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EX-31.1 - 31-1 CEO CERTIFICATION - RUBY TUESDAY INCex31-1_ceo.htm
EX-32.2 - 32-2 CFO CERTIFICATION - RUBY TUESDAY INCex32-2_cfo.htm
EX-31.2 - 31-2 CFO CERTIFICATION - RUBY TUESDAY INCex31-2_cfo.htm
EX-32.1 - 32-1 CEO CERTIFICATION - RUBY TUESDAY INCex32-1_ceo.htm
EX-10.3 - 10-3 3RD AMENDMENT TO 2007 RESTATED ESP 2009 - RUBY TUESDAY INCex10-3_3rdamendmentesp.htm
EX-10.1 - 10-1 RESTATED MORRISON RETIREMENT PLAN - RUBY TUESDAY INCex10-1_morrisonretireplan.htm
EX-10.2 - 10-2 RESTATED SALARY DEFERRAL PLAN - RUBY TUESDAY INCex10-2_salarydefplan.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from __________ to _________
 
 
______________
 
 
RUBY TUESDAY, INC.
(Exact name of registrant as specified in charter)
 
 


GEORGIA
 
63-0475239
(State of incorporation or organization)
 
(I.R.S. Employer identification no.)

150 West Church Avenue, Maryville, Tennessee 37801
(Address of principal executive offices)  (Zip Code)
 
        Registrant’s telephone number, including area code: (865) 379-5700
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o    Accelerated filer x    Non-accelerated filer o    Smaller reporting company o

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

64,493,845
(Number of shares of common stock, $0.01 par value, outstanding as of January 4, 2010)
 
 

 

 
RUBY TUESDAY, INC.
 

 
Page
PART I - FINANCIAL INFORMATION
 
 
     ITEM 1. FINANCIAL STATEMENTS
 
 
                CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
 
                DECEMBER 1, 2009 AND JUNE 2, 2009
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
                FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED
 
                DECEMBER 1, 2009 AND DECEMBER 2, 2008
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH
 
                FLOWS FOR THE TWENTY-SIX WEEKS ENDED
 
                DECEMBER 1, 2009 AND DECEMBER 2, 2008
 
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL
 
                STATEMENTS
 
 
                OF FINANCIAL CONDITION AND RESULTS
 
                OF OPERATIONS
 
 
                MARKET RISK
 
 
 
PART II - OTHER INFORMATION
 
 
     SIGNATURES



 
2

 

Special Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains various forward-looking statements, which represent our expectations or beliefs concerning future events, including one or more of the following:  future financial performance and restaurant growth (both Company-owned and franchised), future capital expenditures, future borrowings and repayments of debt, availability of financing on terms attractive to the Company, payment of dividends, stock repurchases, and restaurant and franchise acquisitions and refranchises.  We caution the reader that a number of important factors and uncertainties could, individually or in the aggregate, cause our actual results to differ materially from those included in the forward-looking statements (such statements include, but are not limited to, statements relating to cost savings that we estimate may result from any programs we implement, our estimates of future capital spending and free cash flow, and our targets for annual growth in same-restaurant sales and average annual sales per restaurant), including, without limitation, the following:

·  
general economic conditions;

·  
changes in promotional, couponing and advertising strategies;

·  
changes in our guests’ disposable income;

·  
consumer spending trends and habits;

·  
increased competition in the restaurant market;

·  
laws and regulations affecting labor and employee benefit costs, including further potential increases in state and federally mandated minimum wages;

·  
guests’ acceptance of changes in menu items;

·  
guests’ acceptance of our development prototypes and remodeled restaurants;

·  
mall-traffic trends;

·  
changes in the availability and cost of capital;

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

·  
costs and availability of food and beverage inventory;

·  
our ability to attract qualified managers, franchisees and team members;

·  
impact of adoption of new accounting standards;

·  
impact of food-borne illnesses resulting from an outbreak at either Ruby Tuesday or other restaurant concepts;

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

·  
significant fluctuations in energy prices.


 
3

 

PART I — FINANCIAL INFORMATION
ITEM 1.
 
RUBY TUESDAY, INC.
(IN THOUSANDS EXCEPT PER-SHARE DATA)
 
(UNAUDITED)
 
   
DECEMBER 1,
   
JUNE 2,
 
   
2009
   
2009
 
       
Assets
 
(NOTE A)
 
Current assets:
           
      Cash and short-term investments
  $ 6,043     $ 9,760  
      Accounts and notes receivable, net
    12,705       8,095  
      Inventories:
               
        Merchandise
    16,134       12,838  
        China, silver and supplies
    8,541       8,187  
      Income tax receivable
    2,845       8,632  
      Deferred income taxes
    13,918       15,918  
      Prepaid rent and other expenses
    12,267       13,423  
      Assets held for sale
    8,748        16,120  
          Total current assets
    81,201       92,973  
                 
Property and equipment, net
    966,135       985,099  
Notes receivable, net
    447       713  
Other assets
    45,976       45,411  
                 
          Total assets
  $ 1,093,759     $ 1,124,196  
 
Liabilities & shareholders’ equity
               
Current liabilities:
               
      Accounts payable
  $ 23,724     $ 21,859  
      Accrued liabilities:
               
        Taxes, other than income taxes
    17,170       19,120  
        Payroll and related costs
    12,353       12,688  
        Insurance
    9,324       8,369  
        Deferred revenue – gift cards
    8,010       8,046  
        Rent and other
    26,503       27,076  
      Current portion of long-term debt, including capital leases
    14,624       16,841  
          Total current liabilities
    111,708       113,999  
                 
Long-term debt and capital leases, less current maturities
    350,835       476,566  
Deferred income taxes
    30,698       20,706  
Deferred escalating minimum rent
    41,889       41,010  
Other deferred liabilities
    56,965       55,549  
          Total liabilities
    592,095       707,830  
                 
Commitments and contingencies
               
                 
Shareholders’ equity:
               
      Common stock, $0.01 par value; (authorized: 100,000 shares;
               
        issued: 64,494 shares at 12/01/09; 52,806 shares at 6/02/09)
    645       528  
      Capital in excess of par value
    98,878       20,804  
      Retained earnings
    413,526       406,951  
      Deferred compensation liability payable in
               
        Company stock
    2,097       2,200  
      Company stock held by Deferred Compensation Plan
    (2,097 )     (2,200 )
      Accumulated other comprehensive loss
    (11,385 )     (11,917 )
      501,664       416,366  
                 
          Total liabilities & shareholders’ equity
  $ 1,093,759     $ 1,124,196  
 
                   The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
4

 
 
RUBY TUESDAY, INC.
(IN THOUSANDS EXCEPT PER-SHARE DATA)
 
(UNAUDITED)
 
   
THIRTEEN WEEKS ENDED
   
TWENTY-SIX WEEKS ENDED
 
   
DECEMBER 1,
   
DECEMBER 2,
   
DECEMBER 1,
   
DECEMBER 2,
 
   
2009
   
2008
   
2009
   
2008
 
   
(NOTE A)
   
(NOTE A)
 
Revenue:
                       
                         
     Restaurant sales and operating revenue
  $ 271,882     $ 287,697     $ 571,183     $ 608,913  
     Franchise revenue
    1,582       2,081       2,893       4,866  
      273,464       289,778       574,076       613,779  
Operating costs and expenses:
                               
     Cost of merchandise
    78,555       78,847       168,882       166,478  
     Payroll and related costs
    95,784       105,239       196,243       215,037  
     Other restaurant operating costs
    60,323       64,846       121,200       133,457  
     Depreciation and amortization
    16,285       19,326       32,566       39,455  
     Selling, general and administrative,
                               
        net of support service fee income
                               
        for the thirteen and twenty-six week
                               
        periods totaling $836 and $2,064
                               
        in fiscal 2010 and $1,515 and $3,287
                               
        in fiscal 2009, respectively
    16,388       24,815       35,408       51,075  
     Closures and impairments
    (52 )     37,174       538       39,083  
     Goodwill impairment
            18,957               18,957  
     Equity in losses of unconsolidated
                               
        franchises
    760       577       988       78  
     Interest expense, net
    4,601       9,888       9,989       19,688  
      272,644       359,669       565,814       683,308  
Income/(loss) before income taxes
    820       (69,891 )     8,262       (69,529 )
Provision/(benefit) for income taxes
    389       (32,472 )     1,687       (32,395 )
                                 
Net income/(loss)
  $ 431     $ (37,419 )   $ 6,575     $ (37,134 )
                                 
Earnings/(loss) per share:
                               
                                 
      Basic
  $ 0.01     $ (0.73 )   $ 0.11     $ (0.72 )
                                 
      Diluted
  $ 0.01     $ (0.73 )   $ 0.11     $ (0.72 )
                                 
Weighted average shares:
                               
                                 
      Basic
    63,319       51,395       59,723       51,388  
                                 
      Diluted
    63,482       51,395       59,889       51,388  
                                 
Cash dividends declared per share
  $ -     $ -     $ -     $ -  
                                 
 
                 The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 

 
 

 
5

 

RUBY TUESDAY, INC.
(IN THOUSANDS)
 
(UNAUDITED)
 
 
TWENTY-SIX WEEKS ENDED
 
  
 
DECEMBER 1,
2009
   
DECEMBER 2,
2008
 
   
 
       
   
(NOTE A)
 
Operating activities:
           
Net income/(loss)
  $ 6,575     $ (37,134 )
Adjustments to reconcile net income/(loss) to net cash
               
  provided by operating activities:
               
  Depreciation and amortization
    32,566       39,455  
  Amortization of intangibles
    331       388  
  Provision for bad debts
    1,070       1,765  
  Deferred income taxes
    11,102       (23,390
  Loss on impairments, including disposition of assets
    154       37,937  
  Goodwill impairment
            18,957  
  Equity in losses of unconsolidated franchises
    988       78  
  Share-based compensation expense
    5,631       3,956  
  Other
    1,158       934  
  Changes in operating assets and liabilities:
               
     Receivables
    (5,481 )     305  
     Inventories
    (3,650 )     (1,002 )
     Income taxes
    5,787       (4,478 )
     Prepaid and other assets
    (1,155 )     6,966  
     Accounts payable, accrued and other liabilities
    3,078       (4,910 )
  Net cash provided by operating activities
    58,154       39,827  
 
Investing activities:
               
Purchases of property and equipment
    (9,891 )     (11,247 )
Proceeds from disposal of assets
    3,589       2,811  
Reductions in Deferred Compensation Plan assets
    205       1,060  
Other, net
    (951 )     (1,043 )
  Net cash used by investing activities
    (7,048 )     (8,419 )
 
Financing activities:
               
Net payments on revolving credit facility
    (117,800 )     (31,600 )
Principal payments on other long-term debt
    (10,148 )     (8,914 )
Proceeds from issuance of stock, net of fees
    73,125          
  Net cash used by financing activities
    (54,823 )     (40,514 )
                 
Decrease in cash and short-term investments
    (3,717 )     (9,106 )
Cash and short-term investments:
               
  Beginning of year
    9,760       16,032  
  End of quarter
  $ 6,043     $ 6,926  
Supplemental disclosure of cash flow information:
               
      Cash paid/(received) for:
               
        Interest, net of amount capitalized
  $ 10,949     $ 18,168  
        Income taxes, net
  $ (15,194 )   $ (5,363 )
Significant non-cash investing and financing activities:
               
        Retirement of fully depreciated assets
  $ 3,262     $ 13,581  
        Reclassification of properties (from)/to assets held for sale or
               
          receivables
  $ (4,525 )   $ 12,199  
 
                 The accompanying notes are an integral part of the condensed consolidated financial statements.
 

 
6

 

 
NOTE A – BASIS OF PRESENTATION
 
Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” “we” or the “Company”), owns and operates Ruby Tuesday® casual dining restaurants and two Wok Hay restaurants.  We also franchise the Ruby Tuesday concept in select domestic and international markets.  The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting only of normal recurring entries) considered necessary for a fair presentation have been included.  The preparation of financial statements in conformity with U.S. 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.  Operating results for the 13- and 26-week periods ended December 1, 2009 are not necessarily indicative of results that may be expected for the year ending June 1, 2010.
 
The condensed consolidated balance sheet at June 2, 2009 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
 
We have performed an evaluation of events that occurred after December 1, 2009, the balance sheet date, but before January 8, 2010, the date the Condensed Consolidated Financial Statements were issued.
 
For further information, refer to the consolidated financial statements and footnotes thereto included in RTI’s Annual Report on Form 10-K for the fiscal year ended June 2, 2009.
 
 
On July 28, 2009, we sold 11.5 million shares of Ruby Tuesday, Inc. common stock in an underwritten public offering at $6.75 per share, less underwriting discounts.  The amount sold included 1.5 million shares sold in connection with the exercise of an over-allotment option granted to the underwriters.  The shares sold were issued pursuant to a shelf registration statement on Form S-3, which was filed with the SEC on June 25, 2009.  We received approximately $73.1 million in net proceeds from the sale of the shares, after deducting underwriting discounts and offering expenses.  Wells Fargo Securities and BofA Merrill Lynch acted as joint book-running managers for the offering and SunTrust Robinson Humphrey, Inc. and Morgan Keegan & Company, Inc. were co-managers of the offering.  The net proceeds were used to repay indebtedness under our Credit Facility.
 
