10-Q 1 form10q.txt RUBY TUESDAY, INC. 3RD QUARTER FISCAL 2002 10-Q 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 5, 2002 -------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission file number 1-12454 -------------- RUBY TUESDAY, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) GEORGIA 63-0475239 -------------------------- -------------------------- (State of incorporation or (I.R.S. Employer identifi- organization) cation no.) 150 West Church Avenue Maryville, TN 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 . -------------------------------------------------------------------------------- 65,159,958 -------------------------------------------------------------------------------- (Number of shares of $0.01 par value common stock outstanding as of April 15, 2002) Exhibit Index appears on page 20 INDEX PAGE NUMBER PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 5, 2002 (UNAUDITED) AND JUNE 5, 2001...........3 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED MARCH 5, 2002 AND MARCH 4, 2001..........4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THIRTY-NINE WEEKS ENDED MARCH 5, 2002 AND MARCH 4, 2001................5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)...............................6-10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................11-18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........................................N/A PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS....................................19 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................NONE ITEM 5. OTHER INFORMATION....................................NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................20 SIGNATURES...................................................21 ---------- PART I - FINANCIAL INFORMATION ITEM 1 RUBY TUESDAY, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT PER-SHARE DATA)
MARCH 5, JUNE 5, 2002 2001 --------------------------------- (UNAUDITED) (NOTE A) Assets Current assets: Cash and short-term investments.................. $ 55,722 $ 10,636 Accounts and notes receivable.................... 11,742 6,754 Inventories: Merchandise.................................... 6,736 6,661 China, silver and supplies..................... 2,957 2,711 Income tax receivable............................ 93 7,671 Prepaid expenses................................. 5,920 7,726 Deferred income taxes............................ 14,056 64 Assets held for disposal......................... 792 22,197 ----------- ----------- Total current assets........................... 98,018 64,420 ----------- ----------- Property and equipment - at cost....................... 523,642 472,337 Less accumulated depreciation and amortization... (200,005) (182,202) ----------- ----------- 323,637 290,135 Goodwill, net.......................................... 7,845 7,845 Notes receivable, net.................................. 36,352 56,881 Other assets........................................... 32,512 26,386 ---------- ----------- Total assets................................. $498,364 $445,667 ========== =========== Liabilities & shareholders' equity Current liabilities: Accounts payable................................. $ 34,275 $ 27,910 Short-term borrowings............................ 14,700 Accrued liabilities: Taxes, other than income taxes................. 7,604 6,349 Payroll and related costs...................... 17,386 18,670 Insurance...................................... 5,396 4,221 Rent and other................................. 19,680 16,083 Current portion of long-term debt.............. 531 500 ---------- ----------- Total current liabilities.................... 84,872 88,433 ---------- ----------- Long-term debt, net of current portion................. 6,811 15,212 Deferred income taxes.................................. 10,900 4,127 Deferred escalating minimum rent....................... 8,734 8,810 Other deferred liabilities............................. 52,898 44,814 Shareholders' equity: Common stock, $0.01 par value;(authorized 100,000 shares; issued 64,816 @ 3/5/02; 63,211 @ 6/5/01) 648 632 Capital in excess of par value................... 33,125 14,830 Retained earnings................................ 304,652 270,556 ---------- ----------- 338,425 286,018 Deferred compensation liability payable in Company stock................................... 4,664 4,248 Company stock held by Deferred Compensation Plan. (4,664) (4,248) Accumulated other comprehensive income........... (4,276) (1,747) ---------- ----------- Total liabilities & shareholders' equity..... $498,364 $445,667 ========== ===========
The accompanying notes are an integral part of the condensed consolidated financial statements. RUBY TUESDAY, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS EXCEPT PER-SHARE DATA) (UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED MARCH 5, MARCH 4, MARCH 5, MARCH 4, 2002 2001 2002 2001 ---------------------- ------------------------ (NOTE A) (NOTE A) Revenues: Restaurant sales and operating revenues $209,628 $185,451 $605,049 $578,870 Franchise revenues..................... 4,108 3,560 10,656 9,185 --------- --------- --------- --------- 213,736 189,011 615,705 588,055 Operating costs and expenses: Cost of merchandise.................... 56,900 51,606 162,780 159,367 Payroll and related costs.............. 67,584 58,118 197,361 186,561 Other restaurant operating costs....... 36,791 33,321 116,928 113,712 Depreciation and amortization.......... 8,425 7,500 25,000 26,439 Loss on valuation of Specialty Restaurant Group, LLC Note (see Note H) ........................ 28,856 - 28,856 - Selling, general and administrative.... 10,972 11,517 33,829 38,271 Interest income, net. ................. (1,662) (1,460) (4,505) (1,886) --------- --------- --------- -------- 207,866 160,602 560,249 522,464 --------- --------- --------- --------- Income before income taxes and cumulative effect of change in accounting principle.............................. 