earnings per share would approximate the pro forma amounts below (in
thousands except for per share data):
1998 1997 1996
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
Net income (loss) $29,080 $26,194 $25,045 $22,331 $(2,884) $(4,671)
Earnings per share:
Basic $ 0.88 $ 0.79 $ 0.71 $ 0.63 $ (0.08) $ (0.13)
Diluted $ 0.84 $ 0.76 $ 0.70 $ 0.62 $ (0.08) $ (0.13)
The following table summarizes the activity in options under these
stock option plans:
(In Thousands Except Per-Share Data) Number of Shares Ubder Option
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
1998 Price 1997 Price 1996 Price
Beginning of year....... 5,526 $ 8.87 4,930 $ 8.74 5,390 $ 7.75
Adjustment due to the
Distribution and
reverse stock split.... (2,736) $ 7.42
Granted................. 518 $12.87 1,338 $ 8.90 2,680 $ 9.28
Exercised .............. (1,024) $ 8.76 (312) $ 5.44 (174) $ 5.07
Forfeited............... (226) $ 9.23 (430) $ 8.90 (230) $10.31
End of year............. 4,794 $ 9.31 5,526 $ 8.87 4,930 $ 8.74
Exercisable............. 1,533 $ 8.64 1,766 $ 8.51 1,616 $ 7.86
Outstanding options'
prices ................ $ 4.62-$15.28 $ 4.35-$15.29 $ 4.05-$15.29
Exercised options'
prices................. $ 4.62-$14.22 $ 4.05-$ 8.55 $ 3.81-$ 7.05
Granted options'
prices................. $10.75-$13.50 $ 8.07-$10.63 $ 6.81-$11.75
Weighted avg. fair value
of options granted
during the year........ $ 4.27 $ 3.30 $ 1.88
The weighted average remaining contractual life of the options
outstanding at June 6, 1998 was 3.03 years.
10. Commitments and Contingencies
At June 6, 1998, the Company was committed under letters of credit of
$7.1 million 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.
11. Subsequent Event
During May and June 1998, the Company entered into a series of
agreements with three franchisees. These agreements provide, among other
things, for the sale of four Florida, three Minnesota, and six in New
York. The closing of the sale of these units, expected to occur in the
first quarter of 1999, is subject to various conditions, including the
transfer of liquor licenses, third party consents and availability of
financing. Upon completion of the sale, the 13 units will be operated as
Ruby Tuesday restaurants under separate franchising agreements and the
Company will receive an aggregate purchase price of $16.5 million, of
which approximately $9.5 - $10.5 million will be paid in cash. The
remaining amount will be in the form of interest bearing notes due through
2009. The sale of these units, anticipated to close late in the first
quarter of fiscal 1999, is expected to result in a pre-tax gain. Fiscal
1998 revenues from these 13 units totaled $26.5 million, with operating
profits of $1.5 million.
The Company also entered into development agreements with the
franchisees whereby each of them will open a minimum of nine franchise
restaurants in their respective areas over the next five to six years.
For these development rights, fees totaling $0.3 million will be paid to
the Company upon the completion of certain financing arrangements.
12. Supplemental Quarterly Financial Data (Unaudited)
Quarterly financial results for the years ended June 6, 1998 and May 31,
1997, are summarized below. All quarters are composed of 13 weeks, except for
the quarter ended June 6, 1998, which includes 14 weeks.
(In Thousands Except Per-Share Data)
For The Year Ended June 6, 1998:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
Revenues $174,099 $170,283 $181,602 $185,436 $711,420
Gross profit* $ 33,460 $ 31,402 $ 38,596 $ 37,866 $141,324
Income before income taxes $ 9,854 $ 7,333 $ 14,187 $ 13,657 $ 45,031
Provision for income taxes 3,474 2,612 5,026 4,839 15,951
Net income $ 6,380 $ 4,721 $ 9,161 $ 8,818 $ 29,080
Earnings per share:
Basic $ 0.19 $ 0.14 $ 0.28 $ 0.27 $ 0.88
Diluted $ 0.18 $ 0.13 $ 0.27 $ 0.26 $ 0.84
(In Thousands Except Per-Share Data)
For The Year Ended May 31, 1997
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
Revenues $157,282 $156,318 $172,605 $169,202 $655,407
Gross profit* $ 28,261 $ 27,956 $ 34,807 $ 32,606 $123,630
Income before income taxes $ 8,509 $ 6,116 $ 12,771 $ 11,417 $ 38,813
Provision for income taxes 3,020 2,170 4,536 4,042 13,768
Net income $ 5,489 $ 3,946 $ 8,235 $ 7,375 $ 25,045
Earnings per share:
Basic $ 0.16 $ 0.11 $ 0.23 $ 0.21 $ 0.71
Diluted $ 0.15 $ 0.11 $ 0.23 $ 0.21 $ 0.70
* The Company defines gross profit as revenue less cost of merchandise,
payroll and related costs, and other operating costs and expenses.
Ruby Tuesday, Inc. common stock is publicly traded on the New York Stock
Exchange under the ticker symbol RI. The following table sets forth the
reported high and low prices of the common stock adjusted for the stock
dividend referred to in Note 9 of Notes to Consolidated Financial Statements
and cash dividends paid thereon for each quarter during fiscal 1998 and 1997.
Fiscal Year Ended June 6, 1998 Fiscal Year Ended May 31, 1997
Per Share Per Share
Cash Cash
Quarter High Low Dividends Quarter High Low Dividends
First $13.91 $10.50 _ First $11.44 $ 9.69 _
Second $14.25 $12.63 _ Second $11.00 $ 7.69 _
Third $13.25 $12.10 $0.045 Third $ 9.50 $ 8.13 _
Fourth $17.78 $12.82 _ Fourth $10.88 $ 8.57 _
On June 30, 1998, the Company's Board of Directors declared a semi-annual
cash dividend of $0.045 per share payable on July 31, 1998, to shareholders of
record on July 10, 1998. As of July 30, 1998, these were approximately 6,220
holders of record of the Company's common stock.
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. and Subsidiaries as of June 6, 1998 and May 31, 1997,
and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three fiscal years in the period ended
June 6, 1998. 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 6, 1998 and May 31, 1997,
and the consolidated results of their operations and their cash flows for
each of the three fiscal years in the period ended June 6, 1998, 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.
/s/ Ernst & Young LLP
Birmingham, Alabama
June 23, 1998