Basic earnings/(loss) per share is computed by dividing net income/(loss) by the weighted average number of common shares outstanding during each period presented.  Diluted earnings/(loss) per share gives effect to restricted stock and options outstanding during the applicable periods.  The stock options and restricted shares included in the diluted weighted average shares outstanding totaled 0.2 million for both the 13 and 26 weeks ended December 1, 2009.  Due to the net loss for the 13 and 26 weeks ended December 2, 2008, all then outstanding share-based awards were excluded from the computation of diluted loss per share because the effect would be anti-dilutive.
 
Stock options with an exercise price greater than the average market price of our common stock and certain options with unrecognized compensation expense do not impact the computation of diluted earnings/(loss) per share because the effect would be anti-dilutive.  For both the 13 and 26 weeks ended December 1, 2009, there were 5.1 million unexercised options that were excluded from these calculations.  Further, for the 13 and 26 weeks ended December 1, 2009, 1.0 million and 0.9 million restricted shares, respectively, were excluded.  For the 13 and 26 weeks ended December 2, 2008, there were 6.9 million unexercised stock options and 1.4 million restricted shares which were excluded from these calculations.
 

 
7

 

NOTE C – FRANCHISE PROGRAMS
 
As of December 1, 2009, we held a 50% equity interest in each of six franchise partnerships which collectively operate 70 Ruby Tuesday restaurants.  We apply the equity method of accounting to all 50%-owned franchise partnerships.  Also, as of December 1, 2009, we held a 1% equity interest in each of seven franchise partnerships, which collectively operate 47 restaurants, and no equity interest in various traditional domestic and international franchises, which collectively operate 109 restaurants.
 
Beginning in May 2005, under the terms of the franchise operating agreements, we required all domestic franchisees to contribute a percentage, currently 0.5%, of monthly gross sales to a national advertising fund formed to cover their pro rata portion of the production and airing costs associated with our national advertising campaign.  Under the terms of those agreements, we can charge up to 3.0% of monthly gross sales for this national advertising fund.
 
Advertising amounts received from domestic franchisees are considered by RTI to be reimbursements, recorded on an accrual basis as earned, and have been netted against selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
 
See Note L to the Condensed Consolidated Financial Statements for a discussion of our franchise partnership working capital credit facility and our related guarantees.
 
NOTE D – ACCOUNTS AND NOTES RECEIVABLE
 
Accounts and notes receivable – current consist of the following (in thousands):
 
   
December 1, 2009
   
June 2, 2009
 
             
Rebates receivable
  $ 610     $ 590  
Amounts due from franchisees
    7,598       3,797  
Other receivables
    3,874       1,822  
Current portion of notes receivable
    5,627       6,434  
      17,709       12,643  
Less allowances for doubtful notes and equity
               
       method losses
    5,004       4,548  
    $ 12,705     $ 8,095  
 
We negotiate purchase arrangements, including price terms, with designated and approved suppliers on behalf of us and our franchise system.  We receive various volume discounts and rebates based on purchases for our Company-owned restaurants from numerous suppliers.
 
Amounts due from franchisees consist of royalties, license and other miscellaneous fees, a substantial portion of which represent prior month's billings.  Also included in amounts due from franchisees is the current portion of the straight-lined rent receivable from franchise sublessees and the amount to be collected in exchange for our guarantees of certain franchise partnership debt.
 
We defer recognition of franchise fee revenue for any franchise partnership with negative cash flows at times when the negative cash flows are deemed to be anything other than temporary and the franchise has either borrowed directly from us or through a facility for which we provide a guarantee.  We also do not recognize franchise fee revenue from franchises with fees in excess of 60 days past due.  Accordingly, we have deferred recognition of a portion of franchise revenue from certain franchisees.  Unearned income for franchise fees was $4.0 million and $1.2 million as of December 1, 2009 and June 2, 2009, respectively, which are included in Other deferred liabilities and/or Accrued liabilities – rent and other in the Condensed Consolidated Balance Sheets.  The increase in unearned income is primarily due to an increase in unearned fees due from a traditional franchise ($1.6 million), for whom we agreed to defer fees for a limited period of time while the franchise negotiated with its lenders for extended terms, and a $1.0 million increase in unearned fees due from our franchise partnerships as a result of fee deferrals primarily during the second quarter of the current year.

 
8

 

As of December 1, 2009, other receivables consisted primarily of amounts due for third party gift card sales, expected proceeds in connection with the Visa/MasterCard antitrust class action litigation in which we were a class member, and amounts due from an insurance provider in connection with a settled, but not paid, general liability claim.  Included in other receivables at June 2, 2009 are amounts due for third party gift card sales and amounts due from various landlords.
 
Notes receivable consist of the following (in thousands):

   
December 1, 2009
   
June 2, 2009
 
             
Notes receivable from domestic franchisees
  $ 8,592     $ 9,644  
Less current maturities (included in accounts and
               
       notes receivable)
    5,627       6,434  
      2,965       3,210  
Less allowances for doubtful notes and equity
               
       method losses, noncurrent
    2,518       2,497  
Total notes receivable, net - noncurrent 
  $ 447     $ 713  

Notes receivable from domestic franchisees generally arose between fiscal 1997 and fiscal 2002 when Company-owned restaurants were sold to new franchise partnerships (“refranchised”).  These notes, when issued at the time of commencement of the franchise partnership’s operations, generally allowed for deferral of interest during the first one to three years and required only the payment of interest for up to six years from the inception of the note.

Twelve current franchisees received acquisition financing from RTI as part of refranchising transactions in prior periods.  The amounts financed by RTI approximated 36% of the original purchase prices.  Eight of these twelve franchisees have paid their acquisition notes in full as of December 1, 2009.
 
Notes receivable from domestic franchisees also include amounts advanced to certain of our franchise partnerships under short-term line of credit arrangements in order to assist the franchises with operating cash flow needs during the current economic downturn.  These arrangements are not required by our franchise operating agreements and may be discontinued in the future.
 
While certain of our domestic franchisees are a few months behind in their franchise fees as previously discussed, as of December 1, 2009, all the domestic franchisees were making interest and/or principal payments on a monthly basis in accordance with the current terms of their notes.  During the second quarter of fiscal 2010, the note associated with one of our franchise partnerships was restructured to extend the maturity date of the note by seven months and require interest only payments for a certain period of time.  All of the refranchising notes accrue interest at 10.0% per annum.
 
The allowance for doubtful notes represents our best estimate of losses inherent in the notes receivable at the balance sheet date.  During the 13 and 26 weeks ended December 1, 2009, we recorded bad debt expense of $0.8 million and $1.1 million, respectively, based on our estimate of the extent of those losses.  On September 1, 2009, we forgave a $1.3 million note owed by our Utah franchise, for which we had a reserve of $1.2 million recorded in our allowance for doubtful notes prior to the forgiveness.
 
Also included in the allowances for doubtful notes at December 1, 2009 and June 2, 2009, are $1.7 million and $0.9 million, respectively, of our portion of the equity method losses of certain of our 50%-owned franchise partnerships which was in excess of our recorded investment in those partnerships.
 
NOTE E – ASSETS HELD FOR SALE, PROPERTY, EQUIPMENT, AND OPERATING LEASES
 
Amounts included in assets held for sale at December 1, 2009 totaled $8.7 million, primarily consisting of parcels of land upon which we have no intention to build restaurants, land and buildings of closed restaurants, and various liquor licenses.  During the 13 weeks ended December 1, 2009, we sold one property and three liquor licenses for a negligible net gain.  During the 26 weeks ended December 1, 2009, we sold four surplus properties and four liquor licenses at a net gain of $0.8 million.  Cash proceeds, net of broker fees, from these sales during the 13 and 26 weeks ended December 1, 2009 totaled $0.8 million and $3.4 million, respectively.
 

 
9

 

Property and equipment, net, is comprised of the following (in thousands):
 
   
December 1, 2009
   
June 2, 2009
 
Land
  $ 218,416     $ 218,452  
Buildings
    460,349       459,335  
Improvements
    409,034       407,962  
Restaurant equipment
    277,412       274,922  
Other equipment
    91,754       90,684  
Construction in progress and other*
    26,185       20,164  
      1,483,150       1,471,519  
Less accumulated depreciation and amortization
    517,015       486,420  
    $ 966,135     $ 985,099  
 
* Included in Construction in progress and other as of December 1, 2009 and June 2, 2009 are $22.0 million and $17.6 million, respectively, of assets held for sale that are not classified as such in the Condensed Consolidated Balance Sheets as we do not expect to sell these assets within the next 12 months.  These assets primarily consist of parcels of land upon which we have no intention to build restaurants.
 
Approximately 52% of our 670 restaurants are located on leased properties.  Of these, approximately 62% are land leases only; the other 38% are for both land and building.  The initial terms of these leases expire at various dates over the next 20 years.  These leases may also contain required increases in minimum rent at varying times during the lease term and have options to extend the terms of the leases at a rate that is included in the original lease agreement.  Most of our leases require the payment of additional (contingent) rent that is based upon a percentage of restaurant sales above agreed upon sales levels for the year.  These sales levels vary for each restaurant and are established in the lease agreements.  We recognize contingent rental expense (in annual as well as interim periods) prior to the achievement of the specified target that triggers the contingent rental expense, provided that achievement of that target is considered probable.
 
NOTE F – LONG-TERM DEBT AND CAPITAL LEASES
 
Long-term debt and capital lease obligations consist of the following (in thousands):
 
   
December 1, 2009
   
June 2, 2009
 
             
Revolving credit facility
  $ 201,300     $ 319,100  
Senior notes:
               
Series A, due April 2010
    72,550       77,146  
Series B, due April 2013
    52,330       55,646  
Mortgage loan obligations
    39,105       41,326  
Capital lease obligations
    174       189  
      365,459       493,407  
Less current maturities
    14,624       16,841  
    $ 350,835     $ 476,566  

On November 19, 2004, we entered into a five-year revolving credit agreement (the “Credit Facility”) to provide capital for general corporate purposes.  On February 28, 2007, we amended and restated our Credit Facility such that the aggregate amount we may borrow increased to $500.0 million.  This amount included a $50.0 million subcommitment for the issuance of standby letters of credit and a $50.0 million subcommitment for swingline loans.  Due to concerns that at some point in the future we might not be in compliance with certain of our debt covenants, we entered into an additional amendment of the amended and restated Credit Facility on May 21, 2008.
 
The May 21, 2008 amendment to the Credit Facility, as well as a similarly-dated amendment and restatement of the notes issued in the Private Placement as discussed below, eased financial covenants regarding minimum fixed charge coverage ratio and maximum funded debt ratio.  We are currently in
 

 
10

 

compliance with our debt covenants.  In exchange for the new covenant requirements, in addition to higher interest rate spreads and mandatory reductions in capacity and/or prepayments of principal, the amendments also imposed restrictions on future capital expenditures and require us to achieve certain leverage thresholds for two consecutive fiscal quarters before we may pay dividends or repurchase any of our stock.
 
Following the May 21, 2008 amendment to the Credit Facility, through a series of scheduled quarterly and other required reductions, our original $500.0 million capacity has been reduced, as of December 1, 2009, to $420.9 million.  We expect the capacity of the Credit Facility will be reduced by $19.5 million during the remainder of fiscal 2010.

Under the Credit Facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize.  Our options for the rate are the Base Rate or an adjusted LIBO Rate plus an applicable margin.  The Base Rate is defined to be the higher of the issuing bank’s prime lending rate or the Federal Funds rate plus 0.5%.  The applicable margin is zero to 2.5% for the Base Rate loans and a percentage ranging from 1.0% to 3.5% for the LIBO Rate-based option.  We pay commitment fees quarterly ranging from 0.2% to 0.5% on the unused portion of the Credit Facility.

As further discussed in Note B to the Condensed Consolidated Financial Statements, on July 28, 2009, we closed an underwritten public offering of 11.5 million shares of Ruby Tuesday, Inc. common stock at $6.75 per share, less underwriting discounts.  We received approximately $73.1 million in net proceeds from the sale of the shares, after deducting underwriting discounts and offering expenses.  The net proceeds were used to repay indebtedness under our Credit Facility.
 
Under the terms of the Credit Facility, we had borrowings of $201.3 million with an associated floating rate of interest of 1.90% at December 1, 2009.  As of June 2, 2009, we had $319.1 million outstanding with an associated floating rate of interest of 2.96%.  After consideration of letters of credit outstanding, we had $205.8 million available under the Credit Facility as of December 1, 2009.  The Credit Facility will mature on February 23, 2012.
 
On April 3, 2003, we issued notes totaling $150.0 million through a private placement of debt (the “Private Placement”).  On May 21, 2008, given similar circumstances as those with the Credit Facility discussed above, we amended and restated the notes issued in the Private Placement.  The May 21, 2008 amendment requires us to offer quarterly and other prepayments, which predominantly consist of semi-annual prepayments to be determined based upon excess cash flows as defined in the Private Placement.