5,870 28,409 55,456 65,591 Provision for income taxes............... 823 10,172 18,428 23,483 Cumulative effect of change in accounting principle, net of tax.................. - - 58 - --------- --------- --------- --------- Net income............................... $ 5,047 $ 18,237 $ 36,970 $ 42,108 ========= ========= ========= ========= Earnings per share: Basic.................................. $ 0.08 $ 0.29 $ 0.58 $ 0.67 ========= ========= ========= ========= Diluted................................ $ 0.07 $ 0.28 $ 0.56 $ 0.65 ========= ========= ========= ========= Weighted average shares: Basic.................................. 64,465 63,385 63,787 62,528 ========= ========= ========= ========= Diluted................................ 66,347 65,518 65,631 64,753 ========= ========= ========= ========= Cash dividends declared per share........ 2.25(cents) 2.25(cents) 4.50(cents) 4.50(cents) ================================================
The accompanying notes are an integral part of the condensed consolidated financial statements. RUBY TUESDAY, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) THIRTY-NINE WEEKS ENDED MARCH 5, MARCH 4, 2002 2001 ------------------------- (Note A) Operating activities: Net income........................................ $ 36,970 $ 42,108 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 25,000 26,439 Amortization of intangibles..................... 13 467 Cumulative effect of accounting change, net of tax........................................ 58 Deferred income taxes........................... 4,558 3,864 Loss (gain) on impairment and disposition of assets..................................... 3,789 (1,056) Loss on valuation of Specialty Restaurant Group, LLC Note (see Note H).................. 28,856 Gain on derivatives............................. (35) Other........................................... 365 155 Changes in operating assets and liabilities: Receivables.................................. (6,841) (4,580) Inventories.................................. (744) (795) Prepaid and other assets..................... 1,394 3,407 Accounts payable, accrued and other liabilities............... 5,328 (8,473) Income tax payable........................... 7,578 (4,750) ------------ ------------ Net cash provided by operating activities....... 106,289 56,786 ------------ ------------ Investing activities: Purchases of property and equipment............... (70,057) (46,987) Acquisition of restaurant properties from franchisee...................................... (1,700) Proceeds from disposal of assets.................. 2,665 29,945 Proceeds from sale of restaurant properties to franchisees.................................. 20,695 7,352 Other, net........................................ (4,805) (2,778) ------------ ------------ Net cash used in investing activities........... (53,202) (12,468) ------------ ------------ Financing activities: Proceeds from long-term debt...................... 11,000 24,000 Net change in short-term borrowings............... (14,700) (3,398) Principal payments on long-term debt.............. (19,370) (72,105) Proceeds from issuance of stock, including treasury stock.................................. 24,371 30,902 Stock repurchases, net of changes in the Deferred Compensation Plan...................... (6,428) (19,694) Dividends paid.................................... (2,874) (2,823) ------------ ------------ Net cash used in financing activities........... (8,001) (43,118) ------------ ------------ Increase in cash and short-term investments....... 45,086 1,200 Cash and short-term investments: Beginning of year............................... 10,636 10,154 ------------ ------------ End of quarter.................................. $ 55,722 $ 11,354 ============ ============ The accompanying notes are an integral part of the condensed consolidated financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the thirteen and thirty-nine week periods ended March 5, 2002 are not necessarily indicative of results that may be expected for the year ending June 4, 2002. The balance sheet at June 5, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. As discussed in Note 1 to the Fiscal 2001 Audited Consolidated Financial Statements, the Company has reclassified coupon expenses against revenues in accordance with Emerging Issues Task Force No. 00-14 "Accounting for Certain Sales Incentives." Accordingly, certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net income. For further information, refer to the consolidated financial statements and footnotes thereto included in Ruby Tuesday, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 5, 2001. NOTE B - EARNINGS PER SHARE Basic earnings per share are based on the weighted average number of shares outstanding during each period. The computation of diluted earnings per share includes the dilutive effect of stock options. Such stock options have the effect of increasing basic weighted average shares outstanding by approximately 1.9 million and 2.1 million for the thirteen weeks ended March 5, 2002 and March 4, 2001, respectively, and approximately 1.8 million and 2.2 million for the thirty-nine weeks ended March 5, 2002 and March 4, 2001, respectively. NOTE C - INTANGIBLE ASSETS The Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), effective June 6, 2001. This statement requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. The Company, formerly known as Morrison Restaurants Inc., currently has unamortized goodwill remaining from the acquisition of the Ruby Tuesday concept in 1982 by the Company in the amount of $7.8 million, which is subject to the transition provisions of SFAS 142. A negligible amount of amortization expense has been recorded during the year, which represents the amortization of trademarks as required under SFAS 142. For each of the next five years amortization expense relating to identified intangibles is expected to be negligible. The effect of the adoption of SFAS 142 as of March 5, 