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EX-32.1 - SECTION 906 CERTIFICATION FOR CEO - RUBY TUESDAY INCex_32-1.htm
EX-12.1 - COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES - RUBY TUESDAY INCex_12-1.htm
EX-31.2 - SECTION 302 CERTIFICATION FOR CFO - RUBY TUESDAY INCex_31-2.htm
EX-31.1 - SECTION 302 CERTIFICATION FOR CEO - RUBY TUESDAY INCex_31-1.htm
EX-32.2 - SECTION 906 CERTIFICATION FOR CFO - RUBY TUESDAY INCex_32-2.htm
EX-10.1 - SECOND AMENDMENT TO RUBY TUESDAY, INC. SDP - RUBY TUESDAY INCex_10-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 1, 2016
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to _________

Commission file number 1-12454
______________
 
RUBY TUESDAY, INC.
(Exact name of registrant as specified in its charter)


GEORGIA
 
63-0475239
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

 
150 West Church Avenue, Maryville, Tennessee 37801
(Address of principal executive offices) (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 x 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 (Do not check if a smaller reporting company) 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

60,189,858
(Number of shares of common stock, $0.01 par value, outstanding as of April 5, 2016)
 
 

 
 
RUBY TUESDAY, INC.
 
INDEX
 
 
Page
PART I - FINANCIAL INFORMATION
 
 
     ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
 
 
               CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
 
               MARCH 1, 2016 AND JUNE 2, 2015
 
 
 
               WEEKS ENDED MARCH 1, 2016 AND MARCH 3, 2015
 
 
               FOR THE THIRTY-NINE WEEKS ENDED
 
               MARCH 1, 2016 AND MARCH 3, 2015
 
               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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements represent our expectations or beliefs concerning future events, including one or more of the following:  future financial performance (including our estimates of changes in same-restaurant sales, average unit volumes, operating margins, expenses, and other items), future capital expenditures, the effect of strategic initiatives (including statements relating to cost savings initiatives and the benefits of our marketing), the opening or closing of restaurants by us or our franchisees, sales of our real estate or purchases of new real estate, future borrowings and repayments of debt, availability of financing on terms attractive to the Company, compliance with financial covenants in our debt instruments, payment of dividends, stock and bond repurchases, restaurant acquisitions and dispositions, and changes in senior management and in the Board of Directors.  We caution the reader that a number of important factors and uncertainties could, individually or in the aggregate, cause our actual results to differ materially from those included in the forward-looking statements, including, without limitation, the risks and uncertainties described in the Risk Factors included in Part I, Item A of our Annual Report on Form 10-K for the year ended June 2, 2015.

 

3

PART I — FINANCIAL INFORMATION
ITEM 1.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER-SHARE DATA)
 
(UNAUDITED)

   
MARCH 1,
   
JUNE 2,
 
   
2016
   
2015
 
         
(as adjusted)
 
       
Assets
 
(NOTE 1)
 
Current assets:
           
      Cash and cash equivalents
  $ 52,458     $ 75,331  
      Accounts receivable
    5,866       5,287  
      Inventories:
               
        Merchandise
    14,755       12,861  
        China, silver and supplies
    7,832       7,550  
      Income tax receivable
    2,958        
      Prepaid rent and other expenses
    11,520       12,398  
      Assets held for sale
    3,402       5,453  
           Total current assets
    98,791       118,880  
                 
Property and equipment, net
    722,570       752,174  
Deferred income taxes, net
    1,995        
Other assets
    47,108       54,398  
          Total assets
  $ 870,464     $ 925,452  
                 
Liabilities & Shareholders’ Equity
               
Current liabilities:
               
      Accounts payable
  $ 16,202     $ 23,005  
      Accrued liabilities:
               
        Taxes, other than income and payroll
    9,279       11,067  
        Payroll and related costs
    13,279       20,351  
        Insurance
    5,929       7,633  
        Deferred revenue – gift cards
    18,797       16,636  
        Rent and other
    21,822       20,535  
      Current portion of long-term debt, including capital leases
    10,964       10,078  
      Income tax payable
          1,069  
      Deferred income taxes, net
    2,612       7  
          Total current liabilities
    98,884       110,381  
                 
Long-term debt and capital leases, less current maturities
    218,117       231,017  
Deferred income taxes, net
          1,442  
Deferred escalating minimum rent
    51,793       50,768  
Other deferred liabilities
    66,116       66,261  
          Total liabilities
    434,910       459,869  
                 
Commitments and contingencies (Note 12)
               
                 
Shareholders’ equity:
               
      Common stock, $0.01 par value; (authorized: 100,000 shares;
               
        Issued and outstanding: 60,193 shares at 3/01/16; 62,098 shares at 6/02/15)
    602       621  
      Capital in excess of par value
    75,592       83,870  
      Retained earnings
    368,953       392,032  
      Deferred compensation liability payable in Company stock
    625       681  
      Company stock held by Deferred Compensation Plan
    (625 )     (681 )
      Accumulated other comprehensive loss
    (9,593 )     (10,940 )
          Total shareholders’ equity
    435,554       465,583  
                 
          Total liabilities & shareholders’ equity
  $ 870,464     $ 925,452  
 
                   The accompanying notes are an integral part of the condensed consolidated financial statements.
 

4
 
(IN THOUSANDS EXCEPT PER-SHARE DATA)
(UNAUDITED)
 
 
THIRTEEN WEEKS ENDED
 
THIRTY-NINE WEEKS ENDED
 
   
MARCH 1,
    MARCH 3,     MARCH 1,    
MARCH 3,
 
   
2016
    2015     2016    
2015
 
          (as adjusted)             (as adjusted)  
     (NOTE 1)      (NOTE 1)  
Revenue:
                       
                         
Restaurant sales and operating revenue
$
269,868
 
$
284,392
 
$
807,105
 
$
825,055
 
Franchise revenue
 
1,602
   
1,521
   
4,801
   
4,699
 
   
271,470
   
285,913
   
811,906
   
829,754
 
Operating costs and expenses:
                       
    Cost of goods sold (excluding depreciation and                        
     amortization shown below)
 
75,143
   
77,796
   
221,689
   
224,589
 
Payroll and related costs
 
93,357
   
96,680
   
280,976
   
286,486
 
Other restaurant operating costs
 
55,311
   
60,972
   
173,903
   
179,706
 
Depreciation and amortization
 
12,732
   
12,961
   
38,474
   
39,319
 
Selling, general and administrative, net
 
27,378
   
28,948
   
84,622
   
87,141
 
Closures and impairments, net
 
6,123
   
3,991
   
18,908
   
6,548
 
Trademark impairment
 
   
   
1,999
   
 
Interest expense, net
 
5,005
   
5,446
   
16,110
   
16,783
 
    Gain on extinguishment of debt    (10  
     (10  
 
   
275,039
   
286,794
   
836,671
   
840,572
 
 
                       
Loss before income taxes
  (3,569 )   (881 )    (24,765 )    (10,818 )
Benefit for income taxes
 
(483
 
(112
)  
(1,686
 
(3,341
)
                         
Net loss
$
(3,086
)
$
(769
)
$
(23,079
)
$
(7,477
)
                         
Other comprehensive income:
                       
Pension liability reclassification
 
885
   
463
   
1,347
   
1,390
 
Total comprehensive loss
$
(2,201
)
$
(306
)
$
(21,732
)
$
(6,087
)
                         
Loss per share:
                       
Basic
$
(0.05
)
$
(0.01
)
$
(0.38
)
$
(0.12
)
Diluted
 $
(0.05
 $
(0.01
)  $
(0.38
 $
(0.12
                         
Weighted average shares:
                       
Basic
 
60,918
   
60,643
   
61,239
   
60,532
 
Diluted
 
60,918
   
60,643
   
61,239
   
60,532
 
 
                The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 

5
 
RUBY TUESDAY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 
(UNAUDITED)
 
  
 
THIRTY-NINE WEEKS ENDED
   
MARCH 1,
2016
   
MARCH 3,
2015
 
  
       
(as adjusted)
 
   
 
       
   
(NOTE 1)
 
Operating activities:
           
Net loss
  $ (23,079   $ (7,477
Adjustments to reconcile net loss to net cash
               
  provided by operating activities:
               
    Depreciation and amortization
    38,474       39,319  
    Deferred income taxes
    (832 )     (2,736 )
    Loss on impairments, including disposition of assets
    15,490       6,755  
    Trademark impairment
    1,999        
    Gain on extinguishment of debt
    (10 )      
    Share-based compensation expense
    1,680       5,380  
    Excess tax benefits from share-based compensation
          (37 )
    Lease reserve adjustments
    3,118       1,141  
    Deferred escalating minimum rent
    1,630       1,764  
    Other, net
    3,135       1,600  
  Changes in operating assets and liabilities:
               
     Receivables
    (579 )     (3 )
     Inventories
    (2,176 )     (1,770 )
     Income taxes
    (4,027 )     (233 )
     Prepaid and other assets
    677       (1,419 )
     Accounts payable, accrued and other liabilities
    (16,961 )     (14,857 )
  Net cash provided by operating activities
    18,539       27,427  
                 
Investing activities:
               
Purchases of property and equipment
    (27,346 )     (21,134 )
Proceeds from disposal of assets
    6,193       8,696  
Insurance proceeds from property claims
          145  
Reductions in Deferred Compensation Plan assets
    833       1,243  
Other, net
    1,611       790  
  Net cash used by investing activities
    (18,709 )     (10,260 )
                 
Financing activities:
               
Principal payments on long-term debt and capital leases
    (12,664 )     (7,412 )
Stock repurchases
    (10,009     (73
Payments for debt issuance costs
    (30 )     (281 )
Proceeds from exercise of stock options
          457  
Excess tax benefits from share-based compensation
          37  
  Net cash used by financing activities
    (22,703 )     (7,272 )
                 
(Decrease)/increase in cash and cash equivalents
    (22,873 )     9,895  
Cash and cash equivalents:
               
  Beginning of year
    75,331       51,326  
  End of quarter
  $ 52,458     $ 61,221  
                 
Supplemental disclosure of cash flow information:
               
      Cash paid for:
               
        Interest, net of amount capitalized
  $ 10,666     $ 11,173  
        Income taxes, net of refunds
  $ 3,178     $ 1,721  
Significant non-cash investing and financing activities:
               
        Retirement of fully depreciated assets
  $ 22,393     $ 17,510  
        Reclassification of properties to assets held for sale
  $ 3,387     $ 5,572  
        Monetization of, and subsequent reinvestment into, life insurance policies
  $ 5,642     $ 6,851  
 
                 The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 

6
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
NOTE 1 – BASIS OF PRESENTATION
 
Description of Business
Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” the “Company,” “we,” and/or “our”), owns and operates Ruby Tuesday® casual dining and Lime Fresh Mexican Grill® (“Lime Fresh”) fast casual restaurants.  We also franchise the Ruby Tuesday concept in selected domestic and international markets and the Lime Fresh concept in selected domestic markets.

Basis of Presentation
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 (“GAAP”) 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 GAAP requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes.  Actual results could differ from those estimates.  Operating results for the 39-week period ended March 1, 2016 are not necessarily indicative of results that may be expected for the 52-week year ending May 31, 2016.  These financial statements should be read in conjunction with the audited consolidated financial statement and footnotes thereto included in RTI’s Annual Report on Form 10-K for the fiscal year ended June 2, 2015.

Reclassifications
As further reflected in Note 6 to the Condensed Consolidated Financial Statements, we adopted Accounting Standards Update (“ASU”) 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) during the first quarter of fiscal year 2016.  As shown in the table below, pursuant to the guidance in ASU 2015-03 we have reclassified unamortized debt issuance costs associated with our senior notes and mortgage loan obligations in our previously reported Consolidated Balance Sheet as of June 2, 2015 as follows (in thousands):
 
 
As presented
June 2, 2015
 
 
Reclassifications
 
As adjusted
June 2, 2015
Prepaid rent and other expenses
$   13,181
$    (783)
$   12,398
Other assets
     57,554
   (3,156)
     54,398
Current maturities of long-term debt,
     
   including capital leases
     10,861
      (783)
     10,078
Long-term debt and capital leases,
     
   less current maturities
  234,173
   (3,156)
   231,017

As shown in the table below, we have also reclassified amortization of intangible assets from Other restaurant operating costs to Depreciation and amortization in the Condensed Consolidated Statements of Operations and Comprehensive Loss for the prior periods to be comparable with the classification for the 13 and 39 weeks ended March 1, 2016.  We made this reclassification to more accurately reflect the nature of the expenses in our Condensed Consolidated Statements of Operations and Comprehensive Loss.  Amounts presented are in thousands.

 
As presented
Thirteen weeks ended
March 3, 2015
 
 
Reclassifications
As adjusted
Thirteen weeks ended
 March 3, 2015
Other restaurant operating costs
$ 61,528
$ (556)
$   60,972
Depreciation and amortization
   12,405
   556
     12,961

 
 
 
As presented
Thirty-nine weeks ended
March 3, 2015
 
 
Reclassifications
As adjusted
Thirty-nine weeks ended
March 3, 2105
Other restaurant operating costs
$ 181,424
$ (1,718)
$   179,706
Depreciation and amortization
     37,601
   1,718
       39,319
 
 

7
 
Change in Accounting Principle
During the first quarter of fiscal year 2016, we completed the implementation of a new inventory management system in our company-owned restaurants.  In connection with this implementation, we changed our method of accounting for inventory from the lower of cost (first-in, first-out) or market method utilized by our legacy system to the lower of cost or market method using a weighted-average cost method.  We believe this change in accounting principle is preferable because we believe it will result in greater precision in the costing of inventories.  In addition, the weighted-average cost method better aligns with the functionality of the new inventory management system.  We determined that the effects of adopting the weighted average cost method were not material to our Condensed Consolidated Financial Statements.  Prior to the conversion to the new inventory management system, we were not able to determine the impact of the change to the weighted-average cost method.  Therefore, we did not retroactively apply the change to periods prior to fiscal year 2016.
 
NOTE 2 – LOSS PER SHARE
 
Loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during each period presented.  Diluted loss per share does not give effect to stock options and restricted stock outstanding during the applicable periods as the effect would be anti-dilutive.  The following table reflects the calculation of weighted average common and dilutive potential common shares outstanding as presented in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per share data):
 
   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
March 1, 2016
   
March 3, 2015
   
March 1, 2016
   
March 3, 2015
 
  Net loss
  $ (3,086 )   $ (769 )   $ (23,079 )   $ (7,477 )
                                 
  Weighted-average common
                               
     shares outstanding
    60,918       60,643       61,239       60,532  
 Dilutive effect of stock
                               
     options and restricted stock
                       
  Weighted average common
                               
     and dilutive potential
                               
     common shares outstanding
    60,918       60,643       61,239       60,532  
                                 
    Basic loss per share
  $ (0.05 )   $ (0.01 )   $ (0.38 )   $ (0.12 )
    Diluted loss per share
  $ (0.05 )   $ (0.01 )   $ (0.38 )   $ (0.12 )
 
Stock options with an exercise price greater than the average market price of our common stock and certain options, restricted stock, and restricted share units with unrecognized compensation expense do not impact the computation of diluted loss per share because the effect would be anti-dilutive.  The following table summarizes on a weighted-average basis stock options, restricted shares, and restricted share units that were excluded from the computation of diluted loss per share because their inclusion would have had an anti-dilutive effect (in thousands):
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
March 1, 2016
 
March 3, 2015
 
March 1, 2016
 
March 3, 2015
  Stock options
2,140
 
3,057
 
2,509
 
3,087
  Restricted shares / Restricted share units
871
 
1,412
 
862
 
1,350
  Total
3,011
 
4,469
 
3,371
 
4,437

NOTE 3 – FRANCHISE PROGRAMS

As of March 1, 2016, our domestic and international franchisees collectively operated 80 domestic and international Ruby Tuesday restaurants and eight domestic Lime Fresh restaurants.  We do not own any equity interest in our existing franchisees.