At December 1, 2009, the Private Placement consisted of $72.6 million in notes with an interest rate of 8.19% (the “Series A Notes”) and $52.3 million in notes with an interest rate of 8.92% (the “Series B Notes”).  The Series A Notes and Series B Notes mature on April 1, 2010 and April 1, 2013, respectively.  During the 26 weeks ended December 1, 2009, we offered, and our noteholders accepted, principal prepayments of $4.6 million and $3.3 million on the Series A and B Notes, respectively.  We estimate that we will offer prepayments totaling $10.1 million during the next twelve months.  Accordingly, we have classified $10.1 million as current as of December 1, 2009.  This amount includes four quarterly offers of $2.0 million each and additional amounts to be determined based upon excess cash flows and sales of surplus properties.

We currently project that $70.2 million will be outstanding on April 1, 2010, the maturity date of our Series A Notes.  Because of our ability and intent to refinance the balance on a long-term basis by utilizing the capacity on our Credit Facility, we have classified this amount as non-current in our December 1, 2009 Condensed Consolidated Balance Sheet.

Simultaneous with the other May 21, 2008 amendments, we entered into a pledge agreement with our Credit Facility and Private Placement creditors, as well as those creditors associated with our Franchise Facility (discussed in Note L to the Condensed Consolidated Financial Statements), whereby we pledged certain subsidiary equity interests as security for the repayment of our obligations under these agreements.
 
 

 
11

 
 
NOTE G – CLOSURES AND IMPAIRMENTS EXPENSE
 
Closures and impairment expenses include the following for the 13 and 26 weeks ended December 1, 2009 and December 2, 2008 (in thousands):
 
   
Thirteen weeks ended
   
Twenty-six weeks ended
 
   
December 1, 2009
   
December 2, 2008
   
December 1, 2009
   
December 2, 2008
 
Impairments for:
                       
  Restaurants closed during the current
                       
    fiscal year
  $     $ 16,023     $     $ 16,604  
  Open restaurants
          9,912       465       10,732  
  Surplus properties
    156       7,335       310       7,592  
  Company airplane
          1,231             1,231  
  Other
          87             87  
 
    156       34,588       775       36,246  
  Dead site costs
    21       2,015       129       2,060  
  Closed restaurant lease reserves
    (255 )     547       397       875  
  Other closing costs
    64       85       55       56  
  Gain on sale of surplus properties
    (38 )     (61 )     (818 )     (154 )
 
  $ (52 )   $ 37,174     $ 538     $ 39,083  
 
A negligible amount of adjustments to lease reserves for the 13- and 26-week periods ended December 2, 2008, respectively, previously classified as Loss from Specialty Restaurant Group, LLC (“SRG”) bankruptcy were reclassified to Closures and Impairments in the current Condensed Consolidated Statements of Operations to ensure consistency with the current presentation.   These reclassifications had no impact on previously reported net income/(loss).  See Note L to the Condensed Consolidated Financial Statements for further discussion of the SRG bankruptcy.
 
A rollforward of our future lease obligations associated with closed properties is as follows (in thousands):

   
Lease Obligations
 
  Balance at June 2, 2009
  $ 9,945  
  Transfer of Specialty Restaurant Group, LLC lease reserve balance
    1,183  
  Closing expense including rent and other lease charges
    397  
  Payments
    (3,061 )
  Balance at December 1, 2009
  $ 8,464  
 
For the remainder of fiscal 2010 and beyond, our focus will be on obtaining settlements on as many of these leases as is possible and these settlements could be higher or lower than the amounts recorded.  The actual amount of any cash payments made by the Company for lease contract termination costs will be dependent upon ongoing negotiations with the landlords of the leased restaurant properties.
 
At December 1, 2009, we had 29 restaurants that had been open more than one year with rolling 12 month negative cash flows of which 16 have been impaired to salvage value.  Of the 13 which remained, we reviewed the plans to improve cash flows at each of the restaurants and determined that no impairment was necessary.  The remaining net book value of these 13 restaurants was $13.8 million at December 1, 2009.
 
Should cash flows at these restaurants not improve within a reasonable period of time, further impairment charges are possible.  Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs, salvage value, and sublease income.  Accordingly, actual results could vary significantly from our estimates.
 
 
12

 
NOTE H – RETIREMENT BENEFITS
 
We sponsor three defined benefit pension plans for active employees and offer certain postretirement benefits for retirees.  A summary of each of these is presented below.
 
Retirement Plan
RTI sponsors the Morrison Restaurants Inc. Retirement Plan (the “Retirement Plan”).  Effective December 31, 1987, the Retirement Plan was amended so that no additional benefits would accrue and no new participants may enter the Retirement Plan after that date.  Participants receive benefits based upon salary and length of service.
 
Minimum funding for the Retirement Plan is determined in accordance with the guidelines set forth in employee benefit and tax laws.  From time to time we may contribute additional amounts as we deem appropriate.  We estimate that we will not be required to make any contributions to the Retirement Plan in fiscal 2010.
 
Executive Supplemental Pension Plan and Management Retirement Plan
Under these unfunded defined benefit pension plans, eligible employees earn supplemental retirement income based upon salary and length of service, reduced by social security benefits and amounts otherwise receivable under other specified Company retirement plans.  Effective June 1, 2001, the Management Retirement Plan was amended so that no additional benefits would accrue and no new participants may enter the plan after that date.

We share with Morrison Health Care, Inc. (“MHC”), a formerly-related company, the liability for retirement benefits accrued through March 1996 under previously-established non-qualified plans by the participants of a second formerly-related company, Morrison Fresh Cooking, Inc. (“MFC”).  These previous non-qualified plans were similar to the Executive Supplemental Pension Plan and the Management Retirement Plan.  See Note L to the Condensed Consolidated Financial Statements for more information on our guarantees and shared liabilities.

Postretirement Medical and Life Benefits
Our Postretirement Medical and Life Benefits plans provide medical and life insurance benefits to certain retirees.  The medical plan requires retiree cost sharing provisions that are more substantial for employees who retire after January 1, 1990.
 
The following tables detail the components of net periodic benefit costs and the amounts recognized in our Condensed Consolidated Financial Statements for the Retirement Plan, Management Retirement Plan, and the Executive Supplemental Pension Plan (collectively, the “Pension Plans”) and the Postretirement Medical and Life Benefits plans (in thousands):
 
Pension Benefits
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
 
December 1,
 
December 2,
 
December 1,
 
December 2,
 
 
2009
 
2008
 
2009
 
2008
 
Service cost
$ 113   $ 102     $ 226   $ 204  
Interest cost
  623     603       1,246     1,206  
Expected return on plan assets
  (106 )   (168 )     (212 )   (336 )
Amortization of prior service cost
  82     82       164     164  
Recognized actuarial loss
  346     242       692     484  
Net periodic benefit cost
$ 1,058   $ 861     $ 2,116   $ 1,722  

 
13

 
 
 
Postretirement Medical and Life Benefits
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
 
December 1,
 
December 2,
 
December 1,
 
December 2,
 
 
2009
 
2008
 
2009
 
2008
 
Service cost
  $ 3     $ 2     $ 6     $ 4  
Interest cost
    21       21       42       42  
Amortization of prior service cost
    (16 )     (16 )     (32 )     (32 )
Recognized actuarial loss
    25       27       50       54  
Net periodic benefit cost
  $ 33     $ 34     $ 66     $ 68  
 
We also sponsor two defined contribution retirement savings plans.  Information regarding these plans is included in our Annual Report on Form 10-K for the fiscal year ended June 2, 2009.
 
NOTE I – INCOME TAXES
 
During the second quarter of fiscal 2010, we collected a federal income tax refund of $19.1 million, a substantial portion of which related to a tax accounting method change as permitted by the Internal Revenue Service relating to the expensing of certain repairs.

We had a liability for unrecognized tax benefits of $4.2 million and $4.5 million as of December 1, 2009 and June 2, 2009, respectively.  As of December 1, 2009 and June 2, 2009, the total amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate was $2.7 million and $2.9 million, respectively.  We do not expect that the amounts of unrecognized tax benefits will change significantly within the next twelve months.
 
Interest and penalties related to unrecognized tax benefits are recognized as components of income tax expense.  As of December 1, 2009 and June 2, 2009, we had accrued $2.0 million and $1.6 million, respectively, for the payment of interest and penalties.  During the first 26 weeks of fiscal 2010, accrued interest and penalties increased by $0.3 million, substantially all of which affected the effective tax rate for the same time period.

The effective tax rate for the 13- and 26-week periods ended December 1, 2009 was 47.4% and 20.4%, respectively, compared to 46.5% and 46.6%, respectively, for the corresponding periods of the prior year.  The change in the effective tax rate resulted primarily from the fact that the Company projects to generate a consistent amount of FICA Tip Credit and Work Opportunity Tax Credit in fiscal 2010 as compared to fiscal 2009, despite recording an operating loss in fiscal 2009 and income in fiscal 2010.  The two tax credits are driven primarily by restaurant sales, rather than closures and impairments and goodwill impairment, which together contributed significantly to the fiscal 2009 operating loss.
 
At December 1, 2009, we are no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2007, and with few exceptions, state and local examinations by tax authorities prior to fiscal year 2006.
 
NOTE J – COMPREHENSIVE INCOME
 
U.S. generally accepted accounting principles require the disclosure of certain revenue, expenses, gains and losses that are excluded from net income.  Items that currently impact our other comprehensive income are the pension liability adjustments and payments received in settlement of the Piccadilly divestiture guarantee.  See Note L to the Condensed Consolidated Financial Statements for further information on the Piccadilly settlement.  Amounts shown in the table below are in thousands.

 
14

 
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
 
December 1,
 
December 2,
 
December 1,
 
December 2,
 
 
2009
 
2008
 
2009
 
2008
 
Net income/(loss)
  $ 431     $ (37,419 )   $ 6,575     $ (37,134 )
Pension liability reclassification, net of tax
    264       201       528       403  
Piccadilly settlement, net of tax
                4        
Comprehensive income/(loss)
  $ 695     $ (37,218 )   $ 7,107     $ (36,731 )
 
NOTE K – SHARE-BASED EMPLOYEE COMPENSATION
 
We compensate our employees and Directors using share-based compensation through the following plans:

The Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan for Directors
Under the Ruby Tuesday, Inc. Stock Incentive and Deferred Compensation Plan for Directors (the “Directors’ Plan”), non-employee directors are eligible for awards of share-based incentives.  Restricted shares granted under the Directors’ Plan vest in equal amounts after one, two, and three years provided the Director continually serves on the Board.  Options issued under the Plan become vested after thirty months and are exercisable until five years after the grant date.  Stock option exercises are settled with the issuance of new shares.

All options awarded under the Directors’ Plan have been at the fair market value at the time of grant.  A Committee, appointed by the Board, administers the Directors’ Plan.  At December 1, 2009, we had reserved 295,000 shares of common stock under this Plan, 190,000 of which were subject to options outstanding, for a net of 105,000 shares of common stock currently available for issuance under the Directors’ Plan.
 
The Ruby Tuesday, Inc. 2003 Stock Incentive Plan and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan
A Committee, appointed by the Board, administers the Ruby Tuesday, Inc. 2003 Stock Incentive Plan (“2003 SIP”) and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan (“1996 SIP”), and has full authority in its discretion to determine the key employees and officers to whom share-based incentives are granted and the terms and provisions of share-based incentives.  Option grants under the 2003 SIP and 1996 SIP can have varying vesting provisions and exercise periods as determined by such Committee.  Options granted under the 2003 SIP and 1996 SIP vest in periods ranging from immediate to fiscal 2012, with the majority vesting 24 or 30 months following the date of grant, and the majority expiring five or seven (but some up to ten) years after grant.  The majority of restricted shares granted under the 2003 SIP and 1996 SIP in fiscal 2010, 2009, and 2008 are performance-based.  The 2003 SIP and 1996 SIP permit the Committee to make awards of shares of common stock, awards of stock options or other derivative securities related to the value of the common stock, and certain cash awards to eligible persons.  These discretionary awards may be made on an individual basis or for the benefit of a group of eligible persons.  All options awarded under the 2003 SIP and 1996 SIP have been awarded with an exercise price equal to the fair market value at the time of grant.
 
At December 1, 2009, we had reserved a total of 5,562,000 and 1,666,000 shares of common stock for the 2003 SIP and 1996 SIP, respectively.  Of the reserved shares at December 1, 2009, 3,954,000 and 1,170,000 were subject to options outstanding for the 2003 SIP and 1996 SIP, respectively.  Stock option exercises are settled with the issuance of new shares.  Net shares of common stock available for issuance at December 1, 2009 under the 2003 SIP and 1996 SIP were 1,608,000 and 496,000, respectively.
 


 
15

 
 
Stock Options
The following table summarizes the activity in options for the 26 weeks ended December 1, 2009 under these stock option plans (in thousands, except per-share data):

       
Weighted-
 
       
Average
 
 
Options
   
Exercise Price
 
Balance at June 2, 2009
4,802     $ 23.06  
Granted
622       6.58  
Exercised
       
Forfeited
(109 )     27.39  
Balance at December 1, 2009
5,315     $ 21.04  
             
Exercisable at December 1, 2009
3,482     $ 27.71  
 
Included in the outstanding balance shown above are approximately 5.2 million of out-of-the money options.  Many are expected to expire out-of-the money in the next three fiscal years.
 