2002 and June 6, 2001 is summarized in the following table (in thousands): MARCH 5, 2002 JUNE 6, 2001 -------------------------- -------------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization Goodwill $ 14,669 $ 6,824 $ 14,669 $ 6,824 Trademarks 716 78 402 68 -------- -------- --------- -------- Total $ 15,385 $ 6,902 $ 15,071 $ 6,892 ======== ======== ========= ======== As required by SFAS 142, the results for the first three quarters of Fiscal 2001 have not been restated. A reconciliation of net income, as if SFAS 142 had been adopted, is presented below for the thirteen and thirty-nine weeks ended March 4, 2001. THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED March 4, 2001 March 4, 2001 ----------------------- ----------------------- (in thousands) (in thousands) Reported net income $ 18,237 $ 42,108 Goodwill amortization 96 434 -------- -------- Adjusted net income $ 18,333 $ 42,542 ======== ======== The adoption of SFAS 142 in Fiscal 2001 would not have resulted in a change to previously reported basic or diluted earnings per share for the thirteen weeks ended March 4, 2001. However, because of rounding, the one-half cent per share impact that the adoption of SFAS 142 would have had for the 39 weeks ended March 4, 2001 would have been an increase to previously reported basic earnings per share from $0.67 to $0.68 and an increase in diluted earnings per share from $0.65 to $0.66. NOTE D - DERIVATIVE INSTRUMENTS The Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), effective June 6, 2001. SFAS 133 requires recognition of all derivatives as either assets or liabilities on the balance sheet measured at fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gains or losses on the derivative instruments are reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Any ineffective portion of the gains or losses on the derivative instruments is recorded in results of operations immediately. Adoption of this new accounting standard resulted in a cumulative effect charge, net of tax, totaling $0.1 million to expense and $1.0 million to other comprehensive income. The Company utilizes interest rate swap agreements to manage interest rate exposure on the Company's floating-rate lease obligations. At March 5, 2002, the Company had five interest rate swaps with notional amounts aggregating $125 million. These swaps have been designated as cash flow hedges and effectively fix the interest rate on an equivalent amount of the Company's floating-rate lease obligations. The amount included in rent expense representing the amount of the hedges' ineffectiveness was approximately ($0.1) million and $0.1 million for the thirteen and thirty-nine weeks ended March 5, 2002, respectively. At March 5, 2002, based on interest rates then in effect, the Company had a deferred loss, net of tax, associated with cash flow hedges of $2.5 million. Due to the Company's expectation that interest rates will remain lower than the swap rates, the Company estimates that a significant portion of this deferred loss will be reclassified from other comprehensive income to rent expense in the upcoming year. See "Special Note Regarding Forward Looking Information." These losses result from LIBOR interest rates which have declined below those of calendar 1998, the year in which the Company entered into its interest rate swaps with notional amounts of $125 million. Rent expense on the units operated under $125 million of synthetic lease arrangements has been fixed through various dates in calendar 2003. NOTE E - OTHER DEFERRED LIABILITIES Other deferred liabilities at March 5, 2002 and June 5, 2001 included $15.0 million and $13.2 million, respectively, for the liability due to participants in the Company's Deferred Compensation Plan and $8.8 million and $8.4 million, respectively, for the liability due to participants of the Company's Executive Supplemental Pension Plan. NOTE F - REFRANCHISING On December 5, 2001, the Company completed the sales of 19 units in Missouri, Indiana, Arkansas, and Illinois to three new franchise partners. The Company received approximately $30.7 million for these units, of which approximately $20.7 million was paid in cash. The remaining amounts received were in the form of notes due through Fiscal 2013 bearing interest at a rate of 10.0% per year. These units will be operated as Ruby Tuesday restaurants under separate franchising agreements. The sales of these units had a minimal impact on the consolidated statement of income. As of December 4, 2001 (the day prior to the change of ownership), all of the units to be sold were open. Revenues for the thirteen and twenty-six weeks ended December 4, 2001 from these 19 units totaled $8.3 million and $17.0 million, respectively. Operating profits for the same thirteen and twenty-six weeks periods from these 19 units totaled $0.7 million and $1.6 million, respectively. The Company defines operating profit as gross profit less depreciation and allocated selling, general and administrative expense. NOTE G - COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") requires the disclosure of certain revenues, expenses, gains and losses that are excluded from net income in accordance with accounting principles generally accepted in the United States of America. Total comprehensive income for the thirteen and thirty-nine weeks ended March 5, 2002 and March 4, 2001 are as follows (in thousands): THIRTEEN WEEKS ENDED MARCH 5, 2002 MARCH 4, 2001 ------------- ------------- Net income...................................... $ 5,047 $ 18,237 Other comprehensive income: Change in current period market value....... (191) - Losses reclassified into the consolidated statement of income....................... 543 - --------- --------- Total comprehensive income...................... $ 5,399 $ 18,237 ========= ========= THIRTY-NINE WEEKS ENDED MARCH 5, 2002 MARCH 4, 2001 ------------- ------------- Net income...................................... $ 36,970 $ 42,108 Other comprehensive income: Unrecognized loss on interest rate swaps: Cumulative effect of change in accounting principle, net................. (1,032) - Change in year-to-date market value......... (2,494) - Losses reclassified into the consolidated statement of income....................... 