Under the terms of the franchise operating agreements, we charge a royalty fee (generally 4.0% of monthly gross sales for our Ruby Tuesday concept franchisees and 5.25% of monthly gross sales for our Lime Fresh concept franchisees) and require all domestic franchisees to contribute a percentage, 1.5% as of March 1, 2016, of monthly gross sales to a national advertising fund formed to cover their pro rata portion of the 

 

8
 
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 and Comprehensive Loss.

In addition to the advertising fee discussed above, our Ruby Tuesday concept franchise agreements allow us to charge up to a 2.0% support service fee and a 1.5% marketing and purchasing fee.  Our last support services contract expired on June 30, 2015.  For the 13 and 39 weeks ended March 1, 2016, we recorded $0.2 million and $0.7 million, respectively, and for the 13 and 39 weeks ended March 3, 2015, we recorded $0.3 million and $1.0 million, respectively, in support service and marketing and purchasing fees, which were an offset to Selling, general and administrative, net in our Condensed Consolidated Statements of Operations and Comprehensive Loss.

NOTE 4 – ACCOUNTS RECEIVABLE
 
Accounts receivable consist of the following (in thousands):
 
   
March 1, 2016
   
June 2, 2015
 
             
Rebates receivable
  $ 831     $ 943  
Amounts due from franchisees
    2,681       1,995  
Third-party gift card sales
    987       1,330  
Other receivables
    1,367       1,019  
    $ 5,866     $ 5,287  

We negotiate purchase arrangements, including price terms, with designated and approved suppliers on behalf of us and our franchise system.  We receive various volume discounts and rebates based on purchases for our Company-owned restaurants from numerous suppliers.

Amounts due from franchisees consist of royalties, license and other miscellaneous fees, a substantial portion of which represents current and recently-invoiced billings.

NOTE 5 – PROPERTY, EQUIPMENT, ASSETS HELD FOR SALE, AND OPERATING LEASES
 
Property and equipment, net, is comprised of the following (in thousands):
 
   
March 1, 2016
   
June 2, 2015
 
             
Land
  $ 212,068     $ 212,073  
Buildings
    427,783       426,813  
Improvements
    339,538       358,549  
Restaurant equipment
    243,711       247,775  
Other equipment
    87,400       87,782  
Surplus properties*
    8,982       10,504  
Construction in progress and other
    4,260       4,316  
      1,323,742       1,347,812  
Less accumulated depreciation
    601,172       595,638  
    $ 722,570     $ 752,174  
* Surplus properties represent 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, closed properties which include a building, and liquor licenses not needed for operations.

Included within the current assets section of our Condensed Consolidated Balance Sheets at March 1, 2016 and June 2, 2015 are amounts classified as held for sale totaling $3.4 million and $5.5 million, respectively.  Assets held for sale primarily consist of parcels of land upon which we have no intention to build restaurants, land and buildings of closed restaurants, and various liquor licenses.  During the second quarter of fiscal year 2016, we entered into an agreement to sell eight Company-owned Lime Fresh restaurants in
 
 

9
 
Florida for approximately $6.3 million, which we expect to complete over the remainder of fiscal year 2016, and closed the remaining 11 Company-owned Lime Fresh restaurants.  Accordingly, included within amounts classified as assets held for sale as of March 1, 2016 was $2.1 million, an amount representing the net book value of improvements, restaurant equipment, and other equipment associated with the eight restaurants that we plan to sell over the remainder of fiscal year 2016.

During the 13 and 39 weeks ended March 1, 2016, we sold surplus properties with carrying values of $2.4 million and $5.2 million, respectively, at net gains of $0.1 million and $1.0 million, respectively.  Cash proceeds, net of broker fees, from these sales during the 13 and 39 weeks ended March 1, 2016 totaled $2.5 million and $6.2 million, respectively.  During the 13 and 39 weeks ended March 3, 2015, we sold surplus properties with carrying values of $2.8 million and $7.3 million, respectively, at net gains of $0.2 million and $1.3 million, respectively.  Cash proceeds, net of broker fees, from these sales during the 13 and 39 weeks ended March 3, 2015 totaled $3.0 million and $8.6 million, respectively.

NOTE 6 – LONG-TERM DEBT AND CAPITAL LEASES
 
Long-term debt and capital lease obligations consist of the following (in thousands):
 
   
March 1, 2016
   
June 2, 2015
 
         
(as adjusted)
 
             
Senior unsecured notes
  $ 212,546     $ 215,000  
Unamortized discount
    (1,866 )     (2,162 )
Unamortized debt issuance costs
    (3,154 )     (3,656 )
Senior unsecured notes less unamortized discount and
               
   debt issuance costs
    207,526       209,182  
Revolving credit facility
           
Mortgage loan obligations
    21,335       31,607  
Unamortized premium - mortgage loan obligations
    161       383  
Unamortized debt issuance costs - mortgage loan obligations
    (141 )     (283 )
Capital lease obligations
    200       206  
      229,081       241,095  
Less current maturities
    10,964       10,078  
    $ 218,117     $ 231,017  

On May 14, 2012, we entered into an indenture (the “Indenture”) among Ruby Tuesday, Inc., certain subsidiaries of the Company as guarantors and Wells Fargo Bank, National Association as trustee, governing the Company’s $250.0 million aggregate principal amount of 7.625% senior notes due 2020 (the “Senior Notes”).  The Senior Notes were issued at a discount of $3.7 million, which is being amortized using the effective interest method over the eight-year term of the notes.

The Senior Notes are guaranteed on a senior unsecured basis by our existing and future domestic restricted subsidiaries, subject to certain exceptions.  They rank equal in right of payment with our existing and future senior indebtedness and senior in right of payment to any of our future subordinated indebtedness.  The Senior Notes are effectively subordinated to all of our secured debt, including borrowings outstanding under our revolving credit facility, to the extent of the value of the assets securing such debt and structurally subordinated to all of the liabilities of our existing and future subsidiaries that do not guarantee the Senior Notes.

Interest on the Senior Notes is calculated at 7.625% per annum, payable semiannually on each May 15 and November 15 to holders of record on the May 1 or November 1 immediately preceding the interest payment date.  Accrued interest on the Senior Notes and our other long-term debt and capital lease obligations was $5.0 million and $1.1 million as of March 1, 2016 and June 2, 2015, respectively, and is included in Accrued liabilities – Rent and other in our Consolidated Balance Sheets.  The Senior Notes mature on May 15, 2020.

At any time prior to May 15, 2016, we may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus an applicable “make-whole” premium and accrued and unpaid interest.  At any time on or after May 15, 2016, we may redeem the Senior Notes, in whole or in 

 

10
 
part, at the redemption prices specified in the Indenture plus accrued and unpaid interest.  There is no sinking fund for the Senior Notes.
 
The Indenture contains covenants that limit, among other things, our ability and the ability of certain of our subsidiaries to (i) incur or guarantee additional indebtedness; (ii) declare or pay dividends, redeem stock or make other distributions to stockholders; (iii) make certain investments; (iv) create liens or use assets as security in other transactions; (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of their assets; (vi) enter into transactions with affiliates; and (vii) sell or transfer certain assets.  The Indenture also restricts the declaration and payment of a dividend or other distribution on, and/or repurchase by RTI in respect of, its outstanding common stock at any time and from time to time.  These covenants are subject to a number of important exceptions and qualifications, as described in the Indenture, and certain covenants will not apply at any time when the Senior Notes are rated investment grade by the Rating Agencies, as defined in the Indenture.  The Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately.

On December 3, 2013, we entered into a four-year revolving credit agreement (the “Senior Credit Facility”) under which we may borrow up to $50.0 million with the option, subject to certain conditions, to increase the facility by up to $35.0 million.  The terms of the Senior Credit Facility provide for a $25.0 million sublimit for the issuance of standby letters of credit.

Under the terms of the Senior Credit Facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize.  Our options for the rate are a Base Rate or LIBOR plus an applicable margin, provided that the rate shall not be less than zero.  The Base Rate is defined as the highest of the issuing bank’s prime rate, the Federal Funds rate plus 0.50%, or the Adjusted LIBO rate (as defined in the Senior Credit Facility) plus 1.0%.  The applicable margin for the LIBOR rate-based option is a percentage ranging from 2.50% to 3.50% and for the Base Rate option is a percentage ranging from 1.50% to 2.50%.  We pay commitment fees quarterly ranging from 0.40% to 0.75% on the unused portion of the Senior Credit Facility.

As security for the Senior Credit Facility, we granted the lenders liens and security interests in substantially all of the shares of capital stock of the Company and each of our present and future subsidiaries, substantially all of the personal property of the Company and each of our present and future subsidiaries, and the real property, improvements, and fixtures of 49 Ruby Tuesday restaurants.  The real property, improvements, and fixtures of the 49 restaurants pledged as collateral appraised at $101.4 million at the time of the transaction and have a March 1, 2016 net book value of $78.6 million.

We had no borrowings outstanding under the Senior Credit Facility at March 1, 2016.  After consideration of letters of credit outstanding, we had $38.4 million available under the Senior Credit Facility as of March 1, 2016.

The Senior Credit Facility contains a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability to incur liens, engage in mergers or other fundamental changes, make acquisitions, investments, loans and advances, pay dividends or other distributions, sell or otherwise dispose of certain assets, engage in certain transactions with affiliates, enter into burdensome agreements or certain hedging agreements, amend organizational documents, change accounting practices, incur additional indebtedness and prepay other indebtedness.

Under the terms of the Senior Credit Facility we are allowed, under certain circumstances, to repurchase up to $20.0 million of the Senior Notes in any fiscal year.  During the 39 weeks ended March 1, 2016, we repurchased $2.5 million of the Senior Notes for $2.4 million plus accrued interest.  We realized a negligible gain on these transactions.  The balance of the Senior Notes was $212.5 million at March 1, 2016.

Under the Senior Credit Facility, we are required to comply with financial covenants relating to the maintenance of a maximum leverage ratio and a minimum fixed charge coverage ratio.  The terms of the Senior Credit Facility require us to maintain a maximum leverage ratio of no more than 4.50 to 1.0 and a minimum fixed charge coverage ratio of 1.55 to 1.0 for the quarter ended March 1, 2016.  For the remainder of fiscal year 2016, the Senior Credit Facility requires us to maintain a maximum leverage ratio of 4.40 to 1.0, and requires us to maintain a minimum fixed charge coverage ratio of 1.60 to 1.0.  The minimum required ratios fluctuate thereafter as provided in the Senior Credit Facility.
 
 

11
 
The Senior Credit Facility terminates no later than December 3, 2017.  Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights under the Senior Credit Facility and any ancillary loan documents.
 
On December 3, 2013, in connection with our entry into the Senior Credit Facility, the Company and certain of its subsidiaries entered into loan modification agreements (the “Loan Modification Agreements”) with certain mortgage lenders to, among other things, provide waivers and consents under certain of our mortgage loan obligations to enter into the Senior Credit Facility.  The Loan Modification Agreements also amended certain financial reporting requirements under the specified loans and modified and/or provided for certain financial covenants for the specified loans, including the maximum leverage ratio and the minimum fixed charge coverage ratio.

We were in compliance with our maximum leverage ratio and our minimum fixed charge coverage ratio as of March 1, 2016.

Our $21.3 million in mortgage loan obligations as of March 1, 2016 consists of various loans acquired upon franchise acquisitions.  These loans, which mature between January 2017 and October 2021, have balances which range from $0.6 million to $7.0 million and interest rates of 7.60% to 10.17%.  Included in our current maturities of long-term debt as of March 1, 2016 is $9.7 million related to two mortgage loan obligations that have balloon payments due during the third quarter of fiscal year 2017.  Many of the properties acquired from franchisees collateralize the loans outstanding.

During the first quarter of fiscal year 2016, we prepaid and retired ten mortgage loan obligations with an aggregate balance of $8.3 million as of June 2, 2015 using cash on hand.  Additionally, we paid $0.9 million in prepayment premiums and an insignificant amount of accrued interest in connection with the retirement of these obligations.  The prepayment of this debt eliminated one mortgage lender and allowed for the release of 26 properties which had served as collateral.

NOTE 7 – CLOSURES AND IMPAIRMENTS EXPENSE

Closures and impairments expense includes the following for the 13 and 39 weeks ended March 1, 2016 and March 3, 2015 (in thousands):

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
March 1, 2016
   
March 3, 2015
   
March 1, 2016
   
March 3, 2015
 
Closures and impairments from
                       
  continuing operations:
                       
    Property impairments
  $ 6,938     $ 3,578     $ 15,730     $ 5,850  
    Closed restaurant lease reserves
    (1,207 )     380       3,118       1,141  
    Other closing costs
    471       277       1,090       905  
    Gain on sale of surplus properties
    (79 )     (244 )     (1,030 )     (1,348 )
Closures and impairments, net
  $ 6,123     $ 3,991     $ 18,908     $ 6,548  

As previously discussed in Note 5 to the Condensed Consolidated Financial Statements, during the second quarter of fiscal year 2016, we entered into an agreement to sell eight Company-owned Lime Fresh restaurants in Florida for approximately $6.3 million, which we expect to complete over the remainder of fiscal year 2016, and closed the remaining 11 Company-owned Lime Fresh restaurants.  Included within closures and impairments, net for the 39 weeks ended March 1, 2016 are $6.4 million of impairments, lease reserves, and other charges relating to the closed Lime Fresh restaurants.  Further information regarding closures and impairments expense for the Lime Fresh concept for all periods presented is contained in Note 11 to the Condensed Consolidated Financial Statements.

In connection with the planned sale of eight Company-owned Lime Fresh restaurants and the closing of the remaining 11 Company-owned Lime Fresh restaurants as discussed above, during the second quarter of fiscal year 2016, we recorded a $2.0 million trademark impairment charge representing a partial impairment of the Lime Fresh trademark.  The Lime Fresh trademark has a net book value of $0.9 million remaining at March 1, 2016.