At December 1, 2009, there was approximately $1.3 million of unrecognized pre-tax compensation expense related to non-vested stock options.  This cost is expected to be recognized over a weighted-average period of 1.4 years.
 
During the first quarter of fiscal 2010, we granted approximately 622,000 stock options to certain employees under the terms of the 2003 SIP and 1996 SIP.  These stock options vest in equal annual installments over a three year period following grant of the award, and have a maximum life of seven years.  These stock options do provide for immediate vesting if the optionee retires during the option period as well as if certain other events occur.  For employees meeting this criterion at the time of grant, the accelerated vesting provision renders the requisite service condition non-substantive and we therefore fully expense the fair value of stock options awarded to retirement eligible employees on the date of grant.  As a result, we recorded during the first quarter of fiscal 2010 an expense of $1.2 million related to stock options awarded on July 7, 2009 to our Chief Executive Officer (“CEO”).
 
Restricted Stock
The following table summarizes our restricted stock activity for the 26 weeks ended December 1, 2009 (in thousands, except per-share data):

         
Weighted-Average
 
   
Restricted
   
Grant-Date
 
Performance-based vesting:
 
Stock
   
Fair Value
 
Non-vested at June 2, 2009
    1,195     $ 7.64  
Granted
    348       6.58  
Vested
    (186 )     7.64  
Forfeited
    (636 )     7.64  
Non-vested at December 1, 2009
    721     $ 7.13  
                 
           
Weighted-Average
 
   
Restricted
   
Grant-Date
 
Time-based vesting:
 
Stock
   
Fair Value
 
Non-vested at June 2, 2009
    208     $ 8.97  
Granted
    299       7.01  
Vested
    (77 )     10.06  
Forfeited
           
Non-vested at December 1, 2009
    430     $ 7.42  
 
The fair values of the restricted share awards reflected above were based on the fair market value of our common stock at the time of grant.  At December 1, 2009, unrecognized compensation expense related to restricted stock grants expected to vest totaled approximately $3.4 million and will be recognized over a weighted average vesting period of approximately 1.6 years.

 
 
16

 

During the first quarter of fiscal 2010, we granted approximately 201,000 time-based restricted shares of common stock and 348,000 performance-based restricted shares of common stock under the terms of the 2003 SIP and 1996 SIP.  Vesting of the performance-based restricted shares, including 177,000 shares that were awarded to our CEO, is also contingent upon the Company’s achievement of certain performance conditions related to fiscal 2010 performance, which will be measured in the first quarter of fiscal 2011.  However, for the same reason as mentioned above in regards to our stock options, we recorded during the first quarter of fiscal 2010 an expense of $1.2 million related to the performance-based restricted shares awarded on July 7, 2009 to our CEO.  Should our CEO retire prior to the end of the performance period, the number of restricted shares he would receive would not be determinable until the completion of the performance period.  The expense we recorded for this award was determined using a model that assumes all of the performance-based shares will be earned.  Also during the first quarter of fiscal 2010, we awarded approximately 177,000 shares of common stock to our CEO and recognized an expense of $1.2 million on the grant date.
 
During the second quarter of fiscal 2010, RTI granted approximately 97,000 restricted shares to non-employee directors.  These shares vest in equal annual installments over a three year period following grant of the award.
 
During the first quarter of fiscal 2010, the Executive Compensation and Human Resources Committee of the Board of Directors determined achievement of the performance condition for the restricted shares awarded in the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009.  As a result, approximately 559,000 restricted shares were earned due to achievement of the performance condition and the remaining approximately 636,000 restricted shares were forfeited and returned to the pool of shares available for grant under the 2003 SIP and 1996 SIP.  The earned shares will vest in equal annual installments over a three year period.  The first third vested during our first quarter of fiscal 2010.
 
NOTE L – COMMITMENTS AND CONTINGENCIES
 
Guarantees
 
At December 1, 2009, we had certain third-party guarantees, which primarily arose in connection with our franchising and divestiture activities.  The majority of these guarantees expire at various dates ending in fiscal 2013.  Generally, we are required to perform under these guarantees in the event that a third-party fails to make contractual payments.
 
As part of the franchise partnership program, we have negotiated with various lenders a $48 million credit facility to assist the franchise partnerships with working capital needs and cash flows for operations (the “Franchise Facility”).  As sponsor of the Franchise Facility, we serve as partial guarantor, and in certain circumstances full guarantor, of the draws made by the franchise partnerships on the Franchise Facility.  Although the Franchise Facility allows for individual franchise partnership loan commitments to the end of the Franchise Facility term, all current commitments are for 12 months.  On September 8, 2006, we entered into an amendment of the Franchise Facility which extended the term for an additional five years to October 5, 2011.
 
Prior to July 1, 2007, we had arrangements with two third-party lenders whereby we provided partial guarantees for specific loans for new franchisee restaurant development (the “Cancelled Facilities”).  Should payments be required under the Cancelled Facilities, we have certain rights to acquire the operating restaurants after the third-party debt is paid.  We have terminated the Cancelled Facilities and notified the third-party lenders that we would no longer enter into additional guarantee arrangements.
 
As of December 1, 2009, the amounts guaranteed under the Franchise Facility and the Cancelled Facilities were $47.3 million and $4.6 million, respectively.  The guarantees associated with one of the Cancelled Facilities are collateralized by a $3.8 million letter of credit.  As of June 2, 2009, the amounts guaranteed under the Franchise Facility and the Cancelled Facilities were $47.5 million and $4.7 million, respectively.  Unless extended, guarantees under these programs will expire at various dates from November 2010 through February 2013.  To our knowledge, despite certain of these franchises having reported coverage ratios below the required levels, all of the franchise partnerships are current in the payment of their obligations due under these credit facilities.  At those times when franchise partnerships report coverage
 

 
17

 

ratios below the requirements, RTI, as sponsor, has the ability to cure the default by increasing our guaranty from 50% to 100%.  We have done so for each such situation as of December 1, 2009 and June 2, 2009 and thus the amounts owed by our franchises under the Franchise Facility are not subject to acceleration.  Furthermore, no events have occurred which would allow for a wind-down of the Franchise Facility itself or necessitate guaranty payments on behalf of the franchise partnerships.
 
We have recorded liabilities totaling $1.6 million and $1.0 million as of December 1, 2009 and June 2, 2009, respectively, related to these guarantees.  These amounts were determined based on amounts to be received from the franchise partnerships as consideration for the guarantees.  We believe these amounts approximate the fair value of the guarantees.
 
Divestiture Guarantees
On November 20, 2000, we completed the sale of all 69 of our American Cafe (including L&N Seafood) and Tia’s restaurants to SRG.  A number of these restaurants were located on leased properties.  We remain primarily liable on certain American Cafe and Tia’s leases that were subleased to SRG and contingently liable on others. SRG, on December 10, 2003, sold its 28 Tia’s restaurants to an unrelated entity and, as part of the transaction, further subleased certain Tia’s properties.

During the second quarter of fiscal 2007, the third party owner to whom SRG had sold the Tia’s restaurants declared Chapter 7 bankruptcy.  This declaration left us and/or SRG either primarily or indirectly liable for certain of the older Tia’s leases.  SRG filed for Chapter 11 bankruptcy during the third quarter of fiscal 2007.

As of December 1, 2009, we have settled almost all of the Tia’s leases.  Future payments to the remaining landlords are expected to be insignificant.

As of December 1, 2009, we remain primarily liable for three SRG leases which cover closed restaurants.  Scheduled cash payments for rent remaining on these three leases at December 1, 2009 totaled $0.3 million.  Because these restaurants were located in malls, we may be liable for other charges such as common area maintenance and property taxes.  In addition to the scheduled remaining payments, we believe an additional $0.8 million for previously scheduled rent and related payments on these leases had not been paid as of December 1, 2009.  As of December 1, 2009, we had recorded an estimated liability of $0.8 million based on the three SRG unresolved claims.  We made payments of $0.2 million on the currently unresolved leases during the 26 weeks ended December 1, 2009.

During fiscal 1996, our shareholders approved the distribution (the “Distribution”) of our family dining restaurant business (MFC) and our health care food and nutrition services business (MHC).  Subsequently, Piccadilly Cafeterias, Inc. (“Piccadilly”) acquired MFC and Compass Group, PLC (“Compass”) acquired MHC.  Prior to the Distribution, we entered into various guarantee agreements with both MFC and MHC, most of which have expired.  As agreed upon at the time of the Distribution, we have been contingently liable for (1) payments to MFC and MHC employees retiring under (a) MFC’s and MHC’s versions of the Management Retirement Plan and the Executive Supplemental Pension Plan (the two non-qualified defined benefit plans) for the accrued benefits earned by those participants as of March 1996, and (b) funding obligations under the Retirement Plan maintained by MFC and MHC following the Distribution (the qualified plan) until 2006, and (2) payments due on certain workers’ compensation claims (the “Piccadilly Liabilities”).
 
On October 29, 2003, Piccadilly filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court in Fort Lauderdale, Florida.  Following this, we have recorded, and begun to pay, our pro rata share of the Piccadilly Liabilities for which we have provided guarantees, including those for MFC employee benefit plans.  Our estimates of these liabilities were included within our petition before the bankruptcy court.
 
During the 26 weeks ended December 1, 2009, we received our sixth, and final, check in settlement of the Piccadilly bankruptcy.  Including this final check, we received $2.0 million in settlement of our claim.
 
We estimated our divestiture guarantees related to MHC at December 1, 2009 to be $3.3 million for employee benefit plans.  In addition, we remain contingently liable for MHC’s portion (estimated to be $2.4 million) of the MFC employee benefit plan liability for which MHC is currently responsible under the
 

 
18

 

divestiture guarantee agreements.  We believe the likelihood of being required to make payments for MHC’s portion to be remote due to the size and financial strength of MHC and Compass.
 
Litigation
 
We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business.  We provide reserves for such claims when payment is probable and estimable in accordance with U.S. generally accepted accounting principles.  At this time, in the opinion of management, the ultimate resolution of pending legal proceedings, including the matter referred to below, will not have a material adverse effect on our operations, financial position or cash flows.
 
On August 28, 2009, a jury in the civil action Dan Maddy v. Ruby Tuesday, Inc., in the Rutherford County, Tennessee Circuit Court, Case No. 53641, rendered a verdict in favor of the plaintiff awarding damages in the amount of $10,035,000.  The plaintiff in this matter alleged claims relating to injury caused by an intoxicated person who was served alcoholic beverages at one of our restaurants.  The judgment is not yet final and is subject to post-trial motions and appeal.  We believe that any judgment entered will be for an amount less than the verdict.  We maintain insurance to cover these types of claims under our primary insurance carrier for amounts up to $1,000,000, subject to a self-insured retention of $500,000, and under a secondary insurance carrier for amounts in excess of $1,000,000 up to an amount in excess of the amount of the verdict.  Our secondary insurance carrier has asserted a reservation of rights, claiming that it did not receive timely notice of this matter from our third party claims administrator in accordance with the terms of the policy.  Our service agreement with our third party claims administrator provides that it will indemnify us against any liabilities, loss or damage that we may suffer as a result of any claim, cost or judgment against us arising out of the third party claims administrator’s negligence or willful misconduct.  Based on the information currently available, and acknowledging the uncertainty of litigation, our December 1, 2009 Condensed Consolidated Balance Sheet reflects the amount of any expected recovery by the plaintiff.  Such amount is included in Insurance within the Accrued liabilities caption in our Condensed Consolidated Balance Sheet.  We intend to appeal the judgment once finalized in the event we are not successful in invalidating the judgment through our post-trial motions, and we believe that we have valid coverage under our insurance policies for any amounts in excess of our self-insured retention.  There can be no assurance, however, that we will be successful in our post-trial motions or appeal of the judgment or, in the event we are not successful, that we will prevail in any dispute with our insurance carrier regarding the validity of our coverage.  Thus, while management believes that this matter will not have a material adverse effect on our operations, financial position or cash flows, there can be no assurance that this matter will not have such a material adverse effect.

NOTE M – FAIR VALUE MEASUREMENTS

We adopted the provisions of Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures” for our financial assets and liabilities, as well as any other assets and liabilities that are carried at fair value on a recurring basis in financial statements, in fiscal 2009.  In the first quarter of fiscal 2010, we adopted the provisions of ASC 820 for non-financial assets and liabilities.  The adoption of ASC 820 for nonfinancial assets and liabilities had no significant impact on our Condensed Consolidated Financial Statements.  ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.  ASC 820 applies under other accounting guidance that requires or permits fair value measurements.  ASC 820 does not require any new fair value measurements.