998 - --------- --------- Total comprehensive income...................... $ 34,442 $ 42,108 ========= ========= NOTE H - LOSS ON VALUATION OF SPECIALTY RESTAURANT GROUP, LLC NOTE RECEIVABLE On November 20, 2000, the Company completed the sale of all of its American Cafe (including L&N Seafood) and Tia's Tex-Mex restaurants to Specialty Restaurant Group, LLC ("SRG"), a limited liability company owned by the former President/Partner of the Company's American Cafe and Tia's Tex-Mex concepts and certain members of his management team. The consideration received by the Company consisted of (i) $30.0 million in cash, (ii) a promissory note payable by SRG to the Company (the "Note") in the original principal amount of $28.8 million, (iii) an option to acquire a 33% membership interest in SRG during the five-year period following November 20, 2000 at varying amounts, (iv) a nonsolicitation agreement for the period during which the note is outstanding and two full years thereafter and (v) the right to use certain trade/service marks, and offer related franchises, outside of the U.S. The Company recorded a $10.0 million loss in Fiscal 2000 on the planned sale. The Note has a term of 10 years, the first three of which are interest only, bears interest at a rate of 10% per annum, and is secured by a pledge of all of the outstanding membership interests of SRG (for further details of the above transaction refer to the consolidated financial statements and footnotes thereto included in Ruby Tuesday, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 5, 2001). During the quarter ended March 5, 2002, the Company fully reserved the Note due to a number of factors all relating to SRG's declining operating performance. The sluggish economy over the last year had a negative effect on SRG's sales and cash flow. The decrease in cash flow has led SRG to be delinquent on interest and/or support service fee payments to the Company during third quarter. The Company records revenue from SRG on a cash basis, and as such, for the quarter ended March 5, 2002 the Company only recognized interest income for the December period. SRG's reduced sales and operating performance previously mentioned also resulted in a decrease in net income and resulting cash flow. The Company believes that, upon completion of SRG's annual financial statement audit, SRG will report debt covenant violations to its senior lender for the fiscal year ended January 1, 2002. The Company believes that SRG has been in compliance with its debt covenants for previous reporting periods. Representatives of the senior lender have warned Company personnel to anticipate that payments to the Company under the Note will be halted as a result of SRG's covenant defaults, pursuant to a Subordination Agreement between the Company and such senior lender, until such time that the covenant defaults are cured. NOTE I - IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically reviews the recorded value of its long-lived assets to determine if the future cash flows to be derived from those assets will be sufficient to recover the remaining recorded asset values. Restaurants in particular are reviewed on a quarterly basis for negative cash flows. Management believes that units with recurring negative cash flows might be impaired based upon poor operating performance. In addition to restaurant unit impairments, the Company recorded a $1.1 million impairment charge in the second quarter of Fiscal 2002 for the abandonment of information technology software which had been developed to produce more automated unit, region and division level management reports. The Company instead is currently developing software with a third party vendor to produce these same and further reports which will be more compatible with its current systems. NOTE J - TRANSFER OF OWNERSHIP OF DENVER FRANCHISE On January 3, 2002, the 99% owner of the Company's Denver franchise ("RT Denver") resigned from his employment with the franchise and agreed to enter into a formal agreement whereby his 99% ownership of RT Denver would be transferred to a new individual. On January 4, 2002, RT Denver employed an individual (a former Ruby Tuesday employee), who would become the new owner of such 99% interest, to manage and operate the day-to-day operations of the restaurants until such time that a transfer of ownership from the previous owner to the new owner could be accomplished. A General Partnership Interest Purchase Agreement was signed on February 8, 2002 between RT Denver, the former owner, and the Company wherein the terms of the transfer to occur were detailed. Under the terms of this agreement the Company incurred a charge of $5.9 million to the bad debt reserve. Pursuant to this agreement, the Company also agreed to acquire one of the Denver units, along with its associated debt, after closing, upon transfer of liquor license. No further losses are anticipated upon the acquisition of this unit. The formal transfer of the 99% ownership interest in RT Denver to the new owner occurred on March 25, 2002. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General: -------------------------------------------------------------------------------- The Company generates revenues from two primary sources: restaurant sales (food and beverage sales) and franchise revenues consisting of franchise royalties (based upon a percentage of each franchise restaurant's monthly gross sales) and development and franchise fees (which typically total $45,000 for each Ruby Tuesday domestic restaurant opened). The Company reported net income of $5.0 million for the thirteen weeks ended March 5, 2002 compared to $18.2 million for the corresponding period of the prior year. Diluted earnings per share for the third quarter of Fiscal 2002 was $0.07, compared to $0.28 for the third quarter of Fiscal 2001. The decrease is attributable to a non-recurring $28.9 million loss on valuation of the Specialty Restaurant Group, LLC ("SRG") Note during the quarter (See Note H to condensed consolidated financial statements). Excluding the $17.5 million after-tax charge associated with this loss, earnings per share would have been $0.34, a 21% increase when compared to the prior year. This increase is due to a 2.5% increase in same store sales for Company-owned restaurants and a reduction, as a percentage of revenues, of operating costs and expenses as discussed below. The Company also reported net income of $37.0 million for the thirty-nine weeks ended March 5, 2002 compared to $42.1 million for the corresponding period of the prior year. Diluted earnings per share for the year-to-date period was $0.56, a 13.8% decrease from the same period of Fiscal 2001. Excluding the $0.27 per share non-recurring loss on valuation discussed above, year-to-date earnings per share would have been $0.83, a 27.7% increase. As of March 5, 2002, the Company owned and operated 391 Ruby Tuesday restaurants located in 25 states. Franchise operations included 182 domestic and 16 international Ruby Tuesday restaurants. Results of Operations: -------------------------------------------------------------------------------- The following table sets forth selected restaurant operating data as a percentage of revenues, except where otherwise noted, for the periods indicated. All information is derived from the unaudited condensed consolidated financial statements of the Company included herein. Thirty-nine weeks ended March 5, March 4, 2002 2001 -------------------------------- Revenues: Restaurant sales and operating revenues 98.3% 98.4% Franchise revenues..................... 1.7 1.6 --------------- --------------- Total revenues....................... 100.0 100.0 Operating costs and expenses: Cost of merchandise (1)................ 26.9 27.5 Payroll and related costs (1).......... 32.6 32.2 Other restaurant operating costs (1)... 19.3 19.6 Depreciation and amortization (1)...... 4.1 4.6 Loss on valuation of SRG Note (1)...... 4.8 - Selling, general and administrative.... 5.5 6.5 Interest income, net................... (0.7) (0.3) --------------- --------------- Income before income taxes and cumulative effect of change in accounting principle.. 9.0 11.2 Provision for income taxes.................. 3.0 4.0 Cumulative effect of change in accounting principle, net of tax..................... - - --------------- --------------- Net income.................................. 6.0% 7.2% =============== =============== (1) As a percentage of restaurant sales and operating revenues. The following table shows year-to-date Company-owned restaurant openings and closings and total Company-owned restaurants as of the end of the third quarter. Year-to-date Year-to-date Total Open at End Openings Closings of Third Quarter -------------- -------------- ----------------- Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal 2002 2001 2002 2001 2002 2001 ------ ------ ------ ------ ------ ------ Ruby Tuesday 44* 34 27** 14** 391 356 American Cafe/Tia's Tex-Mex 0 3 0 69*** 0 0*** The following table shows year-to-date Ruby Tuesday franchised restaurant openings and closings and total Ruby Tuesday franchised restaurants as of the end of the third quarter. Year-to-date Year-to-date Total Open at End Openings Closings of Third Quarter -------------- -------------- ----------------- Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal 2002 2001 2002 2001 2002 2001 ------ ----- ------ ------ ------ ------ Domestic 37** 23** 6* 3 182 157 International 5 1 1 0 16 10 * Includes 3 units acquired from an existing franchise partner. ** Includes 19 units sold to franchisees during the third quarter of Fiscal 2002 and 6 units sold to franchisees during the second quarter of Fiscal 2001. *** All American Cafe, L&N and Tia's Tex-Mex units were sold to SRG during the second quarter of Fiscal 2001. The units sold to SRG included 38 American Cafe, 3 L&N, and 28 Tia's Tex-Mex units. The Company estimates that approximately 8 to 10 additional Company-owned Ruby Tuesday restaurants will be opened during the remainder of Fiscal 2002. The Company expects franchisees to open approximately 3 to 4 Ruby Tuesday restaurants during the remainder of Fiscal 2002. Revenues: -------------------------------------------------------------------------------- Company restaurant sales increased $24.2 million (13.0%) to $209.6 million for the thirteen weeks ended March 5, 2002 compared to the same period of the prior year. Company restaurant sales increased $26.2 million (4.5%) to $605.0 million for the thirty-nine weeks ended March 5, 2002. The quarterly increase is primarily attributable to a net increase of 35 Company-owned Ruby Tuesday units, a 2.5% increase in same store sales, and a 2.6% increase in average unit volumes. The smaller year-to-date increase relates to the inclusion of American Cafe, L&N and Tia's Tex-Mex revenue in the first two quarters of Fiscal 2001. Franchise revenues totaled $4.1 million for the thirteen weeks ended March 5, 2002 compared to $3.6 million for the same period in the prior year. For the thirty-nine week period ended March 5, 2002, franchise revenues were $10.7 million compared to $9.2 million for the same period in the prior year. Franchise revenues are predominately comprised of domestic and international royalties which totaled $9.3 million and $7.9 million for the thirty-nine week periods ending March 5, 2002 and March 4, 2001, respectively. Operating Profits: -------------------------------------------------------------------------------- Pre-tax income for the thirteen weeks ended March 5, 2002 was $5.9 million, a decrease of $22.5 million from the corresponding period of the prior year. For the thirty-nine week period ended on that same date, pre-tax income was $55.5 million, a $10.1 million (15.5%) decrease