 

12
 
A rollforward of our reserve for future lease obligations associated with closed properties is as follows (in thousands):
 
    Reserve for  
    Lease Obligations  
  Balance at June 2, 2015
  $ 7,051  
  Closing expense including rent and other lease charges
    3,118  
  Payments
    (5,252 )
  Other adjustments
    830  
  Balance at March 1, 2016
  $ 5,747  

The amounts comprising future lease obligations in the table above are estimated using certain assumptions, including the period of time it will take to settle the lease with the landlord or find a suitable sublease tenant, and the amount of actual future cash payments could differ from our recorded lease obligations.  Of the total future lease obligations included in the table above, $5.7 million and $7.0 million are included within the Accrued liabilities – Rent and other caption in our Condensed Consolidated Balance Sheets as of March 1, 2016 and June 2, 2015, respectively.  For the remainder of fiscal year 2016 and beyond, we expect that our focus will be on obtaining settlements, or subleases as necessary, on as many of these leases as possible and these settlements could be higher or lower than the amounts recorded.  The actual amount of any cash payments made by the Company for lease contract termination costs will be dependent upon ongoing negotiations with the landlords of the leased restaurant properties.
 
NOTE 8 – EMPLOYEE POST-EMPLOYMENT 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 be required to make contributions totaling $0.2 million to the Retirement Plan during the remainder of fiscal year 2016.

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.  In December 2015, the Executive Supplemental Pension Plan was similarly amended effective as of January 1, 2016 for current participants, and as of January 1, 2018 for two specified potential participants, who are currently not named executive officers.  The amendment and related plan remeasurement did not have a material impact on our Condensed Consolidated Financial Statements.

Included in our Condensed Consolidated Balance Sheets as of March 1, 2016 and June 2, 2015 are amounts within Accrued liabilities: Payroll and related costs of $3.2 million as of both dates and amounts within Other deferred liabilities of $34.5 million and $33.9 million, respectively, relating to our three defined benefit pension plans.

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 

 

13
 
the Executive Supplemental Pension Plan (collectively, the “Pension Plans”) and the Postretirement Medical and Life Benefits plans (in thousands):
 
 
 
Pension Plans
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
March 1, 2016
 
March 3, 2015
 
March 1, 2016
 
March 3, 2015
 
Service cost
  $ 33     $ 75     $ 305     $ 225  
Interest cost
    495       443       1,535       1,330  
Expected return on plan assets
    (103 )     (124 )     (308 )     (373 )
Recognized actuarial loss
    730       430       1,831       1,290  
Curtailment expense
    1             1        
Net periodic benefit cost
  $ 1,156     $ 824     $ 3,364     $ 2,472  
     
 
Postretirement Medical and Life Benefits
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
March 1, 2016
 
March 3, 2015
 
March 1, 2016
 
March 3, 2015
 
Service cost
  $ 1     $ 1     $ 3     $ 3  
Interest cost
    12       12       36       35  
Recognized actuarial loss
    32       33       97       100  
Net periodic benefit cost
  $ 45     $ 46     $ 136     $ 138  

We reclassified recognized actuarial losses of $0.8 million and $1.9 million during the 13 and 39 weeks ended March 1, 2016, respectively, and $0.5 million and $1.4 million during the 13 and 39 weeks ended March 3, 2015, respectively, out of accumulated other comprehensive loss and into pension expense, which is included in Selling, general and administrative, net within our Condensed Consolidated Statements of Operations and Comprehensive Loss.

Accumulated other comprehensive loss in our Condensed Consolidated Balance Sheets as of March 1, 2016 and June 2, 2015 was $9.6 million and $10.9 million, respectively.  The change in accumulated other comprehensive loss during the 39 weeks ended March 1, 2016 was attributable to $1.9 million of recognized actuarial losses as discussed above which were offset by $0.7 million of additional liability related to our pension plans.

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, 2015.

NOTE 9 – INCOME TAXES

Under Accounting Standards Codification 740 (“ASC 740”), companies are required to apply their estimated annual tax rate on a year-to-date basis in each interim period.  Under ASC 740, companies should not apply the estimated annual tax rate to interim financial results if the estimated annual tax rate is not reliably predictable.  In this situation, the interim tax rate should be based on the actual year-to-date results.  Due to changes in our projections, which have fluctuated as we work through our brand repositioning, a reliable projection of our annual effective rate has been difficult to determine.  As such, we recorded a tax provision for the 13 and 39 weeks ended March 1, 2016 and March 3, 2015 based on the actual year-to-date results, in accordance with ASC 740.

We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize the deferred tax assets in the future.  A valuation allowance assessment is performed each reporting period, with any additions or adjustments reflected in earnings in the period of assessment.  In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction.  Our valuation allowance for deferred tax assets totaled $77.3 million and $62.8 million as of March 1, 2016 and June 2, 2015, respectively.
 
 

14
 
We recorded a tax benefit of $0.5 million and $1.7 million for the 13 and 39 weeks ended March 1, 2016, respectively, compared to a tax benefit of $0.1 million and $3.3 million for the 13 and 39 weeks ended March 3, 2015.  Included in our $3.3 million tax benefit for the 39 weeks ended March 3, 2015 was a benefit of $3.2 million representing an immaterial prior period correction to our deferred tax asset valuation allowance.
 
We had a gross liability for unrecognized tax benefits, exclusive of accrued interest and penalties, of $4.4 million and $3.9 million, respectively, as of March 1, 2016 and June 2, 2015, of which $3.5 million and $3.3 million, respectively, was reclassified against our deferred tax assets.  As of March 1, 2016 and June 2, 2015, the total amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate was $2.2 million and $2.4 million, respectively.  The liability for unrecognized tax benefits as of March 1, 2016 includes $0.4 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations and negotiations with tax authorities.

Interest and penalties related to unrecognized tax benefits are recognized as components of income tax expense.  As of both March 1, 2016 and June 2, 2015, we had accrued $0.4 million for the payment of interest and penalties.

At March 1, 2016, we are no longer subject to U.S. federal income tax examinations by tax authorities for fiscal years prior to 2011, and with few exceptions, we are no longer subject to state and local examinations by tax authorities prior to fiscal year 2013.

NOTE 10 – SHARE-BASED EMPLOYEE COMPENSATION

We compensate our employees and directors using share-based compensation through the following plans:

The Ruby Tuesday, Inc. Stock Incentive Plan and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan
A committee, appointed by the Board of Directors, administers the Ruby Tuesday, Inc. Stock Incentive Plan (“SIP”) and the Ruby Tuesday, Inc. 1996 Stock Incentive Plan (“1996 SIP”), and has full authority in its discretion to determine the key employees, officers, and non-employee directors to whom share-based  incentives are granted and the terms and provisions of share-based incentives.  Option grants under the SIP and 1996 SIP can have varying vesting provisions and exercise periods as determined by such committee.  A majority of currently outstanding options granted under the SIP and 1996 SIP vest within three years following the date of grant and expire seven years after the date of grant.  The SIP and 1996 SIP permit the committee to make awards of shares of common stock, awards of stock options or other derivative securities related to the value of the common stock, and certain cash awards to eligible persons.  These discretionary awards may be made on an individual basis or for the benefit of a group of eligible persons.  All options awarded under the SIP and 1996 SIP have been awarded with an exercise price equal to the fair market value at the time of grant.

At March 1, 2016, we had reserved a total of 6,882,000 shares of common stock for the SIP and 1996 SIP.  Of the reserved shares at March 1, 2016, 1,632,000 were subject to options outstanding.  Stock option exercises are settled with the issuance of new shares.  Net shares of common stock available for issuance at March 1, 2016 were 5,250,000.

Stock Options
The following table summarizes our stock option activity under these plans for the 39 weeks ended March 1, 2016 (in thousands, except per-share data):

                 Weighted Average        
     Stock      Weighted Average      Remaining Contractual      Aggregate  
    Options       Exercise Price      Term (years)      Intrinsic Value  
Service-based vesting:
                       
Balance at June 2, 2015
    2,441     $ 7.78              
Cancellations and forfeitures
    (210 )     6.60              
Expired
    (96 )     9.06              
Balance at March 1, 2016
    2,135     $ 7.84       3.46     $  
Exercisable
    1,676     $ 8.20       2.96     $  
 
 

15
 
                                 
Market-based vesting:
                               
Balance at June 2, 2015
    515     $ 8.60                  
Cancellations and forfeitures
    (515 )     8.60                  
Balance at March 1, 2016
        $                  

At March 1, 2016, there was approximately $0.4 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 1.0 years.

The market-based stock options in the table above would have vested if a share of our common stock appreciated to $14 per share or more for a period of 20 consecutive trading days on or before December 3, 2015.  During the 13 weeks ended March 1, 2016, all remaining market-based stock options were cancelled due to the market condition not being satisfied.

Restricted Stock and Restricted Stock Units (“RSU”)
The following table summarizes our restricted stock and RSU activity for the 39 weeks ended March 1, 2016 (in thousands, except per-share data):

         
Weighted-Average
 
   
Number of
   
Grant-Date
 
Service-based vesting:
 
Shares
   
Fair Value
 
Unvested at June 2, 2015
    803     $ 6.98  
Granted
    344       6.45  
Vested
    (319 )     7.54  
Cancellations and forfeitures
    (156 )     7.59  
Unvested at March 1, 2016
    672     $ 6.30  

         
Weighted-Average
 
   
Number of
   
Grant-Date
 
Market-based vesting:
 
Shares
   
Fair Value
 
Unvested at June 2, 2015
        $  
Granted
    262       6.51  
Cancellations and forfeitures
    (4 )     6.51  
Unvested at March 1, 2016
    258     $ 6.51  

The fair values of the restricted stock and RSU awards reflected above were based on the fair market value of our common stock at the time of grant.  At March 1, 2016, unrecognized compensation expense related to restricted stock and RSU grants totaled approximately $3.1 million and will be recognized over a weighted average vesting period of approximately 1.6 years.

During the second quarter of fiscal year 2016, we granted approximately 100,000 restricted shares to non-employee directors under the terms of the SIP.  These shares cliff vest over a one year period following grant of the award.

During the first quarter of fiscal year 2016, we granted 244,000 service-based and 262,000 market-based RSUs to certain employees under the terms of the SIP and 1996 SIP.  The service-based RSUs will vest in three equal installments over a three-year period following the date of grant.  The market-based RSUs will cliff vest at the end of a three-year period following the date of grant.  Vesting of the market-based RSUs is further contingent upon the Company’s achievement of a total shareholder return market condition over a three year period, which will be measured in the first quarter of fiscal 2019.

On July 25, 2015, our then President Ruby Tuesday Concept and Chief Operations Officer left the Company.  Accordingly, included within our share-based compensation expense for the 39 weeks ended March 1, 2016 is a forfeiture credit of $1.3 million in connection with the forfeiture of 333,000 unvested stock options and 137,000 unvested shares of restricted stock.

Included within Selling, general, and administrative, net in our Condensed Consolidated Statements of Operations and Comprehensive Loss is share-based compensation expense of $0.9 million and $1.7 million for the 13 and 39 weeks ended March 1, 2016, respectively, and $1.7 million and $5.4 million for the 13 and 39 weeks ended March 3, 2015, respectively.
 
 

16
 
 
NOTE 11 – SEGMENT REPORTING

As discussed in Note 1 to the Condensed Consolidated Financial Statements, we reclassified unamortized debt issuance costs reported in our June 2, 2015 Consolidated Balance Sheets.  Those reclassifications are reflected in the prior year amounts shown below for total assets.

As previously discussed in Notes 5 and 7 to the Condensed Consolidated Financial Statements, during the second quarter of fiscal year 2016, we entered into an agreement to sell eight Company-owned Lime Fresh restaurants in Florida for approximately $6.3 million, which we expect to complete over the remainder of fiscal year 2016, and closed the remaining 11 Company-owned Lime Fresh restaurants.

Financial results by reportable segment for the 13 and 39 weeks ended March 1, 2016 and March 3, 2015 are as follows (in thousands):

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
March 1, 2016
   
March 3, 2015
   
March 1, 2016
   
March 3, 2015
 
Revenues:
                       
   Ruby Tuesday concept
  $ 268,577     $ 281,118     $ 799,577     $ 814,975  
   Lime Fresh concept
    2,893       4,795       12,329       14,779  
      Total revenues
  $ 271,470     $ 285,913     $ 811,906     $ 829,754  
                                 
Segment profit/(loss):
                               
   Ruby Tuesday concept
  $ 21,771     $ 28,307     $ 67,752     $ 79,152  
   Lime Fresh concept
    1,860       133       (5,361 )     (1,347 )
      Total segment profit
  $ 23,631     $ 28,440     $ 62,391     $ 77,805  
                                 
Depreciation and amortization:
                               
   Ruby Tuesday concept
  $ 12,153     $ 12,010     $ 36,125     $ 36,426  
   Lime Fresh concept
    92       419       794       1,279  
   Support center and other
    487       532       1,555       1,614  
      Total depreciation and amortization
  $ 12,732     $ 12,961     $ 38,474     $ 39,319  
                                 
Closures and impairments, net:
                               
   Ruby Tuesday concept
  $ 7,262     $ 3,877     $ 12,522     $ 4,759  
   Lime Fresh concept
    (1,139 )     114       6,386       1,265  
   Support center and other
                      524  
      Total closures and impairments, net
  $ 6,123     $ 3,991     $ 18,908     $ 6,548  
                                 
Capital expenditures:
                               
   Ruby Tuesday concept
                  $ 26,359     $ 19,917  
   Lime Fresh concept
                    236       145  
   Support center and other
                    751       1,072  
      Total capital expenditures
                  $ 27,346     $ 21,134  

Total assets by reportable segment are as follows (in thousands):

   
March 1, 2016
   
June 2, 2015
 
Total assets:
           
   Ruby Tuesday concept
  $ 761,050     $ 786,931  
   Lime Fresh concept
    4,406       10,839  
   Support center and other
    105,008       127,682  
      Total assets
  $ 870,464     $ 925,452  

 

17
 
The following is a reconciliation of segment profit to loss before income taxes for the 13 and 39 weeks ended March 1, 2016 and March 3, 2015 (in thousands):

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
March 1, 2016
   
March 3, 2015
   
March 1, 2016
   
March 3, 2015
 
Segment profit
  $ 23,631     $ 28,440     $ 62,391     $ 77,805  
Less:
                               
   Depreciation and amortization
    (12,732 )     (12,961 )     (38,474 )     (39,319 )
   Unallocated general and
                               
     administrative expenses
    (9,457 )     (10,777 )     (30,501 )     (31,562 )
   Preopening expenses
          (50 )           (253 )
   Trademark impairment
                (1,999 )      
   Interest expense, net
    (5,005 )     (5,446 )     (16,110 )     (16,783 )
   Other expense, net
    (6 )     (87 )     (72 )     (706 )
Loss before income taxes
  $ (3,569 )   $ (881 )   $ (24,765 )   $ (10,818 )

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Litigation
We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business.  We provide accruals for such claims when payment is probable and estimable in accordance with GAAP.  At this time, in the opinion of management, the ultimate resolution of pending legal proceedings, including the matter referred to below, will not have a material adverse effect on our operations, financial position, or cash flows.