Also during the first quarter of fiscal 2010, we adopted the provisions of ASC 825, “Financial Instruments,” that require disclosures about the fair values of financial instruments in interim as well as in annual financial statements.  The adoption of this accounting guidance did not have a significant impact on our Condensed Consolidated Financial Statements.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  ASC 820 also establishes a three-level fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
 
 
 

 
19

 
 
The following table presents the fair values of our financial assets and liabilities measured at fair value on a recurring basis as of December 1, 2009 (in thousands):
 
 
Fair Value Measurements
 
 
Carrying
Value at
December 1,
2009
 
Quoted
 Prices in
 Active
 Markets for Identical Assets
(Level 1)
 
Significant
 Other
Observable
Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Deferred compensation plan -
                       
   Assets
$
8,301
 
$
8,301
 
$
 
$
 
Deferred compensation plan -
                       
   liabilities
 
(8,301)
   
(8,301)
   
   
 
   Total
$
 
$
 
$
 
$
 

The Ruby Tuesday, Inc. 2005 Deferred Compensation Plan (the “Deferred Compensation Plan”) and the Ruby Tuesday, Inc. Restated Deferred Compensation Plan (the “Predecessor Plan”) are unfunded, non-qualified deferred compensation plans for eligible employees.  Assets earmarked to pay benefits under the Deferred Compensation Plan and Predecessor Plan are held by a rabbi trust.  We report the accounts of the rabbi trust in our Condensed Consolidated Financial Statements.  With the exception of the investment in RTI common stock, the investments held by these plans are considered trading securities and are reported at fair value based on third-party broker statements.  The realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, is recorded in Selling, general and administrative expense in the Condensed Consolidated Financial Statements.

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

The following table presents the fair values for those assets and liabilities measured on a non-recurring basis and remaining on our Condensed Consolidated Balance Sheet as of December 1, 2009 and the losses recognized from all such measurements during the 13 and 26 weeks ended December 1, 2009 (in thousands):
 
 
Fair Value Measurements
 
 
Carrying
Value at
December 1,
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Losses/(Gains)
 
 
2009
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
13 weeks
 
26 weeks
 
Long-lived assets held for sale *
  $ 30,728     $     $ 30,728     $     $ 156     $ 310  
Long-lived assets held for use
    3,757             3,757                   465  
   Total
  $ 34,485     $     $ 34,485     $     $ 156     $ 775  
 
* Included in the carrying value of long-lived assets held for sale are $22.0 million of assets included in Construction in progress and other in the Condensed Consolidated Balance Sheet as we do not expect to sell these assets within the next 12 months.

Long-lived assets held for sale are valued using Level 2 inputs, primarily information obtained through broker listings and sales agreements.  Costs to market and/or sell the assets are factored into the estimates of fair value for those assets included in Assets held for sale on our Condensed Consolidated Balance Sheet.  During the 13 and 26 weeks ended December 1, 2009, long-lived assets held for sale were written down to their fair value, resulting in a loss of $0.2 million and $0.3 million, respectively, which is included in Closures and impairments in our Condensed Consolidated Statement of Operations.  The fair value of these long-lived assets held for sale was $30.7 million as of December 1, 2009.

 
20

 

We review our long-lived assets (primarily property, equipment and, as appropriate, reacquired franchise rights) related to each restaurant to be held and used in the business, whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable.  We evaluate restaurants based upon cash flows as our primary indicator of impairment.  Based on the best information available, we write down an impaired restaurant to its estimated fair market value, which becomes its new cost basis.  Fair value is determined primarily through broker listings.

Long-lived assets held for use presented in the table above include our company airplane and restaurants or groups of restaurants that were impaired as a result of our quarterly impairment review.  From time to time, the table will also include closed restaurants or surplus sites not meeting held for sale criteria that have been offered for sale at a price less than their carrying value.  

During the 26 weeks ended December 1, 2009, we recorded $0.5 million of impairments on our long-lived assets held for use, which is included with Closures and impairments expense in our Condensed Consolidated Statements of Operations.  The Level 2 fair values of our long-lived assets held for use are based on broker estimates of the value of the land, building, leasehold improvements, and other residual assets.
 
Our financial instruments at December 1, 2009 and June 2, 2009 consisted of cash and short-term investments, accounts receivable and payable, notes receivable, long-term debt, franchise partnership guarantees, letters of credit, and, as previously discussed, deferred compensation plan investments.  The fair values of cash and short-term investments and accounts receivable and payable approximated carrying value because of the short-term nature of these instruments.  The carrying amounts and fair values of our other financial instruments not measured on a recurring basis using fair value, however subject to fair value disclosures are as follows (in thousands):
 
   
December 1, 2009
   
June 2, 2009
 
   
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Deferred Compensation Plan
                       
  investment in RTI common stock
  $ 2,097     $ 1,132     $ 2,200     $ 1,318  
Notes receivable, gross
    8,592       8,972       9,644       10,100  
Long-term debt and capital leases
    365,459       373,184       493,407       491,575  
Franchise partnership guarantees
    1,593       1,619       1,034       1,057  
Letters of credit
          365             370  
 
We estimated the fair value of notes receivable, debt, franchise partnership guarantees, and letters of credit using market quotes and present value calculations based on market rates.
 
NOTE N – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
Accounting Pronouncements Adopted in Fiscal 2010
As discussed in Note M to the Condensed Consolidated Financial Statements, in the first quarter of fiscal 2010 we adopted ASC 820, “Fair Value Measurements and Disclosures,” for nonfinancial assets and liabilities and ASC 825, “Financial Instruments,” which requires disclosures about the fair values of financial instruments in interim as well as annual financial statements.  The adoption of this guidance had no significant impact on the Company during the 26 weeks ended December 1, 2009.

In December 2007, the FASB issued updated guidance related to business combinations. The guidance establishes the principles and requirements for how an acquirer: 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and 3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  This guidance is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008 (fiscal 2010 for RTI).  The adoption of the guidance had no impact on our Condensed Consolidated Financial Statements.

In December 2007, the FASB issued guidance establishing accounting and reporting standards that require: 1) noncontrolling interests to be reported as a component of equity; 2) changes in a parent’s ownership

 
21

 
 
interest while the parent retains its controlling interest be accounted for as equity transactions; and 3) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value.  This guidance is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008 (fiscal 2010 for RTI).  The adoption of the guidance had no impact on our Condensed Consolidated Financial Statements.
 
In April 2009, the FASB issued guidance requiring fair value disclosures on an interim basis for financial instruments that are not reflected in the consolidated balance sheets at fair value.  Prior to the issuance of this guidance, the fair values of those financial instruments were only disclosed on an annual basis.  The guidance is effective for interim reporting periods that end after June 15, 2009 (our fiscal 2010 first quarter).  See Note M to our Condensed Consolidated Financial Statements for further information about the fair value of our financial instruments.
 
In May 2009, the FASB issued guidance establishing general standards of accounting for and disclosure of subsequent events.  This guidance was effective for interim or annual reporting periods ending after June 15, 2009 (our fiscal 2010 first quarter).  The adoption of the guidance had no impact on our Condensed Consolidated Financial Statements.

In June 2009, the FASB issued guidance providing for the FASB Accounting Standards Codification (the “Codification”) to become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles (“GAAP”).  The Codification was not intended to change GAAP but reorganizes the literature.  The Codification, which was incorporated into ASC 105, “Generally Accepted Accounting Principles,” was effective for interim or annual periods ending after September 15, 2009.  Our adoption of the Codification changed certain disclosure references to U.S. GAAP, but did not have any other impact on our Condensed Consolidated Financial Statements.

Accounting Pronouncements Not Yet Adopted
In December 2008, the FASB issued updated guidance related to an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  The updated guidance expands the disclosure requirements about plan assets for defined benefit pension plans and postretirement plans.  This guidance is effective for fiscal years ending after December 15, 2009, and will impact our financial statement disclosures beginning with the year ending June 1, 2010 (our current fiscal year).

In June 2009, the FASB issued guidance related to the consolidation of variable interest entities.  The updated guidance eliminates the prior exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity.  This guidance also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying the provisions of the pre-Codification guidance.  The guidance is effective for fiscal years beginning after November 15, 2009 (fiscal 2011 for RTI).  We are currently evaluating the impact of this guidance on our Condensed Consolidated Financial Statements.
 
NOTE O – SUBSEQUENT EVENTS
 
In light of our founder and CEO’s long history with the Company and the current climate regarding certain aspects of executive compensation agreements, our Board of Directors and CEO, Samuel E. Beall, III, determined that a renewal of Mr. Beall’s existing employment agreement with the Company is not necessary.  However, the Board and Mr. Beall desire that he continue his employment with the Company beyond the term of the existing agreement.  Accordingly, on January 6, 2010, the Board approved the Third Amendment to the Ruby Tuesday, Inc. Executive Supplemental Pension Plan, which has the effect of maintaining his retirement benefit.  This amendment, which is consistent with a provision in Mr. Beall’s current employment agreement, addresses any disincentive that may have arisen had the agreement been terminated and the retirement benefit not maintained.  Having addressed this issue, the Board and Mr. Beall decided to terminate the agreement at this time rather than allowing it to terminate on July 19, 2010 in accordance with its terms.  Accordingly, Mr. Beall's employment agreement with the Company was terminated as of January 6, 2010.

 

 
22

 
 
ITEM 2.
 
RESULTS OF OPERATIONS
 
 
General:

 
Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” the “Company,” “we” and/or “our”), owns and operates Ruby Tuesday® casual dining restaurants and two Wok Hay restaurants.  We also franchise the Ruby Tuesday concept in selected domestic and international markets.  As of December 1, 2009 we owned and operated 670, and franchised 226, Ruby Tuesday restaurants.  Ruby Tuesday restaurants can now be found in 46 states, the District of Columbia, 14 foreign countries, and Guam.
 
Overview and Strategies

Casual dining, the segment of the industry in which we operate, is intensely competitive with respect to prices, services, convenience, locations, and the types and quality of food.  We compete with other food service operations, including locally-owned restaurants, and other national and regional restaurant chains that offer the same or similar types of services and products as we do.  In 2005, our analysis of the bar and grill segment within casual dining indicated that many concepts, including Ruby Tuesday, were not clearly differentiated.  We believed that as the segment continued to mature, the lack of differentiation would make it increasingly difficult to attract new guests.  Consequently, we created brand reimaging initiatives to implement our strategy of clearly differentiating Ruby Tuesday from our competitors.  We implemented our strategy in stages, first focusing on food, then service, and in 2007, we embarked on the most capital intensive aspect of our reimaging program – the creation of a fresh new look for our restaurants.  Offering compelling value, our fourth initiative, is especially important in a difficult economy such as we are currently experiencing.  We believe that Ruby Tuesday, as a result of these initiatives, is well positioned for the future.

While we were in the process of implementing our brand reimaging, consumer spending came under pressure for a variety of reasons, and further weakened in the fourth quarter of calendar 2008.  As the economic environment deteriorated, operating results for other casual dining concepts, as well as our operating results, declined significantly.  In response, in the second half of fiscal 2009, we implemented several initiatives intended to enhance our sales, reduce costs and improve cash flow, including the following:

·  
Sales initiatives.  Our sales initiatives aim to increase guest traffic by focusing primarily on two areas: menu and marketing.  The menu emphasizes high quality and compelling value.  For example, we have added several high-quality lobster items to the menu and our burgers now include “endless fries.”  Through independently conducted studies, we regularly measure our guests’ perception of our menu offerings and will make item modifications to enhance their value proposition if necessary.  Our new brand image allows us to credibly offer higher end menu items, such as lobster tails and jumbo lump crab cakes, which we believe allow us to better leverage our fixed costs and further differentiate our brand from our traditional competitors.

We shifted our marketing strategy to more effectively communicate our brand and value message.  We broadened our strategy to encompass four pillars: print promotion, internet activities, traditional media, and community-based programs.  A principal element of our emphasis is greater promotional activity, with a local market focus, that is intended to address the current importance of price in consumers’ perception of value.  We have also developed programs intended to increase sales during off-peak times.

·  
Cost savings.  In the second half of fiscal 2009, we implemented initiatives designed to result in substantial cost savings.  These cost savings are a result of: labor initiatives, including new

 
23

 

            
scheduling systems and the realignment of field supervisors, which are estimated to have accounted for approximately one-half of the savings, while disciplined food cost management, improved operating efficiencies and the closing of the underperforming restaurants are estimated to have accounted for the remainder.
 
   ·  
Restaurant closings.  During our second quarter of fiscal 2009 we conducted an analysis of all our Company-operated restaurants based on profitability, brand image, location, and other factors and identified 73 restaurants to close, 43 of which we closed in the third quarter of fiscal 2009.  Two additional restaurants closed in the first quarter of fiscal 2010 upon their lease expirations.

·  
Generate free cash flow and improve our balance sheet.  Because of our leverage, we are highly focused on maximizing our cash flow and paying down our debt.  If we are successful in stabilizing same-restaurant sales and maintaining or lowering our costs, we have the opportunity to maintain substantial levels of free cash flow.  Furthermore, our near-term capital requirements are relatively modest as we don’t anticipate opening any new Ruby Tuesday restaurants during the remainder of fiscal 2010, and our maintenance capital spending needs are low because we have remodeled virtually all the Company-owned restaurants within the last two years.  We define “free cash flow” to be the net amount remaining when purchases of property and equipment are subtracted from net cash provided by operating activities.