from the corresponding period of the prior year. The decrease in pre-tax income is attributable to a $28.9 million non-recurring loss on valuation of the SRG Note during the quarter. Excluding this loss, pre-tax income for the thirty-nine weeks ended March 5, 2002 would have been $84.3 million, a 28.5% increase over the same period of the prior year. The increase is due to positive same store sales for the Ruby Tuesday concept and a reduction, as a percentage of revenues, of cost of merchandise, other restaurant operating costs, depreciation and amortization, and as a percentage of total operating revenues, selling, general and administrative expenses, and net interest expense as discussed below. Cost of merchandise increased $5.3 million (10.3%) to $56.9 million for the thirteen weeks ended March 5, 2002 and $3.4 million (2.1%) to $162.8 million for the thirty-nine weeks ended March 5, 2002 compared to the same periods of the prior year. However, as a percentage of Company restaurant sales, the cost of merchandise decreased from 27.5% to 26.9% for the thirty-nine weeks ended March 5, 2002. The decrease resulted from the implementation of a new food cost theoretical system that greatly reduced food waste coupled with increased vendor rebates and discounts due to aggressive negotiations. Payroll and related costs increased $9.5 million (16.3%) and $10.8 million (5.8%) for the thirteen and thirty-nine weeks ended March 5, 2002, respectively, as compared to the same periods of the prior year. As a percentage of Company restaurant sales, these expenses increased from 32.2% to 32.6% for the thirty-nine week period ended March 5, 2002, which is attributable to higher management and hourly labor resulting from improved staffing levels offset by corresponding decreased overtime. Additional increases included higher unit bonus expense due to a change in the manager bonus program, increased health insurance expense resulting from unfavorable claims, and increased vacation expense resulting from a change in policy. Other restaurant operating costs increased $3.5 million (10.4%) and $3.2 million (2.8%) for the thirteen and thirty-nine weeks ended March 5, 2002, respectively, as compared to the same periods of the prior year. However, as a percentage of Company restaurant sales, these costs decreased from 19.6% to 19.3% for the thirty-nine week period ended March 5, 2002, due to decreased repairs expense resulting from an increased unit level focus on reducing these costs, lower utilities due to favorable weather and market conditions, and the prior year sale of restaurant units to SRG which ran higher occupancy costs than Ruby Tuesday concept units. Depreciation and amortization expense increased $0.9 million (12.3%) for the thirteen weeks ended March 5, 2002 and decreased $1.4 million (5.4%) for the thirty-nine weeks ended March 5, 2002, respectively, as compared to the same periods of the prior year. As a percentage of Company restaurant sales, depreciation and amortization for the thirty-nine weeks decreased from 4.6% to 4.1%. The decrease is attributable to higher Ruby Tuesday average unit volumes coupled with the prior year sale of restaurant units to SRG, which ran higher depreciation as a percentage of sales than Ruby Tuesday concept units. The loss on valuation of SRG Note was a $28.9 million expense for the thirteen and thirty-nine weeks ended March 5, 2002. See discussion in Note H to the condensed consolidated financial statements. Selling, general and administrative expenses decreased $0.5 million (4.7%) and $4.4 million (11.6%) for the thirteen and thirty-nine weeks ended March 5, 2002, respectively, as compared to the same period of the prior year. As a percentage of total operating revenues, these expenses decreased from 6.5% to 5.5% for the thirty-nine week period ended March 5, 2002. The decrease is attributable to the sale of restaurant units to SRG in the prior year, higher average unit volumes, and higher support service fees from franchisees and SRG. Net interest income increased $0.2 million and $2.6 million for the thirteen and thirty-nine weeks ended March 5, 2002, respectively, as compared to the same period of the prior year. The increase for the thirty-nine week period is due to additional notes receivable relating to refranchising, four additional months' interest on the SRG Note, and a decrease in net outstanding debt balances. Income Taxes: -------------------------------------------------------------------------------- The effective income tax rate was 14.0% for the thirteen weeks ended March 5, 2002 compared to 35.8% for the same period of the prior year. The effective income tax rate was 33.2% for the thirty-nine weeks ended March 5, 2002 compared to 35.8% for the same period of the prior year. The decrease in the effective income tax rate is principally due to the tax effect of the valuation allowance established for the SRG Note and reduced state taxes. LIQUIDITY AND CAPITAL RESOURCES -------------------------------------------------------------------------------- The following table presents a summary of the Company's cash flows from operating, investing, and financing activities for the periods indicated (in thousands). Thirty-Nine Weeks Ended March 5, March 4, 2002 2001 ----------- ----------- Net cash provided by operating activities $ 106,289 $ 56,786 Net cash used in investing activities (53,202) (12,468) Net cash used in financing activities (8,001) (43,118) ----------- ----------- Net increase in cash and short-term investments $ 45,086 $ 1,200 =========== =========== Cash provided by operating activities was $106.3 million for the thirty-nine weeks ended March 5, 2002 as compared to $56.8 million for the same period in the prior year. Cash provided by operating activities as compared to the prior year period reflected a decrease in net income of $5.1 million due to the $28.9 million pre-tax non-cash loss on valuation of the SRG Note previously discussed. In connection with this loss, the Company did not