On July 23, 2014, a case styled Kimberly LaFrance, et al. v. Ruby Tuesday, Inc., was filed against the Company in the State of New York Supreme Court, County of Onondaga on behalf of the plaintiff and all other similarly situated individuals.  The plaintiff alleged violations of certain wage notice requirements under New York law and sought wages, liquidated damages and attorneys’ fees.  The matter was removed to the United States District Court for the Northern District of New York.  On November 20, 2014, the Company filed a motion to dismiss, which was followed by motions filed by the plaintiff on December 29, 2014, for class certification, and on December 31, 2014, for partial summary judgment.  The parties agreed to mediate the case, and on March 5, 2015, the court stayed all deadlines in the matter pending the completion of mediation.  On August 5, 2015, the parties agreed to resolve the matter, and the window for filing claims under the settlement agreement closed. 

On January 7, 2016, the court granted final approval of the settlement without modification.  In connection with granting final approval of the settlement, the court also dismissed the case with prejudice on January 7, 2016.  The thirty-day appeals period, the settlement agreement, and the court's final approval order have become effective, final, and binding.  During the 13 weeks ended March 1, 2016, the Company funded the settlement, which the settlement administrator is to distribute per the terms of the settlement agreement.

NOTE 13 – FAIR VALUE MEASUREMENTS

The following table presents the fair value of financial assets and liabilities measured on a recurring basis and the level within the fair value hierarchy in which the measurements fall (in thousands):
                   
   
Level
 
March 1, 2016
 
June 2, 2015
 
Deferred compensation plan: other investments – Assets
    1     $ 6,456     $ 8,017  
Deferred compensation plan: other investments – Liabilities
    1       (6,456 )     (8,017 )

During the 39 weeks ended March 1, 2016 there were no transfers among levels within the fair value hierarchy.

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.  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
 

18
 
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 value of assets measured on a non-recurring basis during the 13 weeks ended March 1, 2016 and the level within the fair value hierarchy in which the measurements fall (in thousands):

 
Fair Value Measurements
 
 
Level
 
March 1, 2016
 
Long-lived assets held for sale
2
 
$
1,566
 
Long-lived assets held for use
2
   
3,407
 
   Total
   
$
4,973
 

The following table presents losses recognized during the 13 and 39 weeks ended March 1, 2016 and March 3, 2015 resulting from non-recurring fair value measurements.  The amounts presented are included in Closures and impairments, net and Trademark impairment in our Condensed Consolidated Statements of Operations and Comprehensive Loss (in thousands):
   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
March 1, 2016
   
March 3, 2015
   
March 1, 2016
   
March 3, 2015
 
Included within continuing operations
                       
  Long-lived assets held for sale
  $ 174     $ 586     $ 524     $ 1,388  
  Long-lived assets held for use
    6,764       2,992       15,206       4,462  
  Lime Fresh trademark
                1,999        
 
  $ 6,938     $ 3,578     $ 17,729     $ 5,850  

Long-lived assets held for sale are valued using Level 2 inputs, primarily from information obtained through broker listings or sales agreements.  Costs to market and/or sell are factored into the estimates of fair value for those properties included in Assets held for sale on our Condensed Consolidated Balance Sheets.

We review our long-lived assets (primarily property, equipment, and, as appropriate, reacquired franchise rights and favorable leases) related to each restaurant to be held and used in the business, whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable.

Long-lived assets held for use presented in the table above includes restaurants or groups of restaurants that we have impaired.  From time to time, the table will also include closed restaurants or surplus sites not meeting held for sale criteria that have been offered for sale at a price less than their carrying value.
The fair values of our long-lived assets held for use are based on broker estimates of the value of the land, building, leasehold improvements, and other residual assets (Level 2) or discounted cash flow estimates using unobservable inputs (Level 3).

Our financial instruments at March 1, 2016 and June 2, 2015 consisted of cash and cash equivalents, accounts receivable and payable, and long-term debt.  The fair values of cash and cash equivalents and accounts receivable and payable approximated their carrying values because of the short-term nature of these instruments.  The carrying amounts and fair values of our long-term debt, which are not measured on a recurring basis using fair value, are as follows (in thousands):

   
March 1, 2016
   
June 2, 2015
 
             
(as adjusted)
   
Carrying
Value
   
Fair Value
 (Level 2)
   
Carrying
Value
   
Fair Value
 (Level 2)
 
Long-term debt (Level 2)
  $ 228,881     $ 229,788     $ 240,889     $ 255,194  

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

 

19
 
NOTE 14 – SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

As discussed in Note 6 to the Condensed Consolidated Financial Statements, the Senior Notes held by Ruby Tuesday, Inc. (the “Parent”) are guaranteed on a senior unsecured basis by our existing and future domestic restricted subsidiaries, subject to certain exceptions (the “Guarantors”).  Each of the Guarantors is wholly-owned by Ruby Tuesday, Inc.  None of the few remaining subsidiaries of Ruby Tuesday, Inc., which were primarily created to hold liquor license assets, guarantee the Senior Notes (the “Non-Guarantors”).  Our Non-Guarantor subsidiaries are immaterial and are aggregated within the Parent information disclosed below.

The following condensed consolidating financial information, which has been prepared in accordance with the requirements for presentation of Rule 3-10(f) of Regulation S-X promulgated by the Securities and Exchange Commission, presents the condensed consolidating financial information separately for the Parent, the Guarantors, and elimination entries necessary to consolidate the Parent and Guarantors.  Investments in wholly-owned subsidiaries are accounted for using the equity method for purposes of the consolidated presentation.  The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
 
 

20
 
Condensed Consolidating Balance Sheet
As of March 1, 2016
(In thousands)

   
Parent
 
Guarantors
 
Eliminations
 
Consolidated
 
Assets
                       
Current assets:
                       
     Cash and cash equivalents
  $ 52,266     $ 192     $     $ 52,458  
     Accounts receivable
    2,077       3,859             5,866  
     Inventories
    16,056       6,531             22,587  
     Income tax receivable
    169,478             (166,520 )     2,958  
     Other current assets
    12,065       2,857             14,922  
         Total current assets
    251,872       13,439       (166,520 )     98,791  
 
                               
Property and equipment, net
    530,521       192,049             722,570  
Deferred income taxes, net     5,271       (3,276 )           1,995  
Investment in subsidiaries
    123,422             (123,422 )      
Due from/(to) subsidiaries
    74,673       224,422       (299,095 )      
Other assets
    40,191       6,917             47,108  
         Total assets
  $ 1,025,950     $ 433,551     $ (589,037 )   $ 870,464  
                                 
Liabilities & Shareholders’ Equity
                               
Current liabilities:
                               
     Accounts payable
  $ 13,299     $ 2,903     $     $ 16,202  
     Accrued and other current liabilities
    37,052       32,054             69,106  
     Current maturities of long-term debt,
                               
         including capital leases
    (1,046 )     12,010             10,964  
     Income tax payable
          166,520       (166,520 )      
     Deferred income taxes, net     5,011       (2,399           2,612  
        Total current liabilities
    54,316       211,088       (166,520 )     98,884  
 
                               
Long-term debt and capital leases,
                               
   less current maturities
    208,773       9,344             218,117  
Due to/(from) subsidiaries
    224,422       74,673       (299,095 )      
Other deferred liabilities
    102,885       15,024             117,909  
        Total liabilities
    590,396       310,129       (465,615 )     434,910  
                                 
Shareholders’ equity:
                               
     Common stock
    602                   602  
     Capital in excess of par value
    75,592                   75,592  
     Retained earnings
    368,953       123,422       (123,422 )     368,953  
     Accumulated other comprehensive loss
    (9,593 )                 (9,593 )
         Total shareholders’ equity
    435,554       123,422       (123,422 )     435,554  
 
                               
         Total liabilities & shareholders’ equity
  $ 1,025,950     $ 433,551     $ (589,037 )   $ 870,464  
 
 
 

21
 
Condensed Consolidating Balance Sheet
As of June 2, 2015 (as adjusted)
(In thousands)

   
Parent
 
Guarantors
 
Eliminations
 
Consolidated
 
Assets
                       
Current assets:
                       
     Cash and cash equivalents
  $ 75,034     $ 297     $     $ 75,331  
     Accounts receivable
    1,557       3,730             5,287  
     Inventories
    14,581       5,830             20,411  
     Income tax receivable
    153,146             (153,146 )      
     Other current assets
    15,543       2,308             17,851  
         Total current assets
    259,861       12,165       (153,146 )     118,880  
 
                               
Property and equipment, net
    554,089       198,085             752,174  
Investment in subsidiaries
    128,824             (128,824 )      
Due from/(to) subsidiaries
    66,019       215,373       (281,392 )      
Other assets
    44,118       10,280             54,398  
         Total assets
  $ 1,052,911     $ 435,903     $ (563,362 )   $ 925,452  
                                 
Liabilities & Shareholders’ Equity
                               
Current liabilities:
                               
     Accounts payable
  $ 18,533     $ 4,472     $     $ 23,005  
     Accrued and other current liabilities
    42,458       33,764             76,222  
     Current maturities of long-term debt,
                               
         including capital leases
    (994 )     11,072             10,078  
     Income tax payable
          154,215       (153,146 )     1,069  
     Deferred income taxes, net     2,839        (2,832            
        Total current liabilities
    62,836       200,691       (153,146 )     110,381  
 
                               
Long-term debt and capital leases,
                               
   less current maturities
    210,382       20,635             231,017  
Deferred income taxes, net
    (3,865 )     5,307             1,442  
Due to/(from) subsidiaries
    215,373       66,019       (281,392 )      
Other deferred liabilities
    102,602       14,427             117,029  
        Total liabilities
    587,328       307,079       (434,538 )     459,869  
                                 
Shareholders’ equity:
                               
     Common stock
    621                   621  
     Capital in excess of par value
    83,870                   83,870  
     Retained earnings
    392,032       128,824       (128,824 )     392,032  
     Accumulated other comprehensive loss
    (10,940 )                 (10,940 )
         Total shareholders’ equity
    465,583       128,824       (128,824 )     465,583  
 
                               
         Total liabilities & shareholders’ equity
  $ 1,052,911     $ 435,903     $ (563,362 )   $ 925,452  
 
 
 

22
 
Condensed Consolidating Statement of Operations and
Comprehensive (Loss)/Income
For the Thirteen Weeks Ended March 1, 2016
(In thousands)

 
Parent
 
Guarantors
 
Eliminations
   
Consolidated
 
Revenue:
                       
     Restaurant sales and operating revenue
$
194,527
 
$
75,341
 
$
 
$
269,868
 
     Franchise revenue
 
90
   
1,512
   
   
1,602
 
 
 
194,617
   
76,853
   
   
271,470
 
     
                       
Operating costs and expenses:
                       
     Cost of goods sold
 
54,209
   
20,934
   
   
75,143
 
     Payroll and related costs
 
65,474
   
27,883
   
   
93,357
 
     Other restaurant operating costs
 
40,008
   
15,303
   
   
55,311
 
     Depreciation and amortization
 
9,008
   
3,724
   
   
12,732
 
     Selling, general, and administrative
 
17,000
   
10,378
   
   
27,378
 
     Intercompany selling, general, and
                       
        administrative allocations
 
10,726
   
(10,726
)
 
   
 
     Closures and impairments, net
 
3,993
   
2,130
   
   
6,123
 
     Equity in earnings of subsidiaries
 
(5,676
)
 
   
5,676
   
 
     Interest expense, net
 
4,566
   
439
   
   
5,005
 
     Intercompany interest expense/(income)
 
3,058
   
(3,058
)
 
   
 
     Gain on extinguishment of debt    (10              
(10
 
 
202,356
   
67,007
   
5,676
   
275,039
 
                         
(Loss)/income before income taxes
 
(7,739
)
 
9,846
   
(5,676
)
 
(3,569
)
(Benefit)/provision for income taxes
 
(4,653
)
 
4,170
   
   
(483
)
                         
Net (loss)/income
$
(3,086
)
$
5,676
 
$
(5,676
)
$
(3,086
)
                         
Other comprehensive income:
                       
     Pension liability reclassification
 
885
   
   
   
885
 
Total comprehensive (loss)/income
$
(2,201
)
$
5,676
 
$
(5,676
)
$
(2,201
)


 

23
 
Condensed Consolidating Statement of Operations and
Comprehensive (Loss)/Income
For the Thirty-Nine Weeks Ended March 1, 2016
(In thousands)

 
Parent
 
Guarantors
 
Eliminations
   
Consolidated
 
Revenue:
                       
     Restaurant sales and operating revenue
$
583,055
 
$
224,050
 
$
 
$
807,105
 
     Franchise revenue
 
220
   
4,581
   
   
4,801
 
 
 
583,275
   
228,631
   
   
811,906
 
     
                       
Operating costs and expenses:
                       
     Cost of goods sold
 
160,212
   
61,477
   
   
221,689
 
     Payroll and related costs
 
197,732
   
83,244
   
   
280,976
 
     Other restaurant operating costs
 
126,234
   
47,669
   
   
173,903
 
     Depreciation and amortization
 
27,305
   
11,169
   
   
38,474
 
     Selling, general, and administrative
 
53,388
   
31,234
   
   
84,622
 
     Intercompany selling, general, and
                       
        administrative allocations
 
32,188
   
(32,188
)
 
   
 
     Closures and impairments, net
 
16,080
   
2,828
   
   
18,908
 
     Trademark impairment          1,999    
     1,999  
     Equity in earnings of subsidiaries  
(18,907
 
   
18,907
   
 
     Interest expense, net
 
13,816
 
 
2,294
   
   
16,110
 
     Intercompany interest expense/(income)
 
9,049
   
(9,049
 
   
 
     Gain on extinguishment of debt
 
(10
 
 
 
   
(10
 
 
617,087
   
200,677
   
18,907
   
836,671
 
                         
(Loss)/income before income taxes
 
(33,812
)
 
27,954
   
(18,907
)
 
(24,765
)
(Benefit)/provision for income taxes
 
(10,733
)
 
9,047
   
   
(1,686
)
                         
Net (loss)/income
$
(23,079
)
$
18,907
 
$
(18,907
)
$
(23,079
)
                         
Other comprehensive income:
                       
     Pension liability reclassification
 
1,347
   
   
   
1,347
 
Total comprehensive (loss)/income
$
(21,732
)
$
18,907
 
$
(18,907
)
$
(21,732
)


 

24
 
Condensed Consolidating Statement of Operations and
Comprehensive (Loss)/Income
For the Thirteen Weeks Ended March 3, 2015 
(In thousands)

  Parent   Guarantors   Eliminations   Consolidated  
Revenue:
                       
     Restaurant sales and operating revenue
$
204,278
   $  80,114  
$
 
$
284,392
 
     Franchise revenue
 
4
      1,517    
   
1,521
 
 
 
204,282
      81,631    
   
285,913
 
     
                       
Operating costs and expenses:
                       