We generated $48.3 million of free cash flow in the first two quarters of fiscal 2010, all of which was dedicated to the reduction of debt.  We anticipate total capital spending in fiscal 2010 to be $18.0 to $20.0 million.  We also estimate we will generate $45.0 million to $55.0 million of free cash flow during the remainder of fiscal 2010, a substantial portion of which will be dedicated to the reduction of debt.  Similarly, we intend to use free cash flow generated in the next couple of years following fiscal 2010 to reduce debt.  Our objective is to reduce debt as quickly as possible to strengthen our balance sheet and reduce the financial risk related to our leverage.  As another means of reducing our bank debt and strengthening our balance sheet, on July 28, 2009, we closed an underwritten public offering of 11.5 million shares of Ruby Tuesday, Inc. common stock.  The $73.1 million net proceeds raised in the equity offering was also used to reduce our outstanding debt.  See further discussion in the Financing Activities section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

Results of Operations:

 
The following is an overview of our results of operations for the 13- and 26- week periods ended December 1, 2009:
 
Net income increased to $0.4 million for the 13 weeks ended December 1, 2009 compared to a net loss of $37.4 million for the same quarter of the previous year.  Diluted earnings/(loss) per share for the fiscal quarter ended December 1, 2009 was $0.01 compared to $(0.73) for the corresponding period of the prior year as a result of the increase in net income as discussed below.
 
During the 13 weeks ended December 1, 2009:
 
·  
No Company-owned restaurants were opened or closed;
 
·  
Three restaurants were opened by our franchisees;
 
·  
Three franchise restaurants were closed; and
 
·  
Same-restaurant sales* at Company-owned restaurants decreased 1.7%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 4.7%.
 
Net income increased to $6.6 million for the 26 weeks ended December 1, 2009 compared to a net loss of $37.1 million for the same period of the previous year.  Diluted earnings/(loss) per share for the 26 weeks ended December 1, 2009 was $0.11 compared to $(0.72) for the corresponding period of the prior year as a result of the increase in net income as discussed below.
 

 
24

 

During the 26 weeks ended December 1, 2009:
 
·  
Two Company-owned Ruby Tuesday restaurants were closed;
 
·  
Three restaurants were opened by our franchisees;
 
·  
Six franchise restaurants were closed;
 
·  
Same-restaurant sales* at Company-owned restaurants decreased 2.4%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants decreased 5.6%; and
 
·  
We sold 11.5 million shares of Ruby Tuesday, Inc. common stock in an underwritten public offering, receiving approximately $73.1 million in net proceeds from the sale of the shares, after deducting underwriting discounts and offering expenses.
 
* We define same-restaurant sales as a year-over-year comparison of sales volumes for restaurants that, in the current year have been open at least 18 months, in order to remove the impact of new openings in comparing the operations of existing restaurants.
 
The following table sets forth selected restaurant operating data as a percentage of total revenue, except where otherwise noted, for the periods indicated.  All information is derived from our Condensed Consolidated Financial Statements included in this Form 10-Q.
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
December 1,
 
December 2,
 
December 1,
 
December 2,
 
2009
 
2008
 
2009
 
2008
Revenue:
                     
       Restaurant sales and operating revenue
99
.4%
 
99
.3%
 
99
.5%
 
99
.2%
       Franchise revenue
0
.6
 
0
.7
 
0
.5
 
0
.8
           Total revenue
100
.0
 
100
.0
 
100
.0
 
100
.0
Operating costs and expenses:
                     
       Cost of merchandise (1)
28
.9
 
27
.4
 
29
.6
 
27
.3
       Payroll and related costs (1)
35
.2
 
36
.6
 
34
.4
 
35
.3
       Other restaurant operating costs (1)
22
.2
 
22
.5
 
21
.2
 
21
.9
       Depreciation and amortization (1)
6
.0
 
6
.7
 
5
.7
 
6
.5
       Selling, general and administrative, net
6
.0
 
8
.6
 
6
.2
 
8
.3
       Closures and impairments
0
.0
 
12
.8
 
0
.1
 
6
.4
       Goodwill impairment
     
6
.5
       
3
.1
       Equity in losses of
                     
         unconsolidated franchises
0
.3
 
0
.2
 
0
.2
 
0
.0
       Interest expense, net
1
.7
 
3
.4
 
1
.7
 
3
.2
Income/(loss) before income taxes
0
.3
 
(24
.1)
 
1
.4
 
(11
.3)
Provision/(benefit) for income taxes
0
.1
 
(11
.2)
 
0
.3
 
(5
.2)
Net income/(loss)
0
.2%
 
(12
.9)%
 
1
.1%
 
(6
.1)%
 
(1)     As a percentage of restaurant sales and operating revenue.
 
The following table shows year-to-date Company-owned and franchised Ruby Tuesday concept restaurant openings and closings, and total Ruby Tuesday concept restaurants as of the end of the second quarter in each of fiscal 2010 and 2009.
 
   
Thirteen weeks ended
   
Twenty-six weeks ended
 
   
December 1, 2009
   
December 2, 2008
   
December 1, 2009
   
December 2, 2008
 
Company–owned:
                       
       Beginning number
    670       715       672       721  
          Opened
          1             3  
          Closed
          (3 )     (2 )     (11 )
       Ending number *
    670       713       670       713  
                                 
 
25

 

Franchise:
                       
       Beginning number
    226       226       229       224  
          Opened
    3       4       3       8  
          Closed
    (3 )     (3 )     (6 )     (5 )
       Ending number
    226       227       226       227  
 
* The December 1, 2009 and December 2, 2008 amounts exclude two Wok Hay restaurants.
 
We expect our domestic and international franchisees to open approximately three additional Ruby Tuesday restaurants during the remainder of fiscal 2010.
 
Revenue
 
RTI’s restaurant sales and operating revenue for the 13 weeks ended December 1, 2009 decreased 5.5% to $271.9 million compared to the same period of the prior year.  This decrease primarily resulted from the closing of 54 restaurants in fiscal 2009, 43 of which closed after the end of fiscal 2009’s second quarter, and a 1.7% decrease in same-restaurant sales.  The 54 restaurants closed in fiscal 2009 produced $11.0 million of restaurant sales in the second quarter of the prior year.
 
The decrease in same-restaurant sales is attributable to an approximate 3.5% decline in average net check as we have maintained our value positioning and print incentive strategy to motivate new guests to visit our restaurants to experience the reimaged Ruby Tuesday brand.  This strategy has contributed to an approximate 1.8% increase in guest counts, partially offsetting the reduction in average net check.
 
Franchise revenue for the 13 weeks ended December 1, 2009 decreased 24.0% to $1.6 million compared to the same period of the prior year.  Franchise revenue is predominately comprised of domestic and international royalties, which totaled $1.5 million and $1.9 million for the 13-week periods ended December 1, 2009 and December 2, 2008, respectively.  This decrease is due to a decline in royalties from domestic franchisees as a result of temporarily reduced or deferred royalties for certain franchisees and a decrease in same-restaurant sales for domestic franchise Ruby Tuesday restaurants of 4.7% in the second quarter of fiscal 2010.
 
For the 26 weeks ended December 1, 2009, sales at Company-owned restaurants decreased 6.2% to $571.2 million compared to the same period of the prior year.  This decrease primarily resulted from the closing of 54 restaurants in fiscal 2009 as discussed above, and a 2.4% decrease in same-restaurant sales due to an approximate 4.9% decline in average net check for similar reasons as discussed above for the 13-week period partially offset by an approximate 2.5% increase in guest counts.  The 54 restaurants closed in fiscal 2009 produced $24.9 million of restaurant sales in the first two quarters of the prior year.
 
For the 26-week period ended December 1, 2009, franchise revenues decreased 40.5% to $2.9 million compared to $4.9 million for the same period in the prior year.  Domestic and international royalties totaled $2.8 million and $4.5 million for the 26-week periods ending December 1, 2009 and December 2, 2008, respectively.  This decrease is due to a decline in royalties from domestic franchisees as a result of temporarily reduced royalty rates for certain franchisees and a decrease in same-restaurant sales for domestic franchise Ruby Tuesday restaurants of 5.6% for the 26 weeks ended December 1, 2009.
 
Under our accounting policy, we do not recognize franchise fee revenue for any franchise with negative cash flows at times when the negative cash flows are deemed to be anything other than temporary and the franchise has either borrowed directly from us or through a facility for which we provide a guarantee.  We also do not recognize additional franchise fee revenue from franchisees with fees in excess of 60 days past due.  Accordingly, we have deferred recognition of a portion of franchise revenue from certain franchises.  Unearned income for franchise fees was $4.0 million and $1.2 million as of December 1, 2009 and June 2, 2009, respectively, which are included in other deferred liabilities and/or accrued liabilities – rent and other in the Condensed Consolidated Balance Sheets.  The increase in unearned income is primarily due to an increase in unearned fees due from a traditional franchise ($1.6 million), for whom we agreed to defer fees for a limited period of time while the franchise negotiated with its lenders for extended terms, and a $1.0 million increase in unearned fees due from our franchise partnerships as a result of fee deferrals primarily during the second quarter of the current fiscal year.
 

 
26

 
 
Pre-tax Income/(Loss)
 
Pre-tax income was $0.8 million for the 13 weeks ended December 1, 2009, compared to a pre-tax loss of $69.9 million for the same period of the prior year.  The increase in pre-tax income from the prior year is due in significant part to reductions in impairment charges as we impaired our goodwill ($19.0 million) and announced a plan to restructure our property portfolio which resulted in closures and impairments expense of $37.2 million during the second quarter of the prior year.  The increase also included the elimination of $2.7 million in pre-tax losses recorded in the second quarter of fiscal 2009 on the 54 restaurants closed during fiscal 2009, as well as lower payroll and related costs, other restaurant operating costs, depreciation, selling, general and administrative expense, net, and interest expense, net.  These lower costs were partially offset by a decline of 1.7% in same-restaurant sales at Company-owned restaurants.
 
For the 26-week period ended December 1, 2009, pre-tax income was $8.3 million compared to a pre-tax loss of $69.5 million for the same period of the prior year.  The increase in pre-tax income from the prior year is due in significant part to reductions in impairment charges as we impaired our goodwill ($19.0 million) and announced a plan to restructure our property portfolio which resulted in closures and impairments expense of $39.1 million during the first 26 weeks of the prior year.  The increase also included the elimination of $5.5 million in pre-tax losses recorded in the first two quarters of fiscal 2009 on the 54 restaurants closed during fiscal 2009, as well as lower payroll and related costs, other restaurant operating costs, depreciation, selling, general and administrative expense, net, and interest expense, net.  These lower costs were partially offset by a decline of 2.4% in same-restaurant sales at Company-owned restaurants, lower franchise revenue, and higher cost of merchandise and equity in losses of unconsolidated franchises.
 
In the paragraphs that follow, we discuss in more detail the components of the increase in pre-tax income for the 13- and 26-week periods ended December 1, 2009, as compared to the comparable period in the prior year.  Because a significant portion of the costs recorded in the Cost of merchandise, Payroll and related costs, Other restaurant operating costs, and Depreciation and amortization categories are either variable or highly correlate with the number of restaurants we operate, we evaluate our trends by comparing the costs as a percentage of restaurant sales and operating revenue, as well as the absolute dollar change, to the comparable prior year period.
 
2009 Restaurant Closings
 
The table below shows operating results for the 13 and 26 weeks ended December 2, 2008 for the 54 restaurants that closed in fiscal 2009 (in thousands):
 
   
Thirteen Weeks
Ended
December 2, 2008
   
Twenty-Six Weeks
Ended
December 2, 2008
 
             
Total revenue
  $ 11,036     $ 24,906  
                 
Cost of merchandise
    3,162       7,154  
Payroll and related costs
    5,264       11,535  
Other restaurant operating costs
    3,622       8,034  
Depreciation and amortization
    819       1,833  
Selling, general and administrative
    913       1,887  
      13,780       30,443  
Net loss
  $ (2,744 )   $ (5,537 )
 
Cost of Merchandise
 
Cost of merchandise decreased $0.3 million (0.4%) to $78.6 million for the 13 weeks ended December 1, 2009, from the corresponding period of the prior year.  As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 27.4% to 28.9% for the 13 weeks ended December 1, 2009.  Excluding the $3.2 million decrease from the elimination of 54 restaurants closed in fiscal 2009, cost of merchandise increased $2.9 million (3.8%).
 

 
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Cost of merchandise increased $2.4 million (1.4%) to $168.9 million for the 26 weeks ended December 1, 2009, from the corresponding period of the prior year.  As a percentage of restaurant sales and operating revenue, cost of merchandise increased from 27.3% to 29.6% for the 13 weeks ended December 1, 2009.  Excluding the $7.2 million decrease from the elimination of 54 restaurants closed in fiscal 2009, cost of merchandise increased $9.6 million (6.0%).
 
The $2.9 million and $9.6 million increases in fiscal 2010 are a result of an increase in guest counts of approximately 1.8% and 2.5%, respectively, as well as a shift in menu mix corresponding to our value promotions such that our guests are ordering higher cost menu items, the introduction of higher food cost items to our menu, such as lobster entrees, since the same periods of the prior year, and value-enhancing programs such as offering endless fries with burgers.
 
As a percentage of restaurant sales and operating revenue, the increases are also due to several promotions offered in the current quarter including freestanding insert coupons in all markets with Company-owned restaurants, direct address label mail pieces, and a value promotion for our So Connected guests offering a buy one get one free on our Specialties, Fork-Tender Ribs, and Handcrafted Steaks.  These value offerings had the impact of reducing average net check by approximately 3.5% and 4.9% for the 13 and 26 weeks ended December 1, 2009, respectively, for restaurants in our same-restaurant groupings, which increased the related food cost as a percentage of restaurants sales and operating revenue.
 