receive or recognize $0.5 million in interest income during the thirty-nine weeks ended March 5, 2002. The Company does not anticipate the loss of the scheduled interest income to impact future liquidity. Changes in operating assets and liabilities provided a $21.9 million increase which is primarily due to the sale of restaurant units to SRG in the prior year, change in payroll taxes associated with a change in pay week from Sunday to Tuesday, the timing of income tax payments during the current year, and the interest rate swap liability booked in Fiscal 2002 following the adoption of SFAS 133. Losses on disposition of assets, including SFAS 121 impairment charges, accounted for a $4.8 million increase. Net cash used in investing activities was $53.2 million for the thirty-nine weeks ended March 5, 2002 as compared to $12.5 million for the same period in the prior year. The increased use of cash is attributable to $23.1 million of additional purchases of property and equipment, and the purchase of three units from a franchise partner for $1.7 million. In addition, there was a decrease of $27.3 million in cash proceeds from the sale of assets, primarily due to the sale of 69 American Cafe, L&N and Tia's Tex-Mex restaurants to SRG in the prior year. Offsetting this increased use of cash was $13.3 million of additional proceeds from refranchising (see Note F to condensed consolidated financial statements for discussion of current year activity). Net cash used in financing activities was $8.0 million for the thirty-nine weeks ended March 5, 2002 as compared to $43.1 million for the same period in the prior year. This decrease in cash used in financing activities is due to a net decrease in paydown of debt of $28.4 million and $13.3 million less stock repurchases in Fiscal 2002 as compared to Fiscal 2001. Fiscal 2001's higher debt reduction was attributable predominantly to funds received from the sale of restaurant units to SRG. Offsetting these decreases in cash used in financing activities is a net decrease in proceeds from issuance of stock of $6.5 million. The Company requires capital principally for new restaurants, equipment replacement, and remodeling of existing units. Capital expenditures for the thirty-nine weeks ended March 5, 2002 were $70.1 million and expenditures for construction of new units under the Company's synthetic lease program were $42.1 million. Capital expenditures for the remainder of Fiscal 2002 are projected to be approximately $34.0 to $36.0 million. Expenditures for units to be leased by the Company under synthetic lease agreements are projected to be approximately $6.0 to $8.0 million for the remainder of Fiscal 2002. See "Special Note Regarding Forward-Looking Information." During Fiscal 2001 the Company entered into a five-year $50.0 million Senior Revolving Credit Facility with several banks. This facility includes a $10.0 million current credit line ("Swing Line") and a $15.0 million Letter of Credit sub-facility. Borrowings under the Senior Revolving Credit Facility bear interest at various rate options to be chosen by the Company. The rate will either be the Base Rate (which is defined to be the higher of the issuing bank's prime lending rate or the Federal Funds rate plus 0.5%) or LIBOR plus the Applicable Margin (which ranges from 0.875% to 1.75% and is based on Adjusted Funded Debt to Earnings Before Interest, Tax, Depreciation, Amortization and Rent). Commitment fees ranging from 0.15% to 0.375% are payable quarterly on the unused portion of the Senior Revolving Credit Facility. At March 5, 2002, the Company had no borrowings outstanding under the agreement. At March 5, 2002, the Company had committed lines of credit amounting to $5.0 million at various interest rates approximating 2.75%. All of these lines are subject to periodic review by each bank and may be canceled by the Company at any time. The Company utilizes its lines of credit to meet operational cash needs during the year. There were no borrowings on these lines of credit at March 5, 2002. Since Fiscal 1998, the Company has entered into master synthetic lease agreements totaling $235.0 million for the purpose of leasing new free-standing units and the Maryville, Tennessee Restaurant Support Services Center. Under the terms of master synthetic lease agreements, an operating lease agreement is entered into for each facility providing for an initial lease term of five years from the applicable agreement date with two five-year renewal options. The leases also provide for substantial residual value guarantees and include purchase options at the lessor's original cost of the properties. As of March 5, 2002, the Company has entered into leases for 121 units (88 of which were open at March 5, 2002) and the Maryville, Tennessee Restaurant Support Services Center at an aggregated original funded cost to the lessor of approximately $203.6 million. The Company's credit facilities provide for certain restrictions on incurring additional indebtedness, payment of dividends, and certain covenants regarding funded debt and fixed charge coverage requirements. At March 5, 2002, the Company was in compliance with all such covenants. The Company has entered into five interest rate swap agreements with notional amounts aggregating $125.0 million. These swap agreements fix the interest rate on an equivalent amount of the Company's floating-rate lease obligations to rates ranging from 5.99% to 6.63% (including interest rate spreads) for periods up through December 7, 2003. During the remainder of Fiscal 2002, the Company expects to fund operations, capital expansion, any repurchase of common stock, and the payment of dividends from operating cash flows, bank lines of credit, the five-year revolving line of credit, and through operating leases. See "Special Note Regarding Forward-Looking Information." Total long-term debt including current maturities decreased a net $8.4 million during Fiscal 2002 due primarily to the pay down of the Senior Revolving Credit Facility