     Cost of goods sold
 
55,793
      22,003    
   
77,796
 
     Payroll and related costs
 
67,959
     28,721    
   
96,680
 
     Other restaurant operating costs
 
43,565
      17,407    
   
60,972
 
     Depreciation and amortization
 
9,307
      3,654    
   
12,961
 
     Selling, general, and administrative
 
18,244
      10,704    
   
28,948
 
     Intercompany selling, general, and
                       
        administrative allocations
 
11,371
      (11,371
)
 
   
 
     Closures and impairments, net
 
2,086
      1,905    
   
3,991
 
     Equity in earnings of subsidiaries
 
(7,171
)
       
7,171
   
 
     Interest expense, net
 
4,654
     792    
   
5,446
 
     Intercompany interest expense/(income)
 
3,040
      (3,040
)
 
   
 
 
 
208,848
      70,775    
7,171
   
286,794
 
                         
(Loss)/income before income taxes
 
(4,566
)
    10,856    
(7,171
)
 
(881
)
(Benefit)/provision for income taxes
 
(3,797
)
    3,685    
   
(112
)
                         
Net (loss)/income
$
(769
)
$
7,171
 
$
(7,171
)
$
(769
)
                         
Other comprehensive loss:
                       
     Pension liability reclassification
 
463
   
   
   
463
 
Total comprehensive (loss)/income
$
(306
)
  $ 7,171  
$
(7,171
)
$ (306
)

 

25

Condensed Consolidating Statement of Operations and
Comprehensive (Loss)/Income
For the Thirty-Nine Weeks Ended March 3, 2015
(In thousands)

 
Parent
  Guarantors   Eliminations   Consolidated  
Revenue:
                       
     Restaurant sales and operating revenue
$
595,401
   $  229,654  
$
 
$
825,055
 
     Franchise revenue
 
188
      4,511    
   
4,699
 
 
 
595,589
      234,165    
   
829,754
 
     
                       
Operating costs and expenses:
                       
     Cost of goods sold
 
162,041
      62,548    
   
224,589
 
     Payroll and related costs
 
202,349
      84,137    
   
286,486
 
     Other restaurant operating costs
 
130,314
      49,392    
   
179,706
 
     Depreciation and amortization
 
28,197
      11,122    
   
39,319
 
     Selling, general, and administrative
 
55,013
      32,128    
   
87,141
 
     Intercompany selling, general, and
                       
        administrative allocations
 
32,986
      (32,986
)
 
   
 
     Closures and impairments, net
 
4,390
      2,158    
   
6,548
 
     Equity in earnings of subsidiaries
 
(19,278
)
       
19,278
   
 
     Interest expense, net
 
13,901
      2,882    
   
16,783
 
     Intercompany interest expense/(income)
 
8,930
      (8,930
)
 
   
 
 
 
618,843
      202,451    
19,278
   
840,572
 
                         
(Loss)/income before income taxes
 
(23,254
)
    31,714    
(19,278
)
 
(10,818
)
(Benefit)/provision for income taxes
 
(15,777
)
    12,436    
   
(3,341
)
                         
Net (loss)/income
$
(7,477
)
$
19,278
 
$
(19,278
)
$
(7,477
)
                         
Other comprehensive loss:
                       
     Pension liability reclassification
 
1,390
   
   
   
1,390
 
Total comprehensive (loss)/income
$
(6,087
)
  $ 19,278  
$
(19,278
)
$ (6,087
)


 

26
 
Condensed Consolidating Statement of Cash Flows
For the Thirty-Nine Weeks Ended March 1, 2016
(In thousands)

 
 
Parent
 
 
Guarantors
 
 
Eliminations
   
 
Consolidated
 
                         
Net cash (used)/provided by operating activities
$
(8,133
)
$
41,932
 
$
(15,260
)
$
18,539
 
     
                       
Investing activities:
                       
     Purchases of property and equipment
 
(19,892
)
 
(7,454
)
 
   
(27,346
)
     Proceeds from disposal of assets
 
6,193
   
   
   
6,193
 
     Other, net
 
2,444
   
   
   
2,444
 
Net cash used by investing activities
 
(11,255
)
 
(7,454
)
 
   
(18,709
)
                         
Financing activities:
                       
     Principal payments on long-term debt
 
(2,390
)
 
(10,274
)
 
   
(12,664
)
     Stock repurchases
 
(10,009
)
 
   
   
(10,009
)
     Payments for debt issuance costs
 
(30
)
 
   
   
(30
)
     Intercompany transactions
 
9,049
 
 
(24,309
)
 
15,260
   
 
Net cash provided by financing activities
 
(3,380
)
 
(34,583
)
 
15,260
   
(22,703
)
                         
Decrease in cash and cash equivalents
 
(22,768
)
 
(105
)
 
   
(22,873
)
Cash and cash equivalents:
                       
     Beginning of year
 
75,034
   
297
   
   
75,331
 
     End of quarter
$
52,266
 
$
192
 
$
 
$
52,458
 


 

27
 
Condensed Consolidating Statement of Cash Flows
For the Thirty-Nine Weeks Ended March 3, 2015
(In thousands)

 
 
Parent
 
 
Guarantors
 
 
Eliminations
   
 
Consolidated
 
                         
Net cash provided by operating activities
$
37,226
 
$
51,900
 
$
(61,699
)
$
27,427
 
     
                       
Investing activities:
                       
     Purchases of property and equipment
 
(16,569
)
 
(4,565
)
 
   
(21,134
)
     Proceeds from disposal of assets
 
7,649
   
1,047
   
   
8,696
 
     Other, net
 
2,043
   
135
   
   
2,178
 
Net cash used by investing activities
 
(6,877
)
 
(3,383
)
 
   
(10,260
)
                         
Financing activities:
                       
     Principal payments on long-term debt
 
(6
)
 
(7,406
)
 
   
(7,412
)
     Stock repurchases
 
(73
)
 
   
   
(73
)
     Payments for debt issuance costs
 
(281
)
 
   
   
(281
)
     Proceeds from exercise of stock options
 
457
   
   
   
457
 
     Excess tax benefits from share-based
                       
        compensation
 
37
   
   
   
37
 
     Intercompany transactions
 
(20,570
)
 
(41,129
)
 
61,699
   
 
Net cash used by financing activities
 
(20,436
)
 
(48,535
)
 
61,699
   
(7,272
)
                         
Increase/(decrease) in cash and cash equivalents
 
9,913
 
 
(18
)
 
   
9,895
 
Cash and cash equivalents:
                       
     Beginning of year
 
51,012
   
314
   
   
51,326
 
     End of quarter
$
60,925
 
$
296
 
$
 
$
61,221
 

 
 

28
 
NOTE 15 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Not Yet Adopted
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods therein (our fiscal year 2018).  Early application is permitted.  We are currently evaluating the impact of this guidance on our Condensed Consolidated Financial Statements.
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months.  The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases.  The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply.  ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods therein (our fiscal year 2020).  Early application is permitted.  We are currently evaluating the impact of this guidance on our Condensed Consolidated Financial Statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”).  The guidance requires noncurrent presentation of all deferred income tax assets and liabilities.  ASU 2015-17 is effective for annual periods beginning after December 15, 2016, and interim periods therein (our fiscal year 2018).  Early application is permitted.  We do not believe the adoption of this guidance will have a material impact on our Condensed Consolidated Financial Statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”).  The guidance applies to inventory that is measured using either the first-in, first-out or average cost methods and requires entities to measure their inventory at the lower of cost and net realizable value.  ASU 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  ASU 2015-11 is effective for annual periods beginning after December 15, 2016, and interim periods therein (our fiscal year 2018).  We do not expect the adoption of this guidance to have a material impact on our Condensed Consolidated Financial Statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).  The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances.  The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter (our fiscal year 2017).  Early application is permitted.  We do not believe the adoption of this guidance will have an impact on our Condensed Consolidated Financial Statements.

In May 2014, the FASB and International Accounting Standards Board jointly issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).  ASU 2014-09 will replace almost all existing revenue recognition guidance, including industry specific guidance, upon its effective date.  The standard’s core principle is for a company to recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled.  A company may also need to use more judgment and make more estimates when recognizing revenue, which could result in additional disclosures.  ASU 2014-09 also provides guidance for transactions that were not addressed comprehensively in previous guidance, such as the recognition of breakage income from the sale of gift cards.  The standard permits the use of either the retrospective or cumulative effect transition method.  The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (the first quarter of our fiscal year 2019).  Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  We do not expect the adoption of this guidance to impact our recognition of Company-owned restaurants sales and operating revenue or our recognition of continuing fees from
 
 

29
 
franchisees, which are based on a percentage of franchise sales.  We have not yet selected a transition method and are continuing to evaluate the impact of this guidance on our less significant revenue transactions, such as initial franchise license fees.  

 
 

30
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
The discussion and analysis below for the Company should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and the notes to such financial statements included elsewhere in this Quarterly Report on Form 10-Q.  The discussion below contains forward-looking statements which should be read in conjunction with the “Special Note Regarding Forward-Looking Information” included elsewhere in this Quarterly Report on Form 10-Q.
 
General: 


Ruby Tuesday, Inc., including its wholly-owned subsidiaries (“RTI,” the “Company,” “we” and/or “our”), owns and operates Ruby Tuesday® casual dining and Lime Fresh Mexican Grill® (“Lime Fresh”) fast casual restaurants.  As of March 1, 2016, we owned and operated 649, and franchised 80, Ruby Tuesday restaurants.  Ruby Tuesday restaurants can be found in 44 states, 13 foreign countries, and Guam.

As of March 1, 2016, there were eight Company-owned and operated Lime Fresh restaurants, as well as eight domestic Lime Fresh restaurants operated by franchisees.  In an effort to focus on our core Ruby Tuesday concept, during the second quarter of fiscal year 2016 we entered into an agreement to sell eight Company-owned Lime Fresh restaurants in Florida for approximately $6.3 million, which we expect to complete over the remainder of fiscal year 2016, and closed the remaining 11 Company-owned Lime Fresh restaurants.

Overview and Strategies

The bar and grill segment of the casual dining industry in which we primarily operate is intensely competitive with respect to prices, services, convenience, locations, employees, advertising and promotion, and the types and quality of food.  We compete with other food service operations, including locally-owned restaurants, and other national and regional restaurant chains that offer similar types of services and products as we do.  We continue to believe there are opportunities to grow our business, strengthen our competitive position, enhance our profitability, and create value through the execution of the following strategies:

Enhancing Our Business Model
Over the past few fiscal years, we made progress towards lowering our overall cost structure with identified reductions in cost of goods sold, payroll and related costs, and selling, general, and administrative expenses.  In April 2014, we implemented a new labor management system to facilitate more efficient staffing that is contributing to lower labor costs.  We have also implemented enhanced business processes and capabilities, such as an inventory/food waste management system that should benefit our business model by reducing food waste and manager time on inventory management leading to a better customer experience and improved profitability.
 
Enhance Sales and Margins Through Repositioning of Our Core Brand
We are in the process of executing a strategic brand transformation of the Ruby Tuesday concept which is designed to make our brand more energetic, affordable, and broadly appealing.  We believe the execution of this strategy provides opportunities for increased customer counts, same-restaurant sales growth, and increased shareholder value.  Our brand transformation is supported by four key pillars: food, service, atmosphere, and communication.

As part of our transformation strategy, we have taken what we believe to be meaningful steps to improve our food, customer experience, organizational capabilities, and business model.  We continue to transform our menu to be broadly appealing, approachable, and affordable by offering compelling value throughout the menu at a wide-range of price points.  Additionally, we are testing an initiative to enhance our Garden Bar which is a differentiator for our brand and utilized by approximately half of our guests.  Our intent is to incorporate customer feedback to continue to evolve our food offering as well as to promote menu items that customers find highly satisfying.

Enhancing our service is also a critical component of our brand transformation strategy.  In January 2015, we rolled-out a new service training platform which encourages our restaurant teams to provide a genuine, customized experience to our customers while also reinforcing techniques to build add-on sales for
 
 

31
 
beverages, appetizers and desserts.  We believe that there are additional opportunities to improve the guest experience by simplifying the menu, recipes, and operating processes which could result in a better and more consistent service execution and guest experience.

To further enhance the atmosphere of our restaurants, we are currently developing a remodel plan and began testing prototypes in fiscal year 2016 to determine sales building potential, cost effectiveness, and return on investment.  These changes are designed to create an improved dining atmosphere for our customers.

The fourth pillar of our brand transformation strategy is our communication and marketing programs.  The program is designed to reshape consumer perceptions of the Ruby Tuesday brand and enhance our Fresh American Grill positioning by showcasing our brand personality in a fresh and energetic way, featuring compelling new food products, highlighting the freshness and variety of our Garden Bar, and effectively communicating value and affordability.

The four key areas of menu, service, atmosphere, and communication will continue to be foundational drivers of our brand transformation and key to building a stronger business model.  We expect the culmination of the four pillars working fluidly together in conjunction with engaged restaurant and support teams will ultimately drive customer counts, sales, and average check.
 
Strengthen our Balance Sheet to Facilitate Growth and Value Creation
Our priority for the use of cash is to drive shareholder value.  Our objective is to continue to maintain adequate cash levels to support business needs, while investing in our key brand transformation initiatives.  Additionally, we will consider other options such as reducing outstanding debt levels and share repurchases.  Our success in the key strategic initiatives outlined above should enable us to improve both our returns on assets and equity and create additional shareholder value.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires us to make subjective or complex judgments that may affect the reported financial condition and results of operations.  We base our estimates on historical experience and other assumptions that we believe to be reasonable in the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  We continually evaluate the information used to make these estimates as our business and the economic environment changes.
 
Results of Operations: 


The following is an overview of our results of operations for the 13- and 39-week periods ended March 1, 2016:
 
Net loss was $3.1 million for the 13 weeks ended March 1, 2016 compared to $0.8 million for the corresponding period of the previous fiscal year.  Diluted loss per share for the 13 weeks ended March 1, 2016 was $0.05 compared to $0.01 for the corresponding period of the prior fiscal year as a result of an increase in net loss as discussed later within this MD&A.
 
During the 13 weeks ended March 1, 2016:

·  
Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 3.1%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants increased 1.7%;
·  
Six Company-owned Ruby Tuesday restaurants were closed;
·  
Two franchised Ruby Tuesday restaurants were opened;
·  
We repurchased and retired 1.9 million shares of our common stock at an aggregate cost of $10.0 million;
·  
We repurchased $2.5 million of the Senior Notes.  The repurchases settled for $2.4 million plus accrued interest.  We realized a negligible gain on these transactions; and
 
 

32
 
·  
Mike Ellis, an executive with more than 30 years of restaurant industry experience and 24 years of development experience, was appointed Chief Development Officer on February 29, 2016.
 
Net loss was $23.1 million for the 39 weeks ended March 1, 2016 compared to $7.5 million for the corresponding period of the previous fiscal year.  Diluted loss per share for the 39 weeks ended March 1, 2016 was $0.38 compared to $0.12 for the corresponding period of the prior fiscal year as a result of an increase in net loss as discussed later within this MD&A.
 