Payroll and Related Costs
 
Payroll and related costs decreased $9.5 million (9.0%) to $95.8 million for the 13 weeks ended December 1, 2009, as compared to the corresponding period in the prior year.  This amount includes $5.3 million of payroll and related costs spent in fiscal 2009 at the 54 restaurants closed in the prior year.  As a percentage of restaurant sales and operating revenue, payroll and related costs decreased from 36.6% to 35.2%.
 
Payroll and related costs decreased $18.8 million (8.7%) to $196.2 million for the 26 weeks ended December 1, 2009, as compared to the corresponding period in the prior year.  This amount includes $11.5 million of payroll and related costs spent in fiscal 2009 at the 54 restaurants closed in the prior year.  As a percentage of restaurant sales and operating revenue, payroll and related costs decreased from 35.3% to 34.4%.
 
For the 13 and 26 weeks ended December 1, 2009, the remaining decreases of $4.2 million and $7.3 million, respectively, not attributable to closings is primarily due to decreases in hourly labor as a result of new staffing guidelines for certain positions in our restaurants, the elimination of the dedicated To Go positions in our mall restaurants and certain other locations, which were partially offset by increases in minimum wage rates in certain states since the corresponding periods of the prior year.
 
As a percentage of restaurant sales and operating revenue, the decrease in payroll and related costs is attributable to the impact of closing 54 restaurants in fiscal 2009, which ran higher than system average labor, and the hourly labor cost savings initiatives discussed in the prior paragraph.  Offsetting these savings was the impact on the ratio of the value offerings discussed in the Cost of Merchandise section above that contributed during the 13- and 26-week period ended December 1, 2009 to the increase in guest counts of approximately 1.8% and 2.5%, respectively, for the restaurants in our same-restaurant grouping and the decrease in our average net check of approximately 3.5% and 4.9%, respectively.
 
Other Restaurant Operating Costs
 
Other restaurant operating costs decreased $4.5 million (7.0%) to $60.3 million for the 13-week period ended December 1, 2009, as compared to the corresponding period in the prior year.  This decrease includes $3.6 million of costs incurred on the 54 restaurants closed in fiscal 2009.  As a percentage of restaurant sales and operating revenue, these costs decreased from 22.5% to 22.2%.
 
Other restaurant operating costs decreased $12.3 million (9.2%) to $121.2 million for the 26-week period ended December 1, 2009, as compared to the corresponding period in the prior year.  This decrease includes $8.0 million of costs incurred on the 54 restaurants closed in fiscal 2009.  As a percentage of restaurant sales and operating revenue, these costs decreased from 21.9% to 21.2%.
 

 
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For the 13 weeks ended December 1, 2009, the remaining reductions not attributable to closings related to the following (in thousands):
 
Visa/Mastercard antitrust settlement
  $ 922  
Bad debt expense
    594  
Utilities
    392  
Other reductions
    1,263  
Repairs
    (1,015 )
Insurance
    (1,254 )
Net reductions
  $ 902  
 
In both absolute dollars and as a percentage of restaurant sales and operating revenue for the 13-week period, the decrease is primarily due to lower credit card expense resulting from accruing income relating to the expected net proceeds from the Visa/MasterCard antitrust class action litigation in which we were a class member, lower bad debt expense due to larger prior year adjustments for notes due from certain franchisees, decreases in utilities resulting from reductions in overall electric usage and changing natural gas and fuel vendors at certain of our restaurants which resulted in more favorable rates, and other decreases.  These were partially offset by increased repairs expenses due to upgrades and repairs at certain of our restaurants during the current quarter and higher general liability insurance expense due to unfavorable claims experience as compared to the same quarter of the prior year.
 
For the 26 weeks ended December 1, 2009, the remaining reductions not attributable to closings related to the following (in thousands):
 
Utilities
  $ 1,759  
Visa/Mastercard antitrust settlement
    922  
Rent and leasing
    921  
Bad debt expense
    695  
Other reductions
    1,911  
Insurance
    (1,985 )
Net reductions
  $ 4,223  
 
In both absolute dollars and as a percentage of restaurant sales and operating revenue for the 26-week period, the decrease is primarily due to decreases in utilities resulting from reductions in overall electric usage and changing natural gas and fuel vendors at certain of our restaurants which resulted in more favorable rates, lower credit card expense resulting from accruing income relating to the expected net proceeds from the Visa/MasterCard antitrust class action litigation in which we were a class member, lower bad debt expense due to larger prior year adjustments for notes due from certain franchisees, and decreases in rent and leasing and other.  These were partially offset by higher general liability insurance expense due to unfavorable claims experience.
 
Depreciation and Amortization
 
Depreciation and amortization expense decreased $3.0 million (15.7%) to $16.3 million for the 13-week period ended December 1, 2009, as compared to the corresponding period in the prior year.  As a percentage of restaurant sales and operating revenue, this expense decreased from 6.7% to 6.0%.
 
Depreciation and amortization expense decreased $6.9 million (17.5%) to $32.6 million for the 26-week period ended December 1, 2009, as compared to the corresponding period in the prior year.  As a percentage of restaurant sales and operating revenue, this expense decreased from 6.5% to 5.7%.
 
In terms of both absolute dollars and as a percentage of restaurant sales and operating revenue, the decrease for the 13- and 26-week periods is primarily due to reduced depreciation for assets that became fully depreciated since the first quarter of the prior year (reductions of $1.2 million and $3.4 million, respectively), restaurant closures (reductions of $0.8 million and $1.8 million, respectively), and other assets previously impaired (reductions of $0.3 million and $0.7 million, respectively).
 

 
29

 
 
Selling, General and Administrative Expenses, Net
 
 
Selling, general and administrative expenses, net of support service fee income, decreased $15.7 million (30.7%) to $35.4 million for the 26-week period ended December 1, 2009, as compared to the corresponding period in the prior year.
 
The decrease for the 13- and 26-week periods is primarily due to a reduction in advertising ($8.5 million and $15.6 million, respectively) as a result of national cable television advertising during the same periods of the prior year as compared to none in the current year, reflecting a shift in our marketing strategy to one based more on offering guests incentives through print media rather than through television.  Additionally, for the 26-week period the decrease was partially attributable to reduction in media sponsorship expenses relating to sponsorship of a racecar.
 
Closures and Impairments
 
Closures and impairments expense decreased $37.2 million to a $0.1 million income for the 13-week period ended December 1, 2009, as compared to the corresponding period of the prior year.  The decrease for the 13-week period is due primarily to reductions in impairment charges ($34.4 million), dead site costs ($2.0 million), and closed restaurant lease reserve expense ($0.8 million).

Closures and impairments decreased $38.5 million to $0.5 million for the 26-week period ended December 1, 2009, as compared to the corresponding period of the prior year.  The decrease for the 26-week period is due primarily to reductions in restaurant impairment charges ($35.5 million) coupled with higher gains during the period on the sale of surplus properties ($0.7 million), dead site costs ($1.9 million), and closed restaurant lease reserve expense ($0.5 million).

See Note G to our Condensed Consolidated Financial Statements for further information on our closures and impairment charges recorded during the first two quarters of fiscal 2010 and 2009.
 
Equity in Losses of Unconsolidated Franchises
 
 
Our equity in the losses of unconsolidated franchises was $1.0 million for the 26 weeks ended December 1, 2009 compared with $0.1 million for the 26 weeks ended December 2, 2008.  The change is attributable to increased losses from investments in five of our six 50%-owned franchise partnerships.  Two of these franchise partnerships had income for the same period of the prior year.  The increase in losses was due in part to same restaurant sales declines in the current year and fee rebates in the prior year, offset by lower advertising charges in the current year.
 
As of December 1, 2009, we held 50% equity investments in each of six franchise partnerships, which collectively operate 70 Ruby Tuesday restaurants.  As of December 2, 2008, we held 50% equity investments in each of six franchise partnerships which then collectively operated 71 Ruby Tuesday restaurants.
 
Interest Expense, Net
 
Net interest expense decreased $5.3 million to $4.6 million for the 13 weeks ended December 1, 2009, as compared to the corresponding period in the prior year, primarily due to lower average debt outstanding on the revolving credit agreement (the “Credit Facility”), lower interest rates on the Credit Facility, and other debt payments made since the same period of the prior year.  Net interest expense decreased $9.7 million to
 

 
30

 
 
$10.0 million for the 26-week period ended December 1, 2008, as compared to the corresponding period in the prior year, primarily for the same reasons mentioned above.
 
Provision for Income Taxes

The effective tax rate for the current quarter was 47.4% compared to 46.5% for the same period of the prior year.  The effective tax rate was 20.4% for the 26-week period ended December 1, 2009 compared to 46.6% for the corresponding period of the prior year.  The change in the effective tax rate resulted primarily from the fact that the Company projects to generate a consistent amount of FICA Tip Credit and Work Opportunity Tax Credits in fiscal 2010 as compared to fiscal 2009, despite recording an operating loss in fiscal 2009 and income in fiscal 2010.  The two tax credits are driven primarily by restaurant sales, rather than closures and impairments and goodwill impairment, which together contributed significantly to the fiscal 2009 operating loss.
Our MD&A is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make subjective or complex judgments that may affect the reported financial condition and results of operations.  We base our estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  We continually evaluate the information used to make these estimates as our business and the economic environment changes.
 
In our Annual Report on Form 10-K for the year ended June 2, 2009, we identified our critical accounting policies related to share-based employee compensation, impairment of long-lived assets, franchise accounting, lease obligations, estimated liability for self-insurance, and income tax valuation allowances and tax accruals.  During the first 26 weeks of fiscal 2010, there have been no changes in our critical accounting policies.
 
Liquidity and Capital Resources:

 
Cash and cash equivalents decreased by $3.7 million and $9.1 million during the first 26 weeks of fiscal 2010 and 2009, respectively.  The change in cash and cash equivalents is as follows (in thousands):
 
 
Twenty-six weeks ended
 
 
December 1,
 
December 2,
 
 
2009
 
2008
 
Cash provided by operating activities
  $ 58,154     $ 39,827  
Cash used by investing activities
    (7,048 )     (8,419 )
Cash used by financing activities
    (54,823 )     (40,514 )
Decrease in cash and cash equivalents
  $ (3,717 )   $ (9,106 )
 
Operating Activities
 
Cash provided by operating activities for the first 26 weeks of fiscal 2010 increased $18.3 million (46.0%) from the same period of the prior year to $58.2 million.  The increase is due to an increase in net income, after non-cash adjustments, and a greater collection of income taxes ($9.8 million increase) during the first 26 weeks of fiscal 2010 as compared with the same period of the prior year.
 
Our working capital deficiency and current ratio as of December 1, 2009 were $30.5 million and 0.7:1, respectively.  As is common in the restaurant industry, we carry current liabilities in excess of current assets because cash (a current asset) generated from operating activities is reinvested in capital
 

 
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expenditures (a long-term asset) or reduction of debt (a long-term liability) and receivable and inventory levels are generally not significant.
 
Investing Activities
 
We require capital principally for the maintenance and upkeep of our existing restaurants, limited new restaurant construction, investments in technology, equipment, remodeling of existing restaurants, and on occasion for the acquisition of franchisees or other restaurant concepts.  Property and equipment expenditures for the 26 weeks ended December 1, 2009 were $9.9 million, which is $1.4 million less than property and equipment expenditures during the same period of the prior year due to no openings in the current year.
 
Capital expenditures for the remainder of the fiscal year are budgeted to be approximately $8.0 million to $10.0 million based on our planned improvements for existing restaurants.  We intend to fund capital expenditures for Company-owned restaurants with cash provided by operations.
 
Financing Activities
 
Historically, our primary sources of cash have been operating activities and proceeds from stock option exercises and refranchising transactions.  When these alone have not provided sufficient funds for both our capital and other needs, we have obtained funds through the issuance of indebtedness or, more recently, through the issuance of additional shares of common stock.  Our current borrowings and credit facilities and our recent common stock offering are described below.
 
On July 28, 2009, we closed an underwritten public offering of 11.5 million shares of Ruby Tuesday, Inc. common stock at $6.75 per share, less underwriting discounts, as further discussed in Note B to the Condensed Consolidated Financial Statements.  We received approximately $73.1 million in net proceeds from the sale of the shares, after deducting underwriting discounts and offering expenses.  The net proceeds were used to repay indebtedness under our five-year revolving credit agreement (the “Credit Facility”).

On November 19, 2004, we entered into the Credit Facility to provide capital for general corporate purposes.  On February 28, 2007, we amended and restated our Credit Facility such that the aggregate amount we may borrow increased to $500.0 million.  This amount included a $50.0 million subcommitment for the issuance of standby letters of credit and a $50.0 million subcommitment for swingline loans.  Due to concerns that at some point in the future we might not be in compliance with certain of our debt covenants, we entered into an additional amendment of the amended and restated Credit Facility on May 21, 2008.