while short-term borrowings under bank lines of credit decreased $14.7 million. Total funded amount under the master synthetic lease agreements increased $42.1 million during Fiscal 2002, bringing the total funded amount under these agreements to $203.6 million at March 5, 2002. The Company anticipates being in a net cash position at year-end. A net debt position could result if actual cash flows from operations are lower than currently anticipated or if capital expenditures exceed budgeted amounts. See "Special Note Regarding Forward-Looking Information." In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137 and 138, establishes accounting and reporting standards for derivative instruments and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. This statement was adopted by the Company during the first quarter of Fiscal 2002 (see Note D to the condensed consolidated financial statements). Adoption of this new accounting standard did not have a significant impact on net income during the thirteen and thirty-nine weeks ended March 5, 2002 and is not expected to significantly impact net income in the future. In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. This statement was adopted by the Company during the first quarter of Fiscal 2002 (see Note C to the condensed consolidated financial statements). Adoption of this new accounting standard did not have a significant impact on net income during the thirteen and thirty-nine weeks ended March 5, 2002 and is not expected to significantly impact net income in the future. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,"Accounting for the Impairment of Long-Lived Assets" which supersedes SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains many of the provisions of SFAS No. 121, but addresses certain implementation issues associated with that Statement. The Company will adopt SFAS No. 144 beginning in Fiscal 2003. The Company does not expect the adoption of SFAS No. 144 to have a material impact on the consolidated financial statements. KNOWN EVENTS, UNCERTAINTIES AND TRENDS -------------------------------------------------------------------------------- Financial Strategy and Stock Repurchase Plan The Company employs a financial strategy which utilizes a prudent amount of debt including the present value of operating leases, guarantees and letters of credit to minimize the weighted average cost of capital while allowing the Company to maintain financial flexibility and a high level of credit worthiness. The strategy provides for opportunistic repurchases of Company stock at times when cash flow exceeds funding requirements. Pursuant to this strategy, the Company has repurchased 0.4 million shares during the thirty-nine weeks ended March 5, 2002. The total number of remaining shares authorized to be repurchased as of March 5, 2002 is 7.0 million. To the extent not funded with cash from operating activities, additional repurchases will be funded by borrowings on the credit facilities. Cash Dividend During Fiscal 1997, the Board of Directors approved a dividend policy as a means of returning excess capital to its shareholders. This policy calls for payment of semi-annual dividends of 2.25(cent) per share. The payment of a dividend in any particular future period and actual amount thereof remain, however, at the discretion of the Board of Directors and no assurance can be given that dividends will be paid in the future as currently anticipated. See "Special Note Regarding Forward-Looking Information." Dividends totaling approximately $2.9 million were paid to shareholders during the current fiscal year. SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION -------------------------------------------------------------------------------- The foregoing section contains various "forward-looking statements" which represent the Company's expectations or beliefs concerning future events, including the following: future financial performance and unit growth (both Company-owned and franchised), future capital expenditures, future borrowings and repayment of debt, and payment of dividends. The Company cautions that a number of important factors could, individually or in the aggregate, cause actual results to differ materially from those included in the forward-looking statements, including, without limitation, the following: consumer spending trends and habits; mall-traffic trends; increased competition in the casual dining restaurant market; weather conditions in the regions in which Company-owned and franchised restaurants are operated; consumers' acceptance of the Company's development prototypes; laws and regulations affecting labor and employee benefit costs; costs and availability of food and beverage inventory; the Company's ability to attract qualified managers and franchisees; changes in the availability of capital; and general economic conditions. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS -------------------------------------------------------------------------------- The Company is currently, and from time to time, subject to pending claims and lawsuits arising in the ordinary course of its business. In the opinion of management, the ultimate resolution of all pending legal proceedings will not have a material adverse effect on the Company's operations, financial position or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------------------------------------------------------- EXHIBITS The following exhibits are filed as part of this report: Exhibit No. 99.1 First Amendment to the Ruby Tuesday, Inc. Salary Deferral Plan dated February 11, 2002 99.2 Fourth Amendment to the Morrision Retirement Plan dated March 21, 2002 REPORTS ON FORM 8-K None SIGNATURES -------------------------------------------------------------------------------- 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) 4 /19 / 2002 By: /s/ MARGUERITE N. DUFFY ------------- --------------------------------- DATE Marguerite N. Duffy Senior Vice President and Chief Financial Officer