During the 39 weeks ended March 1, 2016:

·  
Same-restaurant sales* at Company-owned Ruby Tuesday restaurants decreased 0.6%, while same-restaurant sales at domestic franchise Ruby Tuesday restaurants increased 4.4%;
·  
Nine Company-owned Ruby Tuesday restaurants were closed;
·  
Four franchised Ruby Tuesday restaurants were opened and two were closed;
·  
We entered into an agreement with Rubio’s Restaurants, Inc. to sell eight Company-owned Lime Fresh restaurants in Florida for approximately $6.3 million.  The completion of the transaction is targeted for later in fiscal year 2016;
·  
11 Company-owned Lime Fresh restaurants were closed;
·  
One franchised Lime Fresh restaurant was opened;
·  
We prepaid and retired ten mortgage loan obligations with an aggregate balance of $8.2 million plus prepayment penalties of $0.9 million and an insignificant amount of accrued interest;
·  
We repurchased and retired 1.9 million shares of our common stock at an aggregate cost of $10.0 million;
·  
We repurchased $2.5 million of the Senior Notes.  The repurchases settled for $2.4 million plus accrued interest.  We realized a negligible gain on these transactions;
·  
Mike Ellis, an executive with more than 30 years of restaurant industry experience and 24 years of development experience, was appointed Chief Development Officer on February 29, 2016; and
·  
On July 25, 2015, Todd A. Burrowes voluntarily resigned as the Company’s President, Ruby Tuesday Concept and Chief Operations Officer.  On July 27, 2015, Brett A. Patterson, an executive with over 25 years of restaurant industry experience who was then our Senior Vice President of Operations, was appointed Ruby Tuesday Concept President.
* 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 Quarterly Report on Form 10-Q.

 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
March 1,
 
March 3,
 
March 1,
   March 3,  
 
2016
 
2015
 
2016
 
2015
 
Revenue:
                       
       Restaurant sales and operating revenue
99
.4%
 
99
.5%
 
99
.4%
 
99
.4%
 
       Franchise revenue
0
.6
 
0
.5
 
0
.6
 
0
.6
 
           Total revenue
100
.0
 
100
.0
 
100
.0
 
100
.0
 
Operating costs and expenses:
                       
       Cost of goods sold (1)
27
.8
 
27
.4
 
27
.5
 
27
.2
 
       Payroll and related costs (1)
34
.6
 
34
.0
 
34
.8
 
34
.7
 
       Other restaurant operating costs (1)
20
.5
 
21
.4
 
21
.5
 
21
.8
 
       Depreciation and amortization (1)
4
.7
 
4
.6
 
4
.8
 
4
.8
 
       Selling, general and administrative, net
10
.1
 
10
.1
 
10
.4
 
10
.5
 
       Closures and impairments, net
2
.3
 
1
.4
 
2
.3
 
0
.8
 
       Trademark impairment
 
 –
   
 
0
.2
   
 
       Interest expense, net
1
.8
 
1
.9
 
2
.0
 
2
.0
 
       Gain on extinguishment of debt
 
   
   
 –
   
 
Total operating costs and expenses
101
.3
 
100
.3
 
103
.1
 
101
.3
 
Loss before income taxes
(1
.3)
 
(0
.3)
 
(3
.1)
 
(1
.3)
 
Benefit for income taxes
(0
.2)
   
 
(0
.2)
 
(0
.4)
 
Net loss
(1
.1)%
 
(0
.3)%
 
(2
.8)%
 
(0
.9)%
 
 
 
 

33
(1)     As a percentage of restaurant sales and operating revenue.
 
The following table shows Company-owned Ruby Tuesday and Lime Fresh concept restaurant activity for the 13- and 39-week periods ended March 1, 2016 and March 3, 2015.
 
 
Ruby
Tuesday
 
Lime
Fresh
 
 
Total
 
13 weeks ended March 1, 2016
 
         
     Beginning number
655
 
8
 
663
 
     Opened
 
 
 
     Closed
(6)
 
(6)
     Ending number
649
 
8
 
657
 
             
39 weeks ended March 1, 2016
 
         
     Beginning number
658
 
19
 
677
 
     Opened
 
 
 
     Closed
(9)
(11)
(20)
     Ending number
649
 
8
 
657
 
             
13 weeks ended March 3, 2015
 
         
     Beginning number
663
 
20
 
683
 
     Opened
 
 
 
     Closed
(5)
(1)
(6)
     Ending number
658
 
19
 
677
 
             
39 weeks ended March 3, 2015
 
         
     Beginning number
668
 
20
 
688
 
     Opened
1
 
 
1
 
     Closed
(11)
(1)
(12)
     Ending number
658
 
19
 
677
 
 
The following table shows franchised Ruby Tuesday and Lime Fresh concept restaurant activity for the 13- and 39-week periods ended March 1, 2016 and March 3, 2015.
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
March 1, 2016
 
March 3, 2015
 
March 1, 2016
 
March 3, 2015
Ruby Tuesday
             
       Beginning number
78
 
81
 
78
 
79
          Opened
2
 
  1
 
  4
 
 6
          Closed
 
  (3)
 
  (2)
 
 (6)
       Ending number
80
 
79
 
80
 
79
 
Lime Fresh
             
       Beginning number
  8
 
  8
 
 7
 
  6
          Opened
  –
 
  –
 
 1
 
  2
          Closed
  –
 
  (1)
 
 –
 
  (1)
       Ending number
  8
 
  7
 
 8
 
  7

Revenue
 
Restaurant sales and operating revenue by concept for the 13 and 39 weeks ended March 1, 2016 and March 3, 2015 was as follows (in thousands):

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
March 1, 2016
   
March 3, 2015
   
March 1, 2016
   
March 3, 2015
 
Restaurant sales and operating revenue:
                       
   Ruby Tuesday concept
  $ 267,268     $ 279,798     $ 795,469     $ 810,888  
   Lime Fresh concept
    2,600       4,594       11,636       14,167  
      Total
  $ 269,868     $ 284,392     $ 807,105     $ 825,055  
 
 

34
 
The Ruby Tuesday concept restaurant sales and operating revenue for the 13 weeks ended March 1, 2016 decreased 4.5% to $267.3 million compared to the corresponding period of the prior fiscal year.  This decrease is primarily a result of restaurant closings since the corresponding quarter of the prior fiscal year coupled with a 3.1% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants.  The decrease in Ruby Tuesday concept same-restaurant sales is attributable to a 5.9% decrease in customer traffic due in part to inclement weather in many of our core markets during the current quarter offset by a 2.8% increase in net check.

The Lime Fresh concept restaurant sales and operating revenue for the 13 weeks ended March 1, 2016 decreased 43.4% to $2.6 million compared to the corresponding period of the prior fiscal year.  This decrease is primarily due to restaurant closures since the same quarter of the prior fiscal year.

The Ruby Tuesday concept restaurant sales and operating revenue for the 39 weeks ended March 1, 2016 decreased 1.9% to $795.5 million compared to the corresponding period of the prior fiscal year.  This decrease is primarily a result of restaurant closings since the corresponding period of the prior fiscal year coupled with a 0.6% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants.  The decrease in Ruby Tuesday concept same-restaurant sales is attributable to a 3.7% decrease in customer traffic due in part to inclement weather in many of our core markets during the current period offset by a 3.1% increase in net check.

The Lime Fresh concept restaurant sales and operating revenue for the 39 weeks ended March 1, 2016 decreased 17.9% to $11.6 million compared to the corresponding period of the prior fiscal year.  This decrease is primarily due to restaurant closures since the corresponding period of the prior fiscal year.

Franchise revenue for the 13 and 39 weeks ended March 1, 2016 and March 3, 2015 was as follows (in thousands):

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
March 1, 2016
   
March 3, 2015
   
March 1, 2016
   
March 3, 2015
 
Franchise revenue:
                       
   Ruby Tuesday concept
  $ 1,309     $ 1,320     $ 4,108     $ 4,087  
   Lime Fresh concept
    293       201       693       612  
      Total
  $ 1,602     $ 1,521     $ 4,801     $ 4,699  

Franchise revenue for the 13 weeks ended March 1, 2016 increased 5.3% to $1.6 million compared to the corresponding period of the prior fiscal year.  Franchise revenue is predominately comprised of domestic and international franchise royalties, which totaled $1.5 million for both 13-week periods ended March 1, 2016 and March 3, 2015.  The increase in franchise revenue for the 13 weeks ended March 1, 2016 was primarily due to a $0.1 million increase in domestic franchise development fees as compared to the corresponding period of the prior fiscal year.

Franchise revenue for the 39 weeks ended March 1, 2016 increased 2.2% to $4.8 million compared to the corresponding period of the prior fiscal year.  As previously discussed, franchise revenue is predominately comprised of domestic and international franchise royalties, which totaled $4.6 million and $4.5 million for the 39-week periods ended March 1, 2016 and March 3, 2015, respectively.  The increase in franchise revenue for the 39 weeks ended March 1, 2016 was primarily due to the increase in domestic royalty fees as compared to the corresponding period of the prior fiscal year.

Segment Profit

Segment profit by reportable segment for the 13 and 39 weeks ended March 1, 2016 and March 3, 2015 is as follows (in thousands):

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
March 1, 2016
   
March 3, 2015
   
March 1, 2016
   
March 3, 2015
 
Segment profit/(loss):
                       
   Ruby Tuesday concept
  $ 21,771     $ 28,307     $ 67,752     $ 79,152  
   Lime Fresh concept
    1,860       133       (5,361 )     (1,347 )
      Total segment profit
  $ 23,631     $ 28,440     $ 62,391     $ 77,805  

 

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Segment profit for the 13 weeks ended March 1, 2016 for the Ruby Tuesday concept decreased $6.5 million to $21.8 million compared to the 13 weeks ended March 3, 2015 due to a 3.1% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants, increases in closures and impairments expense of $3.4 million as a result of higher impairments of poor performing open restaurants as compared to the corresponding period of the prior fiscal year, and increases in advertising spending of $0.8 million due primarily to higher internet, direct mail, and other promotional advertising costs offset by decreases in television advertising.  These were partially offset by decreases in cost of goods sold, payroll and related costs, and other restaurant operating costs as further discussed later within this MD&A, and decreases in general and administrative expenses of $1.0 million primarily as a result of a lower accrual for executive bonus, and reductions in share-based compensation expense and management labor.

Segment profit for the 13 weeks ended March 1, 2016 for the Lime Fresh concept increased $1.7 million compared to the 13 weeks ended March 3, 2015 to $1.9 million due primarily to decreases in closures and impairments expense of $1.1 million as we settled eight leases associated with closed Lime Fresh restaurants during the current fiscal quarter, coupled with lower cost of goods sold, payroll and related costs, other restaurant operating costs, and selling, general and administrative expenses as further discussed later within this MD&A.

Segment profit for the 39 weeks ended March 1, 2016 for the Ruby Tuesday concept decreased $11.4 million to $67.8 million compared to the 39 weeks ended March 3, 2015 due primarily to a 0.6% decrease in same-restaurant sales at Company-owned Ruby Tuesday restaurants, increases in closures and impairments expense of $7.8 million as a result of higher impairments of poor performing open restaurants as compared to the corresponding period of the prior fiscal year, and increases in advertising spending of $2.5 million due primarily to higher internet, magazine, direct mail, and other promotional advertising costs offset by decreases in television advertising.  These were partially offset by lower cost of goods sold, payroll and related costs, and other restaurant operating costs as further discussed later within this MD&A, and decreases in general and administrative expenses of $3.9 million as a result of lower share-based compensation expense due in part to a forfeiture credit as further discussed in Note 10 to the Condensed Consolidated Financial Statements, a lower accrual for executive bonus, and decreased management labor from reductions in staffing.

Segment losses for the 39 weeks ended March 1, 2016 for the Lime Fresh concept increased $4.0 million compared to the 39 weeks ended March 3, 2015 to $5.4 million due primarily to increases in closures and impairments expense of $5.1 million as the current period Lime Fresh segment losses include impairment and other charges for eleven company-owned Lime Fresh restaurants which closed during the second quarter of fiscal year 2016.  This was partially offset by lower cost of goods sold, payroll and related costs, other restaurant operating costs, and selling, general and administrative expenses as further discussed later within this MD&A.

The following is a reconciliation of segment profit to loss before income taxes for the 13 and 39 weeks ended March 1, 2016 and March 3, 2015 (in thousands):

   
Thirteen weeks ended
   
Thirty-nine weeks ended
 
   
March 1, 2016
   
March 3, 2015
   
March 1, 2016
   
March 3, 2015
 
Segment profit
  $ 23,631     $ 28,440     $ 62,391     $ 77,805  
Less:
                               
   Depreciation and amortization
    (12,732 )     (12,961 )     (38,474 )     (39,319 )
   Unallocated general and
                               
     administrative expenses
    (9,457 )     (10,777 )     (30,501 )     (31,562 )
   Preopening expenses
          (50 )           (253 )
   Trademark impairment
                (1,999 )      
   Interest expense, net
    (5,005 )     (5,446 )     (16,110 )     (16,783 )
   Other expense, net
    (6 )     (87 )     (72 )     (706 )
Loss before income taxes
  $ (3,569 )   $ (881 )   $ (24,765 )   $ (10,818 )

Pre-tax Loss

Pre-tax loss was $3.6 million for the 13 weeks ended March 1, 2016 compared to $0.9 million for the corresponding period of the prior fiscal year.  The increase in pre-tax loss is due primarily to a decrease in same-restaurant sales of 3.1% at Company-owned Ruby Tuesday restaurants, higher closures and impairments expense ($2.1 million), and increases, as a percentage of restaurant sales and operating
 

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revenue, of cost of goods sold, payroll and related costs, and depreciation and amortization.  These were partially offset by a decrease in interest expense, net ($0.4 million) and a decrease, as a percentage of restaurant sales and operating revenue, of other restaurant operating costs.
 
Pre-tax loss was $24.8 million for the 39 weeks ended March 1, 2016 compared to $10.8 million for the corresponding period of the prior fiscal year.  The increase in pre-tax loss is due primarily to a decrease in same-restaurant sales of 0.6% at Company-owned Ruby Tuesday restaurants, higher closures and impairments expense ($12.4 million), a partial impairment of the Lime Fresh trademark ($2.0 million), and an increase, as a percentage of restaurant sales and operating revenue, of costs of goods sold and payroll and related costs.  These were partially offset by a decrease in interest expense, net ($0.7 million) and decreases, as a percentage of restaurant sales and operating revenue or total revenue, as appropriate, of other restaurant operating costs and selling, general and administrative, net.

In the paragraphs that follow, we discuss in more detail the components of the increase in pre-tax loss for the 13- and 39-week periods ended March 1, 2016, as compared to the comparable periods in the prior fiscal year.  Because a significant portion of the costs recorded in the cost of goods sold, payroll and related costs, other restaurant operating costs, and depreciation and amortization categories are either variable or highly correlative 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.

Cost of Goods Sold

Cost of goods sold decreased $2.7 million (3.4%) to $75.1 million for the 13 weeks ended March 1, 2016, over the corresponding period of the prior fiscal year.  As a percentage of restaurant sales and operating revenue, cost of goods sold increased from 27.4% to 27.8%.