The May 21, 2008 amendment to the Credit Facility, as well as a similarly-dated amendment and restatement of the notes issued in the Private Placement as discussed below, eased financial covenants regarding minimum fixed charge coverage ratio and maximum funded debt ratio.  We are currently in compliance with our debt covenants.  In exchange for the new covenant requirements, in addition to higher interest rate spreads and mandatory reductions in capacity and/or prepayments of principal, the amendments also imposed restrictions on future capital expenditures and require us to achieve certain leverage thresholds for two consecutive fiscal quarters before we may pay dividends or repurchase any of our stock.

Following the May 21, 2008 amendment to the Credit Facility, through a series of scheduled quarterly and other required reductions, our original $500.0 million capacity has been reduced, as of December 1, 2009, to $420.9 million.  We expect the capacity of the Credit Facility will be reduced by $19.5 million during the remainder of fiscal 2010.

Under the Credit Facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize.  Our options for the rate are the Base Rate or an adjusted LIBO Rate plus an applicable margin.  The Base Rate is defined to be the higher of the issuing bank’s prime lending rate or the Federal Funds rate plus 0.5%.  The applicable margin is zero to 2.5% for the Base Rate loans and a percentage ranging from 1.0% to 3.5% for the LIBO Rate-based option.  We pay commitment fees quarterly ranging from 0.2% to 0.5% on the unused portion of the Credit Facility.

 
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Under the terms of the Credit Facility, we had borrowings of $201.3 million with an associated floating rate of interest of 1.90% at December 1, 2009.  As of June 2, 2009, we had $319.1 million outstanding with an associated floating rate of interest of 2.96%.  After consideration of letters of credit outstanding, we had $205.8 million available under the Credit Facility as of December 1, 2009.  The Credit Facility will mature on February 23, 2012.

On April 3, 2003, we issued notes totaling $150.0 million through a private placement of debt (the “Private Placement”).  On May 21, 2008, given similar circumstances as those with the Credit Facility discussed above, we amended and restated the notes issued in the Private Placement.  The May 21, 2008 amendment requires us to offer quarterly and other prepayments, which predominantly consist of semi-annual prepayments to be determined based upon excess cash flows as defined in the Private Placement.

At December 1, 2009, the Private Placement consisted of $72.6 million in notes with an interest rate of 8.19% (the “Series A Notes”) and $52.3 million in notes with an interest rate of 8.92% (the “Series B Notes”).  The Series A Notes and Series B Notes mature on April 1, 2010 and April 1, 2013, respectively.  During the 26 weeks ended December 1, 2009, we offered, and our noteholders accepted, principal prepayments of $4.6 million and $3.3 million on the Series A and B Notes, respectively.  We estimate that we will offer prepayments totaling $10.1 million during the next twelve months.  Accordingly, we have classified $10.1 million as current as of December 1, 2009.  This amount includes four quarterly offers of $2.0 million each and additional amounts to be determined based upon excess cash flows and sales of surplus properties.

We currently project that $70.2 million will be outstanding on April 1, 2010, the maturity date of our Series A Notes.  Because of our ability and intent to refinance the balance on a long-term basis by utilizing the capacity on our Credit Facility, we have classified this amount as non-current in our December 1, 2009 Condensed Consolidated Balance Sheet.

Simultaneous with the other May 21, 2008 amendments, we entered into a pledge agreement with our Credit Facility and Private Placement creditors, as well as those creditors associated with our Franchise Facility (discussed in Note L to the Condensed Consolidated Financial Statements), whereby we pledged certain subsidiary equity interests as security for the repayment of our obligations under these agreements.

During the remainder of fiscal 2010, we expect to fund operations, capital expansion, and any other investments, from operating cash flows, our Credit Facility, and operating leases.

Covenant Compliance

Under the terms of the Credit Facility and the notes issued in the Private Placement, we are required to satisfy and maintain specified financial ratios and other financial condition tests and covenants.  The financial ratios include maximum funded debt, minimum fixed charge coverage and minimum net worth covenants.  Our continued ability to meet those financial ratios, tests and covenants can be affected by events beyond our control, and we cannot assure you that we will meet those ratios, tests and covenants.

Maximum Funded Debt Covenant
Our maximum funded debt covenant is an Adjusted Total Debt to Consolidated EBITDAR ratio.  Adjusted Total Debt, as defined in our covenants, includes items both on-balance sheet (debt and capital lease obligations) and off-balance sheet (such as the present value of leases, letters of credit and guarantees).  Consolidated EBITDAR is consolidated net income/(loss) (for the Company and its majority-owned subsidiaries) plus interest charges, income tax, depreciation, amortization, rent and other non-cash charges.  Among other charges, we have reflected share-based compensation, asset impairment and bad debt expense, as non-cash.  Until the end of the quarter ended March 3, 2009, we were allowed to add back the costs (up to $10.0 million) incurred in connection with the closing of restaurants recorded in accordance with generally accepted accounting principles (“GAAP”).
 
Consolidated EBITDAR and Adjusted Total Debt are not presentations made in accordance with GAAP, and, as such, should not be considered a measure of financial performance or condition, liquidity or profitability.  They also should not be considered alternatives to GAAP-based net income or balance sheet amounts or operating cash flows or indicators of the amount of free cash flow available for discretionary use by management, as Consolidated EBITDAR does not consider certain cash requirements such as interest payments, tax payments or debt service requirements and Adjusted Total Debt includes certain off-balance sheet items.  Further, because not all companies use identical calculations, amounts reflected by
 

 
33

 
 
RTI as Consolidated EBITDAR or Adjusted Total Debt may not be comparable to similarly titled measures of other companies.  We believe that the information shown below is relevant as it presents the amounts used to calculate covenants which are provided to our lenders.  Non-compliance with our debt covenants could result in the requirement to immediately repay all amounts outstanding under such agreements.
 
The following is a reconciliation of our total long-term debt and capital leases, which are GAAP-based, to Adjusted Total Debt as defined in our bank covenants (in thousands):

   
December 1, 2009
 
Current portion of long-term debt,
     
   including capital leases
  $ 14,624  
Long-term debt and capital leases,
       
   less current maturities
    350,835  
Total long-term debt and capital leases
    365,459  
Present value of operating leases*
    191,290  
Letters of credit*
    13,817  
Guarantees*
    48,065  
Adjusted Total Debt
  $ 618,631  
 
* Non-GAAP measure.  See below for discussion regarding reconciliation to GAAP-based amounts.
 
The following is a reconciliation of net income, which is a GAAP-based measure of our operating results, to Consolidated EBITDAR as defined in our bank covenants (in thousands):
 
   
Twelve Months
 
   
Ended
 
   
December 1, 2009
 
Net income
  $ 25,791  
Interest expense
    25,306  
Income taxes
    9,134  
Depreciation
    68,084  
Amortization of intangibles
    668  
Rent expense
    50,078  
Share-based compensation expense
    7,682  
Asset impairments
    5,672  
Equity in losses of subsidiaries
    896  
Bad debt expense
    2,995  
Amortization of debt issuance costs
    2,094  
Non-cash accruals
    1,696  
Restaurant closing costs
    3,807  
Other
    44  
Consolidated EBITDAR
  $ 203,947  

Adjusted Total Debt to Consolidated EBITDAR – Actual
    3.03 x
Maximum allowed per covenant (1)
    4.00 x
 
(1) The Credit Facility and notes issued in the Private Placement require us to maintain a maximum funded debt ratio, defined as Adjusted Total Debt to Consolidated EBITDAR, of less than or equal to 4.00x from September 2, 2009 to March 2, 2010, 3.75x from March 3, 2010 to March 1, 2011, 3.50x from March 2, 2011 to March 1, 2012, and, for the notes issued in the Private Placement only, 3.25x thereafter.
 
We expect to generate free cash flow of $45.0 to $55.0 million during the remainder of fiscal 2010, a substantial portion of which will be dedicated to the reduction of debt.
 
Minimum Fixed Charge Coverage
Our fixed charge coverage ratio compares Consolidated EBITDAR (as discussed above) to interest and cash-based rents.
 
 
 
34

 
 
The following shows our computation of our fixed charge coverage ratio (in thousands):
 
 
Twelve Months
 
 
Ended
 
 
December 1, 2009
 
Consolidated EBITDAR
$ 203,947  
       
Interest expense
$ 25,306  
Cash rents*
  40,485  
Total
$ 65,791  
 
* Non-GAAP measure.  See below for discussion regarding reconciliation to GAAP-based amounts.
 
Fixed Charge Covenant – Actual
    3.10 x
Minimum allowed per covenant (2)
    2.25 x
 
(2) The Credit Facility and notes issued in the Private Placement require us to maintain a minimum fixed charge coverage ratio of greater than or equal to 2.25x through March 1, 2011, 2.50x from March 2, 2011 to March 1, 2012, and, for the notes issued in conjunction with the Private Placement, 2.75x thereafter.
 
Minimum Consolidated Net Worth Covenant
Our minimum Consolidated Net Worth covenant requires us to maintain a net worth, primarily comprised of the par value of our common stock, plus additional paid in capital and retained earnings, of at least $300,000,000 plus 25% of our consolidated net income for each completed fiscal year ending after June 4, 2003.  For purposes of this requirement, we are allowed to exclude from retained earnings charges recorded for the impairment of goodwill or other intangible assets.  During fiscal 2009, we recorded impairment charges of $19.0 million and $0.5 million relating to impairments of goodwill and other intangible assets, respectively.
 
We reported net income of $431.2 million for the period of fiscal 2004-2008 and a net loss for fiscal 2009.  Under our covenants, this level of net income results in a consolidated net worth requirement, as defined, of $407.8 million.  Excluding the impact of the goodwill impairment ($14.0 million, net of tax) and other intangible asset impairments ($0.3 million, net of tax), the sum of the par value of our common stock, additional paid in capital and retained earnings as of December 1, 2009 was $527.4 million.
 
Non-GAAP Amounts Used in Debt Covenant Calculations
As previously discussed, we use various non-GAAP amounts in our Adjusted Total Debt, Consolidated EBITDAR, and Fixed Charge covenant calculations.  Two of the amounts presented in the Adjusted Total Debt calculation, the present value of operating leases and letters of credit, are off-balance sheet and there is no corresponding amount presented in our Condensed Consolidated Balance Sheets.  We do have a $1.6 million liability for guarantees recorded in our Condensed Consolidated Balance Sheet.  The amount on the balance sheet is the fair value of our guarantee, which is $46.5 million lower than the amount presented in our debt covenant calculations ($48.1 million, the full amount of the guarantee).
 
Our Minimum Fixed Charge Coverage ratio allows for recurring cash rents to be included in the denominator.  Cash rents ($40.5 million on a rolling 12 month basis) differ from rents determined in accordance with GAAP ($50.1 million) by the following (amounts in thousands):
 
Cash rents
  $ 40,485  
Change in rent accruals
    3,973  
Rent settlements
    5,620  
GAAP-based rent expense
  $ 50,078  
 

 
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Payments Due By Period
 
       
Less than
   1-3    3-5  
More than 5
 
   
Total
 
1 year
    years     years  
years
 
Notes payable and other
   long-term debt, including
                         
   current maturities (a)
  $ 39,279   $ 4,550   10,161   8,205   $ 16,363  
Revolving credit facility (a)
    201,300         201,300          
Unsecured senior notes
                               
   (Series A and B) (a)
    124,880     80,257     22,484     22,139      
Interest (b)
    33,447     10,839     12,059     4,626     5,923  
Operating leases (c)
    350,845     38,590     71,561     60,790     179,904  
Purchase obligations (d)
    159,283     93,108     31,295     21,495     13,385  
Pension obligations (e)
    32,460     3,533     12,308     5,182     11,437  
   Total (f)
  $ 941,494   $ 230,877   361,168   122,437   $ 227,012  
 
(a)  
See Note F to the Condensed Consolidated Financial Statements for more information.
(b)  
Amounts represent contractual interest payments on our fixed-rate debt instruments.  Interest payments on our variable-rate revolving credit facility and variable-rate notes payable with balances of $201.3 million and $2.6 million, respectively, as of December 1, 2009 have been excluded from the amounts shown above, primarily because the balance outstanding under the Credit Facility, described further in Note F of the Condensed Consolidated Financial Statements,  fluctuates daily.  Additionally, the amounts shown above include interest payments on the Series A and B Notes at the current interest rates of 8.19% and 8.92%, respectively.  These rates could be different in the future based upon certain leverage ratios.
(c)  
This amount includes operating leases totaling $19.7 million for which sublease income of $19.7 million from franchisees or others is expected.  Certain of these leases obligate us to pay maintenance costs, utilities, real estate taxes, and insurance, which are excluded from the amounts shown above.  See Note E to the Condensed Consolidated Financial Statements for more information.
(d)  
The amounts for purchase obligations include commitments for food items and supplies, telephone, utility, and other miscellaneous commitments.
(e)  
See Note H to the Condensed Consolidated Financial Statements for more information.
(f)  
This amount excludes $4.2 million of unrecognized tax benefits due to the uncertainty regarding the timing of future cash outflows associated with such obligations.
 
Commercial Commitments (in thousands):
 
   
Payments Due By Period
 
         
Less than
     1-3      3-5    
More than 5
 
   
Total
   
1 year
   
years
   
years
   
Years
 
Letters of credit (a)
  $ 13,817     $ 13,817