Cost of goods sold decreased $2.9 million (1.3%) to $221.7 million for the 39 weeks ended March 1, 2016, over the corresponding period of the prior fiscal year.  As a percentage of restaurant sales and operating revenue, cost of goods sold increased from 27.2% to 27.5%.

The absolute dollar decrease in cost of goods sold for the 13- and 39-week periods ended March 1, 2016 was primarily the result of restaurant closures and, for the 39 weeks ended March 1, 2016, $1.4 million in settlement proceeds from a class-action lawsuit against a former vendor, which was offset by price increases on certain produce items since the corresponding periods of the prior fiscal year coupled with a shift in menu mix associated with menu changes introduced in November 2015.

As a percentage of restaurant sales and operating revenue, the increase in cost of goods sold for the 13- and 39-weeks ended March 1, 2016 is primarily the result of price increases and a shift in menu mix since the corresponding periods of the prior fiscal year as discussed above.

Payroll and Related Costs

Payroll and related costs decreased $3.3 million (3.4%) to $93.4 million for the 13 weeks ended March 1, 2016, as compared to the corresponding period in the prior fiscal year.  As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 34.0% to 34.6%.

Payroll and related costs decreased $5.5 million (1.9%) to $281.0 million for the 39 weeks ended March 1, 2016, as compared to the corresponding period in the prior fiscal year.  As a percentage of restaurant sales and operating revenue, payroll and related costs increased from 34.7% to 34.8%.

The absolute dollar decrease in payroll and related costs for the 13- and 39-week periods ended March 1, 2016 was primarily due to restaurant closures, reductions in overtime as a result of scheduling improvements, decreased management labor costs, and lower workers’ compensation costs due to favorable claims experience since the corresponding periods of the prior fiscal year.  These reductions were partially offset by higher health insurance due to unfavorable claims experience.

As a percentage of restaurant sales and operating revenue, the increase in payroll and related costs for the 13 and 39 weeks ended March 1, 2016 is primarily the result of loss of leveraging associated with lower sales volumes.

 

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Other Restaurant Operating Costs

Other restaurant operating costs decreased $5.7 million (9.3%) to $55.3 million for the 13-week period ended March 1, 2016, as compared to the corresponding period in the prior fiscal year.  As a percentage of restaurant sales and operating revenue, these costs decreased from 21.4% to 20.5%.

For the 13 weeks ended March 1, 2016, the decrease in other restaurant operating costs related to the following (in thousands):

Repairs
  $ 1,670  
Legal
    1,150  
Utilities
    1,040  
Insurance
    733  
Rent and leasing
    550  
Other decreases, net
    518  
Net decrease
  $ 5,661  

In both absolute dollars and as a percentage of restaurant sales and operating revenue for the 13-week period ended March 1, 2016, the decrease was a result of lower building repairs, utilities, and rent and leasing due in part to restaurant closures since the corresponding period of the prior fiscal year, lower legal costs related to pending litigation, and insurance as a result of favorable general liability claims.  In addition, the decrease as a percentage of restaurant sales and operating revenue was partially offset by loss of leveraging associated with lower sales volumes. 
 
Other restaurant operating costs decreased $5.8 million (3.2%) to $173.9 million for the 39-week period ended March 1, 2016, as compared to the corresponding period in the prior fiscal year.  As a percentage of restaurant sales and operating revenue, these costs decreased from 21.8% to 21.5%.

For the 39 weeks ended March 1, 2016, the decrease in other restaurant operating costs related to the following (in thousands):

Utilities
  $ 1,526  
Legal
    1,508  
Repairs
    1,400  
Insurance
    1,180  
Rent and leasing
    952  
Other decreases, net
    313  
Business interruption recoveries
    (1,076 )
Net decrease
  $ 5,803  

In both absolute dollars and as a percentage of restaurant sales and operating revenue for the 39-week period ended March 1, 2016, the decrease was a result of lower utilities, building repairs, and rent and leasing due in part to restaurant closures since the corresponding period of the prior fiscal year, lower legal costs related to pending litigation, and insurance as a result of favorable general liability claims.  These were offset by business interruption recoveries related to claims collected in the prior fiscal year for certain of our restaurants in the Gulf Coast area.  In addition, the decrease as a percentage of restaurant sales and operating revenue was partially offset by loss of leveraging associated with lower sales volumes. 

Depreciation and Amortization

Depreciation and amortization expense decreased $0.2 million (1.8%) to $12.7 million for the 13-week period ended March 1, 2016, as compared to the corresponding period in the prior fiscal year.  As a percentage of restaurant sales and operating revenue, depreciation and amortization expense increased from 4.6% to 4.7%.

Depreciation and amortization expense decreased $0.8 million (2.1%) to $38.5 million for the 39-week period ended March 1, 2016, as compared to the corresponding period in the prior fiscal year.  As a percentage of restaurant sales and operating revenue, depreciation and amortization expense was consistent with the same period of the prior fiscal year at 4.8%.
 
 

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The absolute dollar decrease in depreciation and amortization for the 13- and 39-week periods ended March 1, 2016 is due primarily to assets that became fully depreciated or were impaired since the corresponding periods of the prior fiscal year coupled with restaurant closures.
 
As a percentage of restaurant sales and operating revenue, the increase in depreciation and amortization for the 13 weeks ended March 1, 2016 is primarily the result of loss of leveraging associated with lower sales volumes.

Selling, General and Administrative Expenses, Net

Selling, general and administrative expenses, net decreased $1.6 million (5.4%) to $27.4 million for the 13-week period ended March 1, 2016, as compared to the corresponding period in the prior fiscal year.

Selling, general and administrative expenses, net decreased $2.5 million (2.9%) to $84.6 million for the 39-week period ended March 1, 2016, as compared to the corresponding period in the prior fiscal year.

The decrease for the 13 weeks ended March 1, 2016 is due to lower general and administrative costs ($2.4 million) offset by higher advertising ($0.8 million).  The reduction in general and administrative costs is primarily due to a lower accrual for executive bonus and reductions in share-based compensation expense.  The increase in advertising is primarily as a result of higher internet, direct mail, and other promotional advertising costs offset by decreases in television advertising.

The decrease for the 39 weeks ended March 1, 2016 is due to lower general and administrative costs ($4.9 million) offset by higher advertising ($2.4 million).  The reduction in general and administrative costs is primarily due to lower share-based compensation expense as a result of a forfeiture credit as further discussed in Note 10 to the Condensed Consolidated Financial Statements, a lower accrual for executive bonus, and decreased management labor from reductions in staffing.  These were partially offset by higher employee benefit-related costs, travel costs associated with restaurant manager training at our Restaurant Support Services Center, and consulting fees.  The increase in advertising is primarily a result of higher internet, magazine, direct mail, and other promotional advertising costs offset by decreases in television advertising.

Closures and Impairments, Net

Closures and impairments, net increased $2.1 million to $6.1 million for the 13-week period ended March 1, 2016, as compared to the corresponding period of the prior fiscal year.  The increase for the 13-week period ended March 1, 2016 is primarily due to higher property impairment charges ($3.4 million) resulting from the impairment of nine poor performing open Ruby Tuesday concept restaurants and other closing costs ($0.2 million) coupled with lower gains on the sale of surplus properties ($0.1 million).  These were partially offset by lower closed restaurant lease reserve expense ($1.6 million) as we favorably settled eight leases associated with closed Lime Fresh restaurants during the 13 weeks ended March 1, 2016.

Closures and impairments, net increased $12.4 million to $18.9 million for the 39-week period ended March 1, 2016, as compared to the corresponding period of the prior fiscal year.  The increase for the 39-week period ended March 1, 2016 is primarily due to higher property impairment charges ($9.9 million) resulting from the closure of 11 Lime Fresh restaurants and the impairment of 15 poor performing open Ruby Tuesday concept restaurants, closed restaurant lease reserve expense ($2.0 million), and other closing costs ($0.2 million), coupled with lower gains on the sale of surplus properties ($0.3 million).  Included within closures and impairments, net for the 39 weeks ended March 1, 2016 are $6.4 million of impairments, lease reserves, severance, and other charges relating to the closed Lime Fresh restaurants.

See Note 7 to our Condensed Consolidated Financial Statements for further information on our closures and impairment charges recorded during the 13 and 39 weeks ended March 1, 2016 and March 3, 2015.  Further information regarding closures and impairments expense for the Ruby Tuesday and Lime Fresh concepts for all periods presented is contained in Note 11 to the Condensed Consolidated Financial Statements.

As a result of our impairment analysis for the 13-week period ended March 1, 2016, we had 67 restaurants that had been open for more than six full quarters with rolling 12-month negative cash flows of which 38 have been impaired to salvage value.  Included within the 29 restaurants which remained were three owned properties for which we recorded impairments based on the estimated values of the properties.  Of the
 
 

39
 
remaining 26 restaurants, we reviewed the plans to improve cash flows and determined that no impairments were necessary.  The remaining net book value of the 29 restaurants, 13 of which are located on owned properties, was $25.8 million at March 1, 2016.  Included within the net book value of these 13 owned properties are land costs of $10.5 million.
 
Should cash flows at these 29 cash flow negative restaurants not improve within a reasonable period of time, in some cases as early as our fourth quarter of fiscal year 2016, further impairment charges may occur.  Considerable management judgment is necessary to estimate future cash flows, including cash flows from continuing use, terminal value, closure costs, salvage value, and sublease income.  Accordingly, actual results could vary significantly from quarter to quarter and from our estimates.

Trademark Impairment

As previously discussed within this MD&A, during the second quarter of fiscal year 2016 we entered into an agreement to sell eight Company-owned Lime Fresh restaurants in Florida for approximately $6.3 million, which we expect to complete over the remainder of fiscal year 2016, and closed the remaining 11 Company-owned Lime Fresh restaurants.  In connection with these events, we concluded during the second quarter of fiscal year 2016 that the Lime Fresh trademark was partially impaired.  Accordingly, we recorded a non-cash charge of $2.0 million representing a partial impairment of the Lime Fresh trademark.  The Lime Fresh trademark has a net book value of $0.9 million remaining at March 1, 2016.

Interest Expense, Net

Interest expense, net decreased $0.4 million to $5.0 million for the 13 weeks ended March 1, 2016, as compared to the corresponding period in the prior fiscal year, primarily due to lower interest resulting from the early payoff of certain mortgage loans since the corresponding period of the prior fiscal year coupled with lower interest on our Senior Notes as a result of repurchases as discussed below.

Interest expense, net decreased $0.7 million to $16.1 million for the 39 weeks ended March 1, 2016, as compared to the corresponding period in the prior fiscal year, primarily for the same reason as mentioned above, which was partially offset by $0.9 million in prepayment premiums paid in connection with ten mortgage obligations that we prepaid and retired during the first quarter of fiscal year 2016.

Gain on Extinguishment of Debt

Under the terms of the Senior Credit Facility we are allowed, under certain circumstances, to repurchase up to $20.0 million of the Senior Notes in any fiscal year.  During the 13 weeks ended March 1, 2016, we repurchased $2.5 million of the Senior Notes for $2.4 million plus accrued interest.  We realized a negligible gain on these transactions.

Benefit for Income Taxes

Under Accounting Standards Codification 740 (“ASC 740”), companies are required to apply their estimated annual tax rate on a year-to-date basis in each interim period.  Under ASC 740, companies should not apply the estimated annual tax rate to interim financial results if the estimated annual tax rate is not reliably predictable.  In this situation, the interim tax rate should be based on the actual year-to-date results.  Due to changes in our projections, which have fluctuated as we work through our brand repositioning, a reliable projection of our annual effective rate has been difficult to determine.  As such, we recorded a tax provision for the 13 and 39 weeks ended March 1, 2016 and March 3, 2015 based on the actual year-to-date results, in accordance with ASC 740.

We regularly evaluate the need for a valuation allowance for deferred tax assets by assessing whether it is more likely than not that we will realize the deferred tax assets in the future.  A valuation allowance assessment is performed each reporting period, with any additions or adjustments reflected in earnings in the period of assessment.  In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets for each jurisdiction.  We will maintain a valuation allowance for our deferred tax assets until sufficient positive evidence exists to support a reversal of some or all of the valuation allowance.  Our tax benefit recorded in the future will be reduced or increased in the event that changes to the valuation allowance are required.
 
 

40
 
We recorded a tax benefit of $0.5 million and $1.7 million for the 13 and 39 weeks ended March 1, 2016, respectively, compared to a tax benefit of $0.1 million and $3.3 million for the 13 and 39 weeks ended March 3, 2015.  Included in our $3.3 million tax benefit for the 39 weeks ended March 3, 2015 was a benefit of $3.2 million recorded during the first quarter of fiscal year 2015, representing an immaterial prior period correction to our deferred tax asset valuation allowance.
 
Liquidity and Capital Resources:

 
Cash and cash equivalents (decreased)/increased by $(22.9) million and $9.9 million during the first 39 weeks of fiscal year 2016 and 2015, respectively.  The change in cash and cash equivalents is as follows (in thousands):
 
   
Thirty-nine weeks ended
 
   
March 1, 2016
   
March 3, 2015
 
Cash provided by operating activities
  $ 18,539     $ 27,427  
Cash used by investing activities
    (18,709 )     (10,260 )
Cash used by financing activities
    (22,703 )     (7,272 )
(Decrease)/increase in cash and cash equivalents
  $ (22,873 )   $ 9,895  

Operating Activities

Our cash provided by operations is generally derived from cash receipts generated by our restaurant customers and franchisees.  Substantially all of the $807.1 million and $825.1 million of restaurant sales and operating revenue disclosed in our Condensed Consolidated Statements of Operations and Comprehensive Loss for the 39 weeks ended March 1, 2016 and March 3, 2015, respectively, was received in cash either at the point of sale or within two to four days (when our customers paid with debit or credit cards).  Our primary uses of cash for operating activities are food and beverage purchases, payroll and benefit costs, restaurant operating costs, general and administrative expenses, and marketing, a significant portion of which are incurred and paid in the same period.

Cash provided by operating activities for the 39 weeks ended March 1, 2016 and March 3, 2015 was $18.5 million and $27.4 million, respectively.  The decrease is primarily the result of lower Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”), decreases in accounts payable, accrued, and other liabilities due to the timing of payments, and an increase in cash paid for taxes ($1.5 million).  These were partially offset by lower cash paid for interest ($0.5 million) due to the prepayment of certain of our mortgage obligations and other principal payments on our debt since the corresponding period of the prior fiscal year and a decrease in amounts spent on media advertising (approximately $0.5 million).

Our working capital deficiency and current ratio as of March 1, 2016 were $0.1 million and 1.0:1, respectively.  As is common in the restaurant industry, we typically carry current liabilities in excess of current assets because cash (a current asset) generated from operating activities is reinvested in capital expenditures (a long-term asset), stock repurchases (thereby reducing equity), or debt reduction (a long-term liability), and receivable and inventory levels are not significant.

Investing Activities

We require capital principally for the maintenance and upkeep of our existing restaurants, limited new restaurant construction, investments in technology, equipment, remodeling of existing restaurants, and on occasion for the acquisition of franchisees or other restaurant concepts.  Property and equipment expenditures purchased with cash on hand for the 39 weeks ended March 1, 2016 and March 3, 2015 were $27.3 million and $21.1 million, respectively.  In addition, proceeds from the disposal of assets produced $6.2 million and $8.7 million of cash during the 39 weeks ended March 1, 2016 and March 3, 2015.

Capital expenditures for the remainder of the fiscal year are estimated to be approximately $6.7 million to $8.7 million.  We intend to fund our investing activities with cash currently on hand, cash provided by operations, or borrowings on the Senior Credit Facility.


 

41
 
Financing Activities

Historically our primary sources of cash have been operating activities and refranchising transactions.  When these alone have not provided sufficient funds for both our capital and other needs, we have obtained funds through the issuance of indebtedness or through the issuance of additional shares of common stock.  Our current borrowings and credit facilities are described below.
 
On May 14, 2012, we entered into an indenture (the “Indenture”) among Ruby Tuesday, Inc., certain subsidiaries of the Company as guarantors and Wells Fargo Bank, National Association as trustee, governing the Company’s $250.0 million aggregate principal amount of the Senior Notes.  The Senior Notes were issued at a discount of $3.7 million, which is being amortized using the effective interest method over the eight-year term of the notes.

The Senior Notes are guaranteed on a senior unsecured basis by our existing and future domestic restricted subsidiaries, subject to certain exceptions.  They rank equal in right of payment with our existing and future senior indebtedness and senior in right of payment to any of our future subordinated indebtedness.  The Senior Notes are effectively subordinated to all of our secured debt, including borrowings outstanding under our revolving credit facility, to the extent of the value of the assets securing such debt and structurally subordinated to all of the liabilities of our existing and future subsidiaries that do not guarantee the Senior Notes.

Interest on the Senior Notes is calculated at 7.625% per annum, payable semiannually on each May 15 and November 15 to holders of record on the May 1 or November 1 immediately preceding the interest payment date.  Accrued interest on the Senior Notes and our other long-term debt and capital lease obligations was $5.0 million and $1.1 million as of March 1, 2016 and June 2, 2015, respectively, and is included in Accrued liabilities – Rent and other in our Consolidated Balance Sheets.  The Senior Notes mature on May 15, 2020.

At any time prior to May 15, 2016, we may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount, plus an applicable “make-whole” premium and accrued and unpaid interest.  At any time on or after May 15, 2016, we may redeem the Senior Notes, in whole or in part, at the redemption prices specified in the Indenture plus accrued and unpaid interest.  There is no sinking fund for the Senior Notes.

The Indenture contains covenants that limit, among other things, our ability and the ability of certain of our subsidiaries to (i) incur or guarantee additional indebtedness; (ii) declare or pay dividends, redeem stock or make other distributions to stockholders; (iii) make certain investments; (iv) create liens or use assets as security in other transactions; (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of their assets; (vi) enter into transactions with affiliates; and (vii) sell or transfer certain assets.  The Indenture also restricts the declaration and payment of a dividend or other distribution on, and/or repurchase by RTI in respect of, its outstanding common stock at any time and from time to time.  These covenants are subject to a number of important exceptions and qualifications, as described in the Indenture, and certain covenants will not apply at any time when the Senior Notes are rated investment grade by the Rating Agencies, as defined in the Indenture.  The Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all the then outstanding Senior Notes to be due and payable immediately.

On December 3, 2013, we entered into a four-year revolving credit agreement (the “Senior Credit Facility”) under which we may borrow up to $50.0 million with the option, subject to certain conditions, to increase the facility by up to $35.0 million.  The terms of the Senior Credit Facility provide for a $25.0 million sublimit for the issuance of standby letters of credit.

Under the terms of the Senior Credit Facility, interest rates charged on borrowings can vary depending on the interest rate option we choose to utilize.  Our options for the rate are a Base Rate or LIBOR plus an applicable margin, provided that the rate shall not be less than zero.  The Base Rate is defined as the highest of the issuing bank’s prime rate, the Federal Funds rate plus 0.50%, or the Adjusted LIBO rate (as defined in the Senior Credit Facility) plus 1.0%.  The applicable margin for the LIBOR rate-based option is a percentage ranging from 2.50% to 3.50% and for the Base Rate option is a percentage ranging from 1.50% to 2.50%.  We pay commitment fees quarterly ranging from 0.40% to 0.75% on the unused portion of the Senior Credit Facility.
 
 

42
 
As security for the Senior Credit Facility, we granted the lenders liens and security interests in substantially all of the shares of capital stock of the Company and each of our present and future subsidiaries, substantially all of the personal property of the Company and each of our present and future subsidiaries, and the real property, improvements, and fixtures of 49 Ruby Tuesday restaurants.  The real property, improvements, and fixtures of the 49 restaurants pledged as collateral appraised at $101.4 million at the time of the transaction and have a March 1, 2016 net book value of $78.6 million.
 
We had no borrowings outstanding under the Senior Credit Facility at March 1, 2016.  After consideration of letters of credit outstanding, we had $38.4 million available under the Senior Credit Facility as of March 1, 2016.

The Senior Credit Facility contains a number of customary affirmative and negative covenants that, among other things, limit or restrict our ability to incur liens, engage in mergers or other fundamental changes, make acquisitions, investments, loans and advances, pay dividends or other distributions, sell or otherwise dispose of certain assets, engage in certain transactions with affiliates, enter into burdensome agreements or certain hedging agreements, amend organizational documents, change accounting practices, incur additional indebtedness and prepay other indebtedness.

Under the terms of the Senior Credit Facility we are allowed, under certain circumstances, to repurchase up to $20.0 million of the Senior Notes in any fiscal year.  During the 39 weeks ended March 1, 2016, we repurchased $2.5 million of the Senior Notes for $2.4 million plus accrued interest.  We realized a negligible gain on these transactions.  The balance of the Senior Notes was $212.5 million at March 1, 2016.

Under the Senior Credit Facility, we are required to comply with financial covenants relating to the maintenance of a maximum leverage ratio and a minimum fixed charge coverage ratio.  The terms of the Senior Credit Facility require us to maintain a maximum leverage ratio of no more than 4.50 to 1.0 and a minimum fixed charge coverage ratio of 1.55 to 1.0 for the quarter ended March 1, 2016.  For the remainder of fiscal year 2016, the Senior Credit Facility requires us to maintain a maximum leverage ratio of 4.40 to 1.0, and requires us to maintain a minimum fixed charge coverage ratio of 1.60 to 1.0.  The minimum required ratios fluctuate thereafter as provided in the Senior Credit Facility.

The Senior Credit Facility terminates no later than December 3, 2017.  Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights under the Senior Credit Facility and any ancillary loan documents.

On December 3, 2013, in connection with our entry into the Senior Credit Facility, the Company and certain of its subsidiaries entered into loan modification agreements (the “Loan Modification Agreements”) with certain mortgage lenders to, among other things, provide waivers and consents under certain of our mortgage loan obligations to enter into the Senior Credit Facility.  The Loan Modification Agreements also amended certain financial reporting requirements under the specified loans and modified and/or provided for certain financial covenants for the specified loans, including the maximum leverage ratio and the minimum fixed charge coverage ratio.

We were in compliance with our maximum leverage ratio and our minimum fixed charge coverage ratio as of March 1, 2016.

Our $21.3 million in mortgage loan obligations as of March 1, 2016 consists of various loans acquired upon franchise acquisitions.  These loans, which mature between January 2017 and October 2021, have balances which range from $0.6 million to $7.0 million and interest rates of 7.60% to 10.17%.  Included in our current maturities of long-term debt as of March 1, 2016 is $9.7 million related to two mortgage loan obligations that have balloon payments due during the third quarter of fiscal year 2017.  Many of the properties acquired from franchisees collateralize the loans outstanding.

During the first quarter of fiscal year 2016, we prepaid and retired ten mortgage loan obligations with an aggregate balance of $8.3 million as of June 2, 2015 using cash on hand.  Additionally, we paid $0.9 million in prepayment premiums and an insignificant amount of accrued interest in connection with the retirement of these obligations.  The prepayment of this debt eliminated one mortgage lender and allowed for the release of 26 properties which had served as collateral.


 

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During the remainder of fiscal year 2016, we expect to fund operations, capital expansion, and any other investments from cash currently on hand, operating cash flows, or borrowings on our Senior Credit Facility.
 
Significant Contractual Obligations and Commercial Commitments

As previously discussed within this MD&A, during the 39 weeks ended March 1, 2016, we prepaid and retired ten mortgage loan obligations with an aggregate balance of $8.3 million as of June 2, 2015 and repurchased $2.5 million of the Senior Notes using cash on hand.  Payments due under our notes payable and other long-term debt financial obligations have not changed significantly from the amounts disclosed in our Form 10-K for the year ended June 2, 2015 other than for these prepayments and repurchases of the Senior Notes during the 39 weeks ended March 1, 2016.

Recently Issued Accounting Pronouncements

Information regarding accounting pronouncements not yet adopted is incorporated by reference from Note 15 to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
 
Known Events, Uncertainties and Trends: 


Sale of Company-Owned Lime Fresh Restaurants

As previously discussed within this MD&A, during the second quarter of fiscal year 2016 we entered into an agreement to sell eight Company-owned Lime Fresh restaurants for approximately $6.3 million.  We expect to complete the transaction over the remainder of fiscal year 2016.

Financial Strategy and Stock Repurchase Plan

Cash and cash equivalents as of March 1, 2016 were $52.5 million.  Our overall goal is to invest in our brand and to strengthen our balance sheet to improve credit metrics.  As such, our first priority is to ensure that we have adequate cash levels to run the business and internally fund our capital expenditures.  Our second priority is to reduce our outstanding debt to help improve our credit metrics with the goal of improved flexibility and access to capital at reasonable rates.  Lastly, we would consider share repurchases within the limitations of our debt covenants to return capital to shareholders.  During the 39 weeks ended March 1, 2016, we repurchased 1.9 million shares of our common stock at an aggregate cost of $10.0 million.  As of March 1, 2016, the total number of remaining shares authorized to be repurchased was 9.9 million.  Any of these actions, in any particular period and the actual amount thereof, remain at the discretion of the Board of Directors, and no assurance can be given that any such actions will be taken in the future.

Repurchases of Senior Notes

We are allowed under the terms of the Senior Credit Facility to repurchase, in any fiscal year, up to $20.0 million of indebtedness to various holders of the Senior Notes.  During the 39 weeks ended March 1, 2016, we repurchased $2.5 million of the Senior Notes for $2.4 million plus accrued interest.  We realized a negligible gain on these transactions.  As of the date of this filing, we may repurchase $17.5 million of the Senior Notes during the remainder of fiscal year 2016.  Future repurchases of the Senior Notes, if any, will be funded with available cash on hand.

Dividends

During fiscal 1997, our Board of Directors approved a dividend policy as an additional means of returning capital to our shareholders.  No dividends were declared or paid during the 39 weeks ended March 1, 2016 or March 3, 2015.  The payment of a dividend in any particular period and the actual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that dividends will be paid in the future.
 
 

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There were no material changes during the quarter ended March 1, 2016 to the disclosure made in Item 7A of our Form 10-K for the year ended June 2, 2015.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures

Our management, with the participation and under the supervision of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 1, 2016.

Changes in Internal Control

During the fiscal quarter ended March 1, 2016, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II — OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
We are presently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of business, including claims relating to injury or wrongful death under “dram shop” laws, workers’ compensation and employment matters, claims relating to lease and contractual obligations, and claims from customers alleging illness or injury.  We provide accruals for such claims when payment is probable and estimable in accordance with U.S. generally accepted accounting principles.  At this time, in the opinion of management, the ultimate resolution of pending legal proceedings will not have a material adverse effect on our consolidated operations, financial position, or cash flows.  See Note 12 to the Condensed Consolidated Financial Statements for further information about our legal proceedings as of March 1, 2016.
 
ITEM 1A.  RISK FACTORS
 
Information regarding risk factors appears in our Annual Report on Form 10-K for the year ended June 2, 2015 in Part I, Item 1A. Risk Factors.  There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.
 
 

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The following table includes information regarding purchases of our common stock made by us during the third fiscal quarter ended March 1, 2016:
 
   
(a)
   
(b)
   
(c)
   
(d)
 
   
Total number
   
Average
   
Total number of shares
   
Maximum number of shares
 
   
of shares
   
price paid
   
purchased as part of publicly
   
that may yet be purchased
 
Period
 
purchased
   
per share
   
announced plans or programs
   
under the plans or programs (1)
 
                         
Month #1
                       
(December 2 to January 5)
        $             11,762,706  
Month #2
                               
(January 6 to February 2)
    1,103,522       5.43       1,103,522       10,659,184  
Month #3
                               
(February 3 to March 1)
    755,043       5.31       755,043       9,904,141  
Total
    1,858,565     $ 5.38       1,858,565          
 
(1) As of March 1, 2016, 9.9 million shares remained available for purchase under an existing January 8, 2013 authorization by the Board of Directors to repurchase 10.0 million shares.  The timing, price, quantity, and manner of the purchases to be made are at the discretion of management upon instruction from the Board of Directors, depending upon market conditions.  The repurchase of shares in any particular future period and the actual amount thereof remain at the discretion of the Board of Directors, and no assurance can be given that shares will be repurchased in the future.
 
 
 
None.
 
 
Not applicable.
 
 
None.
 
 

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ITEM 6. EXHIBITS
 

 
The following exhibits are filed as part of this report:
 
 
 Exhibit No.
 
10
.1
  Second Amendment, dated as of March 16, 2016, to the Ruby Tuesday, Inc. Salary Deferral Plan.
 
       
12
.1
  Statement regarding computation of Consolidated Ratio of Earnings to Fixed Charges.
 
       
31
.1
  Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
31
.2
  Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
       
32
.1
  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
 
   
      Section 906 of the Sarbanes-Oxley Act of 2002.
 
       
32
.2
  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
 
   
      Section 906 of the Sarbanes-Oxley Act of 2002.
 
       
10
1.INS
  XBRL Instance Document.
 
       
10
1.SCH
  XBRL Schema Document.
 
       
10
1.CAL
  XBRL Calculation Linkbase Document.
 
       
10
1.DEF
  XBRL Definition Linkbase Document.
 
       
10
1.LAB
  XBRL Labels Linkbase Document.
 
       
10
1.PRE
  XBRL Presentation Linkbase Document.
 
       
 
 

47
 
 


 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
RUBY TUESDAY, INC.
(Registrant)
 
Date: April 8, 2016
 
 BY: /s/ JILL M. GOLDER
——————————————
Jill M. Golder
Executive Vice President – Chief Financial Officer, Treasurer, and Assistant Secretary
(Principal Financial Officer)

Date: April 8, 2016
 
 BY: /s/ FRANKLIN E. SOUTHALL, JR.
—————————————————
Franklin E. Southall, Jr.
Vice President – Corporate Controller and
Principal Accounting Officer
(Principal Accounting Officer)
 
 

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